The federal government’s long-standing fight against transactions it perceives to be abusive tax shelters is well-chronicled.1 Because tax shelters are often carefully designed to satisfy the technical provisions of the Internal Revenue Code, the government frequently resorts to common law doctrines to attack the validity of specific transactions. Among the tools in the government’s arsenal is the economic substance doctrine, which one court has described as a “judicial effort to enforce the statutory purpose of the tax code…, [intended] to prevent taxpayers from subverting the legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to reap a tax benefit.”2
On March 30, 2010, after years of failed efforts, a provision codifying the economic substance doctrine was included in the Health Care and Education Reconciliation Act of 2010. While its full impact will not be felt for years, this long-anticipated move will likely affect tax shelter litigation for years to come.
Judicial Application
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