ARTICLE: When and How Should the Economic Substance Doctrine Be Applied? Skip over navigation
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Copyright (c) 2006 New York University School of Law
Tax Law Review

ARTICLE: When and How Should the Economic Substance Doctrine Be Applied?

Fall, 2006

60 Tax L. Rev. 29




I. Introduction
The moment I read the Federal Circuit's opinion in Coltec Industries, Inc. v. United States, 1 my heart sank. The Federal Circuit properly reversed the district court below and found that there is still an economic substance doctrine, 2 but it applied the doctrine so broadly that it failed to provide taxpayers with any meaningful guidance. The court focused on a preliminary transaction step that served to create stock in a subsidiary with a high basis and a low value. 3 The court disallowed the resulting tax benefit - a loss from the subsequent sale of stock - solely because this tax planning step lacked business purpose and economic substance when considered on its own. "The transaction to be analyzed," the court asserted (citing itself in a prior decision), "is the one that gave rise to the alleged tax benefit." 4 Otherwise, "all manner of intermediate transfers could lay claim to 'business purpose' simply by showing some factual connection, no matter how remote, to an otherwise legitimate transaction existing at the end of the line." 5

It is always possible to isolate tax planning steps or structures and observe that they have no tax-independent business purpose or economic substance. But such an exercise does little to help either taxpayers or the Commissioner's agents understand what constitutes legally acceptable tax planning. I agree that the Federal Circuit should have found that the Coltec transaction lacked business purpose and economic substance. But I argue in ...
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