Tax Notes Today Quotes Monte Jackel on Economic Substance Doctrine

Tax Notes Today has quoted Monte Jackel, senior counsel in the tax practice at Akin Gump, in the article “News Analysis: What’s Next for the Economic Substance Doctrine?”

The article reports that the main reasons for retaining the doctrine, which states that a transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to be considered valid (section 7701(o)), are budgetary and political. The Congressional Budget Office estimated last year that repeal of the economic substance doctrine and penalties would result in a federal revenue loss of $5.8 billion over the next 10 years.

Jackel said that, although that revenue estimate is not large compared with other federal budget numbers, the prospect of losing revenue, coupled with the political desire to be seen as tough on tax system abuse, probably means that the codified doctrine would not be pulled as part of either tax reform or a replacement of the Affordable Care Act.

Jackel added that if Congress is going to keep the codified doctrine, it should require the IRS and Treasury to use it. No relevant regulations, he said, were issued during the Obama administration, and the IRS Large Business and International Division in 2011 made it more difficult for the agency to assert the penalty against big companies. “It refused to write regs dealing with economic substance,” he said. The risk of not applying the codified doctrine, Jackel pointed out, is that taxpayers and practitioners might decide they don’t have to worry about section 7701(o) other than addressing it in opinion letters.