Overview
Since the enactment of the codified economic substance doctrine (ESD) of section 7701(o) [1] in 2010, taxpayers, practitioners, and the Internal Revenue Service (IRS) have grappled with a critical question—when is the codified ESD "relevant" to a transaction? That question was recently addressed by the Tenth Circuit in Liberty Global.[2] In a 2-1 decision, the court upheld the district court's determination that Project Soy—a restructuring designed to remove a controlled foreign corporation (CFC) from beneath its US parent without US tax—lacked economic substance. The Tenth Circuit concluded that the codified ESD was relevant when analyzing Project Soy as an integrated whole, regardless of whether some of the steps were basic business transactions to which the ESD would not ordinarily apply.
While binding precedent only within the Tenth Circuit, Liberty Global is likely to fuel IRS arguments for an expansive application of section 7701(o). Because the majority declined to articulate a clear analytical framework for determining relevance, taxpayers face continued uncertainty, particularly in tax planning that relies on statutory compliance or the aggregation of otherwise routine transactions to achieve tax benefits.
Background
Liberty Global is a UK-headquartered corporation and the parent of a multinational group. Project Soy was designed to allow Liberty Global's US subsidiary, Liberty Global, Inc. (LGI), to transfer a UK subsidiary, Telenet Group Holding (TGH) out from under LGI (so that LGI would no longer be subject to tax on TGH's income) while avoiding US tax on LGI's gain in TGH.
Project Soy consisted of four steps, the first three of which were intended to create approximately $4.8 billion of earnings and profits (E&P) in TGH. Due to the interaction of several provisions enacted in the 2017 Tax Cuts and Jobs Act (TCJA), the transactions generating the E&P were not subject to current US tax. This E&P was critical to the intended treatment of step four, which was LGI's sale of TGH to LGI's UK parent company. Because TGH was a CFC, LGI's gain from the sale was treated as a dividend to the extent of TGH's E&P. LGI took the position in a refund claim that the section 245A dividends-received deduction (DRD), also enacted in the TCJA, applied to the deemed dividend arising from the sale.
The IRS denied the refund claim, challenging the claimed tax results under the codified ESD as well as temporary regulations targeting transactions similar to Project Soy. In the refund action, the district court held that the temporary regulations were invalid but subsequently determined that the section 245A DRD should be denied due to the application of section 7701(o).
Majority Opinion
The sole question in the case was whether the codified ESD of section 7701(o) was relevant to Project Soy.[3]
Section 7701(o) provides that a transaction has economic substance only if the transaction (1) meaningfully changes the taxpayer's economic position and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction. However, this two-prong test applies only "[i]n the case of any transaction to which the [ESD] is relevant."[4] Section 7701(o) states that the determination of whether the ESD "is relevant to a transaction shall be made in the same manner as if [section 7701(o)] had never been enacted."[5]
LGI argued that the text of section 7701(o) indicates that there are some transactions to which the ESD is not relevant, and therefore, to which the ESD should not be applied. LGI also argued that such transactions include transactions that mechanically comply with the tax law as well as transactions described in the legislative history as "basic business transactions" (e.g., choosing whether to capitalize with debt or equity and transactions treated as a corporate organization or reorganization).[6] LGI further maintained that Project Soy's first three steps, which generated the E&P that permitted the claimed application of the section 245A DRD to the sale in step 4, were each individually "basic business transactions" to which the ESD should not be "relevant."[7]
The majority opinion concluded that the codified ESD "is relevant to attempts by taxpayers to mechanically utilize the provisions of the Tax Code to obtain a benefit not intended by Congress."[8] The majority looked to Project Soy as a whole, stating that LGI could not avoid the application of the codified ESD "by including within its integrated structure steps that might, if standing alone, be considered basic business transactions."[9]
While the district court had concluded that a categorical exemption of "basic business transactions" does not exist in the codified ESD, the majority opinion declined to address that point, stating that it was unnecessary "to resolve whether any particular type or category of basic business transaction, standing alone or differently bundled than in Project Soy, is exempt from the reach of section 7701(o)." [10] And while LGI had argued that the district court had failed to properly conduct a separate threshold analysis of whether the codified ESD is "relevant" to Project Soy, the majority opinion referred to the issue as a "red herring" because the district court had "concluded the doctrine was relevant because Project Soy was an attempt by LGI to mechanically utilize the provisions of the TCJA to obtain a benefit not intended by Congress."[11]
Dissent
In contrast, the dissenting opinion directly addressed the relevancy question, arguing that there is a "mandatory relevancy determination before the government may invoke the" ESD, because a contrary reading would render the prefatory reference to relevance in the statute "mere surplusage."[12] The dissent surveyed case law prior to the codification of the ESD, finding that courts did not explicitly engage in a relevancy determination. Courts either applied the ESD or did not, without explaining why the ESD was not relevant when they did not so apply it.
Nevertheless, the dissent extracted a general principle from its survey of the case law, stating that, pre-codification, the ESD was traditionally only applicable when there was a dispute about whether the taxpayer had in substance done what the Code provision required economically. For example, the ESD applied in the Supreme Court case Gregory v. Helvering because there was a question of whether what the taxpayer called a reorganization was, in substance, a reorganization. On the other hand, in Dover Corp. v. Comm'r, 122 T.C. 324 (2004), the ESD did not apply to an election under the check-the-box regulations, because those regulations "do not make economic reality or taxpayer motive relevant"—rather, check-the-box elections are "by design ‘all form and no substance.'"[13]
In light of prior case law, the dissent argues the ESD "acts as a substantive canon to interpret statutory terms that involve an economic condition."[14] Thus, the dissent asserts that the ESD would not bar the taxpayer from receiving tax benefits unless "the taxpayer's ‘formal characterization of a transaction fails to capture economic reality and would distort the meaning of the Code in the process.'"[15]
The dissent concludes that the relevancy determination must be applied at each step individually to address "whether the text of the Code addresses economic reality or taxpayer motive…"[16] Based on this premise, the dissent concludes that ESD is inapplicable to LGI's transaction as a whole, because the first three steps constituted basic business transactions, and no one contested that the final step triggered ‘"actual' gain" and accordingly had economic substance under Cottage Savings.[17]
The dissent's analysis of the relevance requirement may provide a roadmap for taxpayers advancing similar arguments in other circuits. Liberty Global may also seek rehearing en banc in the Tenth Circuit, relying on the reasoning articulated in the dissent.
Implications
The majority opinion offers few limiting principles and may be viewed by the IRS as providing substantial discretion in determining relevance, particularly where multiple steps are undertaken as part of a single, tax‑motivated plan. While the decision is binding precedent only in the Tenth Circuit, it is likely to be perceived by the IRS as a green light to challenge tax-motivated transactions.
Even prior to this decision, the IRS's approach to the application of the codified ESD has become more expansive in recent years.[18] One of the factors the IRS says favors application of the ESD is that the "[t]ransaction has no meaningful potential for profit apart from tax benefits."[19] We have seen the IRS apply this factor rigorously and assert the ESD in transactions intended to take advantage of certain tax credits, which by their nature are often unprofitable but for the tax incentive. By failing to address the relevance threshold and stating that the ESD is precluded only when "explicitly authorized" by Congress,[20]the majority opinion leaves the door open for the IRS to assert the ESD in these circumstances. Because Congress does not make pronouncements in legislative text that the ESD does not apply, the "explicitly authorized" exception provides little reassurance.
In the next several years, there will likely be more decisions from appellate courts on the codified ESD. For example, in Patel v. Commissioner, the Tax Court stated that section 7701(o) does have a threshold relevancy determination (while ultimately concluding that the transaction at issue lacked economic substance).[21] The IRS is appealing the decision in Patel to the Fifth Circuit.
Although there have been calls for regulations clarifying section 7701(o) since its enactment, there is no indication that such guidance is a priority for the IRS. As a result, the IRS is likely to continue to take aggressive positions as to the lingering questions about section 7701(o)—such as when the codified ESD is or is not applicable, the significance of the "basic business transactions" discussion in the legislative history, and how to identify the relevant transaction to be tested.
[1] Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended (the "Code"), and all references to "Treas. Reg. §" are to the regulations promulgated thereunder.
[2] Liberty Global, Inc. v. United States, --- F.4th ----, 2026 WL 1077647 (10th Cir. April 21, 2026).
[3] The majority opinion states that LGI had conceded or waived other arguments.
[4] I.R.C. § 7701(o)(1).
[5] I.R.C. § 7701(o)(5)(C).
[6] Liberty Global, 2026 WL 1077647, at *3-4.
[7] Id. at *4.
[8] Id. at *5.
[9] Id. at *7.
[10] Id. at *6.
[11] Id. at *4 n.6,
[12] Id. at *8 (Eid, J., dissenting).
[13] Id. at *11.
[14] Id. at *9.
[15] Id. at *11.
[16] Id. at *13 n.5
[17] Id. at *14.
[18] See LB&I-04-0422-0014; Revenue Ruling 2024-14; FAA 20260401.
[19] LB&I-04-0422-0014.
[20] Liberty Global, 2026 WL 1077647, at *5 n.10.
[21] Patel v. Comm'r, 165 T.C. No. 10, 2025 BL 404445, at *10 (T.C. Nov. 12, 2025).
