Tax Blog/Blawg

On April 21, 2026, a divided panel of the Tenth Circuit issued the first appellate decision regarding the "relevance" threshold in the codified economic substance doctrine under Section 7701(o).  In Liberty Global v. United States, the Court affirmed the U.S. District Court for the District of Colorado’s ruling that the codified economic substance doctrine was relevant to the transactions at issue (Project Soy) and that the transactions lack economic substance because they served no substantial nontax purpose despite the transactions complying with the mechanics of the Internal Revenue Code.

Brief History of the Economic Substance Doctrine

The economic substance doctrine finds its roots in the landmark Supreme Court case Gregory v. Helvering[1] that disregarded a transaction that complied with the literal terms of the Internal Revenue Code but obtained benefits beyond what the statute intended.  In essence, the Supreme Court disallowed the transaction because it served no purpose other than to avoid tax.

The economic substance doctrine continued to evolve throughout the next seventy-five years as the appellate courts weighed in and expanded the test to include a two-pronged objective/subjective analysis that asked:

1. Objectively, whether the transaction had economic substance beyond the tax benefits; and/or
2. Subjectively, whether the taxpayer had a nontax business purpose for entering into the transaction.

The appellate courts did not apply the test in the same manner.  Some circuits applied the test in the conjunctive, while others in the disjunctive; leading to significant confusion on whether transactions fell within its scope.  Additionally, courts would often confuse the economic substance doctrine with other judicial doctrines, such as substance over form or sham partnership, further confusing taxpayers.

In 2010, Congress codified the economic substance doctrine in Section 7701(o) to clarify the doctrine and ensure the IRS only applied it when appropriate.  The statute states:

• (1) Application of doctrine – In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if
• (A) the transaction changes in a meaningful way (apart from the Federal income tax effects) the taxpayer's economic position, and
• (B) the taxpayer had a substantial purpose (apart from the Federal income tax effects) for entering into such transaction.

Liberty Global and Project Soy

After Congress enacted the Tax Cuts and Jobs Act of 2017, Liberty Global, Inc. (LGI) identified a statutory mismatch between two TCJA provisions: the Section 245A dividends-received deduction and the effective date of the global intangible low-taxed income (GILTI) rules.

LGI devised a four-step restructuring plan, internally codenamed "Project Soy," involving its Belgian subsidiaries, Telenet Group BVBA and Telenet Group Holding NV/SA. The plan involved:

1. Converting entities through check-the-box elections and a Section 351 contribution;
2. Recapitalizing Telenet Group with debt and non-qualified preferred stock;
3. Triggering taxable gain within the Telenet structure, which generated earnings and profits (E&P) in LGI's non-U.S. affiliates owned by the U.S. group; and
4. Selling the interest in TGH to a non-U.S. affiliate before the last day of the tax year and treating the gain as a dividend eligible for the Section 245A deduction while having the E&P-generating transactions escape GILTI inclusion due to the sale closing before the GILTI rules kicked in.

Project Soy gave rise to a significant tax deduction that LGI claimed on its return and effectively allowed LGI to repatriate foreign-corporate income with little to no tax effect.  The IRS disallowed the deduction and asserted that the transactions lacked economic substance serving no nontax business purpose.  LGI paid the tax and sued for a refund.  The U.S. District Court for the District of Colorado ultimately sided with the IRS agreeing that the economic substance doctrine was relevant and disallowing Project Soy.  When evaluating the doctrine’s relevance, the Court concluded that “the economic substance doctrine applies when a transaction lacks economic substance.”  LGI decided to appeal the District Court’s decision to the Tenth Circuit Court of Appeals. 

The Tenth Circuit Opinion

The Tenth Circuit rejected LGI's argument that the economic substance doctrine was not relevant to Project Soy on two grounds.  First, the Court cited the longstanding precedent that transactions that "comply with the literal terms of the tax code" have been disregarded for tax purposes if they have no economic substance, but are, instead, mere tax avoidance schemes.  The Court expressly rejected LGI's argument that the codified economic substance doctrine is irrelevant to transactions that mechanically complied with the Internal Revenue Code.

Second, the Court was unpersuaded by LGI's argument that the economic substance doctrine was irrelevant to multi-step transactions.  LGI attempted to rely on the legislative history that stated that basic business transactions fall out of purview of Section 7701(o) to support its argument.  But the Court was unconvinced as the multi-step transaction, when viewed as a whole, is not exempt from the reach of Section 7701(o).  Thus, the Court held that "LGI cannot escape the application of [Section 7701(o)] by including within its integrated structure steps that might, if standing alone, be considered basic business transactions."

Judge Eid provided a scathing dissent of the majority opinion on the basis that the majority stripped Section 7701(o) of its mandatory relevancy determination.  She stated that " If Congress meant the economic substance doctrine to apply to all transactions like the district court suggests, it would not have included the prefatory language in [Section 7701(o)] referencing the relevancy of the doctrine."  She viewed the majority's interpretation as "not only wrong" but that "it borders on the absurd."  She then followed that with an analysis of case law in which courts found that the economic substance doctrine was not relevant to transactions, and applying that precedent to Project Soy, determined that the economic substance doctrine should not apply to Project Soy.

Practical Considerations

The Liberty Global opinion appears to have broadened the relevance of the economic substance doctrine allowing the IRS to apply the doctrine to a greater number of cases.  When evaluating transactions to determine whether the economic substance doctrine applies, taxpayers must determine whether the transactions mechanically comply with the Internal Revenue Code but lead to benefits unintended by Congress.  More appellate courts will likely weigh in on the economic substance doctrine in the future to further clarify the relevance of the doctrine and its applicability to transactions.

[1] 293 U.S. 465, (1935).

Disclaimer: This blog post does not constitute legal advice, does not create an attorney-client relationship, and is intended for informational purposes only.