Rice’s Toyota World (Rice) (plaintiff) was a car-sales company. Rice contacted Finalco, a company that leased equipment, about Finalco’s purchase-and-leaseback arrangements. Finalco would sell equipment to a company and lease the equipment back from the purchaser, creating a large tax loss in the early years of the transaction on which the purchaser could claim depreciation deductions and interest-expense deductions. Rice purchased a used computer from Finalco for approximately $1.5 million, using a recourse note of $250,000 payable over three years and two recourse notes for the remaining amount payable over eight years. Rice leased the computer back over to Finalco, which subleased the computer to another company. After three years, Rice had paid off the $250,000 note and $30,000 in interest on the other notes. On its income-tax returns for those three years, Rice claimed depreciation deductions from its ownership of the computer and interest deductions for its payments on the remaining notes. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed Rice’s interest and depreciation deductions, holding that the purchase-and-leaseback agreement was a sham transaction. Rice petitioned the United States Tax Court for a redetermination, and the tax court upheld the Commissioner’s disallowance. The tax court agreed that the purchase-and-leaseback arrangement was a sham transaction, noting that Rice did not have any business purpose for the arrangement other than receiving tax benefits and that there was no economic substance in the transaction because there was no possibility that it would lead to a profit. Rice appealed.