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Tax Law Roundup current law developments in U.S. taxation

Category Archives: Economic Substance

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New Guidance on Economic Substance Doctrine

Posted in Economic Substance, Procedure

Notice 2014-58 adds some clarity to when the IRS will assert the strict-liability economic substance penalties and how they will determine the “transaction” that is disregarded under the Section 7701(o) economic substance doctrine.  The new guidance amplifies Notice 2010-62 and also formalizes some of the unofficial guidance in the 2011 IRS LB&I field directive. IRS… Continue Reading

8th Circuit Affirms In Wells Fargo – No Business Purpose to Transaction Accelerating Contingent Liabilities

Posted in Deductions, Economic Substance, Litigation/Controversy, Tax Shelters

A new 8th Circuit Wells Fargo Decision held for the IRS, denying the acceleration of deductible expenses in a “contingent-liability strategy” because the transaction lacked economic substance/business purpose.  What was the strategy? Under the strategy, Wells Fargo contributed high-basis valuable assets and deductible contingent liabilities into a subsidiary corporation in a purported tax-deferred transaction.  The… Continue Reading

IRS Throws the Book At Leveraged Partnership Structure

Posted in Economic Substance, Joint Venture, Partnership/LLC, Passthrough Entity, S corporation

In ILM 201324013 the IRS sent a resounding message to taxpayers using partnerships and debt financing to “sell” assets to a buyer without paying tax – make sure your seller guarantees are real and subject to normal commercial terms.  In attacking  one such “seller”  indemnity, the IRS concluded that: (1)  “The indemnity lacked important features… Continue Reading

Tax Court Applies Economic Substance Doctrine in STARS Tax Credit Transaction

Posted in Economic Substance, Tax Shelters

In a case of first impression, the Tax Court ruled for the IRS in denying foreign tax credits to the Bank of New York (BNY) in an elaborate $1.5 billion financing transaction, resulting in income tax deficiencies over $200 million for the years at issue.  The transaction, marketed by KPMG and Barclays to BNY, was… Continue Reading

IRS Wins Con-Ed LILO Case On Appeal – No Substance to Lease or Debt

Posted in Debt vs. Equity, Economic Substance, Litigation/Controversy, Tax Shelters

In a reversal of the taxpayer-favorable lower court opinion, the Appeals Court for the federal Court of Claims concluded that Consolidated Edison’s Lease-In Lease-Out (LILO) transaction did not have economic substance and the purported lease was not a “true lease”.  The IRS “listed” this particular transaction in Rev. Rul. 2002-69 and Congress further stopped these… Continue Reading

Third Circuit Concludes Historic Rehab Credit Investors Were Not Partners

Posted in Debt vs. Equity, Economic Substance, Partnership/LLC, Real Estate, Tax Credits

The IRS has won a significant victory in the world of tax credit partnerships.  Federal tax credits are typically monetized through syndicated credit-investment partnerships where the investor is required to be treated as a partner for tax purposes in order to receive an allocation of the credit.  In a reversal of the Tax Court, the… Continue Reading

10th Circuit Affirms Taxability of Variable Prepaid Forward Contracts

Posted in Economic Substance, General, Securities

The Tenth Circuit, in Anschutz v. Commissioner, affirmed a Tax Court decision taxing the disposition of appreciated stock through a Variable Prepaid Forward Contract (VPFC).  The underlying issue was whether the complex financial arrangement created a taxable constructive sale.  The transaction involved a series of contracts including (1) a “forward contract” to sell the appreciated… Continue Reading

First Circuit Applies 40% Valuation Penalty On Son of BOSS Transaction

Posted in Economic Substance, General, Partnership/LLC, Tax Shelters

In Fidelity International, the First Circuit upheld a 40% valuation penalty on a so-called “Son of BOSS” transaction described in Notice 2000-44.  These transactions involved contributing offsetting long and short options into a partnership and claiming that the net effect of the options resulted in a very high tax basis in the partnership for purposes of… Continue Reading

IRS Has Three New Wins On Tax Shelter Cases

Posted in Economic Substance, General, International, Litigation/Controversy, Partnership/LLC

The Justice Department touted three significant wins on tax shelter cases involving importing foreign built-in tax losses, foreign tax credits, and generating tax losses from “underwater” commercial leases. In the first case, Southgate Master Fund LLC v. United States, the Fifth Circuit Court of Appeals, affirmed a lower court ruling that a purported “partnership” was… Continue Reading

Tax Court Slams “DAD” Loss Importation Shelter

Posted in Economic Substance, Partnership/LLC, Tax Shelters

In Superior Trading LLC v. Commissioner, the Tax Court denied losses and imposed penalties on the “Distressed Asset/Debt” tax shelter, otherwise known as the “DAD” shelter.  The IRS previously described this transaction in a 2007 Coordinated Issue Paper.  The DAD transaction involves a tax-indifferent party contributing built-in loss assets, in this case Brazilian consumer receivables,… Continue Reading

New IRS Guidance to Field on Applying Economic Substance Doctrine

Posted in Economic Substance, Tax Shelters

The IRS issued guidance to its field offices to instruct examiners when appropriate to seek approval to raise the economic substance doctrine.  The guidance also sets forth a series of inquiries the examiner must develop and analyze in order to seek approval for the ultimate application of the doctrine in the examination. Substantive guidance includes… Continue Reading