What are the doctrines of taxation?


Tax "doctrines" have evolved from various court decisions, some which have been codified or reflected in the Code or in regulations ("Judicial Doctrines"). Often the Judicial Doctrines overlap and intersect, and it is often difficult to distinguish one from another.

1. Evasion v. Avoidance. Structuring transactions and entities for tax avoidance and minimization is acceptable, as long as they are compliant with the other Judicial Doctrines. Tax avoidance is distinguished from tax evasion, which is considered criminal and involves some form of concealment or fraud.

2. Business Purpose Doctrine. The business purpose doctrine requires that a transaction will be respected only if it was carried out for a genuine business purpose (alongside any tax avoidance purposes). See Regulations to ยง 269, which disregard transactions that were "not undertaken for reasons germane to the conduct of the business."

3. Substance over Form. The "substance over form" doctrine holds that transactions generally will be taxed according to their economic substance rather than their actual form, unless the specific form was expressly intended by Congress. An example of permitted form is cash versus accrual method of accounting. The Step Transaction Doctrine (defined below) can be applied in addition to the Substance Over Form Doctrine in the same transactions.

4. Sham Entity. An entity that is a "sham" can be disregarded entirely for federal income tax purposes. A "sham" entity is an entity that is not formed for bona fide business purposes, and does not engage in actual business. The sole purpose of a business entity cannot be to avoid income tax.

5. Sham Transaction. Similar to the Sham Entity Doctrine, a transaction will be disregarded to the extent the transaction lacks any bona fide business purpose.

6. Step Transaction Doctrine. The Step Transaction Doctrine takes individual transactions and collapses them into an integrated whole in order to consider the entire substance of the matter rather than rely simply on its form. Transactions are integrated into one to the extent that the 'steps' are interdependent and focused toward a particular overall objective of avoiding or reducing tax liabilities.

7. Assignment of Income. Earned income is taxed to the person performing the service rather than the taxpayer who receives the income. Assigning the income does not transfer tax liability. Note that this doctrine applies to performance of services and does not apply to property.