Chemoil: Economic Substance, Tax Credits, and Unprofitable Ventures

Tax Notes Federal, October 31, 2022, p. 719

10 Pages Posted: 23 Dec 2022

See all articles by Benjamin Alarie

Benjamin Alarie

University of Toronto - Faculty of Law; Vector Institute for Artificial Intelligence

Christopher Yan

Blue J Legal

Date Written: October 31, 2022

Abstract

The Chemoil tax dispute provides an opportunity to explore the relationship between the economic substance doctrine and unprofitable transactions that are rendered economically viable by tax credits. Chemoil raises a particularly interesting point of contention. Transactions that generate specific excise tax credits (which are designed to encourage otherwise unprofitable activities) may appear to run afoul of the economic substance doctrine, which considers whether transactions have independent economic significance setting aside the tax benefits derived from the transactions. Thus, there is a tension between the congressional intent to provide an incentive for otherwise unprofitable activities and the congressional intent behind the economic substance doctrine, which, by its nature, denies tax benefits that arise out of transactions with no economic effects apart from their federal tax implications. Moreover, if a taxpayer cannot avoid application of the economic substance doctrine to the relevant transactions, the dispute raises the further question of whether transactions whose profitability is derived solely from excise tax credits should still be considered as having economic substance because of the nature of how these tax credits operate to encourage otherwise economically unviable yet ostensibly congressionally endorsed activities.

Keywords: economic substance, tax, tax credits

Suggested Citation

Alarie, Benjamin and Yan, Christopher, Chemoil: Economic Substance, Tax Credits, and Unprofitable Ventures (October 31, 2022). Tax Notes Federal, October 31, 2022, p. 719, Available at SSRN: https://ssrn.com/abstract=4300506

Benjamin Alarie (Contact Author)

University of Toronto - Faculty of Law ( email )

Jackman Law Building
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Toronto, Ontario M5S 2C5
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416-946-8205 (Phone)
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HOME PAGE: http://www.benjaminalarie.com

Vector Institute for Artificial Intelligence ( email )

Christopher Yan

Blue J Legal ( email )

325 FRONT ST W
TORONTO, ON M8Z2C3
Canada

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