When and How Should the Economic Substance Doctrine Be Applied?

Download or read book When and How Should the Economic Substance Doctrine Be Applied? written by David P. Hariton and published by . This book was released on 2007 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this essay, I argue that the economic substance doctrine should be applied solely to disallow tax benefits arising from tax shelters. I define a tax shelter as a transaction that generates net losses, deductions or credits that serve to eliminate the tax that would otherwise be imposed on unrelated income. I explain why I think it is problematic for a court to apply the doctrine by recharacterizing transaction steps, rather than by simply disallowing tax benefits. I also explain why I think it problematic for a court to apply the doctrine based on vague reasoning or broad criteria that also encompass routine business transactions (i.e., to allow bad facts to make bad law). In general, I assert that a court must first "frame" the relevant transaction and consider the transaction as a whole, rather than focus on any particular structure or step. It must next determine how much unique economic risk the taxpayer incurs by entering into the transaction. It must next determine what are the tax benefits purportedly arising from the transaction. It must next consider the former in relation to the latter in order to determine whether the transaction as a whole "lacks economic substance." If it does, then the court must next consider whether the relevant tax benefits violate Congressional intent. If, but only if, they do, then it should disallow those benefits under the economic substance doctrine.