Economic substance is a

doctrine Doctrine (from la, doctrina, meaning "teaching, instruction") is a codification of beliefs or a body of teachings or instructions, taught principles or positions, as the essence of teachings in a given branch of knowledge or in a belief system ...

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 (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

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 United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...

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 (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...

by the

Health Care and Education Reconciliation Act of 2010 The Health Care and Education Reconciliation Act of 2010 (, ) is a law that was enacted by the 111th United States Congress, by means of the reconciliation process, in order to amend the Affordable Care Act (ACA) (). The law includes the St ...

.Sec. 1409, Pub. L. No. 111-152, 124 Stat. 1029, 1067 (March 30, 2010).

See also

References

Further reading