RELEVANCE MATTERS AFTER PATEL: WHERE THE ECONOMIC SUBSTANCE DOCTRINE GOES FROM HERE

Authors

• Daniel Chung

Document Type

Article

Abstract

This article examines the modern Economic Substance Doctrine (ESD) through the framework of the Tax Court's decision in Patel v. Commissioner. The author argues that Patel serves as a "doctrinal reset," restoring the ESD to its intended role as a narrow, purpose-driven judicial backstop rather than a generalized anti-abuse tool. Central to this analysis is the reemergence of a "relevance" inquiry, which requires courts to determine if the ESD applies to a transaction at all—based on pre-codification common law—before engaging the statutory two-prong test under Section 7701(o) . While the court in Patel ultimately found the doctrine relevant and sustained a 40% strict-liability penalty for an abusive micro-captive insurance arrangement, the article highlights how the decision's insistence that relevance is not presumed constrains the doctrine's reach . Ultimately, the article explores how this threshold inquiry reshapes tax litigation, addresses continuing uncertainties for taxpayers and the IRS, and reinforces the importance of precise statutory interpretation in an era of legislatively enacted tax incentives .

First Page

1

Last Page

42

Recommended Citation

Daniel Chung, RELEVANCE MATTERS AFTER PATEL: WHERE THE ECONOMIC SUBSTANCE DOCTRINE GOES FROM HERE, 19 J. Bus. Entrepreneurship & L. 1 (2026)
Available at: https://digitalcommons.pepperdine.edu/jbel/vol19/iss1/1