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Washington Tax Alert March 19, 2007 (economic substance doctrine)

Washington Tax Alert from Don Barnes, dbarnes@washingtontaxlaw.com
March 19, 2007

During the past 13 months, there have been five significant court decisions applying the economic substance doctrine to a variety of transactions. The government won all five of these cases. Dow Chemical Co. v. United States, 435 F.3d 594 (6th Cir. Jan. 23, 2006); Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir. Feb. 2, 2006); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. July 12, 2006); TIFD III-E, Inc. v. United States, 459 F.3d 220 (2nd Cir. Aug. 3, 2006); BB&T Corp. v. United States, 2007 WL 37798, 99 AFTR2d 2007-376 (M.D.N.C. Jan. 4, 2007).

Taxpayers' petitions for certiorari in Dow Chemical and Coltec Industries were denied by the United States Supreme Court.

In light of these decisions, taxpayers and their CPA firms should reassess prior transactions to determine whether it is more likely than not that tax benefits from those transactions will be sustained on the merits. Written tax advice or tax opinions with respect to prior transactions may no longer be valid in light of the recent economic substance cases. In some cases, the Service may disallow tax benefits as an improper accounting method, even though the transaction giving rise to the benefits took place in a closed tax year.