From Gregory to Enron: The Too Perfect Theory and Tax Law

60 Pages Posted: 22 Jun 2017

See all articles by Christopher H. Hanna

Christopher H. Hanna

Southern Methodist University - Dedman School of Law

Date Written: 2005


Although financial writers have been using magic terms in describing tax law (and accounting reporting), do such terms and theories really have a place in the law? This Article will show that there is a connection between magic and tax law. In a sense, tax lawyers are magicians in that they are able to structure transactions in a manner to minimize taxes, in many cases, to the complete bewilderment of their clients. Tax lawyers are constantly striving to structure transactions in ways that will withstand scrutiny from both the government and the courts. Experienced and well-informed tax lawyers know, however, not to make a transaction too perfect. If the results are too perfect, then the transaction may be recharacterized by the government or the courts.

For many years continuing until the present day, tax lawyers have interpreted the Supreme Court's decision in Gregory as creating or utilizing a business purpose doctrine, an economic substance doctrine, a step transaction doctrine, or even possibly a substance over form doctrine. But perhaps another doctrine or theory was created in Gregory - the Too Perfect Theory. Gregory's transaction was too perfect, thereby leading the Supreme Court to closely scrutinize her transaction and ultimately conclude that only one interpretation explained the transaction: tax avoidance, which was unacceptable to the Supreme Court.

The article suggests that the government and the courts should scrutinize transactions to determine if the results are too perfect. In such instances, the government and the courts should apply the various doctrines (e.g., business purpose, economic substance, or sham transaction doctrines) to determine whether the transaction should be recharacterized.

Keywords: Corporate America, Tax Avoidance, Tax Law, 'Too Perfect Theory', Contingent Liability, Tax Shelters, Transactional Law, Enron, Gregory v. Helvering

Suggested Citation

Hanna, Christopher H., From Gregory to Enron: The Too Perfect Theory and Tax Law (2005). Virginia Tax Review, Vol. 24, No. 4, Spring 2005, SMU Dedman School of Law Legal Studies Research Paper No. 359, Available at SSRN:

Christopher H. Hanna (Contact Author)

Southern Methodist University - Dedman School of Law ( email )

P.O. Box 750116
Dallas, TX 75275
United States

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