Paul L. Caron

Tuesday, May 31, 2022

Schmalbeck & Soled: Substance Over Form In Transfer Tax Adjudication

Richard Schmalbeck (Duke) & Jay A. Soled (Rutgers; Google Scholar), Substance Over Form In Transfer Tax Adjudication, 55 Loy. L.A. L. Rev. 609 (2022):

The elevated exemption level under the federal transfer tax system (now in excess of $24 million for a married couple) has opened up new and abusive tax-avoidance opportunities. In many areas of the tax law, the substance over form doctrine historically has been effective in controlling such abuses; however, for a myriad of reasons, transfer tax jurisprudence has been marred by the reluctance of courts to embrace this doctrine. In this analysis, we urge reconsideration of that posture.

For over a century, the nation has relied upon its transfer tax regime as a source of revenue and mitigation of wealth concentrations. However, its ability to fulfill its historic missions has been hampered by the fact that the judiciary has been reluctant to apply the substance over form doctrine to challenge a wide range of transfer taxmitigation schemes. The consequences of the judiciary’s inaction have been severe: utilization of these techniques significantly narrows the transfer tax base, enabling billions of dollars of wealth to pass free of transfer tax and allowing wealth concentrations to abound.

To restore the integrity of the transfer tax system, this analysis calls for a legislative and/or judicial approach to resolving the issue of transfer tax schemes that lack substance. One option is for Congress, via legislation, to endorse the use of the substance over form doctrine in the transfer tax context. The other option is for the judiciary to utilize the substance over form doctrine to undo transactions that are wholly synthetic in nature.

By enabling the substance over form doctrine to become an integral part of the transfer tax regime, Congress and the judiciary would simultaneously enhance revenue collection and decrease wealth inequality. And with the nation’s deficit raging at an all-time-high and wealth inequality rampant, these are outcomes that each should actively pursue.

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