Saturday, December 3, 2011

IRS § 7701(o)- Economic Substance Test

New Statute, § 7701(o) of the Internal Revenue Code- Economic Substance Test 

If a taxpayer wants a transaction respected, Transaction must:

  1. Transaction must change the economic position in a meaningful way, AND,
  2. Taxpayer must have substantial non-tax purpose behind the transaction, 
  3. Conjunctive test because of the AND. In essence, it is really the judicial doctrine, formally referred to at the business purpose test. 11th Circuit. 
§ 7702- More detail about the business purpose prong. Pre-tax profits have to be substantial in comparison to the present value in comparison to the after tax benefits.

§ 7701(5)(a) – The IRS and courts are supposed to decide this under the economic substance test

§ 6662- Penalty section. IMPOSES STRICT LIABILITY penalty for violating this. They can’t argue that they had reasonable cause to engage in the transaction.

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