The Relevance of Relevance and the Economic Substance Doctrine

Volume 13 No 1    /    Read Article

By Stanley C. Ruchelman and Wooyoung Lee

The economic substance doctrine has a long-standing history in U.S. tax law, stretching back over 90 years. Case law also developed other related doctrines, such as the business purpose doctrine and step-transaction doctrine, all of which attempted to answer the same question – was the business transaction real or was it a charade intended solely to reduce tax. Code §7701(o), entitled “Clarification of economic substance doctrine,” was enacted in 2010 to codify the preexisting regime. The legislative history provided an angel list of transactions that were not viewed abusive. For those transactions and others that did not contain hallmarks of tax avoidance, it was accepted that the economic substance doctrine was not relevant. Indeed, the statute provides that, with limited exception, if the economic substance doctrine was not relevant to a fact pattern prior to the enactment of Code §7701(o), the economic substance doctrine would not be relevant after the enactment of that provision. Then, in 2023, the I.R.S. put on its sheriff’s hat and turned the angel list into a hit list, taking the position that Code §7701(o) was a game changer. In their article, Stanley C. Ruchelman and Wooyoung Lee examine two recent cases, Liberty Global and Patel, in which the I.R.S. position was that case law was no longer relevant if planning became too aggressive. The I.R.S. won both cases, but the jury is out as to the validity of its position.   See more →