Economic substance is a

doctrine Doctrine (from , meaning 'teaching, instruction') is a codification (law), codification of beliefs or a body of teacher, teachings or instructions, taught principles or positions, as the essence of teachings in a given branch of knowledge or in a ...

in the

tax law Tax law or revenue law is an area of legal study in which public or sanctioned authorities, such as federal, state and municipal governments (as in the case of the US) use a body of rules and procedures (laws) to assess and collect taxes in a ...

of the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

under which a transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to qualify for any tax benefits. This doctrine is used by the

Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...

to determine whether

tax shelter Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments. The methodology can vary depending on local and international tax laws. Types of ...

s, or strategies used to reduce tax liability, are considered "abusive". Under the doctrine, for a transaction to be respected, the transaction must change the taxpayer's economic position in a "meaningful way" apart from the Federal income tax effects, and the taxpayer must have had a "substantial purpose" for entering into the transaction, apart from the Federal income tax effects. The economic substance doctrine was originally a common law doctrine. The doctrine was codified in subsection (o) of section 7701 of the

Internal Revenue Code The Internal Revenue Code of 1986 (IRC), is the domestic portion of federal statutory tax law in the United States. It is codified in statute as Title 26 of the United States Code. The IRC is organized topically into subtitles and sections, co ...

by the Health Care and Education Reconciliation Act of 2010.Sec. 1409, Pub. L. No. 111-152, 124 Stat. 1029, 1067 (March 30, 2010).

See also

References

Further reading