Taxing Definitions

Economic Substance

Thanks for sharing!
1 minute read
Gauzy CurtainsImage source: Billy Hathorn via Wikimedia Commons

Economic substance is a term for a “doctrine” initially created by courts. To curb tax shelters and/or sham schemes that serve no purpose other than tax avoidance, courts invoke the economic substance doctrine to deny deductions, credits and losses arising from these transactions.

What’s it mean? Under the economic substance doctrine, when you enter into a transaction merely to reduce your federal tax bill and no other meaningful economic change occurs, any tax benefits you claim on your return can be denied. That’s true even if you meet all the requirements in the Internal Revenue code that would apply to the transaction.

Economic substance was not part of the tax code until the Health Care and Education Affordability Reconciliation Act of 2010. This law created a new Internal Revenue code section (7701(o)), which provides that–

“In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if–

(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and

(B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.”

The new law applies to transactions occurring after March 30, 2010.

***

Other posts you might enjoy

Definition — Formally moving Image source: openclipart.org What do these two forms have in common? Screen capture by Taxing Lessons In the US, federal law says the information you supply on your tax return is confidential. Taxpayers use Form 2848, Power of Attorney and Declaration of Representative, to authori...
Definition — Laughter and other medical dedu... Image source: openclipart.org Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...
Definition — Safe harbors and taxes Image source: OpenClipArt.org Back in August, the IRS issued proposed regulations about the new limitation on federal income tax deductions for state and local income taxes (see Taxing Lessons post here). After the proposed regulations were issued, the IRS continued to receive questio...
Definitions — More and less, yes or no   Image source: openclipart.org   In general, you're required to file a federal income tax return when your gross income is equal to or exceeds the sum of your exemption plus standard deduction (internal revenue code section 6012(a)(1)). For 2018 returns, to be filed in 2019, the...
Tagged , , ,