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On August 23, 2024, the NAM filed an amicus brief urging the Tax Court to clarify the proper application of the economic substance doctrine, a tax doctrine found in the Internal Revenue Code. That doctrine allows the Commissioner of the IRS to disallow a tax benefit for engaging in a transaction not likely to produce economic benefits aside from reducing tax liability. In this case, the petitioners claimed tax deductions for insurance premiums paid. The Tax Court sustained the Commissioner’s tax deficiency determinations against the petitioners after concluding that the insurance premium payments do not qualify for tax deductions. The Tax Court must now decide whether the petitioners are liable for accuracy-related penalties for the years of underpayment and has asked for amicus briefs on the application of the economic substance doctrine.

In our amicus brief, we explain that the doctrine does not apply to transactions for which the tax code authorizes tax-beneficial treatment and courts are required to first determine whether the doctrine should apply before proceeding to apply it to disallow a tax benefit. Failing to first determine whether the economic substance doctrine is relevant to a transaction has the consequence of expanding the reach of the doctrine in ways that could nullify Congress’s policy judgment regarding which transactions should receive tax benefits that allow manufacturers to compete in a global economy.