William & Mary Business Law Review
Abstract
This article examines Section 7701(o) of the Internal Revenue Code, which codified the judicial doctrine of economic substance. The economic substance doctrine allows courts to disallow tax benefits that are inconsistent with Congressional intent, even if the taxpayer complies with statutory and regulatory requirements. Although Congress intended to strengthen the doctrine by codifying it, the Internal Revenue Service (IRS) was reluctant to apply it, leading to unintended consequences such as reduced enforcement. This reluctance stems in part from mandatory penalties associated with the doctrine, which the IRS hesitates to impose. Additionally, the codification of the economic substance doctrine has heightened the need to distinguish it from other judicial anti-abuse doctrines, particularly in light of recent litigation and the 2017 Tax Act. The article explores broader issues related to agency discretion in enforcing statutes, the issuance of informal guidance, and the implications for the separation of powers between the legislative, judicial, and executive branches.
