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November 8, 2023

US court denies Liberty Global's claim for the IRC Section 245A dividends-received deduction on economic substance doctrine grounds

  • A U.S. district court denied a company's dividends-received deduction under IRC Section 245A after applying the codified economic substance doctrine (the Codified ESD) under IRC Section 7701(o).
  • In reaching its conclusion, the court took a broad view of the Codified ESD, rejecting the company's argument that the doctrine was limited to transactions to which it is "relevant."
  • The decision represents a timely reminder to taxpayers about the role and importance of the common law ESD, including its application to multi-step transactions.

On October 31, 2023, Senior Judge R. Brooke Jackson of the United States District Court for the District of Colorado (the Court) granted the Department of Justice's motion for summary judgment to disregard, under the Codified ESG of IRC Section 7701(o), certain steps of an integrated out-from-under transaction conducted by Liberty Global Inc. (LGI). The Court applied this determination to hold that LGI could not claim a dividends-received deduction (DRD) for the transaction under IRC Section 245A.


In 2018, after the effective date of Tax Cuts and Jobs Act (TCJA), LGI and its affiliates engaged in a four-step transaction, collectively named "Project Soy." Steps 1 through 3, which involved, among others, an entity conversion and an issuance of certain profit certificates, effectively created earnings and profits (E&P) in the hands of a controlled foreign corporation (CFC) indirectly held by LGI. In Step 4, LGI then indirectly transferred the foregoing CFC to its UK parent company, resulting in a capital gain recharacterized as a dividend under IRC Sections 964(e) and 1248(a). The transferred foreign corporation retained its CFC status even after Step 4 — in particular, on the last day of its tax year in which Project Soy took place — due to the constructive ownership of the corporation by a US person. Accordingly, the E&P generated in Steps 1 through 3 did not result in subpart F income or global intangible low-taxed income (GILTI) to an inclusion US shareholder.

On its original 2018 tax return, LGI computed and paid its tax liability for Project Soy in a manner compliant with the temporary regulations under IRC Section 245A, which Treasury issued in June 2019 (presumably under "extraordinary reduction" rules in the temporary regulations). On its amended 2018 tax return, however, LGI sought a refund of the taxes paid by claiming that the temporary regulations were invalid. This position would allow LGI to treat the gain from Step 4 of Project Soy as a dividend eligible for the IRC Section 245A DRD by reason of IRC Section 964(e)(4) and the E&P created under Steps 1 through 3, while avoiding any subpart F income or GILTI inclusion with respect to that E&P.

After filing a complaint, LGI moved for summary judgment, claiming that the IRC Section 245A temporary regulations were invalid on multiple grounds. In a ruling issued in April 2022, the Court partially granted LGI's motion for summary judgment, holding the IRC Section 245A temporary regulations invalid on the grounds that the regulations improperly ignored the notice and comment requirement in the Administrative Procedure Act.

In October 2022, the government filed a complaint against LGI with the Court, contending that LGI was not entitled to the tax refund because the Codified ESD (or alternatively, the judicial step-transaction doctrine) should render Steps 1 through 3 of Project Soy disregarded in calculating LGI's tax liability. Subsequently, the parties filed cross-motions for summary judgment, which formed the basis for the arguments addressed in the Court's October 31, 2023 decision.

Court decision

After establishing that the Codified ESD's application is a question of law, the Court addressed a series of issues, as discussed next, to determine whether the Codified ESD would apply to Project Soy to deny the availability of the IRC Section 245A DRD.

First, the Court considered LGI's argument that the Codified ESD's application would be limited to the transactions to which the ESD is "relevant." Based on the legislative history and court precedents, the Court rejected LGI's claim and concluded that no such "threshold relevance inquiry" applied. The Court reasoned that the doctrine's relevance was "coextensive" with the two prongs contained in IRC Section 7701(o) (i.e., (i) whether the transaction meaningfully changes the taxpayer's economic position, and (ii) whether the taxpayer has a substantial non-tax purpose for entering into the transaction); according to the Court, these two prongs sufficiently reflect the ultimate inquiry of whether a given transaction would violate congressional intent for lack of economic substance. The Court summarized its conclusion: "[a]t the risk of tautology, I proceed with the conclusion that the economic substance doctrine applies when a transaction lacks economic substance."

Second, the Court addressed LGI's argument that the economic substance analysis must be conducted with a narrow focus on Step 3 of Project Soy, the step involving an entity conversion and, according to LGI, the sole step generating the E&P at issue. Rejecting LGI's claim, the Court concluded that Steps 1, 2, and 3 should be considered collectively. The Court reasoned that these steps, together, were required for LGI to take advantage of the TCJA's "mismatch" that gave rise to the tax benefit of avoiding GILTI and capital gain taxes; the legislative intent of IRC Section 7701(o), the Court noted, demonstrated that the economic substance analysis was flexible enough to aggregate interrelated transactions to avoid violating the doctrine's purpose.

Third, the Court assessed whether the Project Soy transactions could be exempted from the Codified ESD explicitly or by analogy to certain statutorily enumerated exceptions. Among others, the Court rejected LGI's argument that Project Soy constituted a "basic business transaction" that the legislature intended to exempt from application of the Codified ESD. The Court concluded that Project Soy was not a basic business transaction; rather, it was to be viewed as a coordinated series of simpler steps that, in totality, reflected a complex transaction.

Finally, the Court considered whether any genuine dispute of fact existed for summary judgment purposes around applying the two-prong conjunctive test of IRC Section 7701(o) to Project Soy. The Court did not find any factual dispute around the first prong based on LGI's own admission that Steps 1 through 3 did not meaningfully change LGI's economic position. Likewise, the Court held that no factual dispute existed for the second prong. The Court noted here that LGI's compliance with certain foreign laws in relation to Steps 1 through 3 or its desire to achieve preferential distribution rights on the profit certificates issued under Step 3 did not qualify as substantial non-tax motivation.

For the foregoing reasons, the Court held that Steps 1 to 3 of Project Soy were to be disregarded under the Codified ESD; accordingly, the E&P generated in those steps could not be used to support the IRC Section 245A DRD with respect to Step 4.


The Court's summary judgment order has limited precedential reach beyond the litigants, at least for the moment. Beyond strict questions of precedential value, the decision represents a significant development for the common law doctrine of economic substance, especially since the doctrine was codified in 2010.

The decision takes a broad view of the Codified ESD. ("At the risk of tautology, I proceed with the conclusion that the economic substance doctrine applies when a transaction lacks economic substance.") It also raises important questions such as:

  • How to define a "transaction" in applying the ESD
  • The relevance of the doctrine to common transactions such as corporate formations
  • The role of congressional "intent" in statutory construction (e.g., are taxpayers obligated to both determine and harmonize such intent from numerous Code provisions enacted by multiple Congresses, such as IRC Sections 245A, 316, 351, 951 and 951A?)

The decision represents a timely reminder to taxpayers about the role and importance of the common law ESD, including application to multi-step transactions. Moreover, the decision also serves as a reminder that, despite codification, the doctrine may still be evolving. The October 31 order, however, seems unlikely to be the last word on the matter, as at least one news service is reporting that LGI intends to appeal the decision to the Tenth Circuit Court of Appeals.1


Contact Information
For additional information concerning this Alert, please contact:
International Tax and Transactions Services
   • Craig Hillier (
   • Colleen O’Neill (
   • Martin Milner (
   • Bona Chung (Senior Manager) (
   • Candice James (Manager) (
   • Ben Satterthwaite (Senior Associate) (
National Tax M&A
   • Donald Bakke (
Tax Policy and Controversy
   • Bryon Christensen (

Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor


1 See Andrew Velarde, Liberty Global Promises Economic Substance Doctrine Appeal, Tax Notes Today Federal (November 6, 2023).


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