The Economic Substance Doctrine

Download or read book The Economic Substance Doctrine written by William W. Chip and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Tax Management Portfolio No. 508-2nd, The Economic Substance Doctrine, analyzes the “economic substance doctrine” as codified in §7701(o) of the Internal Revenue Code. Section 7701(o) defines the “economic substance doctrine” as the “common law” developed by the courts to disallow tax benefits for tax-motivated transactions that had no “business purpose” or no “economic substance.” The “business purpose” test looks to the taxpayer's motives for entering into the transaction, while the “economic substance” test looks to the reality of the transaction. Prior to codification, the presence of either “business purpose” or “economic substance” was sufficient in some circuits to sustain a transaction's tax benefits (the “disjunctive” test); in other circuits both needed to be present (the “conjunctive test”). Section 7701(o) codified the “conjunctive” test by disallowing the federal tax benefits of any transaction for which the courts have found either “business purpose” or “economic substance” to be “relevant” unless, apart from federal tax benefits, there is both a “substantial purpose” for entering into the transaction and a “meaningful change” in the taxpayer's “economic position.” Section 7701(o) also clarifies how the “profit potential” of a transaction may be used to demonstrate economic substance. Of even greater importance to post-codification tax planning is the 20% penalty on §7701(o) adjustments that is imposed by §6662(a) of the Internal Revenue Code (increased to 40% if the transaction is not “adequately disclosed” on the return). The penalty applies without regard to whether the taxpayer had a professional advisor's tax opinion or any other “reasonable basis” for believing the transaction at issue had economic substance. Chapter I of the Portfolio summarizes the codified doctrine, including the strict-liability penalties that attach to economic substance adjustments and important guidance in the legislative history concerning when the doctrine is “relevant” to allowance of tax benefits from a tax-motivated transaction. Chapter II analyzes a series of court decisions that are regarded as landmarks in the development of the business purpose and economic substance doctrines. Chapter III analyzes other judicial doctrines, such as the step-transaction doctrine, that overlap or may supply insight into how the codified economic substance will be applied. Chapter IV distinguishes the conjunctive and disjunctive tests and analyzes the pre-codification circuit split concerning with test to apply. Chapter V discusses the pre-codification “profit potential” authorities. Chapters VI through VIII provide a comprehensive case-by-case survey of pre-codification case law, sorted by topic. This Portfolio may be cited as Chip, 508-2nd T.M., The Economic Substance Doctrine.