Where’s the beef? In Liberty Global, the Tenth Circuit finds Project Soy lacks substance

In a 2–1 decision,¹ the Tenth Circuit affirmed the District of Colorado’s decision in Liberty Global, Inc. v. United States,² holding that the codified economic substance doctrine under section 7701(o)³ barred Liberty Global from claiming a section 245A dividends-received deduction resulting from its 2018 restructuring known as “Project Soy.” The transaction involved a tightly integrated series of steps designed to exploit a perceived mismatch in the Tax Cuts and Jobs Act’s (TCJA’s) international provisions. The majority opinion treated the codified economic substance doctrine as a substantive constraint that can deny tax benefits even where a transaction mechanically complies with the Code.

The decision is important because of the majority’s framing of the relevancy requirement for the codified economic substance doctrine: their opinion treated the doctrine as relevant whenever a taxpayer uses technically compliant steps to obtain a tax result the court views as inconsistent with congressional intent.

Origins of the Economic Substance Doctrine

The economic substance doctrine began as a judicial construct similar to other anti-abuse doctrines, like business purpose, substance-over-form, and step transaction.⁴ Courts applying the economic substance doctrine over the years established an objective test examining the economic realities of the scrutinized transaction, and a subjective test examining the taxpayer’s motivation in entering the transaction.⁵ Courts remained divided, however, over whether these tests were conjunctive, disjunctive, or flexible in application.

Congress resolved this ambiguity in 2010 by enacting a statutory “clarification” of the economic substance doctrine, codified in section 7701(o). Under the statute, a “transaction to which the economic substance is relevant” will have economic substance only if the transaction: (1) “changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position,” and (2) “has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.” 

The statute settled any lingering doubt regarding the application of the two prongs of the test by clearly requiring them to be cumulative. Despite this clarification, the statute created additional ambiguity regarding when the economic substance doctrine was “relevant” to the scrutinized transaction, whether relevance acted as a threshold requirement, and how such a relevancy determination was to be made. Although section 7701(o)(5)(C) states this determination “shall be made in the same manner as if” the codified economic substance doctrine “had never been enacted,” how the determination is made in practice remains unclear.

Background of Liberty Global, Inc. v. United States

Liberty Global centered on a four-step transaction, Project Soy, which the taxpayer undertook in 2018 after enactment of the TCJA. Liberty Global’s tax planning for the transaction depended on a perceived “last day of year rule/mismatch” between the rules governing controlled foreign corporation status and the rules imposing current US tax on global intangible low-taxed income and subpart F income. The IRS and Treasury later enacted Temp. Treas. Reg. § 1.245A-5T in an attempt to address such mismatch concerns.⁶

Project Soy generated approximately $4.8 billion of earnings and profits in a Belgian holding structure and then used those earnings and profits to support dividend treatment for approximately $2.4 billion of gain on the sale of the Belgian affiliate to Liberty Global’s U.K. parent. On its initial return, Liberty Global complied with Temp. Treas. Reg. § 1.245A-5T, which would have prevented the intended result. It later filed an amended return asserting that the regulation was invalid and recomputing its liability as if the regulation did not apply. On that return, Liberty Global sought to offset the gain with a section 245A dividends-received deduction and ultimately claimed a refund of roughly $110 million in federal district court.

The district court resolved the case in two summary judgment opinions on the following issues: (1) whether Temp. Treas. Reg. § 1.245A-5T was valid, and (2) whether the codified economic substance doctrine under section 7701(o) applied to Project Soy. In its first opinion, the district court decided in favor of Liberty Global by finding Temp. Treas. Reg. § 1.245A-5T invalid.⁷ In its second opinion, the district court found that the economic substance doctrine precluded Liberty Global from claiming the section 245A dividends-received deduction in connection with Project Soy. It held that the issue of whether the doctrine is relevant to a transaction is co-extensive with the question of whether the transaction fails the two-prong test under section 7701(o)(1)(A) and (B).⁸ It further held that the economic substance doctrine gives courts the flexibility to apply the two-part test to an individual step in a transaction or, as the district court did in this case, to the transaction as a whole. Looking at the transaction steps together, it rejected Liberty Global’s argument that Project Soy involved a basic business transaction that fell outside the scope of the economic substance doctrine. Finally, the district court found that Project Soy failed the two-part conjunctive test in section 7701(o).

Liberty Global appealed, arguing that the district court was required to conduct a threshold relevancy inquiry, the codified economic substance doctrine was not “relevant” to Project Soy under section 7701(o), and the steps of Project Soy were exempt or excluded from the application of the doctrine.

After the district court’s decision, the US Tax Court reached a different statutory construction of section 7701(o)’s language of relevance. In Patel v. Commissioner,⁹ the Tax Court found that the statute indeed required a threshold relevancy determination prior to examining a transaction under the two-prong test in section 7701(o)(1)(A) and (B). This determination, the court in Patel held, was made by examining pre-codification case law and drawing parallels from those cases with the transaction at issue.

The Tenth Circuit’s Holding

In denying Liberty Global’s appeal, the Tenth Circuit’s majority opinion held the codified economic substance doctrine was relevant to Project Soy and that the first three steps of the project were disregarded under the doctrine. The court rejected the taxpayer’s central argument that section 7701(o) is merely an interpretive tool that cannot override the literal terms of the Code.

Section 7701(o)(5)(C) states that whether the economic substance doctrine is relevant to a transaction should be determined in the same manner as before enactment of Section 7701. Accordingly, the Tenth Circuit majority looked to pre-codification cases that disregarded transactions that lacked economic substance and business purpose – notwithstanding compliance with the literal terms of the Code. In the majority’s view, codification preserved that common-law principle.

The opinion also rejected Liberty Global’s effort to isolate particular steps or sub-steps as supposedly “basic business transactions” exempt from applicability of section 7701(o). Instead, the majority held the transaction to be analyzed was the entirety of Project Soy, not its individual steps, which the court described as a tightly integrated series of transactions carried out over four days for the specific purpose of exploiting an unintended mismatch in the TCJA.

Regarding the relevancy requirement of section 7701(o), in a footnote the majority disregarded the issue as a “red herring.” The court agreed with the district court’s ruling that Project Soy was relevant to the economic substance doctrine because the transaction “was an attempt by [Liberty Global] to mechanically utilize the provisions of the TCJA to obtain a benefit not intended by Congress.” 

Liberty Global conceded in the district court that the first three steps of Project Soy did not meaningfully change its economic position and served no substantial non-tax purpose. Those concessions made it easier for both courts to disregard those steps. Once those steps were disregarded, the earnings and profits generated by the restructuring were unavailable to support the section 245A dividends-received deduction that had offset the deemed dividend resulting from the fourth step.

The Dissent

Judge Eid dissented. In her view, section 7701(o) requires a distinct threshold determination that the economic substance doctrine is “relevant” before a court may proceed to the statute’s familiar two-prong analysis. She was also critical of the majority’s dismissal of this threshold inquiry and the majority’s language referring to this as a mere “red herring.”

The dissent further criticized both the district court and the majority for effectively collapsing the threshold relevance question into the merits of the two-prong analysis. Judge Eid further warned that the majority’s approach was overly broad and risks making the doctrine available whenever the government believes a transaction is inconsistent with statutory purpose, notwithstanding that Congress added a limiting relevance requirement in section 7701(o).

Finally, in surveying pre-codification case law, Judge Eid found the doctrine was relevant “when the favorable tax treatment provided by another provision’s text turns on ‘objective economic realities of a transaction’ or the taxpayer’s economic motive.”

In applying this framework to the case, Judge Eid found the doctrine was not relevant to Project Soy because Liberty Global’s decision of how and when to recognize gain did not implicate a provision that would make economic reality or taxpayer motive relevant. 

Practical Implications

The Tenth Circuit majority found the relevance requirement satisfied where a taxpayer claims tax benefits “not intended by Congress” through transactions deemed to serve no economic purpose besides tax savings and went on to deny tax benefits even though the taxpayer complied with the literal requirements of the Code. 

Moving forward, the IRS may invoke economic substance more aggressively. However, the role of the relevance requirement remains uncertain with the majority’s view in stark tension not just with the dissent but also with the Tax Court’s decision in Patel. 

Takeaway

Liberty Global is a meaningful government win and an important section 7701(o) case for domestic and international tax planning moving forward. At minimum, taxpayers should expect the government to rely on the opinion for the proposition that a formally compliant structure can still fail where it is assembled to generate a tax result the court views as inconsistent with congressional intent. The unresolved role of the relevance requirement will likely be the subject of continuing litigation in this area.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

^{1 Liberty Global, Inc. v. United States, No. 23-1410 (10th Cir. Apr. 21, 2026).
2 Liberty Global, Inc. v. United States (ESD Order), No. 1:20-cv-03501-RBJ (D. Colo. Oct. 31, 2023).
3 Unless otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (Code), and all “Treas. Reg. §” references are to the regulations promulgated thereunder by the Department of the Treasury (Treasury Regulations or Regulations) as in effect as of the applicable taxable year or as of the date of this legal alert, as relevant.
4 See Gregory v. Helvering, 293 US 465 (1935); Frank Lyon Co. v. United States, 435 US 561 (1978).
5 See Rice’s Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir. 1985); ACM Partnership v. Commissioner, 157 F.3d 231 (3rd Cir. 1998).
6 See REG-106282-18 (June 18, 2019); T.D. 9865 (June 14, 2019).
7 Liberty Global, Inc. v. United States, Civ. No. 1:20-cv-03501-RBJ, 2022 WL 1001568 (D. Col. April 4, 2022).
8 Liberty Global, Inc. v. United States, Civ. No. 1:20-cv-03501-RBJ, 2023 WL 8062792 (D. Col. Oct. 31, 2023).
9 Patel v. Commissioner, 165 T.C. No. 10 (2025)}.