Jack Cummings was quoted in a Compliance Week article discussing IRS’ internal guidance on the economic substance doctrine that suggests examiners will have to see negative evidence before they are likely to raise a red flag on any given transaction. “The directive is very pro-taxpayer,” Cummings said. “It can reasonably be read to take a lot of pressure off of compliance officers who have been probably fairly concerned about this.”
“When Congress codified the economic substance doctrine, it did so in a way that led to some confusion,” he continued. “Congress said we're not going to tell you what the economic substance doctrine is, but when the court says it applies, here's the test.”
“It left a lot of us scratching our heads as to what to do, particularly because the statute imposed a very high penalty if you lost a tax case under the doctrine. While the latest guidance is meant to give internal direction on how it will be applied, it serves as guidance for corporate tax and compliance staff as well. It maps out a four-step process for an examiner to follow in deciding whether to blow the whistle on a given transaction. Examiners are told to evaluate the circumstances from both a negative and affirmative viewpoint—that is whether application of the doctrine is likely not appropriate, then whether it may be appropriate. If the examiner needs to look further, the guidance outlines a series of questions to follow and gives instructions on how to engage higher authorities' approval.”
“The guidance is specific enough that tax and compliance officers should be able to build their own internal checklists for assessing transactions to evaluate their risk of raising an examiner's concern. It's the best guidance corporate taxpayers have received so far.”
“Up to now, the government has not fleshed out the safe harbors,” he said. “You didn't have much to go on. Now with this directive, we know what the economic substance doctrine means to the IRS.”
“When Congress codified the economic substance doctrine, it did so in a way that led to some confusion,” he continued. “Congress said we're not going to tell you what the economic substance doctrine is, but when the court says it applies, here's the test.”
“It left a lot of us scratching our heads as to what to do, particularly because the statute imposed a very high penalty if you lost a tax case under the doctrine. While the latest guidance is meant to give internal direction on how it will be applied, it serves as guidance for corporate tax and compliance staff as well. It maps out a four-step process for an examiner to follow in deciding whether to blow the whistle on a given transaction. Examiners are told to evaluate the circumstances from both a negative and affirmative viewpoint—that is whether application of the doctrine is likely not appropriate, then whether it may be appropriate. If the examiner needs to look further, the guidance outlines a series of questions to follow and gives instructions on how to engage higher authorities' approval.”
“The guidance is specific enough that tax and compliance officers should be able to build their own internal checklists for assessing transactions to evaluate their risk of raising an examiner's concern. It's the best guidance corporate taxpayers have received so far.”
“Up to now, the government has not fleshed out the safe harbors,” he said. “You didn't have much to go on. Now with this directive, we know what the economic substance doctrine means to the IRS.”