Beyond Economic Substance: Interrogating the Full Impacts of Third-Party Relationships in Tax Shelter Cases
University of Pennsylvania Journal of Business Law, Vol. 13, No. 2, pp. 385-444, 2011
60 Pages Posted: 17 Jun 2011
Date Written: September 1, 2010
The evaluation of relationships between actors is an important preoccupation across many areas of law. The degree of respect accorded a relationship can give rise to significant legal consequences. No less so in tax law. Relationships between taxpayers and other parties are critical in triggering the realization events necessary to generate favorable tax consequences. And, where tax law refuses to respect such relationships, adverse tax consequences follow. This article analyzes the effects of relationality in tax shelter transactions. First, it discusses the importance of relationship evaluation in traditional assessments of whether a tax transaction has, “substance,” highlighting challenges faced by courts in performing such evaluation and arguing that despite moderate success, judicial efforts at relationship evaluation could be more consistent and more robustly expressed. The article next identifies two additional problems associated with relationships with third parties in tax shelter litigation, namely, adverse impacts on evidentiary transparency and obfuscatory impacts on doctrine. To mitigate these problems, it offers two proposals: (1) judicial application of a rigorously implemented and explicitly expressed, “oppositional-choice,” analysis; and (2) rehabilitation of the business purpose doctrine from the confusion caused by relationships with third parties. These proposals will encourage more accurate judicial determinations of whether to respect relationships between taxpayers and third parties, raise public consciousness about the importance of third parties in tax planning by encouraging explicit judicial narratives about third-party relationships, and discourage taxpayers from engaging in the aggressive formation of relationships that serve only to drain the fisc.
Keywords: Tax, Tax Shelters, Economic Substance, Narrative
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