Empty Forms : Applying the Assignment-of-Income Doctrine to Contingent Liability Tax Shelters

Government attacks on abusive tax shelters often assume one of two forms. On the one hand, the Executive Branch brings actions that rest, in part, on broad judicial doctrines. One such doctrine, for example, requires that potentially abusive transactions demonstrate economic substance. On the other hand, congressional attacks on abusive tax shelters often assume the form of narrow amendment to the Internal Revenue Code. Using as a case study a popular corporate tax shelter based upon the assumption of contingent liabilities in a section 351 transaction, this paper shows why the two forms of attack often fail. Judicial doctrines such as the economic substance doctrine fail in the sense that they generally cast too wide a net to provide consistent guidance to the courts. Thus as standards, doctrines such as the economic substance doctrine are too broad. Conversely, precise amendments to the Code - as narrow rules - fail to keep pace with tax planners' innovations. Instead of the broad-standards or narrow-rules approaches to contingent liability shelters, this paper proposes a middle ground: a narrow judicial doctrine known as assignment of income. As a straightforward solution grounded in the underlying economics of a transaction, the assignment-of-income doctrine holds the potential to curb abusive contingent liability shelters consistently