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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Economic substance’

The Economic Substance Doctrine Can Unwind Even the Best Laid Plans

Posted by William Byrnes on October 29, 2010


A rush of IRS challenges to transactions that provide your clients with a significant tax benefit may be on its way.  The IRS has new options for denying tax deductions and other tax benefits when it— at its discretion—believes that a transaction has been entered into solely for a tax reduction and not a valid business purpose.

This IRS`s “new” tool is the recently-codified economic substance doctrine, which was signed into law earlier this month by President Obama as part of the Health Care and Education Affordability Reconciliation Act of 2010. The IRS says that the act codifies only existing case law, but in practice, it gives the service the power to supplant a taxpayer`s business judgment with the service`s judgment of whether a transaction has profit potential, the end result being a denial of the tax benefit of transactions that the IRS judges not to have an economic purpose other than the reduction of taxes.

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