Looking back at 2023, it is clear that the IRS has begun to increasingly assert anti-abuse doctrines, most notably the economic substance doctrine (ESD), in contentious tax controversies. Correspondingly, courts have had more opportunities to analyze and conceptualize the various anti-abuse doctrines. Courts in Liberty Global, GSS Holdings, and Chemoil have each offered unique and sometimes conflicting analyses in this regard. When reviewing these cases at a high level, a worrisome pattern emerges of courts conceiving of the traditional three anti-abuse doctrines as simply manifestations of a much broader substance over form tax principle. Further, despite the text of section 7701(o), courts are rejecting the idea that there exist certain transactions to which the ESD does not apply.

After initially granting certiorari and hearing oral arguments in In re Grand Jury ─ a matter concerning the application of the attorney-client privilege to dual-purpose communications ─ the United States Supreme Court “dismissed as improvidently granted” the case. Tax practitioners had hoped that a ruling by the Supreme Court would resolve a circuit split regarding the extent to which such communications fall within the ambit of the privilege.

The IRS is laying the groundwork for more aggressive and contentious transfer pricing controversies, recently revealing that it will more actively consider applying the economic substance doctrine and related penalties in those cases. It is unclear how the IRS would apply the doctrine to otherwise economically meaningful related party arrangements, but the IRS’s shot across the bow should be taken seriously, and the new approach will likely soon be made manifest at the examination stage.