William & Mary Business Law Review
Abstract
This article examines the codification of the judicial economic substance doctrine through Section 7701(o) of the Internal Revenue Code, which empowers courts to disallow tax benefits inconsistent with Congressional intent even when statutory and regulatory requirements are satisfied. While Congress intended codification to strengthen the doctrine and enhance tax enforcement, the Internal Revenue Service (IRS) has instead become reluctant to apply it—largely due to the strict liability penalties accompanying the statute. This agency response has diminished the doctrine’s use in litigation and shifted emphasis toward other anti-abuse doctrines, raising questions about agency discretion to decline enforcement and its authority to issue guidance through informal means. The codification further highlights constitutional and structural issues, including interactions among the legislative, executive, and judicial branches and ongoing debates about the doctrine’s validity under separation of powers principles. Ultimately, codification has produced consequences opposite to those intended by Congress, weakening the doctrine and compelling courts and the IRS to rely on alternative approaches to address abusive tax avoidance strategies.