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Codification of the Economic Substance Doctrine: Issues, Uncertainties, and Application

Product Code - TMAU71
Speaker(s): Gary Vogel, Marjorie Rollinson, David Garlock, Kevin Richards
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New Section 7701(o) codifies the economic substance doctrine (or “ESD”), and imposes a strict liability penalty of up to 40% for transactions lacking economic substance. Treasury and the IRS have so far offered little guidance on the interpretation and application of this new section. The universe of transactions to which the ESD is relevant is unclear, and the statute and legislative history offer limited guidance on the means to satisfy the ESD where it is relevant. In light of these uncertainties and the significant stakes created by the strict liability penalty, practitioners are having to spend increasing amounts of time evaluating the potential application of the ESD to transactions on which they are advising.

This presentation focuses on the key transactional issues presented by Section 7701(o) and how they may be evaluated and resolved, including a discussion of common transactions raising potential ESD application issues that the speakers have encountered in practice.

Presentation Objectives:

The objectives of this presentation are twofold:

1. Review Section 7701(o) (and related penalty provisions) and the relevant legislative history.

a. When does Section 7701(o) apply?

i. What is a transaction to which Section 7701(o) is relevant?

ii.“Angel list” in the Joint Committee Report

iii.Defining “transaction” – when might steps be aggregated or disaggregated?

b. How is the ESD satisfied?

i. Interpreting the two-pronged statutory test – meaningful economic change and substantial non-Federal tax purpose.

ii.Measuring profit potential

c.Penalty provisions and administrative aspects (adequate disclosure, criteria for enforcement, etc.)

2.Discuss the application of Section 7701(o) to specific transactions.

a. “Basic business transactions” respected under longstanding judicial or administrative practice

b. Common transaction structures

c. Whether outcomes of any prior cases might now turn out differently (e.g, Shell Petroleum, Dover, and others)

Upon completion of this program, participants will be able to:

1.Understand the ESD as codified.

2.More effectively identify transactions to which Section 7701(o) may or may not be relevant, and determine its application to transactions to which it is relevant.

3.More effectively evaluate the existence of any risk posed by Section 7701 to a transaction undergoing consideration.

Gary Vogel, Marjorie Rollinson, David Garlock, Kevin Richards

Gary Vogel is part of the National Tax Department/Transaction Advisory Services practice, based in Washington, D.C. He focuses on corporate tax matters arising in domestic and cross-border transactions

Marjorie Rollinson is the National Director of International Tax Services Technical Services in Washington, D.C. Margie provides international tax planning for US multinational corporations, including foreign tax credits, controlled foreign corporations, and mergers and acquisitions.

David Garlock is a principal in the National Tax Department/Transaction Advisory Services practice, based in Washington, D.C. He focuses on financial products and instruments.

Kevin Richards is part of the National Tax Department/Joint Venture and Partnership Tax Services practice, based in Houston, Texas. Kevin provides domestic and cross-border planning for partnerships and other joint venture arrangements, with a primary focus on real estate and oil and gas transactions.