Daily Tax Update - April 5, 2012: IRS Chief Counsel Notice Details Counsel Coordination On Economic Substance

IRS CHIEF COUNSEL NOTICE DETAILS COUNSEL COORDINATION ON ECONOMIC SUBSTANCE:  To ensure the economic substance ("ES") doctrine is raised only in appropriate cases, the IRS Office of Chief Counsel ("Counsel") has issued a notice (CC-2012-008) providing instructions regarding (i) Counsel’s role in an examination involving the ES doctrine, (ii) the review of a proposed statutory notice of deficiency ("statutory notice") or a proposed notice of final partnership administrative adjustment ("FPAA") concluding that a transaction lacks ES, (iii) required coordination procedures when litigating the ES doctrine, and (iv) required coordination procedures involving administrative pronouncements.  Highlights of the notice are provided below. 

  • Examination:  When providing advice during an examination with respect to whether assertion of ES is appropriate, Counsel should consider the factors outlined in the two prior LB&I Directives on ES (even if the case originates from a division other than LB&I) as well as appropriate case law.  If the taxpayer under examination previously received a favorable letter ruling or determination letter involving the transaction under examination, Counsel is to request that Associate Chief Counsel review and, if appropriate, revoke the ruling or letter.  If revocation is appropriate, a proposed adjustment applying the ES doctrine should not be issued prior to confirmation of such revocation. 
  • Statutory Notice and FPAA:  If a proposed statutory notice or FPAA concludes that a transaction lacks ES, Counsel attorneys must coordinate their review with Division Counsel headquarters and the Office of the Associate Chief Counsel (Procedure and Administration) (“ACC(PA)”), and ACC(PA) is to further coordinate National Office review with other Counsel offices having substantive jurisdiction over the issues involved.
  • Litigation:  Before raising ES as an issue in a Tax Court case or a defense or suit letter to the Department of Justice, (i) the same procedures required for a statutory notice and a FPAA apply and (ii) the same procedures required in the examination setting for prior favorable rulings or letters apply.  Further, National Office review is required before briefs, motions, or letters involving ES issues are filed or sent.
  • Administrative Pronouncements:  Division or Associate Offices with subject matter jurisdiction over administrative pronouncements (e.g., Appeals Settlement Guidelines and Coordinated Issue Papers) must review administrative pronouncements to ensure that any discussion of ES is consistent with the statute, the LB&I Directives, relevant case law, and the notice.  Such review must be coordinated with ACC(PA) as well.
  • The notice can be accessed here and the prior LB&I Directives can be accessed here and here.
  • For additional information, contact For additional information, contact Matthew D. Lerner - mlerner@steptoe.com, Aaron P. Nocjaranocjar@steptoe.com, Mark J. Silverman - msilverman@steptoe.com or Philip R. West - pwest@steptoe.com 

SHULMAN LEAVING IRS IN SEPTEMBER:  Today, IRS Commissioner Douglas Shulman said that he will leave his post when his five-year term of office ends in September.  Shulman said, "My plan is to leave at the end of this term."  He added that the IRS is "a great institution” that will continue to serve millions of American taxpayers well."


Announcement 2012-16 announces the July 27, 2012 filing deadline for Telephone Excise Tax Refund requests and confirms that the IRS will continue to process requests for the refund of the wrongfully collected Telephone Excise Taxes described in Notice 2006-50 and Notice 2007-11.

Notice 2012-28 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008.  It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under § 430(h)(2).  In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

Notice 2012-27 (released April 2) provides guidance relating to the application of the tax imposed by new § 4043 of the Internal Revenue Code on fuel used in fractional ownership program aircraft.  Section 4043 was added to the Code by section 1103 of the FAA Modernization and Reform Act of 2012 (Pub. L. 112-95) and applies to fuel used after March 31, 2012.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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