Economic Substance Doctrine
The Economic Substance Doctrine requires that a transaction have meaningful economic purpose beyond tax avoidance. Transactions lacking economic substance can be disregarded for tax purposes.
Exam Tip
Economic substance doctrine = must have REAL economic purpose beyond tax savings. Penalties are severe (20-40%).
What is the Economic Substance Doctrine?
A transaction must have real economic purpose beyond just reducing taxes.
Two-Part Test
| Test | Question |
|---|---|
| Objective | Does the transaction change the taxpayer's economic position in a meaningful way? |
| Subjective | Did the taxpayer have a business purpose other than tax benefits? |
Penalty for Violation
Strict liability penalty of 20% (40% if not disclosed) of any underpayment.
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