Some audits are about bad math (or bad records): The
taxpayer has one set of numbers and the government grades her. Others are more
complicated: The taxpayer has carefully structured one or more transactions to
reach a particular result; the government decides to recharacterize them
according to the economic reality of the situation, which involves a higher tax
bill. The government can do that because in tax law, substance controls, not
form.
What happens if a taxpayer tries that? It generally does not work because the “Danielson Rule” binds a taxpayer to the form of the transaction she structured. In Commissioner v.… Read More