Torpedoing A Transaction: Economic Substance Versus Other Tax Doctrines And The Application Of The Strict Liability Penalty

Transactions designed to intentionally reduce one’s taxes often attract suspicion and become the subject of judicial review. To evaluate suspicious transactions, courts have developed special common-law doctrines that impose additional requirements beyond those in the Internal Revenue Code. These doctrines could be considered standard methods of fact finding or legal interpretation, yet they have taken on their own identity within court analyses with varying interpretations and applications. An examination of cases demonstrates significant overlap in the doctrines and exemplifies how the application of the doctrines adds confusion and uncertainty to tax law. Compounding on this uncertainty is the codification of the economic substance doctrine and related strict liability penalty for its violation, which suggests that the distinct nature of the common-law doctrines is a false assumption that only confuses tax law. Taxpayers, however, may be able to use the confusion between doctrines to avoid the strict liability penalty by arguing that even if a transaction is invalid, it is invalid not under the codified economic substance doctrine, but under one of the common-law doctrines that does not impose strict liability