Economic Substance and the Supreme Court
University of Iowa - College of Law
Tax Notes, Vol. 116, No. 11, 2007
The Supreme Court grants certiorari in a wide variety of fascinating cases. Occasionally, it agrees to decide tax cases, too.
Perhaps because of the perceived dryness of tax law, the Court has been hesitant to address the validity of the so-called economic substance doctrine. Although there are too many formulations of the doctrine to count, the lower courts often hold that even when a taxpayer has met a statute's requirements, he cannot enjoy any of its benefits unless his conduct reveals a business purpose and a reasonable expectation of profit.
This article argues that the lower courts' application of an extrastatutory economic substance doctrine cannot be reconciled with the Supreme Court cases that purportedly gave birth to that doctrine. Part II explains how lower courts apply economic substance principles regardless of statutory language. Part III demonstrates that the Supreme Court uses economic substance principles only to the extent that the applicable statute makes them relevant. Although this distinction may seem subtle at first, Part IV shows that the two approaches are in fact irreconcilable. Part IV also recommends that the Court affirm its prior holdings, and addresses possible counterarguments to this article's conclusions.
Number of Pages in PDF File: 28
Keywords: intentionalism, supreme court, economic substance doctrine, tax shelters, tax, statutory interpretation, purposivism, textualism, Coltec, Gregory, Knetsch, economic substance, sham transaction doctrine, substance over form doctrine, business purpose doctrine, LILO, Son of BossAccepted Paper Series
Date posted: September 12, 2007 ; Last revised: September 28, 2008
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