Paul L. Caron

Friday, October 7, 2022

Weekly SSRN Tax Article Review And Roundup: Speck Reviews New Work On Form And Substance In Tax Cases By Gillis & Grewal

This week, Sloan Speck (Colorado; Google Scholar) reviews new work by Rory Gillis (Western; Google Scholar), The Limits of Legal Substance: Tax Avoidance and Equitable Remedies After Collins Family Trust, 66 Can. Bus. L.J. __ (2022), and Amandeep S. Grewal (Iowa; Google Scholar), When Is the Economic Substance Doctrine “Relevant” to a Transaction? (Aug. 17, 2022).


According to a well-traveled adage among tax experts, United States tax law looks to economic substance over legal form—except when it doesn’t. In new work, Rory Gillis and Andy Grewal explore the complex dynamics between form and substance in two very different contexts: a recent Supreme Court of Canada decision that denies equitable remedies to tax-motivated transactions gone wrong, and the statutory interpretation issues that may arise from the IRS’s recent relaxation of internal procedures with respect to audit-level application of the economic substance doctrine. Both Gillis and Grewal emphasize the fundamental challenges faced by courts in implementing appropriate understandings of form and substance in taxation.

In The Limits of Legal Substance: Tax Avoidance and Equitable Remedies After Collins Family Trust, Gillis dissects the reasoning and implications of the Supreme Court of Canada’s decision in Collins Family Trust, which denies the Anglo-Canadian equitable remedies of rectification and rescission to a highly structured transaction that yielded (unexpected) tax liabilities instead of the (anticipated) tax benefits. In doing so, the Court “adopts a broad prohibition on equitable remedies in tax law.” This sweeping decision rejects the more-tailored approach favored by the U.K. Supreme Court and—perhaps—embraces something akin to the Danielson rule in U.S. tax law, which limits taxpayers from disavowing the tax-motivated form of a transaction, if that form subsequently proves disadvantageous.

Gillis notes that, in Collins Family Trust, “much of the reasoning is either unarticulated or only suggested,” and he ably closes this omission by offering three well-developed rationales to support a blanket ban on equitable remedies in taxation. Such a ban may reduce inappropriate incentives for aggressive tax planning, advance distributive justice across society, and remedy structural concerns with case-by-case adjudication. More generally, Gillis situates Collins Family Trust within broader transnational trends towards skepticism about “creative tax planning”—and provides a rigorous framework for examining future legislative and judicial action.

In When Is the Economic Substance Doctrine “Relevant” to a Transaction, Grewal illuminates infirmities in Congress’s 2010 effort to codify the economic substance doctrine in U.S. tax law. Grewal argues that, although § 7701(o) resolved the conjunctive-disjunctive debate for the doctrine’s profit potential and business purpose prongs, the provision introduced (and reinforced) scope-related uncertainties by requiring the economic substance doctrine to be “relevant” in order to apply. Grewal identifies two historic approaches to the economic substance doctrine’s scope. In his analysis, the extrastatutory approach posits economic substance as a prerequisite to any tax benefit, perhaps including those benefits clearly intended by Congress or Treasury (such as elections). By contrast, the statutory approach would apply the economic substance doctrine only when specifically implicated by Congress—for example, as Grewal adeptly elaborates, when a Code provision contemplates some sort of “meaningful economic activity.” Grewal argues that neither approach is likely to lead to clarity or consistency from courts—the scope-defining project is “monumental” and “doomed to failure.” Grewal hopes that Congress eventually intervenes to clean up the resulting mess.

Both Gillis and Grewal raise issues of deterrence in their treatments of substance and form in tax law. Gillis convincingly argues that a ban on after-the-fact equitable judicial remedies enhances deterrence by forcing taxpayers to commit to a single tax treatment ex ante. This commitment enforces a downside risk to tax planning. Grewal also alludes to “[u]npredictability and uncertainty” as “hallmarks, if not features, of the economic substance doctrine.” To the extent that courts adjudicate case-by-case—especially in a milieu of skepticism towards tax planning—taxpayers may forego more aggressive tax schemes. What’s interesting about this juxtaposition is that Gillis’s rule-bound prohibition on back-end remedies harmonizes with Grewal’s observations about fuzzy standards’ effects on front-end planning. If the goal is deterrence, then policymakers may need to leverage both substance and form, and in very particularistic ways, to achieve an optimal result.

Similarly, both authors implicate complexity and institutional capacities as they interplay with form and substance. Gillis notes that equitable remedies place tremendous burdens on trial courts, and eliminating these remedies may reduce decisional pressures as well as caseloads—a rule leads to simpler law. Grewal makes similar arguments about inchoate triggers to apply the economic substance doctrine: Congress’s failure to provide concrete guidance leaves a morass for finders of fact and law—complexity out of a fuzzy standard. To the extent that private planning itself is a source of complexity in tax law, however, these approaches to simplification may not last over the long term. For example, a firm rule of precommitment may encourage taxpayers to enter into even more tightly planned transactions to manage front-end risk. Similarly, a narrow gate for the economic substance doctrine may require Congress to police tax planning with increasingly bespoke rules. Again, policy seems to require a highly nuanced approach to questions of substance and form.

Finally, Gillis and Grewal offer a meaningful reminder that economic substance and similar doctrines play a crucial role in intellectual approaches to tax law, regardless of these concepts’ complicated legal position. Tax systems typically choose to prioritize either substance or form, but the alternative always lurks in the background, as a backstop or a touchstone or a road not taken. In addition, economic substance (or other arguments against form) may be deployed affirmatively by taxpayers in various ways. These principles are not a one-way ratchet, as Gillis demonstrates. The landscape is intricate, and teasing out consequences isn’t easy. Gillis and Grewal’s work yields important insights into these difficult issues.

Overall, Gillis and Grewal offer essential and compelling perspectives on current debates about form and substance in tax law. Their work should be of significant interest to policymakers and scholars across the field of taxation.

Here’s the rest of this week’s SSRN Tax Roundup:

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