Substance over Form

About Substance over Form:

The Substance Vs. Form doctrine is a concept that distinguishes substance, which is the material or essential part of something, from form, which is the observance of a legal or technical manner or order. Doctrine which allows the tax authorities to ignore the legal form of an arrangement and to look to its actual substance in order to prevent artificial structures form being used for tax avoidance purposes. In some tax situations, the courts and the U.S. Internal Revenue Service look through the form to determine the substance of a transaction in order to find out what was done in fact rather than what the taxpayer contends occurred. In other situations, the form controls even though the substance of the transaction could have resulted from a different form. Examples of areas of substance vs. form conflict are:

• partnership vs. corporation.

• disregard of trust as an entity.

• disregard of corporation as an entity.

• collapsible corporation.

• allocation of income and deductions between related parties.

• agreement not to compete.

• assignment of income.

• sale of restricted property as compensation.

• debt vs. equity (thin capitalization).

• sale vs. lease.