Risk, Return, And Objective Economic Substance‪.‬

I. Introduction The economic substance doctrine is a judicial method used to evaluate transactions suspected of being nothing more than elaborate (and illicit) tax avoidance. The doctrine was developed in the court system, and its precise requirements are continually evolving. Generally, the test consists of a subjective inquiry into whether a taxpayer had a nontax purpose for entering the suspect transaction and an objective inquiry into whether the transaction accomplished anything beyond tax effects. (1) These inquiries frequently focus on the economic profit available in the transaction because taxpayers often assert a profit motive as their nontax reason for entering the suspect transaction. Economic profit is determined by looking to the pre-tax landscape.