The Substance Over Form Doctrine
The substance over form doctrine states that the tax results
of a transaction should be based on the underlying substance of the
transaction, not mere compliance with individual formalities along the way to
the result. Taxpayers are usually bound to
the tax consequences of their chosen legal form, but the IRS and courts may re-characterize
a transaction according to its underlying substance, if that substance is
demonstrably contrary to the form. In
applying the substance over form doctrine, a court will look to the objective
economic realities of a transaction rather than mere form. The rationale behind the doctrine is that two
transactions that achieve the same ultimate goal should not garner different
tax treatment simply because the transactions follow different formal steps
along the way. The burden of proof rests
on the taxpayer to show that the form of the transaction matched its substance.