Reproduced with permission from Tax Management Real Estate Journal, Real Estate Journal, 04/07/2010. Copyright 2010 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com Developments in Economic Substance: How Codification and New Case Law Will Change the Rules by Stuart J. Bassin, Esq., and John R. Lehrer II, Esq. * From relatively humble origins in a few phrases in the landmark Gregory v. Helvering 1 case, the economic substance doctrine has de- veloped 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 de- bate and litigation, often leaving practitioners with doubts regarding whether any particular transaction can survive an economic substance challenge. In recent years, Congress has debated whether the economic substance doctrine should be codified as part of the Internal Rev- enue Code (the Code). Much of the debate has centered on whether codification is good policy; questions regarding the technical for- mulation of the doctrine to be codified have re- ceived considerably less attention. Congres- sional passage of legislation codifying eco- nomic substance now appears imminent, 2 and the formulation of the doctrine and related pen- * Stuart Bassin is a partner and National Tax Litigation Team Leader at Baker & Hostetler LLP,Washington, D.C. John Lehrer is a tax attorney at Baker & Hostetler LLP. Earlier in his career, Mr. Bassin served as counsel for the United States in several of the cases discussed in this ar- ticle. The authors thank Mike Desmond, Jeff Paravano, and Paul Schmidt for their helpful comments. 1 293 U.S. 465 (1935). 2 Codification of the economic substance doctrine is in- cluded in the American Workers, State, and Business Re- lief Act of 2010, H.R. 4213 (as passed by the Senate on Mar. 10, 2010) at §421, and is also included in the House’s Substitute Amendment (Health Care and Educa- tion Affordability Reconciliation Act of 2010) for H.R. 4872, Reconciliation Act of 2010, in Combination With Senate-Passed H.R. 3590, Patient Protection and Afford- able Care Act (as passed by the House on Mar. 21, 2010) at §1409. (For simplicity, the House’s Substitute Amend- ment will be referred to as ‘‘H.R. 4872’’ throughout the remainder of this article.) The language of H.R. 4872 §1409 (‘‘House bill’’) is nearly identical to the language TAX MANAGEMENT REAL ESTATE JOURNAL a monthly professional review of current tax, legislative and economic developments TAX MANAGEMENT INC.
Developments in Economic Substance: How Codification and New Case Law Will Change the Rules
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