By Bryan C. Skarlatos
Journal of Tax Practice & Procedure
October - November 2012 Edition
In 2010, Congress codified the economic substance doctrine and created a strict liability penalty for understatements attributable to transactions that did not have economic substance. Practitioners universally expressed concern that it was not wise to attach a strict liability penalty to a standard as ambiguous as the economic substance doctrine. Some commentators predicted that courts would avoid finding that transactions lacked economic substance because the resulting strict liability penalty for a taxpayer who may not have realized that the transaction did not have “economic substance” was not fair or appropriate. Recent court decisions have fulfilled those predictions by refusing to invalidate transactions based on economic substance and focusing instead on other doctrines such as sham transaction and substance over form to find that the transactions in those cases should not be respected thereby invalidating the claimed tax benefits. It is not surprising that courts are finding ways to avoid the economic substance doctrine in light of the harsh penalty that Congress has attached to it.