The US IRS on October 9 released guidance on what constitutes a “transaction” for purposes of section 7701(o), which disallows tax benefits when a transaction lacks economic substance. The guidance also clarifies when the IRS will apply related penalties provisions of Section 6662(b)(6).
The IRS states that a “transaction” under section 7701(o) could be an aggregate of a series of steps. Additionally, when a series of steps includes a tax-motivated step that is not necessary to achieve a non-tax objective, the “transaction” tested for economic substance may include only the tax-motivated steps that are not necessary to accomplish the non-tax goal, the IRS said. “Separable activities may take many forms including, for example, the use of an intermediary employed for tax benefits and whose actions or involvement was unnecessary to accomplish an overarching non-tax objective,” the IRS said.
The notice also clarifies that if the IRS does not raise section 7701(o) to disallow claimed tax benefits, instead relying only upon other judicial doctrines to challenge a transaction such as substance-over form or step transaction doctrines, the IRS will not argue that a a section 6662(b)(6) penalty applies. Notice 2014-58
