United States Tax: 40% strict liability penalty applies to tax understatements

The Reconciliation Act of 2010 was signed into law on 30 March 2010 as a companion package of "fixes" to a health care law signed 23 March 2010 (Patient Protection and Affordable Care Act). The Reconciliation Act codifies the economic substance doctrine, requiring taxpayers to show that:

(1) a transaction changed their economic position in a meaningful way apart from the federal income tax effects, and
(2) they had a substantial purpose apart from federal income tax effects for entering into the transaction.

A 40% strict liability penalty applies to tax understatements attributable to undisclosed non-economic substance transactions (20% if adequately disclosed). Unlike prior proposals, there is no reasonable cause exception limiting the ability of large corporations and publicly traded companies to obtain relief from accuracy-related penalties. The measure, estimated to raise USD 4.5 billion over 10 years, is effective for transactions entered into after the date of enactment (30 March).