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Living with (and Dying by) the Codified Economic Substance Doctrine


Martin J. McMahon Jr.


University of Florida - Levin College of Law

June 11, 2010

University of Florida Levin College of Law Research Paper No. 2010-13

Abstract:     
This article examines recently enacted section 7701(o), codifying clarifications to the judicial economic substance doctrine, and the associated new strict liability penalty regime applicable to transactions that are found to lack economic substance. Section 7701(o) provides that for a transaction to satisfy the economic substance doctrine it must meet a conjunctive test requiring, first, that the transaction change the taxpayer’s economic position in a meaningful way apart from Federal income tax consequences, and, second, both that the taxpayer have a substantial nontax purpose for entering into such transaction. The article traces the origins of these requirements to various judicial applications of the economic substance doctrine, or one of the various other judicial anti-abuse doctrines, beginning with Gregory and going all the way up to the recent decisions of the Court of Appeals for the Fifth Circuit in Klamath Strategic Investment Fund v. United States. The article examines each of the subsections of § 7701(o) to put each of them in the context of prior case law, and where possible to make some assessment of the future impact of the various provisions. In this context the article compares various cases the outcome of which likely would not have been affected, or likely would have been affected, had section 7701(o) been in effect at the time of the transactions, ranging from Cottage Savings to the recent ConEd case. The article considers transactions that the legislative history suggests should be insulated from application of the economic substance doctrine and discusses practitioner suggestions that an “angel list” should be promulgated. Unlike most prior analysis, the article suggests that the Treasury’s hesitancy to promulgate an angel list is well founded.

Number of Pages in PDF File: 47

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Date posted: June 12, 2010  

Suggested Citation

McMahon, Martin J., Living with (and Dying by) the Codified Economic Substance Doctrine (June 11, 2010). University of Florida Levin College of Law Research Paper No. 2010-13. Available at SSRN: http://ssrn.com/abstract=1623822 or http://dx.doi.org/10.2139/ssrn.1623822

Contact Information

Martin James McMahon Jr. (Contact Author)
University of Florida - Levin College of Law ( email )
P.O. Box 117625
Gainesville, FL 32611-7625
United States
352-273-0931 (Phone)
352-392-7647 (Fax)
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