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Angie Drobnic Holan
By Angie Drobnic Holan June 10, 2010

Law sets rule to prevent tax dodges

It's called the "economic substance doctrine." What it means is that people aren't allowed to find creative ways to avoid paying their taxes.

Here's how the U.S. Treasury Department defines it: "The common-law 'economic substance' doctrine generally denies tax benefits from a transaction that does not meaningfully change a taxpayer"s economic position, other than tax consequences, even if the transaction literally satisfies the requirements of the Internal Revenue Code."

In practice, the economic substance doctrine applies in court cases when tax filers, usually companies, are being sued for tax evasion. Tax filers have to prove that financial transactions that appear to be simple tax dodges actually benefit them.

The measure is expected to generate a relatively small amount of new tax revenue, about $4.5 billion over 10 years, according to the the Congressional Joint Committee on Taxation.

The economic substance doctrine was put into law as little-noticed part of the health care overhaul. We rate this Promise Kept.

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Angie Drobnic Holan
By Angie Drobnic Holan October 23, 2009

Treasury Department promotes "economic substance" doctrine

Yes, it's an arcane bit of the tax code. But President Barack Obama's campaign promise to codify the "economic substance" doctrine means that people wouldn't be allowed to find creative ways to avoid paying taxes. Here's how the U.S. Treasury Department describes the "economic substance" doctrine:

"The common-law 'economic substance' doctrine generally denies tax benefits from a transaction that does not meaningfully change a taxpayer"s economic position, other than tax consequences, even if the transaction literally satisfies the requirements of the Internal Revenue Code."

That means that tax filers would have to prove that financial transactions that appear to be simple tax dodges actually have an economic benefit.

The Treasury Department says it intends to formally adopt this as part of its regulations, so that courts could enforce it in tax evasion cases. We rate this promise In the Works.

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