Monday, February 24, 2014

offer in compromise form 656 - irs tax levy





2014ARD 034-1

Internal Revenue Service: Interim guidance: Federal contractor levies

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
SMALL BUSINESS/SELF-EMPLOYED DIVISION
February 10, 2014
Control Number: SBSE-05-0214-0007
Expiration: February 10, 2015
Impacted: IRM 5.11.1
IRM 5.7.9
MEMORANDUM FOR DIRECTORS, FIELD COLLECTION AREA OPERATIONS DIRECTOR, ADVISORY AND INSOLVENCY
FROM: Dretha Barham /s/ Dretha Barham
Director, Collection Policy
SUBJECT: Interim Guidance Memorandum for Federal Contractor Levies Issued by Field Collection
The purpose of this memorandum is to provide guidance for Field Collection revenue officers about federal contractor levies (referred to as FEDCON levies) and related Collection Due Process (CDP) issues. Please ensure this information is distributed to all affected employees within your organization.
Background
The Small Business Jobs Act of 2010 amended IRC section 6330(f) and (h), to permit the IRS to issue any levy on a taxpayer prior to providing them with their Collection Due Process (CDP) notice and hearing if the taxpayer is a federal contractor. In addition, FEDCON levies may be served during a timely requested pre- or post-levy CDP hearing or judicial review of such hearing to collect liabilities for all outstanding balance due periods including periods that are the subject of the hearing.
Federal contractors are any person or entity who currently has a contract with the federal government to sell or lease property, goods or services. This does not include a taxpayer who was in the past a federal contractor but currently is not involved in any contractual relationship with the federal government. A contract is a mutually binding legal relationship obligating a person or entity to furnish property, goods, or services and the federal executive agency to pay for those property, goods, or services. Attached are guidelines for FEDCON levy and CDP issues for status 26 cases.
ICS Considerations:
Field Collection (FC) revenue officers may begin to issue FEDCON levies in ICS on the issuance date of this memorandum to collect any IMF or BMF liability, for which the IRC 6331(d), Notice of Intent to Levy (CP 504 notice) period has expired, if the taxpayer is a federal contractor.
  • ICS Cases in which there is an unreversed Federal Contractor Indicator (FCI) are flagged with a red literal (FCA) on the Case Summary screen.
  • ICS will block revenue officer issuance of the FEDCON levy unless the revenue officer answers “yes” when ICS prompts with the following: “Final Notice Delivery Date is not 30 days prior to levy. Is this a FEDCON levy? (Yes or No)?” This is a requirement because there would be no TC 971 AC 069 on the module.
  • See changes listed in ICS User Guide.
See the following attachments for additional information on Federal Contractor Levies issued by Field Collection:
  • Attachment 1, Guidance to be included in IRM 5.7.9, Federal Contractors.
  • Attachment 2, Guidance to be included in IRM 5.11.1, Background, Pre-Levy Actions, Restrictions on Levy & Post-Levy Actions.
IRM 5.11.1 and 5.7.9 will be updated to incorporate these guidelines. If you have any questions, please contact me, or a member of your staff may contact Kathleen Morton, Senior Program Analyst or James Maslanka, Senior Program Analyst. Territory personnel should direct any questions, through their management staff, to the appropriate Area contact.
Attachments
cc: Director, Enterprise Collection Strategy
Director, Field Collection
www.irs.gov
Attachment 1, Guidance to be included in IRM 5.7.9, Federal Contractors
Decision Point: How to Recognize a Federal Contractor for FEDCON Levy Purposes:
If there is an unreversed TC 971 AC 647, also known as a Federal Contractor Indicator (FCI), on the taxpayer's Master File (MF) record, and the taxpayer has a current federal contract consider the taxpayer a federal contractor. See IRM 5.7.9.2.1, Federal Contractor Indicator (FCI). Often, this indicator is systemically input based on a Form 8596, Information Return for Federal Contracts , filed with the IRS. The indicator may also be manually input. If you determine during a case investigation that a taxpayer is a federal contractor and has been awarded a contract, request input of the TC 971 AC 647.
Conditions, which support a RO finding that a taxpayer is a federal contractor subject to FEDCON levy, include:
1.
Unreversed TC 971 AC 647 and current federal contract.
2.
Taxpayer interview confirms they are currently a federal contractor. See IRM 5.7.9.2.3, Federal Contractors Identified Through Case Investigation . Request input of the TC 971 AC 647.
3.
Certain FPLP cases annotated with TC 971 AC 062. The FPLP TC 971 AC 062 DLN may indicate if the taxpayer is currently receiving federal contractor or vendor payments. See IRM 5.7.9.2.2, further research may be necessary to confirm whether the taxpayer is a current contractor or vendor. Request input of TC 971 AC 647 if confirmed.
4.
Taxpayer answers “yes” to question 55, Is the business a Federal Contractor on Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals or question 15, Is the business a Federal Government Contractor , on Form 433-B, Collection Information Statement for Businesses. Request input of the TC 971 AC 647.
Manual Input of TC 971 AC 647 (FCI):
Revenue officers should request input of TC 971 AC 647 (FCI) if the case investigation reflects that a taxpayer is currently in a contractual relationship with the federal government and:
  • You have confirmed that the TP has been awarded a federal contract.
  • The master file does not yet contain an unreversed FCI.
Exception: TC 971 AC 647 should not be input for Medicare providers/suppliers. This is because these providers/suppliers are not federal contractors under IRC section 6330.
Use the Form 4844 template in ICS to request input of the FCI. The input requires an entry in the field for “contract end date.” If the contract end date is known, request input of that date. If the contract end date is not known, select a date 1 year from the input request date. Conduct further research to ascertain the correct end date.
Note: There is no requirement that an unreversed TC 971 AC 647 be present on an account before a FEDCON levy is issued but the taxpayer must currently be a federal contractor when the levy is initiated. Request input prior to issuing levy.
Reversing the TC 971 AC 647 :
A systemic process posts reversals of the FCI to the Master File once a year for BMF accounts (January) and twice a year for IMF accounts (January and June) based on the expiration of the contract end date. TC 972 AC 647 is posted when the FCI indicator is reversed. Reversals may also be manually input at any time by requesting input of TC 972 AC 647.
A manual reversal would be appropriate if you determine that the taxpayer federal contract has been completed or the end date has expired. For example:
  • Case investigation and verification supports a finding that the taxpayer has not received any federal payments during the current year.
  • Most recent contract end date has expired.
  • RO determines that the FCI was erroneously input because the taxpayer was never a federal contractor.
Federal Payment Levy Program (FPLP) Considerations/FPLP Block:
FPLP incorporated the post-levy CDP FEDCON levy process starting in January 2012. See IRM 5.11.7.2.3.4(4), Levy Service Process , for more information about those cases. FPLP systemically identifies accounts with unreversed FCI annotations, including those accounts in stats 22, 24 and 26. This automated levy program may issue FEDCON levies on cases that are in ACS, the Queue and in RO inventories.
Generally it may be more effective to allow FPLP to levy the federal payment source under the provisions of IRC 6331(h)(3) rather than using a paper levy under the provisions of IRC 6331(a) because, in federal contractor cases, levies under IRC 6331(a) are not likely to be of continuing effect. FPLP would be the more effective method since IRC section 6331(h)(3) allows for continuous levy of up to one hundred percent (100%) of any specified payment due to a vendor of property, goods or services sold or leased to the Federal government
Even if FPLP remains in place, consider using a paper FEDCON levy to reach other sources.
If you contemplate using the FPLP block see IRM 5.11.2.2, Releasing Levies , for guidance about when levy release is appropriate. Document the ICS case history with the reasons when an FPLP block is requested. Current procedures require GM approval of FPLP block requests. See IRM 5.11.7.2.6(1 ) Blocking or Releasing FPLP Levy.
Collection Statute Considerations:
When taxpayers file a timely request for CDP hearing, the collection statute is suspended on the periods that are the subject of the CDP even if FEDCON levy action continues for those periods.
Attachment 2, Guidance to be included in IRM 5.11.1, Background, Pre-Levy Actions, Restrictions on Levy & Post-Levy Actions
Post-Levy Action - Federal Contractor Levy
(1) This section contains guidance on post-levy actions for Stat 26 federal contractor levy cases in Field Collection.
Levy Authority Amended
The Small Business Jobs Act of 2010 (SBJA) section 2104, amended IRC section 6330(f) and (h)(2) to allow the collection due process (CDP) notice and hearing to occur post-levy with respect to “federal contractor levies.” This term is defined in section 6330(h)(2) as “…any levy if the person whose property is subject to levy is a Federal contractor.”
Federal Contractor Levy
(1) IRC section 6330(h)(2) describes a federal contractor (FEDCON) Levy, as any levy if the person whose property is subject to levy is a Federal contractor. When a FEDCON levy is served, the taxpayer will be given post-levy CDP rights. The taxpayer may seek Tax Court judicial review of the determination resulting from the post-levy hearing.
(2) Federal contractors are any person or entity who currently has a contract with the federal government to sell or lease property, goods or services. This does not include a taxpayer who was in the past a federal contractor but currently is not involved in any contractual relationship with the federal government. A contract is a mutually binding legal relationship obligating the person or entity to furnish property, goods, or services and the federal executive agency to pay for those property, goods, or services.
(3) Our computer systems identify some federal contractor cases on the Individual Master File (IMF) and the Business Master File (BMF). Indicators that a person or entity is a federal contractor may include the following:
  • Federal Contractor Indicator. See IRM 5.7.9.2.1, Federal Contractor Indicator (FCI) (unreversed TC 971 AC 647).
  • Federal Payment Levy Program (FPLP), TC 971 AC 062 Document Location Number (DLN). See IRM 5.7.9.2.2 and Exhibit 5.11.7-5, TC 971 AC 062 (Document Locator Number (DLN) Format, Miscellaneous Field, XREF Field).
  • The Federal Payment Levy Program (FPLP) can also issue Federal Contractor (FEDCON) Levies and can be identified by a TC 971 AC 677 posted to the module. See IRM 5.11.7.2.3.4(4).
Note: Revenue officers can also identify federal contractor cases. See Attachment 1, Identification and General Instructions for FEDCON Levy. This information will be included in IRM 5.7.9.
Note: The TC 971 AC 062 DLN positions 11 and 12 are also designated with a ‘03’ in the payment position for Medicare payments, and positions 7, 8 &9 will show the federal agency code of ‘0306’ for HHS Medicare match, which are not FEDCON eligible.
(4) Only the federal contractor may be listed on the FEDCON levy. For federal payments other than Social Security or RRB benefit payments, a FEDCON levy may be issued to any payment source on all BMF tax modules and IMF tax modules if the entity is identified as a Federal contractor with an unreversed TC 971 AC 647 posted on the entity. For BMF tax modules do not include or list the general partners and members of a LLC on the FEDCON levy. For IMF tax modules only include the spouse identified as the federal contractor on filing status 2, married filing joint modules.
(5) A FEDCON levy may have previously been issued by FPLP. A TC 971 AC 677 will post on the module with the literals “SAL, OTH” displayed in the Miscellaneous Field. This will generate a post-levy CDP notice CP 90C (or 297C) and post a TC 971 AC 069. The taxpayer is provided their CDP appeal rights after the levy. See IRM 5.11.7.2.3.3, FPLP Notice Process (TC 971 AC 069 or AC 169).
(6) The FEDCON (TC 971 AC 677) levy processes occur after the expiration of the 30-day notice required by IRC 6331(d). The issuance of the CP 504 meets the 30-day pre-levy requirement of IRC 6331(d)
Issuing Notice of Intent to Levy and Notice of Your Right to a Hearing in Field Collection FEDCON Case
(1) When warranted, the Service may exercise its discretion to issue a pre-levy CDP notice on modules eligible for FEDCON levy based upon the unique case factors.
Examples of unique case factors:
  • The issuance of a pre-levy notice might be advisable if there no contact with the taxpayer within the last 180 days. See IRM 5.11.1.2.2.7, Timeliness of Notice.
  • When the Letter 1058 is issued on initial contact with a BMF or combination BMF/IMF taxpayer when a deadline is set for the taxpayer to take specific action. See IRM 5.11.1.2.2(3), Satisfying the Notice Requirement.
  • When the Letter 1058 will be issued during initial contact on IMF case but a FEDCON levy is not yet appropriate. See IRM 5.11.1.2.2(4).
Note: The federal contractor exception in IRC 6330(f) applies to a FEDCON levy. Similar to a DETL levy, a FEDCON levy can be served during a timely requested pre or post-levy CDP hearing or judicial review of such hearing to collect tax liabilities (FEDCON tax periods) subject to the hearing. Prior to levying, you are required to determine if Appeals or Counsel has information that prohibits levy (OIC, IA etc.) or may affect the decision to levy. Follow the guidance in IRM 5.1.9.3.15(7) for contacting Appeals or Counsel. FEDCON levies may be issued for any levy source, not just federal payments.
(2) If the tax period meets the criteria for issuing a FEDCON levy and levy action is determined to be appropriate:
  • Make sure the IRC 6331(d), Notice of Intent to Levy, was properly issued at least 30 days prior to levy action
Note: This refers to the CP 504 notice or the “Status 58” notice. If the CP 504 notice was not issued, issue the pre-levy CDP notice, L1058. This meets the IRC 6331(d) and IRC 6330 requirement. FEDCON levy can only be issued 30 days after issuance of the L1058 per IRC 6331(d).
  • Document the ICS case history regarding the FEDCON determination.
Note: When there is no TC 971 AC 069 on the module, ICS will block revenue officer issuance of the FEDCON unless the revenue officer answers yes when ICS prompts with the following: “Final Notice Delivery Date is not 30 days prior to levy. Is this a FEDCON levy? (Yes or No)?”
(3) Include Letter 1058-F, Post Levy Federal Contractor Collection Due Process with the taxpayer's copy of a FEDCON levy for post-levy CDP notices.
Caution: If the taxpayer was issued a pre-levy CDP notice (L1058) for the FEDCON tax period(s) being levied, do not issue a post-levy CDP notice (L1058-F).
(4) Both the post-levy or pre-levy CDP notice must be:
  • Given in person,
  • Left at the taxpayer's home or business, or
  • Sent to the taxpayer's last known address by certified or registered mail return receipt requested.
Note: Use registered mail only if the taxpayer is outside the United States. There is no international certified mail.
Note: Where L1058-F has been correctly sent to the taxpayer's last known address and another address is subsequently found, do not send an additional L1058-F, relating to the same tax liability, to the new address.
Note: If L1058-F is mistakenly sent to an address other than the last known address, immediately send a new L1058-F to the correct last known address.
(5) Include a copy of the levy, Publication 594, Publication 1660 and Form 12153 with the L1058-F.
(6) If the L1058-F is issued more than 10-days after issuing the FEDCON, document the reason in the ICS history.
(7) FEDCON post-levy hearing requests are processed similarly to other hearing requests. Refer to IRM 5.1.9 , Collection Appeal Rights , for guidance in processing hearing requests.
 
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IRS Small Business and Self Employed (SB/SE) Division Memorandum: Interim Guidance Memorandum for Federal Contractor Levies Issued by Field Collection (SBSE-05-0214-0007)
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Sunday, February 23, 2014

www.offerincompromiseform656 doubt as to collectibility

  1. Doubt as to Collectibility (DATC) offers the decision to accept or reject usually rests on whether the amount offered reflects the reasonable collection potential (RCP). The exception to this rule would be for offers not accepted based on public policy reasons as defined in IRM 5.8.7.7.2, Public Policy Rejection. RCP is defined as the amount that can be collected from all available means, including administrative and judicial collection remedies. Generally, the components of collectibility outlined in IRM 5.8.4.3.1 below, will be included in calculating the total RCP. .
  2. Offers should not be accepted where the tax can be paid in full as a lump sum or can be paid under current installment agreement (IA) guidelines, unless special circumstances are identified that warrant consideration of a lesser amount. The offer should be recommended for rejection based on the taxpayer's ability to full pay under current IA guidelines.

    An offer in compromise is a legitimate alternative to a protracted installment agreement. A protracted installment agreement is defined as an agreement that extends beyond the Collection Statute Expiration Date (CSED)


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Section 7701(o) codification of the economic substance doctring Notice 2010-62


Part III - Administrative, Procedural, and Miscellaneous




Interim Guidance under the Codification of the Economic Substance Doctrine and
Related Provisions in the Health Care and Education Reconciliation Act of 2010


Notice 2010-62

PURPOSE

This notice provides interim guidance regarding the codification of the economic
substance doctrine under section 7701(o) and the related amendments to the penalties
under sections 6662, 6662A, 6664, and 6676 by section 1409 of the Health Care and
Education Reconciliation Act of 2010 (Act), Pub. L. No. 111-152. The notice applies
with respect to transactions entered into on or after March 31, 2010, which is the
effective date for the amendments made by section 1409 of the Act.
BACKGROUND
 Section 1409 of the Act added new section 7701(o) to the Code. Section
7701(o)(1) provides that, in the case of any transaction to which the economic
substance doctrine is relevant, the transaction shall be treated as having economic
substance only if (i) the transaction changes in a meaningful way (apart from Federal
income tax effects) the taxpayer’s economic position, and (ii) the taxpayer has a
substantial purpose (apart from Federal income tax effects) for entering into the  2
transaction. Section 7701(o)(5)(A) states that the term “economic substance doctrine”
means the common law doctrine under which tax benefits under subtitle A with respect
to a transaction are not allowable if the transaction does not have economic substance
or lacks a business purpose.
 that the determination of whether the economic
substance doctrine is relevant to a transaction shall be made in the same manner as if
section 7701(o) had never been enacted. With respect to individuals, however, section
7701(o)(5)(B) states that the two-prong analysis in section 7701(o)(1) shall apply only to
a transaction entered into in connection with a trade or business or an activity engaged
in for the production of income. In addition, section 7701(o)(5)(D) states that the term
“transaction” as used in section 7701(o) includes a series of transactions.
 Section 7701(o)(2)(A) provides that a transaction’s potential for profit shall be
taken into account in determining whether the requirements of section 7701(o)(1) are
met only if the present value of the reasonably expected pre-tax profit is substantial in
relation to the present value of the claimed net tax benefits. For purposes of computing
pre-tax profit, section 7701(o)(2)(B) provides that the Secretary shall issue regulations
treating foreign taxes as a pre-tax expense in appropriate cases.
The Act also added section 6662(b)(6), which provides that the accuracy-related
penalty imposed under section 6662(a) applies to any underpayment attributable to any
disallowance of a claimed tax benefit because of a transaction lacking economic
substance (within the meaning of section 7701(o)) or failing to meet any similar rule of
law (collectively a section 6662(b)(6) transaction). The Act also added section 6662(i),  3
which increases the accuracy-related penalty from 20 to 40 percent for any portion of an
underpayment attributable to one or more section 6662(b)(6) transactions with respect
to which the relevant facts affecting the tax treatment are not adequately disclosed in
the return or in a statement attached to the return. Furthermore, new section 6662(i)(3)
provides that certain amended returns or any supplement to a return shall not be taken
into consideration for purposes of section 6662(i).
The Act amended section 6664(c) so that the reasonable cause exception for
underpayments found in section 6664(c)(1) shall not apply to any portion of any
underpayment attributable to a section 6662(b)(6) transaction. The Act similarly
amended section 6664(d) so that the reasonable cause exception found in section
6664(d)(1) shall not apply to any reportable transaction understatement (within the
meaning of section 6662A(b)) attributable to a section 6662(b)(6) transaction. The Act
also amended section 6676 so that any excessive amount (within the meaning of
section 6676(b)) attributable to any section 6662(b)(6) transaction shall not be treated
as having a reasonable basis.
APPLICATION OF THE ECONOMIC SUBSTANCE DOCTRINE WITH RESPECT TO
TRANSACTIONS ENTERED INTO AFTER THE EFFECTIVE DATE OF THE ACT
A. Application of the Conjunctive Test
 For transactions entered into on or after March 31, 2010, to which the economic
substance doctrine is relevant, section 7701(o)(1) mandates the use of a conjunctive
two-prong test to determine whether a transaction shall be treated as having economic
substance. The first prong, found in section 7701(o)(1)(A), requires that the transaction  4
change in a meaningful way (apart from Federal income tax effects) the taxpayer’s
economic position. The second prong, found in section 7701(o)(1)(B), requires that the
taxpayer have a substantial purpose (The second prong, found in section 7701(o)(1)(B), requires that the
taxpayer have a substantial purpose (apart from Federal income tax effects) for entering
into the transaction.
 The IRS will continue to rely on relevant case law under the common-law
economic substance doctrine in applying the two-prong conjunctive test in section
7701(o)(1). Accordingly, in determining whether a transaction sufficiently affects the
taxpayer’s economic position to satisfy the requirements of section 7701(o)(1)(A), the
IRS will apply cases under the common-law economic substance doctrine (as identified
in section 7701(o)(5)(A)) pertaining to whether the tax benefits of a transaction are not
allowable because the transaction does not satisfy the economic substance prong of the
economic substance doctrine. Similarly, in determining whether a transaction has a
sufficient nontax purpose to satisfy the requirements of section 7701(o)(1)(B), the IRS
will apply cases under the common-law economic substance doctrine pertaining to
whether the tax benefits of a transaction are not allowable because the transaction
lacks a business purpose.
The IRS will challenge taxpayers who seek to rely on prior case law under the
common-law economic substance doctrine for the proposition that a transaction will be
treated as having economic substance merely because it satisfies either section
7701(o)(1)(A) (or its common-law corollary) or section 7701(o)(1)(B) (or its common-law
corollary). For all transactions subject to section 1409 of the Act that otherwise would
have been subject to a common-law economic substance analysis that treated a  5
transaction as having economic substance merely because it satisfies either section
7701(o)(1)(A) (or its common-law corollary) or section 7701(o)(1)(B) (or its common-law
corollary) the IRS will apply a two-prong conjunctive test consistent with section
7701(o).
B. Determination of Economic Substance Transactions
 Section 7701(o)(5)(C) provides that the determination of whether a transaction is
subject to the economic substance doctrine shall be made in the same manner as if
section 7701(o) had never been enacted. In addition, section 7701(o)(1) only applies in
the case of any transaction to which the economic substance doctrine is relevant.
Consistent with these provisions, the IRS will continue to analyze when the economic
substance doctrine will apply in the same fashion as it did prior to the enactment of
section 7701(o). If authorities, prior to the enactment of section 7701(o), provided that
the economic substance doctrine was not relevant to whether certain tax benefits are
allowable, the IRS will continue to take the position that the economic substance
doctrine is not relevant to whether those tax benefits are allowable. The IRS anticipates
that the case law regarding the circumstances in which the economic substance
doctrine is relevant will continue to develop. Consistent with section 7701(o)(5)(C),
codification of the economic substance doctrine should not affect the ongoing
development of authorities on this issue. The Treasury Department and the IRS do not
intend to issue general administrative guidance regarding the types of transactions to
which the economic substance doctrine either applies or does not apply.
 C. Calculating Net Present Value of the Reasonably Expected Pre-tax Profit.
 In determining whether the requirements of section 7701(o)(1)(A) and (B) are
met, the IRS will take into account the taxpayer’s profit motive only if the present value
of the reasonably expected pre-tax profit is substantial in relation to the present value of
the expected net tax benefits that would be allowed if the transaction were respected for
Federal income tax purposes. In performing this calculation, the IRS will apply existing
relevant case law and other published guidance.
D. Treatment of Foreign Taxes as Expenses in Appropriate Cases.
Section 7701(o)(2)(B) provides that the Secretary shall issue regulations
requiring foreign taxes to be treated as expenses in determining pre-tax profit in
appropriate cases. The Treasury Department and the IRS intend to issue regulations
pursuant to section 7701(o)(2)(B). In the interim, the enactment of the provision does
not restrict the ability of the courts to consider the appropriate treatment of foreign taxes
in economic substance cases.
ACCURACY-RELATED PENALTIES
Unless the transaction is a reportable transaction, as defined in Treas. Reg.
§ 1.6011-4(b), the adequate disclosure requirements of section 6662(i) will be satisfied
if a taxpayer adequately discloses on a timely filed original return (determined with
regard to extensions) or a qualified amended return (as defined under Treas. Reg.
§ 1.6664-2(c)(3)) the relevant facts affecting the tax treatment of the transaction. If a
disclosure would be considered adequate for purposes of section 6662(d)(2)(B) (without
regard to section 6662(d)(2)(C)) prior to the enactment of section 1409 of the Act, then it  7
will be deemed to be adequate for purposes of section 6662(i). The disclosure will be
considered adequate only if it is made on a Form 8275 or 8275-R, or as otherwise
prescribed in forms, publications, or other guidance subsequently published by the IRS
consistent with the instructions and other guidance associated with those subsequent
forms, publications, or other guidance. Disclosures made consistent with the terms of
Rev. Proc. 94-69 also will be taken into account for purposes of section 6662(i). If a
transaction lacking economic substance is a reportable transaction, as defined in Treas.
Reg. § 1.6011-4(b), the adequate disclosure requirement under section 6662(i)(2) will
be satisfied only if the taxpayer meets the disclosure requirements described earlier in
this paragraph and the disclosure requirements under the section 6011 regulations.
Similarly, a taxpayer will not meet the disclosure requirements for a reportable
transaction under the section 6011 regulations by only attaching Form 8275 or 8275-R
to an original or qualified amended return.
EFFECT ON OTHER DOCUMENTS
 The IRS will not issue a private letter ruling or determination letter pursuant to
section 3.02 (1) of Rev. Proc. 2010-3, 2010-1 I.R.B. 110 (or subsequent guidance),
regarding whether the economic substance doctrine is relevant to any transaction or
whether any transaction complies with the requirements of section 7701(o).
Accordingly, Rev. Proc. 2010-3 is modified.
REQUEST FOR COMMENTS
 The IRS is interested in comments concerning the disclosure requirements set
forth in this notice with regard to section 6662(i), especially with regard to the interplay  8
between Rev. Proc. 94-69, proposed Schedule UTP, and the LMSB compliance
assurance process (CAP) program. Interested parties are invited to submit comments
on this notice by December 3, 2010. Comments should be submitted to: Internal
Revenue Service, CC:PA:LPD:PR (Notice 2010-62), Room 5205, P.O. Box 7604, Ben

Franklin Station, Washington, DC 20224. 


www/offerincompromiseform656.com

Alvin Brown & Associates, PLLC


212-588-1113
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economic substance doctrine section 7701(o)


Economic substance doctrine is codified and clarified in Code Sec. 7701(o). Code Sec. 7701(o) codifies and clarifies the economic substance doctrine by providing that a transaction (or series of transactions) to which the doctrine is relevant has economic substance only if: (1) the transaction changes the taxpayer's position in a meaningful way (apart from federal income tax effects), and (2) the taxpayer has a substantial purpose (apart from federal income tax effects) for entering into the transaction. (Item (1) is referred to below as the “objective test” and item (2) is referred to as the “subjective test” and this list is referred to as the economic substance test list.) Code Sec. 7701(o)(1). In applying this list, a “transaction” includes a series of transactions. Code Sec. 7701(o)(5)(D). This clarifies that the economic substance doctrine involves a conjunctive analysis, i.e., there must be an inquiry as to the objective effects of the transaction on the taxpayer's economic position and an inquiry as to the taxpayer's subjective motives for engaging in the transaction. A transaction must satisfy both tests, i.e., the transaction must change in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position and the taxpayer must have a substantial non-Federal-income-tax purpose for entering into the transaction, for a transaction to be treated as having economic substance. This clarification eliminates the disparity that has existed among the Federal circuit courts as to the application of the doctrine, and modifies its application in those circuits in which either a change in economic position or a non-tax business purpose (without having both) was sufficient to satisfy the economic substance doctrine. Thus, the definition includes any doctrine that denies tax benefits for lack of economic substance, for lack of business purpose, or for lack of both. Joint Comm Staff, Tec Expln of the Revenue Provisions of the Reconciliation Act of 2010, as Amended in Combination With the Patient Protection and affordable Care Act (JCX-18–10), 3/21/2010, pp.153–154,


The “economic substance doctrine” is defined as the common law doctrine under which the Federal tax benefits of a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. Code Sec. 7701(o)(5)(A). Thus, the definition includes any doctrine that denies tax benefits for lack of economic substance, for lack of business purpose, or for lack of both. .

 A transaction may be subject to the step transaction and substance over form doctrines (which establish the relevant facts) in addition to being tested for economic substance. The IRS will continue to rely on relevant case law under the common-law economic substance doctrine in applying the two-prong conjunctive test at (1) and (2) above. Thus, in determining if a transaction sufficiently affects the taxpayer's economic position to satisfy the requirements at (1), the IRS will apply cases under the common-law economic substance doctrine (as identified in Code Sec. 7701(o)(5)(A)) as to whether the tax benefits of a transaction are not allowable because the transaction does not satisfy the economic substance prong of the economic substance doctrine. Similarly, in determining whether a transaction has a sufficient nontax purpose to satisfy the requirements at (2), IRS will apply cases under the common-law economic substance doctrine pertaining to whether the tax benefits of a transaction are not allowable because the transaction lacks a business purpose. Notice 2010-62, 2010-40 IRB 411. The IRS will challenge taxpayers who seek to rely on prior case law under the common-law economic substance doctrine for the proposition that a transaction will be treated as having economic substance merely because it satisfies either (1) above (or its common-law corollary) or (2) above (or its common-law corollary). For all transactions subject to Code Sec. 7701(o) the IRS will apply a two-prong conjunctive test consistent with Code Sec. 7701(o).

Notice 2010-62, 2010-40 IRB 411. Consistent with the Code Sec. 7701(o)(1) relevancy requirement and Code Sec. 7701(o)(5)(C), the IRS will continue to analyze when the economic substance doctrine will apply in the same fashion as it did before the enactment of Code Sec. 7701(o). If authorities, before the enactment of Code Sec. 7701(o), provided that the economic substance doctrine wasn't relevant to whether certain tax benefits are allowable, the IRS will continue to take the position that the economic substance doctrine isn't relevant to whether those tax benefits are allowable.

 To ensure consistent administration of the Code Sec. 6662(b)(6) strict liability penalty related to the application of the economic substance doctrine.

Alvin Brown & Associataes, PLLC

212-588-1113

ab@irstaxattorney.com



www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com