Wednesday, June 27, 2012

Economic Substance

What is economic substance?

1) the transaction  must change in a meaningful way the taxpayer's economic position and

2)  the taxpayer must have a substantial business purpose for the transaction.

Neither the change in economic position or the business purpose may be saving taxes! This legal doctrine allows the IRS to unravel more complicated/tiered business structures, many times disregarding a tier. It is not allowed t o devlop such structured simply to save taxes. A lack of economic substance can result in an additional 20% or 40% penalty.

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