Solution
.
ECONOMIC SUBSTANCE refers to the application of income tax laws, i.e., the substance of
the transaction, rather than its form, determines the tax consequences, with few exceptions. The
\"form\" of a transaction is only the label the interested parties attach to their arrangement. For
instance, an arrangement might be called a compensation agreement, loan, lease or sale.
Documents may support the form, but the courts are not concerned with these labels or papers
that purport to govern the transaction -- they focus on its substance. The \"substance over form\"
analysis is used to dissect self-serving transactions between parties, including loans and
payments to family members; transactions between related corporations and their shareholders,
partnerships and their partners; and between trusts and their beneficiaries. For instance, sale of a
home by a parent to a child may be re-characterized by the court as a gift, if the child never pays
for it. Related-party transactions provide fertile territory for self-dealing, with the tax benefit as
the real motivating purpose, disguised by the form of the transaction. In contrast, arms-length
transactions with independent third parties are far less vulnerable.
Example :- A company is short of cash, so it sells its machinery to the bank and obtains it back
on a lease. It is called sale and leaseback. Although the legal ownership has transferred but the
underlying economics remain the same and hence under the substance over form principle the
sale and subsequent leaseback are considered one transaction.
Solution.ECONOMIC SUBSTANCE refers to the application of income ta.pdf
1. Solution
.
ECONOMIC SUBSTANCE refers to the application of income tax laws, i.e., the substance of
the transaction, rather than its form, determines the tax consequences, with few exceptions. The
"form" of a transaction is only the label the interested parties attach to their arrangement. For
instance, an arrangement might be called a compensation agreement, loan, lease or sale.
Documents may support the form, but the courts are not concerned with these labels or papers
that purport to govern the transaction -- they focus on its substance. The "substance over form"
analysis is used to dissect self-serving transactions between parties, including loans and
payments to family members; transactions between related corporations and their shareholders,
partnerships and their partners; and between trusts and their beneficiaries. For instance, sale of a
home by a parent to a child may be re-characterized by the court as a gift, if the child never pays
for it. Related-party transactions provide fertile territory for self-dealing, with the tax benefit as
the real motivating purpose, disguised by the form of the transaction. In contrast, arms-length
transactions with independent third parties are far less vulnerable.
Example :- A company is short of cash, so it sells its machinery to the bank and obtains it back
on a lease. It is called sale and leaseback. Although the legal ownership has transferred but the
underlying economics remain the same and hence under the substance over form principle the
sale and subsequent leaseback are considered one transaction
