Learned Hand famously opined that "[a]ny one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."1 There is, however, a line between legitimate tax avoidance and illegal tax evasion and, in drawing that line, the IRS has long challenged attempts by taxpayers to reduce their tax liability by executing transactions that lack economic substance. Under the economic substance doctrine, courts preclude taxpayers from claiming benefits arising from certain transactions that satisfy the technical requirements of the Internal Revenue Code, but create consequences that are contrary to the purpose of the tax laws.2

The breadth and flexibility of this doctrine is demonstrated by the wide range of contexts in which the government has used it to nullify benefits claimed by a taxpayer, including schemes to avoid the tax consequences of winning the lottery, sale-leaseback transactions meant to shift energy tax credits from one taxpayer to another, and deductions arising from interest incurred on loans used to finance employee life insurance policies owned by corporations. The doctrine has also been used to support tax shelter prosecutions involving the country's most prominent accounting firms.3

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