Tax lawyers routinely test proposed transactions against the technical requirements of the Internal Revenue Code. The Tenth Circuit’s recent decision in Liberty Global, Inc. v. United States[1] is a reminder that literal compliance may not always end the analysis. In Liberty Global, the court applied the codified economic substance doctrine to deny a claimed § 245A benefit arising from a transaction that the government did not contend failed the Code’s mechanical requirements.
The decision contrasts with the Sixth Circuit’s 2017 opinion in Summa Holdings, Inc. v. Commissioner,[2] which is often cited for the proposition that a taxpayer who complies with the Code’s rules should not lose the benefit of those rules simply because the IRS or a court later disapproves of the result. The cases are distinguishable, but together they highlight the important question of when the economic substance doctrine is “relevant” to a transaction that otherwise satisfies the statute’s operative rules.
The Codified Economic Substance Doctrine
Congress codified the economic substance doctrine in 2010.[3] A transaction “to which the economic substance doctrine is relevant” has economic substance only if it (i) changes the taxpayer’s economic position in a meaningful way apart from federal tax effects, and (ii) reflects a substantial non-tax purpose. Both prongs must be satisfied and an understatement attributable to a transaction lacking economic substance draws a 20% accuracy-related penalty, 40% if not adequately disclosed, with no reasonable cause defense available.[4] The statute, however, is prefaced by stating “in the case of any transaction to which the economic substance doctrine is relevant.”[5] Relevance is determined as if § 7701(o) had never been enacted.[6] This requires courts to consider pre-codification common law to decide when the doctrine even comes into play. The question of relevance runs through Liberty Global, the Tax Court’s recent decision in Patel v. Commissioner,[7] and Summa Holdings.
Project Soy
In late 2018, LGI and its affiliates implemented a four-step restructuring known as “Project Soy.” The transaction generated approximately $4.8 billion of earnings and profits at a foreign holding-company level and then caused an affiliate to sell its interest in that holding company before the end of the taxable year. LGI’s amended return took the position that the resulting approximately $2.4 billion gain could be treated as a dividend eligible for the Section 245A deduction, rather than giving rise to a current global intangible low-taxed income tax (“GILTI”) inclusion. LGI sought a refund of approximately $110 million.
The government did not dispute, for purposes of the appeal, that the transaction complied with the relevant statutory mechanics. The dispute was whether the economic substance doctrine nevertheless applied. LGI conceded that the first three steps of Project Soy failed the two-prong economic substance test but argued that the doctrine was not relevant in the first instance. LGI contended that a threshold relevance inquiry must be satisfied before the two-prong test applies because the statutory provisions at issue did not make economic substance relevant.
The Majority Opinion
The district court granted summary judgment to the government, and a divided Tenth Circuit panel affirmed. The majority explained that the economic substance doctrine has long been applied to disregard transactions that comply with the literal terms of the Code but are mere tax-avoidance devices. Because Section 7701(o) directs courts to determine relevance under pre-codification law, the court rejected LGI’s argument that mechanical compliance foreclosed application of the doctrine.[8]
The majority found no exemption in § 7701(o) for any basic business transactions, describing certain references to basic transactions in legislative history references as illustrations rather than exemptions. Further, the opinion cited the need to look into Project Soy as a whole, not its individual steps. The four steps of the transaction were so integrated that isolating each step would let taxpayers “inoculate their complex transactions from application of § 7701(o) by including therewithin ‘basic business transactions.'” As to relevance, the majority did not squarely resolve the full contours of a separate threshold “relevance” inquiry. Instead, it held that the doctrine was relevant on these facts because Project Soy was a tightly integrated arrangement designed to obtain a tax benefit the court viewed as inconsistent with Congress’s purpose in enacting the GILTI provisions at issue.
The Dissent
One judge dissented. In her view, the relevance provisions of § 7701(o) would be surplusage if relevance and the substantive test collapsed into one inquiry, in tension with the cardinal principle that courts must give effect to every clause of a statute.[9] Analyzing pre-codification case law, she concluded the doctrine has historically been relevant only where the Code provision granting the benefit itself turns on objective economic realities or the taxpayer’s economic motive.[10] Where a provision does not condition its benefit on economic reality, such as an entity classification election for which no non-tax business purpose is required, the economic substance doctrine is not applicable.
Applying that framework, Judge Eid would have found the doctrine largely irrelevant to Project Soy. The gain was real, the decision to sell before year end was a routine timing choice, and the entity conversion mechanics were no more tied to economic reality than a couple’s choice to file a joint return.[11] According to the dissenting opinion, the majority’s approach effectively hands the government “a blank check to declare any transactions it does not like to be within the doctrine” which is precisely what Summa Holdings may be read to have disallowed.
Summa Holdings
Summa Holdings was central to both the majority’s and the dissent’s analysis because it illustrates the tension between literal statutory compliance and a broader economic substance inquiry. There, a taxpayer’s compliance with the literal terms of the Code was respected even where the combination of provisions used produces a result Congress may not have specifically anticipated.
In Summa Holdings, the taxpayer used a domestic international sales corporation (“DISC”) to route export commissions to their sons’ Roth IRAs, using each provision exactly as written and moving more than $5 million into accounts otherwise subject to a $5,000 annual contribution limit. The Sixth Circuit reversed the Tax Court’s substance-over-form recharacterization, reasoning that Congress designed DISCs to be “all form and no substance” and separately permitted Roth IRAs to own DISC shares. Therefore, the court could not unwind a combination that the Code, read as written, plainly allowed, even if permitting Roth IRAs to own DISC shares “was an oversight.”
Two points are important regarding Summa Holdings. First, the tax year at issue predated codified § 7701(o). The Sixth Circuit applied the older common law doctrine rather than the statute at issue in Liberty Global. Second, the holding did not necessarily treat tax motivation as irrelevant in all circumstances. Rather, it held that substance-over-form principles could not override a statutory arrangement that Congress had expressly authorized to function through formal mechanisms that the Code permitted, even if the combination produced a result Congress may not have anticipated.
Reconciling Liberty Global and Summa Holdings
The Liberty Global majority addressed Summa Holdings directly by distinguishing it from the situation in Liberty Global. Summa Holdings involved a DISC that Congress explicitly authorized to engage in transactions with no economic substance at all to provide a specific export subsidy. However, “nothing in the TCJA evidences any similar intent to provide massive tax benefits for the admittedly economically meaningless transaction at issue here.” The two decisions deal with different situations. On the one hand, a benefit Congress deliberately built to reward form over substance. On the other hand, a benefit that materializes only because two provisions with staggered effective dates briefly failed to speak to one another.
The decisions therefore do not present a direct conflict with their holdings. They do, however, reflect materially different views of the role of economic substance in a highly detailed Code. Summa Holdings emphasizes statutory text and the limits of judicial recharacterization where Congress has authorized the form used. Although Summa Holdings did not articulate the threshold relevance test in the same terms, its reasoning is consistent with the dissent’s and Patel’s view that economic substance principles should be used to test whether form departs from the economic reality required by the operative statutory provisions, not simply to deny a tax-favorable result that Congress may not have anticipated. Liberty Global permits a more holistic inquiry into whether an integrated transaction exploits statutory mechanics to obtain a benefit inconsistent with Congress’s design.
The dissent read Summa Holdings for the broader proposition that the economic substance doctrine is not a license to override transactions that comply with the Code merely because, in combination, they lead to an outcome Congress did not intend. The dissent notes that that the Sixth Circuit itself acknowledged the DISC/Roth combination might have been an oversight and held that it makes no difference because the actions taken complied with the Code. If an oversight favoring the taxpayer did not open the door to recharacterization in Summa Holdings, an effective date mismatch should not open it in Liberty Global either.
Summa Holdings did not ask whether Congress intended the DISC/Roth combination. Rather, it asked only whether each provision permitted what the taxpayer did. Liberty Global asked the broader question whether the transaction as a whole was consistent with congressional intent. Certainly, testing transactions from these different questions may produce different answers on similar facts. The majority distinguished Summa Holdings on the ground that the DISC regime was expressly designed as a substance-free subsidy, but it also acknowledged that the line between an intended tax-favorable result and an unintended mismatch is not always self-evident. Ultimately, courts will need to consider these variables in cases where taxpayers literally comply with the Code but end up with benefits it appears Congress may not have intended.
On its face, Liberty Global does not appear to create an explicit circuit split with Summa Holdings. The Tenth Circuit distinguished rather than rejected the Sixth Circuit’s reasoning, but the issues are not limited to the Sixth Circuit and the Tenth Circuit. Considering the identical statutory language, the Tax Court held in Patel v. Commissioner that § 7701(o) treated relevance as a threshold inquiry separate from the two-prong test, creating a framework that differs from the district court approach sustained in Liberty Global. Because any appeal would lie in the Fifth Circuit, appellate review could further develop the disagreement over the meaning of “relevant” in Section 7701(o).[12] The real split is whether this separate relevance inquiry must be addressed before applying the economic substance doctrine or, alternatively, whether the relevancy requirement is inherent in any tax transaction mechanically utilized for unintended tax benefits.
Conclusion
Liberty Global neither holds that literal compliance with the Code is irrelevant, nor does it erase the principle in Summa Holdings that courts may not use substance-over-form analysis to rewrite tax provisions Congress deliberately enacted. But it confirms that, at least in the Tenth Circuit, a taxpayer cannot necessarily insulate an integrated transaction from § 7701(o) merely by assembling it from steps that might be respected in isolation.
The developing controversy concerns the threshold relevance inquiry. Under Liberty Global, the inquiry may turn on whether an integrated transaction obtains a result inconsistent with Congress’s overall design for the relevant provisions. Under the dissent’s approach, also reflected in Patel, the doctrine is relevant only when the particular Code provision granting the claimed tax benefit makes the transaction’s economic reality or the taxpayer’s motive pertinent to qualification for that benefit. Until appellate courts provide further guidance, taxpayers undertaking technically complex planning should evaluate the transaction as a whole and preserve contemporaneous evidence of its business objectives, commercial effects, and non-tax rationale. This uncertainty has practical consequences. Promoters of tax strategies often focus on showing that a proposed transaction follows the literal terms of the Code and may support that conclusion with an opinion of counsel. But because the penalty for a transaction found to lack economic substance is strict liability and no reasonable-cause defense is available, a favorable opinion of counsel may not provide protection.
[1] Liberty Global, Inc. v. United States, 174 F.4th 1208 (10th Cir. 2026).
[2] Summa Holdings, Inc. v. Comm’r, 848 F.3d 779 (6th Cir. 2017).
[3] IRC § 7701(o). We have described the statute elsewhere. See S. Gray Edmondson, “GSS Holdings – A Reminder on Economic Substance and Step Transaction,” Oct. 4, 2023, https://esapllc.com/a-reminder-on-economic-substance-and-step-transaction-gss-holdings-2023/; Joshua W. Sage, “Playing with a Loaded Deck: CARDS and the Economic Substance Doctrine,” July 18, 2018, https://esapllc.com/playing-with-a-loaded-deck-cards-and-the-economic-substance-doctrine/.
[4] IRC §§ 7701(o)(1); IRC §§ 6662(b)(6), 6662(i), 6664(c)(2), 6664(d)(2).
[5] IRC § 7701(o)(1).
[6] IRC § 7701(o)(5)(C).
[7] Patel v. Comm’r, 165 T.C. 10 (Nov. 12, 2025).
[8] Citing Gregory v. Helvering, 293 U.S. 465, 470 (1935); Blum v. Comm’r, 737 F.3d 1303, 1309 (10th Cir. 2013); Sala v. United States, 613 F.3d 1249, 1253 (10th Cir. 2010).
[9] Citing Williams v. Taylor, 529 U.S. 362, 404 (2000); Boulware v. United States, 552 U.S. 421, 429 (2008)).
[10] Citing Knetsch v. United States, 364 U.S. 361 (1960); Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Blum v. Comm’r, 737 F.3d 1303 (10th Cir. 2013)).
[11] Citing Cottage Sav. Ass’n v. Comm’r, 499 U.S. 554, 567–68 (1991); Dover Corp. & Subs. v. Comm’r, 122 T.C. 324, 351 n.19 (2004); United Parcel Serv. of Am., Inc. v. Comm’r, 254 F.3d 1014, 1019 (11th Cir. 2001)).
[12] Patel v. Comm’r, 165 T.C. 10 (Nov. 12, 2025). See also, Perrigo Co. v. United States, No. 1:17-cv-00737 (W.D. Mich. Sept. 25, 2025), on appeal to the Sixth Circuit, which stated that “tax planning is as American as apple pie” and ruling for the taxpayer in analyzing the pre-codification economic substance doctrine.
