Title
Economic Substance and the Supreme Court
Abstract
The Supreme Court grants certiorari in a wide variety of fascinating cases. Occasionally, it agrees to decide tax cases, too.
Perhaps because of the perceived dryness of tax law, the Court has been reluctant to address the validity of the so-called "economic substance doctrine." Though there are too many formulations of the doctrine to count, the courts typically hold that even when a taxpayer has met a statute's requirements, he cannot enjoy any of its benefits unless his conduct reveals a business purpose and a reasonable expectation of profit.
Economic substance cases raise a host of difficult factual and legal issues, and one can understand why the Court might not wish to get involved. However, the lower courts' creation of an economic substance doctrine contradicts Supreme Court precedent and is inconsistent with well-settled rules of statutory interpretation. Given that the doctrine is a prerequisite to the application of every Code provision offering tax benefits, the Court should reiterate its prior holdings and instruct the lower courts that the casual disregard of statutory language is inappropriate.
While the Court itself applies economic substance principles from time to time, it does so only because the governing statute makes those principles relevant. The lower courts, contrarily, apply economic substance principles regardless of what the Code says (i.e., they apply a "free-floating" test). By ignoring statutory language, the courts have essentially reduced Congressional intent to one of several factors in their analysis. That approach flatly contradicts a long line of Supreme Court cases holding that the sole function of courts is to give effect to the will of the legislature.
This Report argues that the lower courts' application of a free-floating economic substance test to tax statutes cannot be reconciled with the Supreme Court cases that purportedly gave birth to the doctrine.
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