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

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

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.

 This article is available to subscribers of the Weekly State Tax Report. For more information or to take a trial to the report, click here.

Request Weekly State Tax Report