# Economic substance

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{{Short description|Taxation doctrine}}
'''Economic substance''' is a [doctrine](/source/Legal_doctrine) in the [tax law](/source/tax_law) of the [United States](/source/Taxation_in_the_United_States) 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](/source/Internal_Revenue_Service) to determine whether [tax shelter](/source/tax_shelter)s, or strategies used to reduce tax liability, are considered "abusive".<ref>[https://www.irs.gov/pub/irs-utl/economic_substance_(1_25_05).pdf ''The Economic Substance Doctrine in the Current Tax Shelter Environment'']: Remarks by Donald L. Korb, Chief Counsel of the Internal Revenue Service</ref> 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.<ref>See subsection (o) of {{usc|26|7701}}.</ref>

The economic substance doctrine was originally a common law doctrine.<ref> See ''ACM Partnership v. Commissioner'', 157 F.3d 231 (3rd Cir. 1998), affirming 73 T.C.M (CCH) 2189 (1997), cert. denied, 526 U.S. 1017 (1999).</ref> The doctrine was codified in subsection (o) of section 7701 of the [Internal Revenue Code](/source/Internal_Revenue_Code) by the [Health Care and Education Reconciliation Act of 2010](/source/Health_Care_and_Education_Reconciliation_Act_of_2010).<ref>{{cite web|url=https://politifact.com/truth-o-meter/promises/promise/17/require-economic-justification-for-tax-cuts/|title=The Obameter: Require economic justification for tax changes|work=PolitiFact}}</ref><ref>Sec. 1409, Pub. L. No. 111-152, 124 Stat. 1029, 1067 (March 30, 2010).</ref>

==See also==
* [Step transaction doctrine](/source/Step_transaction_doctrine)
* [Substance over form](/source/Substance_over_form)
* ''[Gregory v. Helvering](/source/Gregory_v._Helvering)''

== References ==
{{Reflist}}

==Further reading==
*{{cite journal |last=Black |first=Stephen |year=2008 |title=A Daddy-Daughter Chat About Economic Substance |doi=10.2139/ssrn.1282195 |ssrn=1282195 |s2cid=152696047 }}

Category:Taxation in the United States
Category:Law of the United States
Category:Legal doctrines and principles

{{tax-stub}}

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