Congress codified and clarified the common law doctrine of "economic substance." There are many problems with the new law. For example, the 40% strict liability penalty does not apply only to transactions lacking economic substance. It also applies to transactions involving substance over form, sham, the step transaction doctrine and lack of business purpose. The new law removes any argument that the taxpayer might have based on "reasonableness." It has a number of undefined terms and a general lack of guidance, e.g., transactions which are clearly permitted.
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