Grewal: When Is The Economic Substance Doctrine 'Relevant' To A Transaction?

Andy Grewal (Iowa; Google Scholar), When Is the Economic Substance Doctrine 'Relevant' to a Transaction?:

In 2010, Congress added Section 7701(o) to the tax code and codified the economic substance doctrine. That doctrine had allowed courts to override tax statutes in favor of judge-made tests. The enactment of Section 7701(o) partly addressed constitutional objections to that practice.

Unfortunately, when it enacted Section 7701(o), Congress failed to address a critical question: When does the economic substance doctrine properly apply? The statute says that the doctrine will apply whenever "relevant" but offers no further elaboration of that term. In a highly unusual move, Congress also said that courts could not look to the statute for guidance on when the doctrine might be relevant.

This Chapter explains the interpretive difficulties that will arise when courts try to reconcile the Section 7701(o) "relevant" standard with pre-enactment case law. Given those difficulties, the statute may be doomed to failure.