Economic Substance Doctrine Codified in New Legislation

On March 30, 2010, President Obama signed the Health Care and Education Affordability Reconciliation Act of 2010 (the "Act"). Section 1409 of the Act codifies the economic substance doctrine and applies to transactions entered into after March 30, 2010.

The economic substance doctrine is a judicially-developed doctrine under which the anticipated tax benefits from a transaction may be denied if the transaction does not result in a meaningful change to the taxpayer's economic position other than reducing federal income taxes. This result can occur even if the transaction otherwise satisfies all statutory and administrative requirements.

The Act adds new section 7701(o) to the Internal Revenue Code which provides that in the case of any transaction "to which the economic substance transaction is relevant" the transaction shall be treated as having economic substance only if (1) the transaction changes in a meaningful way (apart from federal income tax effects) the