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Mark Allison Quoted in Tax Notes, Practitioners Examine Economic Substance in Tax Shelter Cases

January 23, 2012, Tax Notes
Excerpt taken from article.

Although recent court decisions have provided some clarity on the judicial treatment of the economic substance doctrine in tax shelter cases, practitioners' efforts in those cases haven't been as successful as they had hoped, panelists said January 19 at a District of Columbia Bar Taxation Section luncheon in Washington. Practitioners examined some recent decisions from high-profile tax shelter cases and discussed what transactional elements qualified or should have qualified under the two prongs of the economic substance doctrine: objective profit potential and subjective business purpose.

John Lindquist, a senior litigation counsel for the Justice Department's Tax Division, speaking on his own behalf, said that before 2001, the industry standard was to structure a transaction so that it had ‘‘any profit possibility,'' which was evident in the range of son-of-BOSS cases.

Practitioners have since become better at structuring transactions and presenting arguments in a way that reflects economic substance, Lindquist said. He said he looked to Fidelity as a ‘‘wonderful example'' of the application of the objective profit potential test. (For Fidelity International Currency Advisor A Fund LLC v. United States, 747 F. Supp.2d 49 (D. Mass. 2010), see Doc 2010-10960 or 2010 TNT 96-16.)

Fidelity represents a second-generation son-of-BOSS transaction, demonstrating that practitioners are now designing the transaction ‘‘to have the appearance of the possibility of being able to cover your fees,'' Lindquist said.

The taxpayer in Fidelity, former U.S. Ambassador to Ireland Richard Egan, engaged in a transaction that was both a loss generator and a gain eliminator. It was designed to create a ‘‘head of the pin payout'' whereby the possibility of a payout ‘‘hitting the gusher'' would be low, but the payout itself would be quite high, Lindquist said. The appearance of a possibility for a large profit ‘‘gives legs to the transaction for economics,'' he said.

Nonetheless, in the end, the government's examination of supporting documents, including e-mails and communications, showed that the preparations were ‘‘after-the-fact machinations to show a valid business purpose,'' not unlike the transaction undertaken in WFC Holdings, Lindquist said. (For WFC Holdings Corp. v. United States, No. 0:07-cv-03320 (D.Minn. 2011), see Doc 2011-20825 or 2011 TNT 192-9.)

In WFC Holdings, which involved a purported tax shelter by Wells Fargo & Co., an employee in the bank's tax department was tasked with creating a business purpose memo to justify the transaction, said Mark D. Allison, a partner with Caplin & Drysdale. If the memo had been written and simply placed in a file, the result might have been different, but the employee ‘‘had to keep rewriting the memo because they kept coming up with better or different business purposes,'' Allison said, adding, ‘‘The court saw right through that.''

Click here to read the article on the economic substance doctrine in tax shelter cases.


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