TEI recommends removal of economic substance provisions from AMT Relief Act.

• Position: Tax Executives Institute

On December 17, 2007, TEI President Robert J. McDonough the following letter to the House Ways & Means and Senate Finance Committees reiterating TEI's opposition to codification of the economic substance doctrine. The provision was proposed as a "pay-for" in the 2007 AMT Relief Act. The submission was prepared under the aegis of TEI's Federal Tax Committee, whose chair is Carita Twinem of Briggs & Stratton Corporation. [The provision was stricken from the bill before enactment.]

Tax Executives Institute recommends that proposals to codify the economic substance doctrine and related penalty proposals be removed from the AMT Relief Act of 2007.

TEI's 7,000 members work for 3,200 of the largest companies in the United States, Canada, Europe, and Asia. The Institute is dedicated to the development of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike.

The AMT Relief Act of 2007 (H.R. 4351) includes provisions to (1) codify the economic substance doctrine and (2) impose a 20-percent penalty for understatements of tax attributable to transactions lacking economic substance that are disclosed to the IRS (and increase the penalty to 40 percent for nondisclosed transactions).

The proposed economic substance provisions will "clarify" that in any case in which the economic substance doctrine is relevant to a transaction a taxpayer must establish that (1) the transaction changes in a meaningful way (apart from the federal income tax consequences) the taxpayer's economic position and (2) the taxpayer has a substantial non-federal-tax purpose for entering into a transaction. Regrettably, the statutory terms relevant, meaningful, and substantial do not provide any objective standard to clarify when the economic substance doctrine should apply.

The economic substance doctrine was developed by the courts as a backstop to the Internal Revenue Code's substantive provisions. When abuses of substantive provisions of the Code occur, the courts have demonstrated their willingness and ability to use existing doctrine to prevent such abuses. There is little empirical evidence that anything more is needed. Thus, one court has explained:

The economic substance doctrine represents a judicial effort to enforce the statutory purpose of the tax code. From its inception, the economic substance doctrine has been used to...