In brief

The US District Court for the District of Colorado (the District Court) issued its opinion in Liberty Global Inc. v. United States on October 31, granting summary judgment in favor of the government that the transaction at issue (‘Project Soy’) lacked economic substance.  

Section 7701(o) provides that, when the economic substance doctrine is relevant to a transaction, the transaction has economic substance only if (1) the transaction changes in a meaningful way the taxpayer’s economic position and (2) the taxpayer has a substantial business purpose for entering into the transaction. A key issue in Liberty Global was whether the economic substance doctrine was ‘relevant’ to the underlying transaction. 

Takeaway: The taxpayer has stated that it will appeal the District Court’s decision to the US Court of Appeals for the Tenth Circuit. While the District Court’s decision has limited precedential value, taxpayers should continue to monitor the Liberty Global appeal and related litigation to assess further developments in the manner courts interpret the application of the economic substance doctrine. 

November 2023 District Court Decision 

District Court Key Determinations  

No “relevance” threshold inquiry 

The District Court rejected the taxpayer’s argument that the legislative history of Section 7701(o) evidenced a Congressional intent to limit the types of transactions to which the provision was relevant. The District Court instead concluded – based upon its interpretation of certain statements in the Section 7701(o) legislative history and prior case law – that there is no initial “relevance” inquiry prior to applying the economic substance test.  

Observation: Section 7701(o)(1) provides in relevant part that “[i]n the case of any transaction to which the economic substance doctrine is relevant ….” (emphasis added) and 7701(o)(5)(C) states “[t]he determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.”   

Observation: Case law prior to the codification of the economic substance doctrine concluded that the doctrine did not apply to certain transactions solely motivated by tax reduction. See, e.g., Cottage Savings, Ass’n v. Commissioner, 499 U.S. 554 (1991). It remains to be seen how the doctrine may be applied going forward, including in courts outside of Colorado. 

No basic business transaction exception  

The legislative history states that Section 7701(o) does not apply to certain “basic business transactions that, under longstanding judicial and administrative practice are respected, merely because the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages.” The District Court concluded that the Project Soy steps were not basic business transactions because (i) the steps produced a tax result that was violative of the Congressional intent underlying the GILTI regime and Section 245A, (ii) the transaction was planned with the help of a sophisticated tax advisor, and (iii) the transaction comprised a complex series of steps.   

Observation: The District Court characterizes the “basic business transaction” designation as a potential “exemption” or “exception” to the application of Section 7701(o). Many tax practitioners interpret the Section 7701(o) legislative history as instead supporting an evaluation of “basic business transaction” status in the context of an initial “relevance” inquiry; however such an inquiry would not be required under the District Court’s analysis.  

Observation: The District Court stated that a tax advisor’s participation in the transaction indicated that it did not qualify as a basic business transaction. The court stated that the reference to basic business transactions must be construed narrowly, and exempting the current transaction effectively would, according to the court, nullify the rule. The court’s line between a basic business transaction and a complex transaction subject to Section 7701(o) is unclear and may have been based in part in light of the types of tax benefits involved.  

Observation: The District Court decision suggests that a transaction can only qualify as a "basic business transaction" if the results of the transaction are consistent with Congressional intent. Determining the intent of Congress on specific facts may not be straightforward, and the court's reasoning could therefore significantly narrow the potential applicability of the legislative history.