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The Economic Substance Doctrine in State Taxation, Including Sales Taxation
COST 45th Annual Meeting
October 22, 2014
Kendall Houghton
Alston & Bird LLP
Washington, DC
Todd Lard
Sutherland Asbill & Brennan LLP
Washington, DC
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Council On State Taxation
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Roadmap
• Federal Tax Doctrines
– Developed to combat income tax BEPS
• Economic Substance/Sham Transaction/Business Purpose
• Substance Over Form/Step‐Transaction
• Codification of Economic Substance
• State Application of Doctrines
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Statutory and Regulatory Authority
Court Applications of the Doctrines, by Tax Type
Relationship between Doctrine and Legislative Intent
Framework for Application of the Doctrines
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Federal Tax Doctrines
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Do Taxpayers Have the Right to Avoid Taxes?
• The U.S. Supreme Court has stated that “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” Gregory v. Helvering, 293 U.S. 465, 469 (1935).
• However, the right of a taxpayer to arrange its affairs so as to reduce or limit its federal tax liability has been limited by certain common law doctrines.
• State revenue departments and state courts have for some time been adopting and applying these doctrines in state tax cases.
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Economic Substance/Business Purpose Doctrine
• Under the common law economic substance doctrine, a transaction will not be respected for tax purposes if the transaction lacks a legitimate business purpose other than to achieve a tax benefit (“business purpose test”) and/or if the transaction lacks economic substance (“economic substance test”). • Some courts view this is a disjunctive test requiring either a business purpose or economic substance; other courts view this as a conjunctive test requiring both a business purpose and economic substance.
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Economic Substance
• A taxpayer may be denied tax benefits achieved by a business transaction where the transaction itself lacks any economic benefit without regard to the tax benefits.
• “The tax law . . . requires that the intended transactions have economic substance separate and distinct from economic benefit achieved solely by tax reduction. The doctrine of economic substance becomes applicable, and a judicial remedy is warranted, where a taxpayer seeks to claim tax benefits, unintended by Congress, by means of transactions that serve no economic purposes other than tax savings.” ACM P’ship v. Comm’r, 73 T.C.M. (CCH) 2189, 2215 (1997), aff’d in part and rev’d in part, 157 F.3d 231 (3d Cir. 1998).
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Sham Transaction
• Factual Sham vs. Economic Sham
• “A factual sham is one in which the alleged transactions never actually took place. In an economic sham, or a sham in substance, the alleged transactions actually took place, but are nonetheless without economic substance.” Lerman v. Comm’r, 939 F.2d 44, 48, n.6 (3d Cir. 1991).
• Courts have used Economic Sham and Economic Substance interchangeably.
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Substance Over Form
• The tax results of a particular transaction should be evaluated based on substance of what took place, rather than the formal steps the taxpayer took to get there.
• Applied in several areas
• Leasing transactions
• Distinguishing between debt and equity
• Determining if a transfer of property ownership occurred
• “Substance and not mere form shall govern in determining a deductible loss.” Treas. Reg. § 1.165‐1(b) Council On State Taxation
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Substance over Form (cont.)
• Under the “substance over form” doctrine, a transaction will be re‐characterized and its tax consequences determined in accordance with its true substance.
• Frank Lyon (US 1978) established a three‐part test: (1) Does reality comport with the form of the transaction?
(2) Did business or regulatory realities compel the structure of the transaction?
(3) Does the taxpayer possess benefits and burdens of the role it purports to play?
• Taxpayers are generally stuck with the tax consequences of the form chosen for their transactions. See, e.g., Comm’r. v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974).
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Step Transaction
• Extension of “substance over form” – applied when series of transaction steps is involved.
• “The step transaction doctrine generally applies in cases where a taxpayer seeks to get from point A to point D and does so stopping in between at points B and C. The whole purpose of the unnecessary stops is to achieve tax consequences differing from those which a direct path from A to D would have produced. In such a situation, courts are not bound by the twisted path taken by the taxpayer, and the intervening stops may be disregarded or rearranged.” Smith v. Comm’r, 78 T.C. 350, 389 (1982).
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Step Transaction (cont.)
• Three tests employed for determining whether to invoke the doctrine (see Andantech L.L.C. v. Comm’r, 83 T.C.M. (CCH) 1476 (2002) – courts split on whether one or more must be satisfied.
• Binding Commitment Test – “if at the time the first step was entered into, there was a binding commitment to undertake the later step.” • End Results Test – focuses on actual intent to reach a particular result; no independent recognition will be given to the individual steps unless the taxpayer can show that the result of each step was the intended end result in and of itself.
• Interdependence Test – “if separate steps are so interdependent that the legal relations created by one step would have been fruitless without a completion of the series of steps.” This test looks to the relationship among the steps as opposed to the end result.
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Federal Economic Substance Codification
• Codified for federal tax purposes in 2010
• I.R.C. § 7701(o)(1) provides:
In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if—
(A) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (B) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. • The term “economic substance doctrine” means the “common law doctrine under which [federal income tax benefits] with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.”
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State Application of Doctrines
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State Application ‐ Background
• Corporate Income Tax
– Two parts to state corporate income tax return
• Determination of Federal Taxable Income (FTI) – “above the line”
• Everything else (modifications, business/nonbusiness income, allocation/apportionment, credits) – “below the line”
– State audits and adjustments generally focus on “below the line” issues
– Most states define FTI as referenced in section 63 of the IRC – either before or after special deductions (line 28 or line 30 of Form 1120)
– State, nonetheless, may take position that it is free to determine FTI on its own
• Graham v. McKesson Information Solutions, LLC – Georgia Superior Court (2004‐CV‐82565, July 13, 2005) – state “may make an independent determination as to [FTI] based upon its own investigation, and, accordingly, may review, modify or reject federal tax determinations.”
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State Application ‐ Background
• Corporate Income Tax (cont.)
– States generally feel free to use doctrines for purposes of determining FTI for state purposes – “above the line”
• Common in situations where state separate reporting regime creates tax results that are invisible to the IRS due to consolidated reporting (i.e., typical state tax planning structures)
– Most states also view these common law doctrines as available for “below the line” adjustments
• Sales/Use, Real Estate Transfer & Property Taxes
– Historically, these were form‐driven taxes
– States vary on applicability of doctrines outside income tax
– Substance over Form/Step‐transaction doctrines most widely used
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State Codification of the Doctrines
• Several states have codified some version of an economic substance doctrine
– CA, MA, OH, TN, WI
• Most states do not explicitly conform to I.R.C. § 7701(o)
– Do these go beyond the scope of the doctrine as developed under case law?
• Doctrines also may be embedded in other provisions
– Expense disallowance
– Forced combination
– Transfer pricing adjustments
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Statutory and Regulatory Authority of General Applicability
• Mass. Gen. L. ch. 62C § 3A – Commissioner has the discretion to disallow the asserted tax consequences of a transaction through the use of sham transaction or any other related tax doctrine, in which case the taxpayer has burden to prove (i) a valid good‐faith business purpose other than tax avoidance and (ii) economic substance apart from asserted tax benefit (and that business purpose is commensurate with tax benefit claimed)
• NOTE: This power applies to most tax laws administered by the state (including non‐income taxes)
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Statutory and Regulatory Authority of General Applicability
• N.H. Rev. Stat. Ann § 21‐J:38‐a
– Commissioner may disallow any sham transaction in ascertaining taxpayer’s liability – burden on taxpayer when transaction between members of a controlled group
• If commissioner disallows a sham transaction, applicable SOL period for assessing tax, interest, and penalties is extended by the applicable SOL period (i.e., SOL period is doubled) – no extension for refunds
• “Sham transaction” means a transaction or series of transactions without economic substance because there is no business purposes or expectation of profit other than obtaining tax benefits
– In administering any tax, commissioner may apply the doctrines of economic reality, substance over form, and step transaction
• Ohio Rev. Code Ann. § 5703.56 – substantively identical to New Hampshire statute above
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Statutory and Regulatory Authority of Specific Applicability
• Washington – The department must disregard, for tax purposes, the tax avoidance transactions/arrangements described below (Wash. Rev. Code § 82.32.655):
– Arrangements through which a taxpayer attempts to avoid B&O taxes by disguising income received, or otherwise avoiding tax on income, from a person that is not affiliated with the taxpayer from business activities that would be taxable in Washington by moving that income to another entity that would not be taxable in Washington
– Arrangements through which a taxpayer attempts to avoid sales/use taxes by engaging in a transaction to disguise its purchase or use of tangible personal property by vesting legal title or other ownership interest in another entity over which the taxpayer exercises control in such a manner as to effectively retain control of the tangible personal property
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Statutory and Regulatory Authority of Specific Applicability
• Adjustments to Income/Combined Reporting
– Fla. Admin Code Ann. 12C‐1.044 and Conn. Agencies Regs. 12‐226a‐1 both provide the commissioner the power to make adjustments to a taxpayer’s income when an arrangement has the result of an improper or inaccurate reflection of income. • This includes arrangements, transactions or agreements with little or no business purpose other than the reduction or avoidance of tax. – N.C. Gen. Stat. § 105‐130.5A (eff. 1/1/12) provides commissioner power to adjust income or require combined report upon finding that intercompany transactions lack economic substance or are not at FMV.
• See N.C. Admin. Code 05F.0101 et seq. for rules explaining economic substance test Council On State Taxation
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Statutory and Regulatory Authority of Specific Applicability
• Adjustments to Income/Combined Reporting
• Wis. Stat. § 71.10(1m) – Department may re‐determine taxable income with regard to transactions without economic substance.
• NY has now expressly included economic substance principles into its new combined reporting guidelines (TSB‐M‐08(2)C, Mar. 3, 2008).
– “In determining whether the substantial intercorporate transactions requirement has been met, the Tax Department will consider the materiality of the transactions and whether the transactions have economic substance, including the extent to which the motivation of the taxpayer in undertaking the transactions was to affect the membership of the combined group.”
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Statutory and Regulatory Authority of Specific Applicability
• NOL Carryover Limitations
– N.J. Admin. Code 18:7‐5.14 allows the commissioner to disallow NOL carryovers in instances where facts support premise that corporation was acquired primarily to obtain NOLs – “economic substance is paramount” to retain NOL carryovers.
• Property Tax
– South Carolina Property Taxes (§ 12‐37‐3160(A))
• “The department shall examine the substance, rather than merely the form of the transfer . . . and may use the step transaction, economic reality . . . and other judicially developed doctrines in determining whether the requisite assessable transfer of interest has occurred.”
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Statutory and Regulatory Authority of Specific Applicability
• Penalty Provisions
– California’s State Tax Shelter Legislation (§ 19774) –
includes an additional 40% penalty for understatements attributable to a “noneconomic substance transaction”
• Turns on whether taxpayer had a non‐tax business purpose
• Tax Credit Qualification
– Hawaii High Technology Business Investment Tax Credit
• Haw. Rev. Stat. § 235‐110.9 provides tax credit for investments made in a qualified high technology business
• Paragraph (h) states that “common law principles, including the doctrine of economic substance and business purpose, shall apply to any investment.”
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Statutory and Regulatory Authority of Specific Applicability
• Real Estate Transfer Taxes
– Minnesota (§ 287.21(1)(c)) disallows exemptions for transfers to a subsidiary if ownership in the entity is transferred within 6 months (i.e., step‐transaction)
– Maryland (Regs. 18.13.02.02 and 18.13.02.04), effective 6/30/08, applies “step transaction doctrine to controlling interest transfers under its recording and transfer tax provisions
– Others as well Council On State Taxation
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State Court Applications of the Common Law Doctrines
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How Have Courts Applied These Doctrines in State Tax Cases?
• Generally employed in attempting to disregard the state income tax benefits of certain transactions or structures
• Theoretically applicable to all tax types
• State tax cases involving the doctrines arise in a number of different contexts including: – Cases addressing whether to ignore or re‐characterize transactions
– Cases challenging the separate existence of a corporation
– Cases addressing whether to require combined returns
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Income Tax Decisions Involving Common Law Doctrines
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Income Tax: Ignore/Re‐characterize Transactions
• Syms Corp. v. Commissioner of Revenue, 436 Mass. 505 (2002)
– Creation of intangible holding company subsidiary was held to be a sham transaction that had no economic substance since it had no practical economic effect other than the creation of tax benefits and had no business purposes other than tax avoidance. Court held that the transfer and license‐back of the trademarks should be disregarded and the resulting royalty payments were not deductible. • Kimberly‐Clark Corp. v. Comm’r. of Rev., 981 N.E. 2d 208 (Mass. Ct. App. 2013)
– Court affirmed the disallowance of royalty and interest expense deductions because the payments lacked economic substance and business purpose. The court noted the circular flow of funds, the lack of third‐party licensing and the documented tax savings rational. Council On State Taxation
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Income Tax: Challenging the Separate Existence of a Corporation
• The Classics of Chicago v. Comptroller, 189 Md. App. 695 (2010)
– Taxpayer maintained and preserved certain trademarks and licensed those trademarks to its Parent. – Maryland Court of Appeals held that Taxpayer and Parent were both liable for Maryland corporate income tax because Taxpayer lacked real economic substance as a separate business entity and, therefore, constitutional nexus existed. – Taxpayer had little to no expenses for officer compensation, wages, other labor costs, maintenance, professional services, service charges, directors’ fees, or rent. Council On State Taxation
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Income Tax: Cases Addressing Whether to Require Combined Returns
• Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, 87 A.3d 1263 (Md. Ct. App. 2014)
• Ramifications of this decision are significant because it calls into question whether a corporation must file a Maryland tax return if it engages in intercompany transactions with an in‐state related parent company.
– Maryland Tax Court had held that the holding companies were dependent upon their parent company because of a dependence for their income, a circular flow of cash and the “general absence of substantive activity from either [holding company] that was in any meaningful way separate from Gore.” – Court of Appeals dismissed as “window dressing” the holding companies’ acquisitions of patents from third parties and the license fees paid from third parties. • New York has numerous cases on this issue.
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Sales Tax Decisions Involving Common Law Doctrines Council On State Taxation
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Sales Tax: Ignore/Re‐characterize Transactions
• Indiana Department of State Revenue v. Belterra Resort Indiana, LLC, 935 N.E.2d 174 (Ind. 2010)
– Indiana Supreme Court addressed issue of whether the contribution of a boat into a subsidiary was subject to Indiana sales and use tax.
– Taxpayer’s parent purchased a boat in Alabama and transferred title and possession to Taxpayer as a contribution to capital while the boat was in international waters. Taxpayer then brought the boat to its casino resort on the Ohio River in Indiana. Indiana assessed use tax on the boat.
– Court applied the step transaction doctrine and collapsed transactions so as to treat the boat as having been purchased by Taxpayer at retail: • Court determined that transactions were “component parts of a single transaction
intended from the outset to reach the ultimate result of avoiding Indiana use tax while maintaining 100% control of [the boat]” • Transactions “were so interdependent that it is unreasonable to conclude that any of the transactions would have been undertaken except with a view to completing the whole series of transactions.”
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Sales Tax: Ignore/Re‐characterize Transactions
• Sullivan Brothers, Inc. v. State of Wisconsin Department of Revenue, No. 2013AP818 (Wis. Ct. App. 2014)
– The Wisconsin Court of Appeals affirmed a use tax assessment against a ceiling materials contractor, finding that an affiliated supply company it transfers materials to did not have independent substance and the affiliate's sole purpose was to allow the taxpayer to avoid paying sales tax on its purchases. – The Commission unanimously decided that the Sullivan‐Supply‐
customer transactions lacked economic substance and a business purpose, and affirmed "the Department's decision to ignore the indirect route of the two individual steps, view the [exempt‐entity installation projects] in their entireties, and treat them as transactions between Sullivan and its tax‐exempt customers." Council On State Taxation
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Sales Tax: Ignore/Re‐characterize Transactions
• In re TJX Cos., DTA No. 812048 (Div. Tax App. Nov. 9, 1995)
– Taxpayer agreed to sell business to third party structured as a stock sale with a 338(h)(10) election. Taxpayer held some assets of the business directly and so it transferred those assets as a capital contribution to a wholly‐owned subsidiary (tax free) and then transferred the stock of subsidiary and other subsidiaries that operated the business to the purchaser (tax free).
– NY contended that the substance over form doctrine and the step transaction doctrine should be applied to assets, which would result in treatment as taxable asset sale to third party.
– ALJ refused to apply these doctrines since steps were carried out for a valid business purpose (to achieve stock sale and 338(h)(10) treatment, allowing the subsidiaries to take advantage of a better position for recognition of gains or losses), and that favorable sales tax result was just a by‐product.
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Sales Tax: Challenging Separate Existence of a Corporation
• Ohio Valley Aluminum Co. LLC v. Dep’t of Revenue, No. 2013‐
CA‐000507‐MR (Ky. Ct. App. Sept. 12, 2014)
– Kentucky Court of Appeals utilized the substance over form doctrine in holding a scrap aluminum processor and its wholly‐owned subsidiary constituted one company for calculating the amount of sales tax due.
– Taxpayer argued that because it had set up a subsidiary to own the raw materials that were processed and because that subsidiary entered into a tolling contract with the processor, the value of the processed aluminum should not be included in the taxpayer’s costs of production.
– The court applied substance over form doctrine
• The subsidiary company did not have any of its own employees, was wholly owned, had the taxpayer as its only aluminum processor, and commingled its assets in the same bank account as the taxpayer.
– The court held that
• the statutes at issue must be expansively interpreted to encompass all costs of production • the taxpayer did not demonstrate that it was truly a separate and complete operation from its subsidiary
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Sales Tax Guidance Applying Common Law Doctrines
• California Annotations – several examples of state applying step‐transaction doctrine to multi‐step transactions (e.g., California Sale & Use Tax Annotations 395.2000 (Nov. 19, 1974))
– Contribution of assets to subsidiary followed by sale of subsidiary stock
– Transaction will be respected if taxpayer has a valid non‐
tax business purpose (Query – Is this consistent with federal guidance on relevance of tax motivation for application of step‐transaction doctrine?)
• Texas is currently considering promulgating economic substance regulations to apply to aircraft and resale transactions
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State Court Decisions Applying Common Law Doctrines to Other Tax Types
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State Court Decisions Applying Common Law Doctrines to Other Tax Types
• California Transient Occupancy Taxes – City of Santa Monica v. Expedia, Cal. Sup. Ct. Case No. JCCP4427 (3/16/11), aff’d by Cal. Ct. App. Dkt. No. B236166 (11/1/12)
• Issue was applicability of tax to amounts paid by transient to online travel companies (OTCs), where statute subject amounts paid “to any hotel” to tax.
• City argued that the “step transaction doctrine dictates that the OTCs’ sales to transients should be taxed based on the total amount paid by the transient. The federal courts and our California state courts have adopted a principle of tax law by which a transaction that is performed in steps may be analyzed according to the end result and overall effect of the transaction.”
• The court did not apply the doctrine, stating that “the step transaction doctrine addresses situations in which a series of sham transactions are designed to evade a tax on the overall result of the transaction. The City does not suggest that it is undertaking to prove that the OTCs and the hotels have devised an elaborate internet discount sales mechanism for the purpose of tax avoidance.”
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State Court Decisions Applying Common Law Doctrines to Other Tax Types
• Real Estate Transfer Tax
– Wisconsin did not apply doctrines to real estate transfer tax (The Collegiate, LLC v. Wisconsin Dep’t of Revenue, No. 08‐T‐047, Wis. Tax App. Comm’n, Dec, 15, 2009)
• Taxpayer LLC transferred real estate to another LLC owned by the exact same family members
• Transfer would have been exempt if real estate was first transferred to members and then transferred to other LLC – New York State has applied step‐transaction doctrine in In re Kelly, DTA No. 819863 (Div. Tax App. Dec. 8, 2005)
• DTA applied doctrine despite acknowledging business purpose for transactions
• See also City of New York Statement of Audit Procedure, No. RPTT 2008‐1 (Feb. 29. 2008) – applying doctrine to certain real property transfers into and out of charitable organizations
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State Court Decisions Applying Common Law Doctrines to Other Tax Types
• Property Taxes
– McMillin‐BCED/Mirimar Ranch N. v. Cty of San Diego, 37 Cal. Rptr. 2d 472 (Cal. Ct. App. 1995) : Applied step transaction doctrine to determine if a change in ownership had occurred that would trigger reassessment under Prop. XIII.
– Read v. Supervisor of Assessments of Anne Arundel County, 731 A.2d 868 (Md. 1999): Adopted the step transaction doctrine to treat a series of transactions as a withdrawal of property for purpose of conveyance subject to rollback tax.
– Mid City Bank, Inc. v. Douglas County Board of Equalization, 616 N.W.2d 341 (Neb. 2000): Applied the step transaction doctrine to treat a series of transactions as a “purchase” of assets for purpose of valuation. Council On State Taxation
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Relationship Between the Doctrines and Legislative Purpose/Intended Benefits Council On State Taxation
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Relationship Between the Doctrines and Legislative Purpose • What about “intended tax benefits”?
• Should the doctrines be applied when taxpayers structure transactions so as to take advantage of a tax benefit specifically created by the legislature?
• Compare the result in TD Banknorth with the result in HMN Financial.
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Relationship Between the Doctrines and Legislative Purpose TD Banknorth, N.A. v. Dep’t of Taxes, 2008 Vt. 120 (2008)
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Taxpayer had three VT subsidiary banks, each of which established a wholly‐
owned subsidiary holding company and assigned certain stocks, securities, mortgages, loans and bonds to it. •
Banks reported losses and holding companies were subject only to $150 minimum tax applicable to certain holding companies whose activities were confined to maintenance and management of their intangible investments. •
Court held that even though holding companies met literal requirements for minimum tax imposition, they should be disregarded under economic substance doctrine because they were formed solely for tax avoidance purposes. –
Court found holding companies carried no economic risk with respect to loans because losses related to uncollectible loans were booked to banks and holding companies conducted virtually no independent activities, bore little or no economic risk, and never engaged in any meaningful business with third parties. Thus, they failed to qualify as independent entities under the business purpose doctrine. Council On State Taxation
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Relationship Between the Doctrines and Legislative Purpose HMN Financial, Inc. v. Comm’r, 782 N.W.2d 558 (Minn. 2010)
• Taxpayer set up captive REIT to hold certain real estate loans. Captive REIT was wholly‐owned by a foreign operating company (FOC). REIT paid little or no MN tax due to its DPD. REIT distributed all its income to the FOC, which is statutorily excluded from a MN combined report. Taxpayer included the income of the FOC as a “deemed dividend,” but took an 80% DRD. • Commissioner argued that captive REIT should be disregarded because it was motivated solely by tax avoidance.
• Court refused to apply the business purpose or economic substance doctrines to disregard the REIT structure because “foreign operating corporations received beneficial tax treatment under Minnesota statutes.” Council On State Taxation
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Relationship Between the Doctrines and Legislative Purpose
MASSPCSCO v. Board of Assessors of Woburn, 953 N.E.2d 263 (Mass. App. Ct. 2011)
– MA has property tax exemption for certain personal property (e.g., stock in trade) owned by corporations. – Limited Partnership (LP) had historically owned certain wireless network equipment (e.g., towers, antennas, switches, software) and leased that equipment to a partner. When it became clear that LPs did not qualify for stock‐in‐trade exemption, LP transferred its MA property to a wholly‐
owned business trust, which qualified as a “corporation” for MA tax purposes. – Court disregarded the transfer as a sham because it was “created solely for the purpose of avoiding tax liability and was not a viable business entity engaging in substantial business activities.” Court noted that the business trust did not have any employees, did not maintain separate bank accounts, did not independently invest its profits, did not do business with any unrelated parties, did not maintain any office space, and did not prove it had dealt with its affiliates in an arm’s length manner. Council On State Taxation
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Sample Framework for ES/BP Analysis
Is Structure/Transaction a Sham in Fact?
No
Yes
Is Structure/Transaction Reorganization of an Existing, Bona-fide
Business or Other Special Situation?
Yes
(Structure/Transaction Will Not Be
Respected)
No
(Structure/Transaction Should Be
Respected)
Does Structure/Transaction Have Economic
Substance?
No
Does Structure/Transaction
Have Business Purpose?**
No
(Structure/Transaction Should Not
Be Respected)
Yes
(Structure/Transaction Should Be
Respected)
Yes
(Structure/Transaction Should Be
Respected)
** Assumes a rigid, twopart alternative test and
no codification of the
doctrines
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Tax Planner’s Checklist
• Facts, facts, facts: document at time of transaction, not afterwards
• Structure transaction to meet the doctrinal tests
• Address business and regulatory realities in transaction documentation
• Demonstrate non‐tax business purposes, where they exist
• Demonstrate substantive activities “with the outside world”
• Identify risks and benefits associated with future options, decision points – avoid “inevitable” outcomes • If state has doctrinal codification, how do the standards deviate from those under case law and/or federal law?
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Conclusion
• Income Taxes – Majority rule: apply doctrines although specific application and interpretation may differ
• Non‐Income Taxes – No clear majority rule although trends suggest that state will continue to aggressively pursue transactions perceived as “abusive”
• Codification – Consider impact of federal codification (state conformity)
• What can taxpayers do?
– Document! Document! Document!
– Financial reporting rules – confirm advisors are addressing potential application of doctrines to transaction at issue
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Contact Info
Kendall Houghton
Todd Lard
Alston & Bird LLP
Sutherland Asbill & Brennan
950 F Street, N.W.
700 Sixth Street, N.W., Suite 700
Washington, D.C. 20004
Washington, D.C. 20001
(202) 239‐3673 office
(202) 383‐0909 office
Kendall.Houghton@alston.com
Todd.Lard@sutherland.com
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