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Substance v. form

Individuals should arrange their financial transactions in a manner that will minimize their tax liability. If a transaction is all it purports to be and not merely a transaction to avoid taxes, then it is valid. If the transaction is solely to avoid taxes and there is no business purpose to the transaction, then it is invalid. The fact that a taxpayer uses one form of transaction rather than another to minimize taxes does not invalidate the transaction. A good example of when substance v. form is a significant issue is in the area of leases. Payments under a lease are tax deductible. Paymetns under a purchase agreement are not tax deductible. Therefore, it is of utmost importance to determine the true "substance" of this type of transaction. Questions to be asked might include: Do any equity rights transfer to the lessee at the end of the lease period? May the lessee buy the property at a nominal purchase price? With a lease transaction it is immaterial that the parties refer to the transaction as a lease. The true substance of the transaction controls over the form.