IRS Notice CC-2012-008 announces new Chief Counsel Coordination Procedures for asserting the economic substance doctrine, which was recently codified in Internal Revenue Code Section 7701(o). The notice is intended to ensure that the economic substance doctrine is applied consistently
If a transaction does not have economic substance, and the lack of economic substance results in an understatement of tax, that tax understatement is subject to a 20% penalty, if the transaction is disclosed on the tax return. If the transaction is not disclosed on the tax return, the penalty jumps to 40%. Once the economic substance doctrine is invoked, a taxpayer is precluded from claiming the "reasonable cause" exception to avoid the penalties. The Notice incorporates a Large Business & International (LB&I) Directive that had been previously issued.
The Notice provides the following:
- Requires revocation of any letter ruling issued to the taxpayer under examination or in litigation before assertion of an economic substance doctrine adjustment, even if the ruling did not address the economic substance doctrine.
- In all cases when Counsel advises the field on the economic substance doctrine it should consider the factors outlined in the prior LB&I Directives, even though they are limited to LB&I taxpayers and examiners.
- All assertions of the economic substance doctrine should be coordinated through the Associate Chief Counsel for Procedure and Administration.
The Notice also provides some technical guidance on the possible revocation of prior letter rulings; the Notice mentions the revocation of letter rulings prior to the assertion of the doctrine, even if the letters do not relate to economic substance. For the time being, however, the IRS will not issue a private letter ruling or determination letter regarding whether the economic substance doctrine is relevant to any transaction or whether any transaction complies with the requirements of section 7701(o). Most importantly, however, the Notice provides for national coordination of economic substance cases.
To read the Notice in its entirety, click here.