"The IRS has always had non-statutory doctrines available to combat transactions it does not like. The “substance over form” doctrine is used to disallow tax benefits from transactions whose form differs from its substance. Assume a shareholder capitalizes a corporation with $1,000 and loans it $100,000. The large debt is to permit the corporation to deduct the interest. The IRS might seek to disallow the corporation’s interest deduction on the grounds that the loan is really equity, not debt. The “step transaction” doctrine is used to treat separate transactions or steps as a single, unified transaction for tax purposes. Assume a shareholder who is under contract to sell his stock transfers some of it to a charitable remainder trust (“CRT”). A CRT, if properly used, would: (i) give the shareholder a current deduction for the present value of the charity’s right to receive the assets on the shareholder’s death; (ii) pay the shareholder an income stream for the rest of the shareholder’s life; and (iii) not pay capital gains tax on the sale of the stock. The IRS might treat the stock owned by the CRT as still owned by the shareholder, and tax the gain to the shareholder.
The doctrine which the IRS has used recently with increasing frequency is the “economic substance” doctrine. Under this doctrine the IRS seeks to deny tax benefits from transactions that do not result in a meaningful change to the taxpayer’s economic position other than reducing federal income tax. The IRS successfully used this doctrine to strike down most of the 1990s tax shelter transactions, e.g., Son-of-BOSS, LILO and other well-publicized abusive structures. "
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Tax Law Updates, Wills, Trusts, & Estate Planning Updates
DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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