Generally, proposals would codify the definition of "economic substance" rather than codifying the doctrine. This codification has been proposed in several bills during the 110 th Congress. This penalty would be 30% of the understatement in tax that resulted from disallowance of the transaction. The bill would add language to also prohibit deduction of interest on underpayments due to a transaction that lacked economic substance. However, since it is left to the courts to determine whether the economic substance doctrine is relevant, taxpayers are placed in a situation in which they may need professional guidance as to whether the doctrine is applicable, but cannot rely on that guidance to avoid a substantial penalty if a court determines that the doctrine applies and the transaction lacked economic substance. There is also some question about both the cost saving and revenue raising prospects for the proposal.
The economic substance doctrine was judicially developed. A number of bills introduced in the 110 th Congress would codify the definition of "economic substance," provide a strict liability penalty for underpayments resulting from disallowed transactions that lack economic substance, and prohibit deduction of interest on those underpayments. The proposals would not codify the doctrine, itself, nor provide standards for a court's determination that the doctrine was relevant to a particular case. Codification has been dubbed a "revenue raiser," though there is disagreement as to both the amount that would be raised and the way in which codification would increase revenue.