An Introduction to Anti-Avoidance Law
Historically, the courts have developed and applied numerous judicial doctrines to deny the intended tax benefits of certain transactions in order to prevent taxpayers from abusively avoiding federal income tax. The four primary doctrines are: the sham transaction doctrine; the step transaction doctrine; the substance over form doctrine; and, the economic substance doctrine. While it is possible, with some effort, to properly separate these doctrines from one another, significant overlap exists among many of the doctrines. Some courts even consider the economic substance doctrine to be a “composite” of the other three. The result is often a fiendishly muddled application of the doctrines by the judiciary. In reality, many of these judicial doctrines were never intended to be differentiated by bright lines. Rather, they represent the evolution of somewhat malleable general principles designed to broadly police the most egregious abuses of the system, allowing judges adaptability when confronted by varied factual scenarios. One such underlying principle is that while taxpayers generally may order their affairs in a tax-beneficial manner, taxpayers cross the line when they reap tax benefits that were neither intended nor contemplated by Congress. Another is that purely formal distinctions cannot obscure the substance of a transaction.