Threshold Relevancy Determination Rejected: Tenth Circuit Decides in IRS’s Favor on Economic Substance Doctrine

In its April 21, 2026, opinion, the U.S. Court of Appeals for the Tenth Circuit affirmed the lower court’s ruling in Liberty Global, holding that the codified economic substance doctrine applies even when a taxpayer mechanically utilizes the provisions of the Tax Code. The court also held that common mergers and acquisitions elements and basic business transactions are not categorically carved out from the economic substance doctrine. The court dismissed the taxpayer’s argument that a separate relevancy determination needs to be made before the economic substance doctrine can be applied.

Liberty Global centers around a four-part, cross-border transaction called Project Soy, through which Liberty Global intended to take advantage of a timing mismatch in the Tax Cuts and Jobs Act between the Global Intangible Low-Taxed Income (GILTI) and subpart F regimes and the 245A dividends-received deduction to treat $2.4 billion in taxable gain as a dividends-received deduction. Liberty Global conceded in the district court that the first three steps of its four-part plan failed the economic substance test, leaving as the only question on appeal whether the codified economic substance doctrine was “relevant” to Project Soy.

One member of the Tenth Circuit panel dissented, finding support for a threshold relevancy determination in the text of the statute. This dissent may tee up the relevancy issue for further appeal in this case via a petition for en banc reconsideration or even certiorari, and even if not, increases the likelihood that the issue will be pursued in other cases in other circuits.  

Key Takeaways

1. Although this decision could be appealed and additional litigation may follow, the IRS will likely be emboldened by its win and continue to challenge transactions under the economic substance doctrine, particularly those based upon mechanical compliance with Code provisions resulting in a tax benefit that is difficult to reconcile with congressional intent.
2. Contemporaneous documentation supporting economic substance in transactions is vital. Taxpayers and advisors should not rely on technical compliance alone.
   1. Taxpayers must carefully document that the transactions are driven by business, and tax planning around those business-driven decisions is appropriate but follows the business considerations.
   2. Transactions should always have a business “owner” who can provide evidence and explanation to show the business needs or issues the transaction is intended to address.
   3. Documentation of the business purpose should be consistent in all communications, including tax memos and opinions, slide decks, correspondence about the transaction (both internal and external), board communications, and press releases.
   4. Project names that denote a tax objective should be avoided.
3. Taxpayers should keep key transaction documents in anticipation of an IRS examination. These may include the formal reorganization plan, business purpose documentation, financial analysis and projections (both pre- and post-transaction), alternative options considered, and operational substance.
4. A reasonable cause defense is not available for the 20% accuracy-related penalty on any underpayment attributable to a transaction lacking economic substance. Therefore, if a taxpayer loses on economic substance, the penalty will be imposed. A 40% penalty is imposed rather than a 20% penalty for undisclosed transactions.