In Liberty Global, Inc. v. United States, decided by the Tenth Circuit on April 21, 2026, the court applied section 7701(o)’s codified economic substance doctrine (“ESD”) to a multi-step corporate restructuring. The decision has immediate consequences for evaluating opinions, thinking through tax return disclosures and risk of strict liability penalties, and formulating strategies for audit defense in complex internal restructuring transactions.
A divided Tenth Circuit panel affirmed the application of ESD to deny the taxpayer’s dividends received deduction under section 245A arising from the generation of $2.4 billion of foreign earnings and profits in a transaction dubbed “Project Soy.” The opinion underscores the imperative to define the scope of the transaction carefully for purposes of determining if ESD applies. In addition, it affirms the lower court’s view of limits on “basic business transactions” as barriers to IRS challenge.
At the same time, the decision arises from a posture particularly favorable to the government. Section 7701(o)(1) provides that, for any transaction where the economic substance doctrine is relevant, the transaction has economic substance only if (1) it changes in a meaningful way the taxpayer’s economic position, and (2) the taxpayer has a substantial business purpose for entering into the transaction. Liberty Global admitted that the first three steps of Project Soy did not meaningfully change its economic position and served no substantial non-tax purpose. As a result, the ESD analysis was limited to the issue of relevance, and the Tenth Circuit’s opinion does not address how the two-prong test applies once ESD has been deemed relevant. Further, the taxpayer’s admissions may have shaped both the relevance analysis and its outcome. Notwithstanding the unique posture of the case, the result may embolden the IRS to assert codified ESD and penalties more broadly.
The central issue in Liberty Global was whether ESD was “relevant” to Project Soy, comprised of four steps, one of which was the conversion of a disregarded entity to a regarded corporation, a deemed incorporation under section 351. The majority opinion upheld the assertion of ESD, which disregarded the earnings and the dividends received deduction. The IRS did not assert penalties in this case.
The taxpayer argued that because each of the steps of Project Soy, standing alone, complied with the literal terms of the Code, Project Soy was exempt from ESD scrutiny. The appellate majority rejected that argument, citing common law precedent denying tax benefits that Congress did not intend where the transaction was found to be economically meaningless.
Also, the taxpayer had argued that one of the four steps of Project Soy – the conversion – was a “basic business transaction” protected under the “angel list” in the legislative history and that the single step shielded the other steps – and thus the transaction as a whole – from ESD. The majority opinion rejected that argument, concluding that the scope of the “transaction” comprised all four “tightly integrated” steps designed to yield a tax benefit that Congress did not intend. Even if the conversion were a “basic business transaction” – which the appellate majority explicitly did not reach – that did not shield Project Soy from ESD.
Both decisions (from the district and circuit courts) are worth reviewing for what they have to say about the importance of defining the scope of the “transaction” for purposes of the statute. To that end, moreover, the decisions signal the limits of relying on an argument that seeks to exempt a “basic business transaction.” The takeaway is that ESD may be relevant to a multi-step transaction, including an internal restructuring, even if individual sub-steps are on the list of “basic business transactions” in the legislative history.
The case is also notable because the government’s win came in the context of an internal, multi-step corporate restructuring involving transactional steps commonly used in ordinary tax planning (entity conversions, capital structure adjustments,
etc.). This case also reflects the IRS’s increasing use of ESD to challenge transactions that the IRS views as providing disproportionate tax benefits. As a practical matter, taxpayers should expect the IRS to define the relevant “transaction” broadly, scrutinize internal planning materials, and resist arguments that the inclusion of one or more arguably “basic business” steps can shield a broader integrated plan from ESD scrutiny.
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