Economic substance is a doctrine in the tax law of the United States under which a transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to be considered valid. This doctrine is used by the Internal Revenue Service to determine whether tax shelters, or strategies used to reduce tax liability, are considered "abusive." Under the doctrine, for a transaction to be respected, the transaction must change the taxpayer's economic position in a "meaningful way" apart from the Federal income tax effects, and the taxpayer must have had a "substantial purpose" for entering into the transaction, apart from the Federal income tax effects.
References to the Economic Substance Doctrine were enacted as subsection (o) of section 7701 of the Internal Revenue Code by section 1409 of the Health Care and Education Reconciliation Act of 2010.
- The Economic Substance Doctrine in the Current Tax Shelter Environment: Remarks by Donald L. Korb, Chief Counsel of the Internal Revenue Service
- See subsection (o) of 26 U.S.C. § 7701.
- "The Obameter: Require economic justification for tax changes". PolitiFact.
- Sec. 1409, Pub. L. No. 111-152, 124 Stat. 1029, 1067 (March 30, 2010).
- Black, Stephen (2008). "A Daddy-Daughter Chat About Economic Substance". Retrieved April 12, 2016.