Castle Harbour: Economic Substance and the Overall Tax-Effect Test

12 Pages Posted: 19 Aug 2008

See all articles by Karen C. Burke

Karen C. Burke

University of Florida Levin College of Law

Date Written: August 19, 2008


The taxpayer victory in Castle Harbour v. Commissioner has been heralded as a watershed in tax shelter litigation. The district court rejected the government's arguments that the partnership was a sham and that the partnership's allocations violated the overall-tax-effect test. This article explores the relationship between the economic substance doctrine and limitations on flexible allocations under Subchapter K. Although the section 704(c) regulations now provide an anti-abuse rule that should make it impossible to replicate the Castle Harbour transaction, the government also maintained that the partnership's allocations lacked substantial economic effect under the section 704(b) regulations. The article argues that the district court's circular interpretation of the overall test threatens to undermine the ability of the section 704(b) regulations to deter tax-driven allocations. Although the government's relative ownership test was defective, the article suggests alternative methods for reallocating the partnership's book items to reflect the partners' economic interests.

Keywords: Castle Harbour, tax shelter, substantiality, 704(c), 704(b), abuse, partnership, partners' interest, reallocation

JEL Classification: K34

Suggested Citation

Burke, Karen C., Castle Harbour: Economic Substance and the Overall Tax-Effect Test (August 19, 2008). Tax Notes, Vol. 107, 2005, Available at SSRN:

Karen C. Burke (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics