Interesting article today on Bloomberg:  Tax-Shelter Crackdown Sought by Senate in Quest for Revenue, by Ryan J. Donmoyer:

U.S. lawmakers, searching for new sources of revenue, are reviving a proposal that would impose penalties on tax-saving financial transactions that don’t otherwise have a clear business purpose. This so-called economic-substance test may be included in a package of education tax incentives the Senate will take up as early as next week, according to a congressional aide who confirmed the plan on the condition of anonymity.

The proposal, if enacted, may have a wide impact on business. It would potentially penalize common tax-saving transactions, such as those taken to minimize liability in mergers and acquisitions. The Bush administration and the legal and accounting professions have opposed similar measures in the past, claiming such rules would impede commerce. …

On Feb. 16, the U.S. Supreme Court declined to hear two cases [Dow Chemical and Coltec] that would have tested the court system’s ability to apply the economic-substance test. The courts’ ruling left intact IRS rulings in both cases. Opponents of the new tax rules say the Supreme Court’s refusal to consider the two cases indicates the court system is successfully applying the economic-substance test on a case-by- case basis. They say writing a definition of economic substance into the law will only hinder enforcement efforts. …

Eric Solomon, the assistant secretary for tax policy at the Treasury Department, reiterated the administration’s position that decisions about which transactions qualify as tax avoidance are best left to the courts.