Economic Substance Doctrine: New Directive for IRS Examiners and Managers: LB&I Directive Sets Out Detailed Substantive and Procedural Standards for IRS Examiners to Follow – This Provides Valuable Information to Taxpayers and Their Advisors

Sullivan & Cromwell LLP - July 22, 2011

The Commissioner of the Large Business and International Division of the IRS (“LB&I”) recently issued a directive (the “Directive”) to LB&I examiners and managers setting out specific analytical steps that the examiners must complete before asserting the newly codified economic substance doctrine with respect to a particular transaction. The Directive establishes a detailed four-step analysis that an examiner must complete, and fully document, before asserting the new strict liability penalty that applies when an underpayment is determined to be attributable to a failure to satisfy the codified economic substance doctrine.