Codification of Economic Substance Doctrine in Federal Law Raises Questions About Potential Impact on States, Taxpayers

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

With the passage of the 2010 Revenue Reconciliation Act—health care reform—Congress enacted a new federal tax law provision that codifies the common-law doctrine of economic substance. The new I.R.C. § 7701(o) establishes a two-part test for determining when a transaction has economic substance, and it carries substantial new penalties for transactions that fail to meet the test. These provisions apply to transactions entered into after March 30, 2010. An open question is what impact the federal codification of economic substance might have on the states, which vary widely in applying the doctrine to combat certain corporate structures that have resulted in tax benefits. In this interview, BNA talks with Jeff Friedman, partner at Sutherland, Asbill & Brennan, about the new federal provision and the clarity—or lack of it—it could bring to the long-simmering “sham” transaction debate in the states.

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