Codification of the Economic Substance Doctrine: Agency Response and Certain other Unforeseen Consequences

William & Mary Business Law Review, Volume 10 | Issue 1, 2018

69 Pages Posted: 13 May 2019

See all articles by Rebecca Rosenberg

Rebecca Rosenberg

Ohio Northern University, Pettit College of Law

Date Written: November 10, 2018

Abstract

Section 7701(o) of the Internal Revenue Code incorporates the controversial judicial doctrine of economic substance into statutory language. In other words, it “codifies” the doctrine. (The economic substance doctrine generally provides that a tax benefit that goes beyond Congressional intent can be disallowed by the courts, even if the taxpayer meets all of the literal Code and regulatory requirements for claiming the benefit).

This codification appears to have accidentally dissuaded the relevant agency (the Internal Revenue Service, or IRS) from raising economic substance issues — an effect that is contrary to Congress’ intent in enacting the doctrine into legislation. The IRS response to codification raises bigger picture issues, such as an agency’s ability to disregard (or decline to enforce) a statute and the parameters of an agency’s ability to issue public guidance using informal means (rather than formal regulations).

In addition, this codification raises structural issues, including the interaction between the three branches of government in this context and the impact of Congressional approval on arguments about the validity of this judicial doctrine. Lastly, such codification places new emphasis on distinguishing between the now-codified economic substance doctrine and other anti-abuse doctrines.

Keywords: tax, federal income tax, 7701(o), economic substance

JEL Classification: K34

Suggested Citation

Rosenberg, Rebecca, Codification of the Economic Substance Doctrine: Agency Response and Certain other Unforeseen Consequences (November 10, 2018). William & Mary Business Law Review, Volume 10 | Issue 1, 2018. Available at SSRN: https://ssrn.com/abstract=3371508

Rebecca Rosenberg (Contact Author)

Ohio Northern University, Pettit College of Law ( email )

525 South Main Street
Ada, OH 45810
United States

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