Nearly 15 years have elapsed since Congress codified the economic substance doctrine (ESD) through the enactment of Code Sec. 7701(o). As of the summer 2024, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) have not issued regulations interpreting Code Sec. 7701(o) and the associated strict liability penalty. George Hani and Jeffrey Tebbs argue that initially, this approach was sustainable, as the IRS had instituted procedural safeguards that limited the circumstances in which examiners were permitted to assert the codified ESD. However, in recent months, the IRS has relaxed those administrative guardrails and started to assert the codified doctrine in several high-profile disputes, including cases in which taxpayers have challenged the validity of regulations issued to implement the Tax Cuts and Jobs Act. The renewed vigor with which the IRS is applying Code Sec. 7701(o) is placing significant strain on the text of the statute. 
 
In the absence of binding guidance, Hani and Tebbs analyze longstanding questions about the proper operation of the economic substance penalty. In particular, they critically evaluate the standard for determining when the 20-percent penalty may be enhanced to 40 percent for inadequate disclosure. In addition, the authors consider what constitutes a failure to satisfy a "similar rule of law," other than the economic substance doctrine, for which the strict liability penalty may be imposed. For each issue, Hani and Tebbs identify practical considerations for the planning, compliance, and controversy settings.

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