Economic Substance Principle

Economic substance principle is a legal principle used by the courts to interpret the meaning of the Tax Code in regards to sham transactions designed to avert payment of taxes. For an in-depth understanding and examples of its use, read:  Economic Substance Princple (Doctrine).

Railroad Fund – Update 02/26/2020 Coronavirus Impact

Railroad Fund

I noticed that Union Pacific (I consider Union Pacific the highest quality stock within the six Class I railways of the railroad fund) is now at $165.00 even. A 17% drop is the requirement for me to buy; see my article: Union Pacific – Buy/Sell Model. The prior high was on 01/24/2020 at 9:55 AM at $188.90. A 17% drop means the price would need to dip to $156.79 before I can purchase any stock. If this happens, I will use the excess cash of $1,304.65 to make a purchase. I will go one step further, if my Norfolk Southern increases in value back to my buy point of about $202 per share, I’ll sell half to buy Union Pacific at this extremely low price. As stated in several of my articles, the key is purchase quality stock at a good price. Union Pacific as of this month is the best quality stock of the existing six railroads to choose from. I am simply reducing my risk at no cost to the fund. It is unlikely Union will drop while Norfolk Southern increases; but at least I conveyed my thinking related to economic substitution and its value with reducing risk.

Economic Substance Principle

Economic Substance Principle

The taxpayer must prove that the underlying economic transaction was not concocted to avoid or reduce tax liability. In the Gregory Vs. Helvering case, the Supreme Court actually uses the word  ‘sham’.