Economic Substance Doctrine

The economic substance doctrine is a judicially-developed doctrine under which the anticipated tax benefits from a transaction may be denied if the transaction does not result in a meaningful change to the taxpayer’s economic position other than reducing federal income taxes. This result can occur even if the transaction otherwise satisfies all statutory and administrative requirements. The recent healthcare reform legislation codified this doctrine in Section 7701(o) of the Internal Revenue Code.

Although the doctrine is frequently applied, existing authorities do not clearly define the types of transactions that are subject to the economic substance doctrine. Accordingly, taxpayers are left with substantial uncertainty as to the circumstances in which this new statute will be applied. Additionally, strict liability penalties were added, making violation of the doctrine more costly than ever.

While application of this doctrine was always a consideration, its codification should alert the prudent tax advisor and his or her clients that its application may be more frequent and potentially more rigid. These changes in the law make it that much more important to have a qualified and quality tax attorney on your side.

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2011 Sunset

The amount of property that passes free of the federal estate tax is unlimited this year…so far. Estate tax is scheduled to return in 2011. The tax not only returns in 2011, it returns to the amount that existed in 2000 which allows only a $1,000,000 taxable estate to remain untaxed, as opposed to $3,500,000.00 last year.

Sunset Provisions

The return of the Federal Estate Tax in 2011 is due to a "sunset provision" in EGTRRA, (The Economic Growth and Tax Relief Reconciliation Act of 2001), the law that created these changes to the tax. A sunset provision is part of a law that requires the automatic termination of that law on a specific date.

Upcoming Changes?

A great deal of speculation circulates surrounding the potential changes to our Estate Tax laws. Rather than add to the rumors, FHP watches carefully for definitive indications of the end result. We don’t wish to frighten our clients into making changes that may not hold up or be necessary just so we can pad our profit margin.

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