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95 Iowa Law Review 389 (2010)


Transactions that claim inappropriate tax benefits are a perennial problem. When the IRS claims a transaction is abusive, courts generally examine whether the taxpayer had a business purpose and whether the transaction had economic substance (essentially a prospect of profit before taxes). This two-pronged "economic substance doctrine" developed from a series of Supreme Court cases.

Unfortunately, the economic substance doctrine provides a poor proxy for the real question, which was the focus of the early cases-whether the claimed tax results are consistent with Congress's intent. One important drawback of the shift from a focus on congressional intent to a focus on the taxpayer's intent and the prospect of pre-tax profit is a doctrine that is much easier for taxpayers to manipulate. The result is a test that does little to distinguish tax shelters and other abusive transactions from legitimate ones.

This Article therefore argues that the modern economic substance doctrine should be abandoned and replaced with a direct inquiry into congressional intent. Others have addressed the mechanics of determining congressional intent, including how to apply the purposive method of interpretation used in such cases as Gregory v. Helvering. This Article instead examines why courts today generally do not perform this vital inquiry and explains why they should.