Notice defines terms for economic substance doctrine
On Thursday, the IRS provided guidance defining "transaction" for purposes of applying the Sec. 7701(o) economic substance doctrine and "similar rule of law" for purposes of the Sec. 6662(b)(6) accuracy-related penalty (Notice 2014-58).
The economic substance doctrine is a common law judicial doctrine that disallows tax benefits of a transaction if the transaction lacks economic substance or a business purpose. The doctrine was codified in 2010 in Sec. 7701(o), which defines a transaction as having economic substance if (1) the transaction changes in a meaningful way (apart from its federal income tax effects) the taxpayer's economic position; and (2) the taxpayer has a substantial purpose (apart from those tax effects) for entering into the transaction.
In the notice, the IRS states that for purposes of determining whether the codified economic substance doctrine applies, a transaction generally includes all the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement; and any or all of the steps that are carried out as part of a plan. Facts and circumstances determine whether a plan's steps are aggregated or disaggregated when defining a transaction. Read more on the Journal of Accountancy.