US Tax laws are based on several important doctrines. •The assignment of income doctrine - states that income must be taxed to the entity that renders the service or owns the capital with respect to which the income is paid. •The economic substance doctrine - holds that a transaction that changes the taxpayer’s economic situation only for the tax savings from the transaction can be disregarded by the IRS. •The business purpose doctrine - a transaction should not be effective or allowed for tax purposes unless it has a business purpose other than tax avoidance. •The step transaction doctrine - allows the IRS to collapse a series of intermediate transactions into a single transaction to determine the tax consequences of the arrangement in its entirety. To perform professional tax planning, we adhere to several maxims. First we need to analyze the variables that determine the tax consequences of a transaction. Then we apply one or more of the following tax planning maxim strategies that reduce tax and enhance cash flows: •Generate income in a lower tax rate entity – tax costs decrease. •Defer taxes - shift income to a future year when rates are lower, or move expenses forward to the current year when tax rates are higher or they can decrease income. •Generate income in a lower tax jurisdiction - tax costs decrease when income is taxed at a lower tax rate. •Change the character of the revenue - tax costs decrease when income is taxed at a preferential rate because of its character. Specific discussion question: Conduct tax research and provide a tax court case that disallowed one of the strategies described above and explain what happened, what tax strategy maxim was applied to try and reduce the tax, what doctrine was used to deny the tax strategy, and what were the Internal Revenue Code sections cited. Solution Principles of Application of the Federal Tax Laws With Emphasis on the Opinions of the Supreme Court of the United States By Jasper L. Cummings, Jr. CummingsRound3.indd 1 5/5/2010 9:29:56 AM APPLICATION OF THE FEDERAL TAX LAWS ii The views and opinions expressed herein are entirely those of the author. Nothing contained herein is to be considered as the rendering of legal advice, nor should it be construed as representing the opinions, views, or actions of the American Bar Association or the Section of Taxation, unless duly approved by the Association or the Section. This book is intended for educational and informational purposes only. The views expressed herein have not been approved by the House of Delegates nor the Board of Governors, nor the Section of Taxation of the American Bar Association and, accordingly, should not be construed as representing the policy of the American Bar Association. Printed in the United States of America. Published by the American Bar Association Section of Taxation 740 15th Street, N.W., Washington, DC 20005-1009. © Copyright 2010 American Bar Association. All rights reserved. No part of this publication.

1. US Tax laws are based on several important doctrines. •The assignment of income doctrine -
states that income must be taxed to the entity that renders the service or owns the capital with
respect to which the income is paid. •The economic substance doctrine - holds that a transaction
that changes the taxpayer’s economic situation only for the tax savings from the transaction can
be disregarded by the IRS. •The business purpose doctrine - a transaction should not be effective
or allowed for tax purposes unless it has a business purpose other than tax avoidance. •The step
transaction doctrine - allows the IRS to collapse a series of intermediate transactions into a single
transaction to determine the tax consequences of the arrangement in its entirety. To perform
professional tax planning, we adhere to several maxims. First we need to analyze the variables
that determine the tax consequences of a transaction. Then we apply one or more of the
following tax planning maxim strategies that reduce tax and enhance cash flows: •Generate
income in a lower tax rate entity – tax costs decrease. •Defer taxes - shift income to a future year
when rates are lower, or move expenses forward to the current year when tax rates are higher or
they can decrease income. •Generate income in a lower tax jurisdiction - tax costs decrease when
income is taxed at a lower tax rate. •Change the character of the revenue - tax costs decrease
when income is taxed at a preferential rate because of its character. Specific discussion question:
Conduct tax research and provide a tax court case that disallowed one of the strategies described
above and explain what happened, what tax strategy maxim was applied to try and reduce the
tax, what doctrine was used to deny the tax strategy, and what were the Internal Revenue Code
sections cited.
Solution
Principles of Application of the Federal Tax Laws With Emphasis on the Opinions of the
Supreme Court of the United States By Jasper L. Cummings, Jr. CummingsRound3.indd 1
5/5/2010 9:29:56 AM APPLICATION OF THE FEDERAL TAX LAWS ii The views and
opinions expressed herein are entirely those of the author. Nothing contained herein is to be
considered as the rendering of legal advice, nor should it be construed as representing the
opinions, views, or actions of the American Bar Association or the Section of Taxation, unless
duly approved by the Association or the Section. This book is intended for educational and
informational purposes only. The views expressed herein have not been approved by the House
of Delegates nor the Board of Governors, nor the Section of Taxation of the American Bar
Association and, accordingly, should not be construed as representing the policy of the American
Bar Association. Printed in the United States of America. Published by the American Bar
Association Section of Taxation 740 15th Street, N.W., Washington, DC 20005-1009. ©

2. Copyright 2010 American Bar Association. All rights reserved. No part of this publication may
be reproduced, stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without the prior written
permission of the American Bar Association. 10-Digit ISBN: 1-60442-756-6 13-Digit ISBN:
978-1-60442-756-1 Price: $135 for members of the Section of Taxation of the American Bar
Association and $155 for non-members. To order additional copies, contact the ABA Service
Center at (800) 285-2221 and request product code 5470744. CummingsRound3.indd 2 5/5/2010
9:29:57 AM PREFACE xi Preface This book is for practitioners and other students of the federal
tax laws. It addresses all issues arising in the application of the Internal Revenue Code that are
outside of the operation of the substantive law and tax procedure. Therefore, this book explores
statutory interpretation and construction and methods of fact finding used in the application of
the Code to taxpayers’ facts. In addition it collects, categorizes and explains the significant
statements of the United States Supreme Court on these subjects. Many of the subjects here
addressed have escaped careful analysis; for them this book provides such analysis, with
surprising results in many cases. For other more discussed subjects this book collects and
organizes sources that can be hard to find, and states truisms established in those sources that
have been overlooked. This book makes existing knowledge accessible and organizes and
presents the disparate but integrated issues in a way not elsewhere available, somewhat akin to a
restatement. Some subjects may seem obvious when presented, but are not necessarily part of
many tax lawyers’ tool kits simply because they have never focused on them; this book identifies
such subjects and places them in familiar context. Therefore, this book has some of the
characteristics of a (very long) law review article, and also aspires to be a black letter law
treatise. This book is organized with a detailed Table of Contents and is heavily footnoted so that
it can serve as a resource. In the age of electronic word searches, it is easy to forget that not all
useful information can be found that way. CummingsRound3.indd 11 5/5/2010 9:29:58 AM
APPLICATION OF THE FEDERAL TAX LAWS xii This book is organized around three
premises: (1) the federal tax laws are not different from the rest of the law, and do not require
special legal processes, apart from standard statutory interpretation and fact finding; (2) a wealth
of usually untapped guidance can be derived from the Supreme Court’s extensive federal tax
opinions; and (3) rather than episodically picking out phrases from Supreme Court (and other)
opinions for citation, practitioners and students need a firm grasp of the progress of the Supreme
Court’s federal tax jurisprudence and the meaning of certain high profile decisions of the Court,
including particularly those that have established base line concepts, such as Eisner v.
Macomber, Gregory v. Helvering, Higgins v. Smith, Court Holding, Knetsch, and Frank Lyon.
The lower federal courts have developed what they consider to be special legal processes for
federal tax cases (called herein “tax specific doctrines”), which with one exception are only

3. applications of standard law methods of fact finding or legal interpretation; the one exception is
the economic substance doctrine, which since the 1980s has come to be treated as a positive rule
of law, seemingly enacted by the lower federal courts. The tax specific doctrines are variously
described as assessing business purpose, substance over form, economic substance, step
transactions, sham transactions and related tax specific concerns. The economic substance
doctrine functions like an uncodified preamble to the Code, albeit applied in episodic and
unpredictable ways. Bittker & Lokken applied the term “preamble” for this purpose and stated:
“[T]ransactions are to be taken at face value for tax purposes only if they are imbued with a
‘business purpose or reflect economic reality’ . . .”1 Throughout, this book contrasts and
compares what the Supreme Court actually has done versus tax specific doctrines, and otherwise
comments on the doctrines’ wisdom. Many of the doctrines are just names for common fact
finding techniques (for example, stepping related transactions together for analysis). But the
economic substance doctrine has evolved into a positive rule of law. Moreover, a careful focus
on the Supreme Court’s tax opinions is justified by its huge federal tax caselaw of well over 900
opinions. That body of opinions is sufficiently large and authoritative to be the principal source
of guidance on the application of the Code. Advocates can and will always find and cite the
recent relevant opinions of the lower courts; this book helps them find the better Supreme Court
authority that can overcome adverse lower court rulings. This book is an objective reference
book with two differences: its analyses aim to go deeper than the standard reference works, by
identifying the most pertinent among competing authorities and questioning spurious authorities;
also, it has a stated point of view. 1Bittker & Lokken, Federal Taxation of Income, Estates and
Gifts ¶4.3.1 (2010) (Warren Gorham & Lamont 3d ed. 1999 & Supp. 2010).
CummingsRound3.indd 12 5/5/2010 9:29:58 AM PREFACE xiii In going deeper, this books
integrates three sources of information not directly related to tax: (1) general legal principles as
applied outside the tax law, (2) legal history both generally and in the tax law, and (3) academic
viewpoints on statutory interpretation. Ordinarily tax treatises do not attempt to integrate any,
much less all, of these sources. They are included here because they are useful to the
understanding of the current tax law, because they are often hard to find, and because the tax law
has suffered from isolation and from ignoring its own history. The summaries of academic
debates (for example, about Chevron deference and strict construction) may seem abstract, but
should serve the purpose of alerting the practitioner to otherwise foreign territory and permitting
an evaluation of the debates. As a reference this book contains in depth analyses of several sub
topics related to the application of the Code, such as section 269, the Chevron Doctrine, the
economic substance doctrine in the courts, and the several frequently cited Supreme Court
opinions. Admittedly, herein the discussions of some court opinions and certain issues (like
Chevron deference and tax equity) are quite detailed and heavily footnoted. That unusual detail

4. is provided either to support a counterintuitive point or as evidence of one of the fundamental
assumptions that underpins this book: too often the real tax law is overwhelmed by gloss and
cliché thus necessitating a careful and discerning reading of the apt authorities. The book’s point
of view is one of not necessarily assuming that the current state of the law is the most
advantageous, or that current understandings of the law are correct, or that (in some cases) even
Supreme Court opinions are correct in all of their reasoning. This book aims for a fresh look at
many accepted truths in the tax laws. This book draws inspiration from the three volumes of
Studies in Federal Taxation written by Randolph E. Paul between 1937 and 1940. Paul was the
consummate practitioner, administrator and scholar, who had little patience for the inscrutable.
He set a matchless standard in extracting concrete meaning from tax case law, and in stating both
what the law was and what it should be. I urge you to use this book to understand the origin and
place in the tax law of the tax specific doctrines, to understand the role and views of the Supreme
Court in federal tax cases, and to find support for more lawyerly approaches to legal
interpretation and fact finding in tax cases. That notwithstanding, in the end it may be necessary
to develop systemic changes to address the more intractable difficulties of the interpretation and
construction of the Code. Finally, I thank Professor Michael Mulroney for reading the
manuscript and offering many useful suggestions, and the American Bar Association Section of
Taxation for publishing this book. Jasper L. Cummings, Jr. Raleigh, North Carolina April, 2010