The Sham Doctrine and Tax Law

Abstract

This paper considers the common law sham doctrine and its inability to achieve appropriate outcomes in tax cases. Tax cases raise particular issues that normal contractual cases do not. Generally for a sham to exist the common intention of parties to a transaction must be to deceive a third party. This requirement may result in a deceptive tax planning scheme escaping liability, where one party does not have an intention to deceive. The requirement for common intention has been altered in other areas of law such as employment and tenancy law. The requirement of common intention should now be altered in tax law. Instead of requiring all parties to a transaction to intend to deceive, just being reckless as to whether deceit occurs should be enough. Altering this requirement to allow recklessness should be limited to the party not receiving the tax benefit. Lowering the common intention threshold in this way would lead to better results in tax cases. The courts also need to be more willing to engage in an analysis of sham, in cases where this is warranted. The current reluctance by the courts to consider sham law in some of the most appropriate cases creates a flaw in the judicial process that is open to exploitation by taxpayers. A sham analysis, if adapted for tax law, could be a useful tool in preventing taxpayers from reducing their tax liability in unlawful ways.