The Planner

Taxpayer Lacks Substance

Scroll down to see more
Arrow down button
The Planner illustration graphic
Close popup button
January 12, 2011
Core Group US
Tax News

Taxpayer Lacks Substance

I’ve been accused of that a couple of times, but in this case, I’m talking about economic substance. Recently a taxpayer lost their battle with the IRS, with the Tax Court citing that the transactions of their business entities lacked economic substance, and were only done to pay the couple’s personal living expenses.

Believe it or not, the IRS actually has written guidance on the subject, giving taxpayers a two- prong test to determine whether the transaction has economic substance. The first is that the transaction must, in a meaningful way (other than federal tax purposes), CHANGE the taxpayer’s economic position. The second test is that the taxpayer has a substantial PURPOSE (other than federal income tax purposes) for the transaction. Seems pretty simple, huh?

As in most things with the IRS, they (and the Tax Court) are going to look at the facts and circumstances surrounding the transaction. As an example, in the above-mentioned case, the taxpayer failed to show the economic substance for one of their entities paying for the individual’s food, medical and dental, and residential real property taxes. Although these items may have been deductible to the individual taxpayer, the transactions at a company level failed to prove economic substance (other than just not having to pay income tax).

As I am so fond of saying, pigs get fat and hogs get slaughtered. Often times small business owners go to extreme lengths to not pay income taxes when in reality they are doing nothing other than playing “audit roulette”. When looking at transactions of a business entity, try applying a simple test, if taxes had nothing to do with it, would I be doing this?

We Are Here To Help

Let our experts serve you with any of you bookkeeping, payroll or tax needs. Contact our offices in Oklahoma City: 405-288-1209 or Tulsa: 918-209-3441 to get the help you require.

Ask Us a Question
Seems like no one has asked a question yet. Be the first one to do so by filling the form below
Thank you for engaging with us!
We’ll review your question and notify you as soon as we post our answer as quickly as possible. If you have any other questions, you can reach us at your earliest convenience
Oops! Something went wrong while submitting the form.
More Related Content
We couldn't find any related content.
Corey using his computer

Ready to make more money and keep more of it?

Each day you tell yourself you’ll get to this “one day” you are throwing money out the window. You risk getting to a point where you want to exit or retire, but you aren’t able to. The growth of your business, and your ideal outcome for your future depend on setting this up now.

Schedule Free Consultation
Contact Us
We respect your Privacy. The information you provide will be used to answer your question or to schedule an appointment if requested.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Close popup button