When a multi-step transaction is "entered into" for the codified economic substance doctrine

Plain-English summary

This is an informal email from IRS Chief Counsel answering a colleague's question about the codified economic substance doctrine in section 7701(o). That doctrine, added in 2010, lets the IRS disregard a transaction that has no real economic substance beyond tax savings, but it only applies to transactions "entered into" after March 30, 2010. The question was how to tell whether a multi-step plan (here, creating a new entity, merging an old one into it, and issuing new policies) counts as a single transaction entered into before the effective date, or as a later, separate tax-motivated step. The lawyer explains there is no case law on timing, but Notice 2014-58 lets the Service either aggregate the steps (treating interconnected steps as one transaction, which here points to a pre-2010 date) or disaggregate them (isolating a later tax-motivated step that was not needed for a non-tax goal). Which approach fits is a factual question. The email closes with a key reminder: codifying the doctrine did not replace the older common-law economic substance doctrine, which can still be applied to transactions entered into either before or after March 30, 2010. This matters because it shows the IRS can reach a suspect transaction even when the codified rule's timing is uncertain.

Ruling snapshot

• Question: When is a series of steps "entered into" for purposes of
  the codified economic substance doctrine under IRC § 7701(o)?
• Outcome: Advice given (informal Chief Counsel email)
• Key authorities: IRC § 7701(o), including § 7701(o)(5)(D); Notice
  2014-58, 2014-44 I.R.B. 746

Full text (IRS public release)

ID:      CCA_2022082912235813               [Third Party Communication:
UILC:    7701.34-00                         Date of Communication: Month DD, YYYY]

Number: 202240019
Release Date: 10/7/2022
From: ------------------------
Sent: Monday, August 29, 2022 12:23:58 PM
To: ------------------------
Cc:
Bcc:
Subject: RE: 7701(o) Question


Hi, --------.

There is no case law on section 7701(o) relating to when a transaction was "entered into"
for purposes of applying the codified doctrine. The Service did, however, issue guidance
in analyzing "transaction" for the purposes of section 7701(o).

Whether the codified economic substance doctrine applies to the transaction (because it
was entered into after the March 30, 2010 effective date) is a factual inquiry. The
codified doctrine, however, defines "transaction" to include a "series of transactions."
I.R.C. § 7701(o)(5)(D). The facts below seem to indicate that this may be a "series of
transactions" depending on how factually similar the pre-codified steps are to the steps
taken in 2015.

The Service can use an aggregation or disaggregation approach to determine whether a
transaction lacks economic substance under section 7701(o). See I.R.S. Notice 14-58,
2014-44 I.R.B. 746. The aggregation approach interprets "transaction" to include all of
the steps taken together when a plan that generates a tax benefit involves a series of
interconnected steps. Id. From the facts described below, it appears that the creation of
the NewCap, merging OldCap into NewCap, and the issuance of new policies would be a
series of interconnected steps to generate a tax benefit. Under the aggregation approach,
therefore, it appears "the transaction" was entered into before the effective date of
section 7701(o), as the steps are included together.

The disaggregated approach applies when a series of steps includes a tax motivated step
that is not necessary to achieve a non-tax objective, the "transaction" may include only
the tax-motivated steps that are not necessary to accomplish the non-tax goals. See
I.R.S. Notice 14-58. The disaggregated approach may apply here. If the tax-motivated
step is entering into new policies, there may be an argument that those steps can be
viewed in isolation, notwithstanding what took place with OldCap and NewCap. The
facts here would need to show that what occurred after 2010 is not part of a "series of
transactions" and that the tax-motivated step is not necessary to obtain a non-tax goal.
                                                            2

It should be noted, however, that the codification of the economic substance doctrine
did not supplant the common law doctrine. The common law doctrine can be applied to
transactions entered into before and after March 30, 2010.

Let me know if you would like to schedule a call to discuss further.

---------
------

--------------------------------------
-------------
---------------------------------------------------------
-------------------