Taxing Definitions

Substantial Compliance Doctrine

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The tax code contains elections that notify the Internal Revenue Service of your intention to select a specific tax treatment when more than one is available or applicable. Generally, you must comply with the underlying regulations governing the completion of the election you’ve chosen in order to give the IRS enough information to determine whether the election can or should be granted.

In some situations, even when you do not strictly follow the requirements, you may still be able to qualify for an election. Substantial compliance means you have complied with the underlying statutory purpose of the requirements though you did not follow them to the letter.

As a deciding factor, the tax court looks at what needs to be done under the statute. When the requirements relate to the substance or essence of the statute, strict adherence is required. If the requirements are procedural or directory, they may be fulfilled by substantial, if not strict compliance.

See Sperapani v. Commissioner 42 T.C. 308 (1964) for judicial reasoning behind the doctrine of substantial compliance. A more recent case is T.C. Memo. 2012-115 (Storey), in which the taxpayer filed an incomplete but substantially compliant election for the treatment of costs incurred during the production of a movie.

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