Skip to main content
Unpublished Paper
Economic Substance and the Standard of Review
ExpressO (2008)
  • Christopher M. Pietruszkiewicz

Traditionally, appellate review hinged on the distinction between law and fact, producing a simplistic exercise – appellate courts review legal conclusions de novo while factual findings are reviewed under a clearly erroneous standard of review. The systemic difficulty with the fact/law distinction is defining fact and defining law. While appellate courts often create sound bites and offer elaborate musings on the definition of each, they maintain the misguided illusion that a trial court determination is either a question of law or a question of fact. In essence, an appellate court uses the fact/law distinction and the attendant standard of review to promote its view of the “correct result.”

Instead of focusing on hollow labels, Legal Proceduralists focus on the structure of decision making within an institution, placing primary emphasis on the meting out of responsibility among decision makers. Utilizing judicial responsibility as a benchmark, appellate courts should focus on developing the law in a particular area as guidance for future cases and rectifying egregious errors in particular cases even if unrelated to developing the law.

In the economic substance context, a clearly erroneous standard of review accomplishes both purposes. Economic substance is a fluid concept that eliminates the pretenses of manufactured transactions and gives the Internal Revenue Service the ability to challenge technical tax results based on subjective standards that overlay the objective rules prescribed by the Internal Revenue Code. A transaction has economic substance if the transaction is rationally related to a useful non-tax business purpose and/or if the transaction results in a meaningful and appreciable enhancement in the net economic position of the taxpayer other than the reduction of taxes.

Under both tests, a decision of a trial court, while likely to be significant in terms of dollars at issue, is unlikely to have any appreciable impact on the development of the law in the economic substance area because both questions focus on factually intensive, case specific questions with little value beyond the case at issue. Appellate decisions have no impact on the predictability of future cases and do not advance uniformity in the law. In such cases, judicial responsibility dictates the adoption of a clearly erroneous standard of review.

  • standards of review,
  • deference,
  • clearly erroneous,
  • de novo,
  • economic substance,
  • rule 52
Publication Date
March 4, 2008
Citation Information
Christopher M. Pietruszkiewicz. "Economic Substance and the Standard of Review" ExpressO (2008)
Available at: