Tax Management Real Estate Journal: Developments in Economic Substance

Articles / April 7, 2010

Washington, D.C., partner Stuart Bassin and associate John Lehrer co-authored an article, "Developments in Economic Substance: How Codification and New Case Law Will Change the Rules," which was published in the April 7, 2010, edition of the Tax Management Real Estate Journal.

According to Bassin and Lehrer: "From relatively humble origins in a few phrases in the landmark Gregory v. Helvering case, the economic substance doctrine has developed into one of the most important topics in the world of tax litigation and tax planning. Review of the doctrine’s history shows how courts and the Internal Revenue Service (IRS) have developed a relatively simple idea into a rapidly growing, multi-faceted series of rules for determining whether specific transactions have sufficient economic substance. Especially during the past decade, the contours of those rules have been the subject of continuing debate and litigation, often leaving practitioners with doubts regarding whether any particular transaction can survive an economic substance challenge . . . Congressional passage of legislation codifying economic substance now appears imminent, and the formulation of the doctrine and related penalty provisions under consideration can be usefully compared to the judicial precedent to evaluate the basic question of whether codification will change existing legal requirements."

The authors continue: "The simple concept enunciated by the Gregory Court in 21 words—'the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended'— has evolved into an edifice of rules that, when reduced to legislative language, requires several hundred words to elucidate. All of that verbiage reflects numerous subsidiary issues that have been addressed in the hundreds of cases that have defined the parameters of the economic substance doctrine during the past 75 years. By focusing on those subsidiary issues and their treatment in the proposed legislation, practitioners can better advise their clients regarding the reach of the economic substance doctrine, regardless of whether Congress ultimately enacts any of the current proposals."

Click to read the full article, "Developments in Economic Substance: How Codification and New Case Law Will Change the Rules."