The Republican effort to repeal the Affordable Care Act appears to be stalling. If and when it picks up again, the fate of section 7701(o) of the Internal Revenue Code will be far from the most consequential issue at stake. But section 7701(o), the provision added by the ACA that codifies the tax law economic substance doctrine, matters still — to the tune of $5.8 billion in federal revenue that will be lost over the next decade if the provision is repealed. Or so the Congressional Budget Office estimates; what repeal of section 7701(o) would actually accomplish is something of a mystery. [See Leandra Lederman’s cross-linked post at Surly Subgroup for more on what repeal of section 7701(o) might mean for common law tax anti-abuse doctrines, and for Leandra’s characteristically thoughtful take on the policy implications of repeal.]

By most accounts, the common law economic substance doctrine dates back to the 1935 Supreme Court case Gregory v. Helvering. (For a comprehensive account of the doctrine’s evolution through 2010, see Leandra Lederman, W(h)ither Economic Substance, 95 Iowa L. Rev. 389 (2010).) By 2010, the doctrine was widely understood to incorporate an objective prong and a subjective prong: (1) objectively, did the transaction have economic substance?; and (2) subjectively, did the taxpayer have a business purpose for entering into the transaction? Yet courts applied the two prongs inconsistently: some courts would recognize a transaction only if it satisfied both prongs; others said that satisfying either prong was enough; and still others focused exclusively on one of the prongs or applied something like a balancing test.

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