George Hani discusses a notice issued by the IRS chief counsel on April 3 that explains how counsel intends to interact with the IRS and Justice Department for issues involving common law economic substance and codified economic substance claims. The notice's instruction that counsel attorneys, for purposes of litigation, coordinate with the appropriate associate chief counsel's office to review favorable private letter rulings or determination letters issued regarding the transaction could have negative consequences for taxpayers, said Hani. Practitioners have an idea of "negative comfort" for rulings, whereby if the government believes the transaction has failed economic substance, it won't issue a favorable ruling, he said. Transactions for tax credit monetization, for example, are motivated solely for tax purposes, and if the IRS issues a favorable ruling, that would suggest that economic substance isn't relevant, Hani said. In those cases, the notice "invites" counsel to review letter rulings that previously gave taxpayers the sense that economic substance was not a factor meriting concern, Hani said.

Overall, the notice provides for an institutional approach by the IRS to embrace the directive developed by LB&I. "It's a positive sign that the institution as a whole has a coordinated approach," Hani said. The notice also appears to confirm that the directive contains "nuggets of substantive guidance" and is not purely procedural. Chief counsel is effectively saying, "Look to the LB&I directives," Hani said.