On April 21, 2026, the Tenth Circuit issued its opinion in Liberty Global v. United States, addressing the question of whether the economic substance doctrine is “relevant” to a series of restructuring steps implemented by the taxpayer. Deciding in favor of the government, the court held that the economic substance doctrine is “relevant to attempts by taxpayers to mechanically utilize the provisions of the Tax Code to obtain a benefit not intended by Congress.” The court also determined that the appropriate transaction for analysis was the entirety of the restructuring as opposed to the individual components of the overall restructuring.
The decision has important implications for tax planning, particularly when a transaction involves formal elections, entity classification choices, capitalization decisions, or other steps that, standing alone, might ordinarily be respected even if tax-motivated.
Background
Liberty Global, a UK multinational telecommunications company, implemented a four-step series of transactions, referred to as “Project Soy,” designed to extract a subsidiary, Telenet Group Holding (TGH), out from under its U.S. tax chain while avoiding current U.S. tax on substantial built-in gain.
In simplified terms, Project Soy involved (1) a share-capital reduction by a Belgian subsidiary; (2) a restructuring involving a disregarded financing subsidiary; (3) the conversion of Telenet, a subsidiary of TGH, from a disregarded entity into a regarded corporation for U.S. tax purposes, combined with the issuance of profit certificates and the creation of “springing to life” debt; and (4) the sale of TGH to Liberty Global’s UK parent company.
Steps 1 through 3 generated approximately $4.8 billion of earnings and profits (E&P) in TGH. That E&P was important because, under Sections 964(e) and 1248, gain from the sale of certain controlled foreign corporation (CFC) stock can be treated as a deemed dividend to the extent of the CFC’s E&P. Liberty Global claimed that the sale of TGH generated approximately $2.4 billion of gain treated as a deemed dividend and that the deemed dividend was eligible for a Section 245A dividends-received deduction.
Project Soy exploited a mismatch in the 2017 Tax Cut and Jobs Act’s international tax rules. Because of the timing of the sale before year-end, the E&P generated in steps 1 through 3 avoided current taxation under GILTI or Subpart F, while nevertheless generating a Section 245A deduction for the deemed dividend arising from the sale in step 4. The government sought to deny the Section 245A deduction on the grounds that the transactions giving rise to the tax benefit lacked economic substance within the meaning of Section 7701(o). Section 7701(o)(5)(A) defines the “economic substance doctrine” as the common-law doctrine under which the tax benefits of a transaction are disallowed if the transaction does not have economic substance or lacks a business purpose. Section 7701(o)(1) provides that:
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—
- the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position, and
- the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
The statutory phrase “to which the economic substance doctrine is relevant” has generated substantial controversy. In the district court, Judge Jackson suggested that there was no independent threshold relevance inquiry, stating: “At the risk of tautology, I proceed with the conclusion that the economic substance doctrine applies when a transaction lacks economic substance.” That aspect of the district court’s opinion drew significant practitioner attention.
The Tenth Circuit’s Decision
The Tenth Circuit affirmed the district court’s judgment for the government. Although the Tenth Circuit did not explicitly adopt the district court’s conclusion that there is no threshold relevancy requirement, the court’s reasoning substantially narrowed the practical force of that requirement. The court held that the economic substance doctrine was relevant because Project Soy was an integrated plan designed to obtain a tax benefit the court concluded Congress did not intend.
Liberty Global argued that several of the component steps involved “basic business transactions” that historically have been respected even when tax-motivated, including entity classification choices and capitalization choices. The court rejected any categorical exemption for those steps.
In the court’s view, the proper inquiry was not whether each component step, viewed in isolation, resembled an ordinary tax election or business transaction. Rather, the court considered the overall plan and concluded that Project Soy was a “highly structured tax-avoidance scheme,” not a protected basic business transaction. The court emphasized that Liberty Global had admitted that steps 1 through 3 did not meaningfully change its economic position and had no substantial non-tax purpose. Once those steps were disregarded, the E&P they created could not support the claimed Section 245A deduction.
Significance
Liberty Global gives courts and the IRS a potentially broad path to apply the economic substance doctrine even when individual steps of a transaction are governed by formal rules or elective regimes. The decision suggests that a taxpayer may not be able to defend an integrated plan merely by showing that its component parts involve entity classification elections, debt/equity choices, or other transactions that are often respected when undertaken for tax reasons.
At the same time, the decision leaves uncertainty. The Tenth Circuit did not provide a crisp test for when the economic substance doctrine is “relevant” under Section 7701(o). Instead, the court focused on whether the overall transaction mechanically achieved a tax result inconsistent with Congress’s intended statutory design. The court did not elaborate on how to determine whether in fact a transaction or set of transactions generates a tax benefit that Congress did not intend. The court’s approach creates risk for tax planning that relies on the literal operation of detailed Code provisions but produces results that a court may later view as unintended.
The dissent strongly objected, concluding that the majority’s approach “borders on the absurd.” In the dissent’s view, Section 7701(o)’s relevance requirement has independent significance, and the economic substance doctrine is relevant only when the statutory or regulatory provision at issue requires an inquiry into economic reality or taxpayer motive. In that way, the doctrine acts as substantive canon to interpret statutory terms that involve an economic condition and should not be used as an all-purpose anti-abuse tool to override formal tax elections or mechanical statutory consequences that Congress or Treasury has otherwise authorized.
The Tax Court recently addressed the relevance issue in Patel v. Commissioner, holding that Section 7701(o) does require a threshold relevance determination and that the relevance inquiry is not coextensive with the two-part economic substance test. The Tax Court nevertheless concluded that the doctrine was relevant to the microcaptive insurance transactions at issue in that case.
We note that the Tax Court’s decision in Patel is being appealed to the Fifth Circuit. This sets up a potential circuit split should the Fifth Circuit agree with the Tax Court’s approach, leading to the possibility that the relevance issue will ultimately be resolved by the U.S. Supreme Court.
For taxpayers with questions about the Liberty Global decision or how the economic substance doctrine may apply to their tax planning, please contact Scott Harty at +1 404 881 7867 or Chaim Stern at +1 212 905 9153.
If you have any questions, or would like additional information, please contact one of the attorneys on our Federal & International Tax team.
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