Form Remains Important: The Sixth Circuit Rejects the Application of Substance-Over-Form Doctrine in a Roth IRA Case

Emperor CaligulaTaxpayers often find creative ways to avoid taxes. As a consequence, various common law doctrines have developed that permit the IRS to recharacterize transactions for tax purposes, including the substance-over-form doctrine, the economic substance doctrine, and the step transaction doctrine.

Under the economic substance doctrine, courts examine whether transactions had a business purpose beyond achieving tax benefits and whether they had a realistic prospect of generating profits. Recently, the First Circuit applied the economic substance doctrine to invalidate a foreign tax credit shelter. Santander Holdings USA, Inc. v. United States, 844 F.3d 15, 22-24 (1st Cir. 2016). The economic substance doctrine is quite flexible, and some judges have expressed concern that it amounts to little more than a smell test: “I can’t help but suspect that the majority’s conclusion .… Read More