The Internal Revenue Service released Notice 2014-58 entitled “Additional Guidance under the Codified Economic Substance Doctrine and Related Penalties”. This newly announced notice provides further guidance on applying the economic substance doctrine and related and accuracy-related penalty, covering mainly two following topics: 1) definition of “transaction” for purpose of codification under the economic substance doctrine, and 2) related penalty amendments.

  • For purpose of the codified economic substance doctrine under section 7701(o), IRS referred to an analogous definition of reportable transaction in order to define the statutory term “transaction”, namely, “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.” While the Notice indicates that whether the economic substance doctrines applies will be determined case-by-case, it also purports aggregation approach (a transaction is aggregated when “a plan that generated a tax benefit involves a series of interconnected steps with a common objective”), as well as disaggregation approach (a transaction involves a series of steps including “a tax-motivated step that is not necessary to achieve a non-tax objective”).
  • The meaning of “similar rule of law” as defined in the Notice is “a rule or doctrine that applies the same factors and analysis that is required under section 7701(o) for an economic substance analysis,” despite the use of other terms such as shame transaction doctrine. With respect to penalties, the Notice states that the IRS will apply penalty when the it arises under section 6662(b)(6), as well as under section 7701(o) to disallow the claimed tax benefits because the transaction needs to meet the requirements of similar rule of law.

Notice 2014-58 is effective for transactions entered into after March 30, 2010.

See IRS Notice 2014-58.

 

Posted by Jiaqi Wang, Associate Editor, Wealth Strategies Journal