The IRS released some guidance on September 13 on the codification of the economic substance doctrine, and issue that has worried practitioners (and likely taxpayers) since the doctrine was codified in the Health Care Education REconciliation Act of 2010 (Pub. L. No. 111-152, section 1409, codifying the doctrine in section 7701(o) of the Code).
Notice 2010-62 9Download Notice 2010-62. Economic Substance Guidance. pdf), due to be published in IRB 2010-40 and dated Oct. 4, provides interim guidance. The notice indicates that the IRS will rely on the case law developing the judicial doctrine to determine whether the two-pronged test for economic is satisfied--i.e., whether the transaction has sufficient non-tax economic benefits to satisfy the economic substance prong and whether the transaction has a significant non-tax business purpose. Not unexpectedly, the IRS will not permit taxpayers to rely on the case law under the judicial doctrine that required satisfaction of only one-prong of the test: both prongs must be satisfied to pass muster. Further the IRS indicates that it will continue to rely on prior case law to determine when the economic substance analysis is relevant, and expects that the case law on that determination will continue to develop under the codified test.
The Notice reiterates the position, stated at prior ABA tax section meetings and elsewhere, that the IRS does not intend to issue so-called "angel lists" of transactions that will not be subject to economic substance analysis, nor does it intend to issue lists of suspect transactions.
The statute provides that the IRS may treat foreign taxes as expenses for purposes of determining economic substance, and the Notice indicates an intent to deal with this issue. It also notes that courts may take foreign taxes into account as expenses in their analyses even prior to administrative guidance on this issue. The Notice indicates that the IRS will not issue private letter rulings on whether the economic substance doctrine is relevant to a transaction or whether a transaction complies with the requirement of IRC 7701(o).
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