Tax Avoidance: Causes and Solutions - Scholarly Commons Home

5.0 Judicial/administrative rule
5.1 Examples of judicial and administrative rule
5.1.1 United States
Over time, the United States judiciary has long been activist in interpreting tax laws,
fashioning a number of anti-avoidance doctrines to reflect the presumed intent of Congress
in enacting the income tax laws. The Gregory 86 case is the starting point of the
development of those anti-avoidance doctrines. In the Gregory 87 case, the court developed
a doctrine allowing them to set aside certain legal constructions that do not have a
“business purpose”. When a legal construction has its clear purpose of avoidance of income
tax and does not at the same time involve some economic substance, it can be set aside by
the courts as having no effect for tax purposes and replaced by another characterization of
the underlying factual situation.
From that time, the courts have developed several judicial doctrines, such as constructive
income or ownership, 88 continuity of business enterprise, 89 and the step-transaction
doctrine 90 . The step-transaction doctrine allows a court to decompose a transaction into
several distinct steps, or to take several separate transactions together, in order to ascertain
whether each of the individual steps, or the overall complex transaction, meets the
requirements to benefit from certain effects under the tax law. 91
The application of substance over form approach, in United States tax case law, has been
summarized by Bittker & Eustice 92 as following:
“One of the persistent problems of income taxation, as in other branches of law, is the
extent to which legal consequences should turn on the substance of a transaction rather than
on the transaction's form. It is easy to say that substance should control, but, in practice,
form usually has some substantive consequences. If two transactions differ in form, they
86 Gregory v. Helvering, 69 F.2d 809 (2d Cir. 1934), aff'd, 293 U.S. 465 (1935).
87
Ibid.
88
Commissioner v. Court Holding Co., 324 U.S. 331 (1945).
89
Standard Realization Co. v. Commissioner, 10 T.C. 708 (1948).
90
West Coast Marketing Corp. v. Commissioner, 46 T.C. 32 (1966).
91
Ibid.
92
Bittker & Eustice, supra note 132, 1.05[2][b], 1.O5[3][d].
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