Information Regarding The Economic Substance Doctrine

The Internal Revenue Service (IRS) aggressively pursues taxpayers it believes make use of abusive tax shelters. One way they do this is through economic substance, a common law doctrine that is used to deny tax benefits resulting from transactions the IRS determines lack any practical economic significance other than the tax benefit achieved.

The doctrine states a transaction of substance must (a) change the taxpayer's economic position in a "meaningful way" and (b) have an underlying business purpose apart from federal income tax effects.

In 2010, codification of the economic substance doctrine imposed new penalties on transactions that do not have economic substance. The penalty is 20 percent if the transaction is disclosed and 40 percent if the transaction is not disclosed.

Consult With A Knowledgeable Tax Attorney

Many issues surrounding the economic substance doctrine remain open to interpretation. Consulting with a knowledgeable tax attorney prior to certain transactions may help in structuring the transaction so it falls within the guidelines of economic substance.

Theodore L. Craft, Esq., LLM, Attorney at Law & Tax Counsel, in Boston offer legal guidance regarding economic substance and tax law disputes. Call 781-606-0489 or use our online contact form to schedule a meeting.