The “economic substance” doctrine allows the Commissioner to disregard transactions that lack a non-tax business purpose or economic substance, resulting in additional taxes being levied based on the true economic nature of the transactions. This doctrine is based on IRC section 7701(o) and has been developed by the courts to prevent tax avoidance schemes.
In the case of Acqis Technology v. Commissioner (TC Memo 2024-21), the court upheld the economic substance doctrine in a situation where there was an apparent scheme to evade taxes related to settlement proceeds from patent infringement claims. This case serves as a reminder of the importance of maintaining economic substance in transactions to avoid potential tax consequences.
By ignoring transactions that lack economic substance, the Commissioner can ensure that taxpayers are not using artificial structures to create tax benefits without a genuine business purpose. This helps to maintain the integrity of the tax system and prevent abuse of tax laws by individuals or businesses seeking to evade their tax obligations.