W(h)ither Economic Substance?

Abusive transactions that claim inappropriate tax benefits are a perennial problem, but they are particularly distressing in a weak economy. When the IRS claims a transaction is abusive, courts generally examine whether the taxpayer had a business purpose and whether the transaction had economic substance (essentially a prospect of profit before taxes). This two-pronged economic substance doctrine developed from a series of Supreme Court cases. Courts do not apply the doctrine consistently, however, so the prospect of codifying the doctrine as a revenue-raiser is very much on the table. Unfortunately, the economic substance doctrine provides a poor proxy for the real question, which was applied in early Supreme Court cases - whether the claimed tax results are consistent with Congress's intent. One important drawback of the shift from a focus on congressional intent to a focus on the taxpayer's intent and the prospect of pre-tax profit is a doctrine that is much easier for taxpayers to manipulate. The result is a test that does little to distinguish tax shelters and other abusive transactions from legitimate ones. The Article therefore argues that modern economic substance doctrine should be abandoned and replaced with a direct inquiry into congressional intent. The Article does not focus on how such an inquiry into congressional intent should be incorporated into tax disputes; others have addressed that issue from a variety of perspectives. Rather, the Article examines why courts today generally do not perform this vital inquiry in cases of claimed abuse of the tax laws, and explains why they should. In developing this argument, the Article explains that identifying abusive transactions is so difficult largely because some tax statutes merely try to measure income while others try to provide an incentive for particular behavior. Identifying which goal is operative in a particular provision requires ascertaining congressional intent. The Article traces the development of the economic substance doctrine to pinpoint when it shifted its focus away from congressional intent. It also critiques the subjective and objective prongs of the existing doctrine, showing how they can be exploited to allow abusive transactions to stand simply because they are bundled with business activity