Save the Economic Substance Doctrine from Congress

8 Pages Posted: 3 Apr 2008

See all articles by Dennis J. Ventry

Dennis J. Ventry

University of California, Davis - School of Law

Date Written: April 2008


Over the last several years, federal courts have invalidated abusive transactions by relying heavily on the judicially created economic substance doctrine. These court decisions not only reinforce the vitality of the doctrine, but also reaffirm the principle that literal compliance with statutory tax provisions is simply not enough to secure tax benefits. Despite the impressive anti-shelter effectiveness of the economic substance doctrine, Congress is preparing to straitjacket the doctrine by codifying it under the Internal Revenue Code. Codification is a terrible idea. Reducing the doctrine to an inelastic administrative rule would sap its power and lead to more rather than less abuse by providing clever tax planners an opportunity to occupy and manipulate the statutory line between permissible and impermissible behavior. The power of the doctrine lies in its ability to adapt to new and unforeseen tax planning strategies. Malleable standards are particularly important in tax law, where the law itself can be ambiguous and where application of fact to law contains numerous outcomes, such that determining the right answer is an inherently uncertain proposition. A rigid rule would provide opportunity rather than certainty, and it would foster overaggressive tax planning. The economic substance doctrine regularly acts as the last line of defense against abusive tax avoidance, and its facts and circumstances analysis is better left in the hands of judges than legislative drafters.

Keywords: Taxation, Tax Policy, Tax Practice, Tax Shelters

Suggested Citation

Ventry, Dennis J., Save the Economic Substance Doctrine from Congress (April 2008). Tax Notes, Vol. 118, No. 14, 2008, Available at SSRN:

Dennis J. Ventry (Contact Author)

University of California, Davis - School of Law ( email )

UC Davis School of Law
400 Mrak Hall Drive
Davis, CA 95616-5201
United States
530-752-4566 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics