IRS Notice CC-2012-008 announces new Chief Counsel coordination procedures for assertion of the economic substance doctrine, which incorporate the LB&I Directives previously issued.
The new Notice does the following:
- Requires revocation of any letter ruling issued to the taxpayer under examination or in litigation before assertion of an economic substance doctrine adjustment, even if the ruling did not address the economic substance doctrine.
- In all cases when Counsel advises the field on the economic substance doctrine it should consider the factors outlined in the prior LB&I Directives, even though they are limited to LB&I taxpayers and examiners.
- All assertions of the economic substance doctrine should be coordinated through the Associate Chief Counsel for Procedure and Administration.
The statement that Counsel will apply the LB&I Directives’ factors in its own analysis is important. Those Directives literally do not apply to other operating Divisions, much less Chief Counsel. The factor analysis has been thought to raise substantial hurdles to the application of the economic substance doctrine on examination.
The Notice twice discusses the revocation of letter rulings prior to the assertion of the doctrine. This suggests that Counsel has faced cases in which taxpayers have letter rulings covering transactions that the field wants to attack using the economic substance doctrine. It also suggests that the existence of such rulings has been a substantial impediment to adjustments, despite the fact that the rulings either do not mention or caveat the doctrine.
These suggestions are both good and bad for taxpayers. They are good in that they suggest even the IRS views a letter ruling to have some prophylactic effect despite not mentioning the doctrine. They are bad in that they signal that the IRS is willing to attack that problem head on and revoke rulings.
