Economic substance definition
/What is Economic Substance?
Economic substance refers to a transaction that has a purpose besides the reduction of a tax liability. For a transaction to have economic substance, a taxpayer’s economic position must have been significantly impacted by it, not including any income tax effects. The concept is used in the examination of tax shelters to see if they are abusing the tax laws. When a tax shelter is determined to be abusive, it is disallowed and those using it are penalized by the IRS.