It is commonly said that taxation -- at least sometimes -- follows the "substance" of a transaction, rather than its "form." However, determining what the "substance" of a transaction is and when it will (or will not) be given effect, in disregard of the "form," is not an easy task or one for which the courts have always given us clear guideposts. Moreover, the imagination and enthusiasm of taxpayers, investment bankers, and their respective advisors in creating new, ever-more-complex structures cannot always be constrained.
As a result, it has sometimes been possible to avoid taxation, in ways viewed as inappropriate by the Treasury Department and the Internal Revenue Service, by structuring financial transactions which utilize multiple entities. Certain transaction forms have been subject to attack, sometimes successfully, by the IRS, but the case-by-case and issue-by-issue development of the law has left the IRS "playing catch-up" again and again, as new techniques, arguably
