As part of the President's first budget proposal for fiscal year 2010, the Obama Administration has proposed codifying the "economic substance" doctrine. This judicial doctrine has long been used by the IRS to challenge taxpayer positions or recharacterize the treatment of certain transactions which the IRS views as shams.

REVENUE RAISER

At first blush, it may seem that incorporating a judicial doctrine into federal tax statutes would not be a major change to existing tax law. However, according to published reports, the codification of the economic substance doctrine is intended to raise up to $5 billion dollars of revenue over the next ten years. Clearly codifying the economic substance doctrine is intended to bolster the IRS's power to challenge and recharacterize taxpayer positions and discourage taxpayer's from engaging in aggressive tax planning to minimize federal taxation.

IRS EXAMINATIONS

Last month, the Obama administration announced the formation of a "Tax Gap" task force commissioned to simplify the tax code, close loopholes and raise revenues by combating the underreporting of income. The proposal to codify the economic substance doctrine seems to be another indication that the IRS will be more aggressive in audits and examinations in the foreseeable future.

CHANGES TO COME

Both the House of Representatives and Senate have approved a version of the President's fiscal year 2010 budget. The two chambers will negotiate a final bill to be sent to the President for his signature. We will keep you posted as the 2010 budget's tax provisions are signed into law.  

CONTACT US

To speak to a tax attorney about corporate tax planning or how to respond to IRS inquiries, please contact us here or call 713.650.9700.

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