In the closely watched Liberty Global dispute, the U.S. Court of Appeals for the Tenth Circuit affirmed a 2023 district court decision applying the economic substance doctrine to disallow a dividends received deduction under section 245A. Although the Tenth Circuit refrained from embracing the lower court's admittedly tautological framework for determining when the codified economic substance doctrine is "relevant" to a transaction, the court concluded the doctrine was relevant to the transactions at issue and disallowed tax benefits claimed by the taxpayer. 

In 2010, Congress codified the economic substance doctrine in section 7701(o). That provision requires that, "in the case of any transaction to which the economic substance doctrine is relevant," the taxpayer must demonstrate an objective change in economic position and subjective, non-tax business purpose. At issue on appeal was whether that two-part test applies indiscriminately to all transactions or whether certain types of transactions are outside its scope. The district court concluded below that "[t]here is no 'threshold' inquiry separate from the statutory factors" of objective economic effect and substantial business purpose. The court further stated that, "[a]t the risk of tautology, I proceed with the conclusion that the economic substance doctrine applies when a transaction lacks economic substance," which is "analyzed using the enumerated statutory prongs[.]" 

The Tenth Circuit side-stepped meaningful discussion of the question presented on appeal: whether section 7701(o) requires a determination that the doctrine is "relevant" to a transaction before analyzing whether the tax benefits of that transaction should be disallowed. Instead, in a footnote, the court labeled the issue a red herring on the facts of this case. The court agreed with the district court that the overall, multi-step transaction was "not a basic business transaction" and concluded that it was therefore "unnecessary for this court to resolve whether any particular type or category of basic business transaction, standing alone or differently bundled than in [this case], is exempt from the reach of § 7701(o)." Notably, the court never endorsed the district court's legal conclusion that the statute does not mandate a "threshold" relevance inquiry, and the court invoked section 7701(o)(5)(C) for the proposition that "the relevance of the doctrine" needed to be determined by reference to "extant precedent." 

The court's narrow approach in Liberty Global may cabin the implications of the case beyond the context of the disputed transaction. The majority's opinion was accompanied by a thoughtful dissent, which emphasized that the Supreme Court and lower courts have not applied the economic substance doctrine to a taxpayer's choice of "when" to recognize bona fide gains and losses, and this precedent should have informed the majority's analysis of "relevance" here in accordance with section 7701(o)(5)(C). In light of this dissent, and the potential tension with the Tax Court's framework for determining whether the economic substance doctrine is relevant pursuant to its decision in Patel v. Commissioner, many observers anticipate a motion for rehearing en banc. Taxpayers should continue to monitor Liberty Global and other significant pending cases involving the codified economic substance doctrine. 

For more information, please contact:

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

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