Beware: Liberty Global Appeal Puts Basic Tax Planning in Jeopardy

The Liberty Global Inc. v. United States appeal has practitioners and taxpayers concerned that the economic substance doctrine will be applied to disallow the tax benefits of ordinary course of business decisions and disrupt basic tax planning. The economic substance doctrine is a judicial doctrine that allowed courts to disregard tax benefits if the transaction lacked economic substance or a business purpose. Congress codified the economic substance doctrine in 2010.

Exceptions to the Economic Substance Doctrine

The legislative history to the codified economic substance doctrine provides that it does not apply to basic business transactions, even though the decisions are primarily – if not solely – driven by tax considerations. These basic business transactions include:

• decisions to capitalize a business with debt or equity
• choices between using a foreign or domestic entity
• tax classification of an entity
• choices to use related parties

In addition, the legislative history makes clear that if the tax benefits are consistent with Congress' purpose in enacting the statute, the tax benefit should be allowed. For example, tax credits should be allowed if the taxpayer makes the investment that the credit was intended to encourage.

Liberty Global

Liberty Global involves a series of intercompany transactions designed to leverage the different effective dates between two different provisions enacted in the Tax Cuts and Jobs Act. The regulations that would have prevented the tax result in Liberty Global were held invalid, so the government sought to disallow the tax benefits under the economic substance doctrine. The taxpayer responded that several of the steps in the transaction – including the tax classification of an entity – were exempt from the economic substance doctrine under the legislative history and prior case law. The district court disallowed the tax benefits under the economic substance doctrine and held that there is no separate threshold inquiry as to whether the economic substance doctrine applies to the transaction.

The decision has been appealed to the U.S. Court of Appeals for the Tenth Circuit, and Liberty Global filed its opening brief on April 30, 2024. Multiple amicus briefs were filed by business organizations supporting Liberty Global and asking the Tenth Circuit to reverse the decision. Each expressed significant concern that the district court's application of the economic substance doctrine creates uncertainty and confusion for routine transactions that Congress never intended to be covered.

Conclusion and Takeaways

If the district court's decision is upheld, there is a real risk that the IRS raises the economic substance doctrine in audits, appeals and litigation to disallow tax benefits of ordinary course of business transactions that taxpayers have long thought were exempt. This trend will be particularly troubling for transactions that are motivated in significant part by tax credits or other tax benefits under the Inflation Reduction Act.

If you have questions about the implications of Liberty Global and the economic substance doctrine on tax planning and tax controversies, please contact the authors or another member of Holland & Knight's Tax Controversy and Litigation Practice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.