IRS Issues Notice on Codification of the Economic Substance Doctrine: IRS Will Not Publish an “Angel List” of Transactions to Which the Economic Substance Doctrine Is Not Considered Relevant or Issue Private Letter Rulings Regarding Whether the Economic Substance Doctrine Is Relevant to a Particular Transaction

Sullivan & Cromwell LLP - September 14, 2010

The Health Care and Education Reconciliation Act of 2010 (the “Act”) codified the judicially developed economic substance doctrine, and on Monday, September 13, 2010, the IRS issued Notice 2010-62 (the “Notice”), providing “interim guidance” regarding the codification of the economic substance doctrine and related penalties. The Notice applies to transactions entered into on or after March 31, 2010, which is the effective date for the codification of the economic substance doctrine. The Notice does not provide any substantive IRS interpretation of the economic substance doctrine. Moreover, the Notice states that the IRS (a) does not intend to issue an “angel list” or similar guidance regarding the types of transaction to which the economic substance doctrine either applies or does not apply and (b) will not issue private letter rulings or determination letters regarding whether a transaction complies with the codified economic substance doctrine.

Additionally, on Tuesday, September 14, 2010, the Commissioner of the Large and Mid-Size Business Division of the IRS (the “LMSB”) issued a directive providing that any proposal to impose penalties under the economic substance penalty regime at the examination level “must be reviewed and approved by the appropriate Director of Field Operations before the penalty is proposed.” In other words, the imposition of penalties must be approved by one of the second highest officials in each Industry Group within the LMSB.