Court rules CFC transaction lacked economic substance


The U.S. District Court of Colorado has issued an opinion on Liberty Global, Inc. v. United States granting summary judgment for the government and denying a $110 million refund claim based on a lack of economic substance.


The motions for summary judgment filed by each side centered around the economic substance doctrine in Section 7701(o) related to an internal restructuring architected by Liberty Global and a global public accounting firm at the end of 2018 referred to as Project Soy.


The transaction involved three internal restructuring steps followed by a fourth step, which was the sale of a Controlled Foreign Corporation (CFC) of Liberty Global to its UK parent. The first three internal restructuring steps were designed to generate earnings and profits (E&P) in the CFC that was sold in the fourth step in a transaction that would have been subject to tax under the global intangible low taxed income (GILTI) regime, but for the timing of the fourth step of the transaction.


The transaction sought to exploit an apparent mismatch between (1) the rules for paying tax on GILTI and subpart F tax on a gain generated by a CFC, and (2) the qualification of an entity as a CFC. The fourth step of the transaction resulted in a capital gain recharacterized as a dividend under Sections 964(e) and 1248(a), for which Liberty Global took a deduction under Section 245A. Steps one through three generated enough E&P for the 245A dividends received deduction to offset a $2.4 billion gain that otherwise would have been Subpart F. Following the steps outlined in Project Soy, Liberty Global treated the gain from Step 4 of Project Soy as subpart F eligible for the Section 245A dividends received deduction as a result of Section 964(e)(4). It was able to do so primarily because of the E&P created under Steps 1 through 3, while avoiding any subpart F income or GILTI inclusion with respect to the creation of such E&P.


In June 2019, Treasury issued temporary regulations for extraordinary dispositions to prevent Section 245A from applying in transactions such as Project Soy. However, in April 2022, the court held, in partial summary judgment, that the temporary regulations under Section 245A with retroactive effect were invalid because they were issued without following the Administrative Procedure Act’s (APA) notice and comment requirements. After the Court’s ruling, the government argued that the taxpayer should not be eligible for a tax refund, asserting that the initial three steps of the transaction should be dismissed in accordance with the economic substance doctrine.


Under Section 7701(o)(1), a transaction has economic substance if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position; and (2) the taxpayer has a substantial purpose apart from Federal income tax effects for entering into such transaction. The main question in the case revolved around whether the economic substance doctrine under Section 7701(o) was deemed 'relevant' to the transaction.


During the deposition, Liberty Global’s representative admitted that the board wasn’t fully aware of the details of the transaction, that several of the steps served no substantial non-tax purpose, and that those same steps only existed to generate E&P for use in the final step. However, Liberty Global attempted to argue that economic substance in Section 7701(o) was not “relevant” to the transaction. The court dismissed the taxpayer's assertion, indicating that Congress did not intend to restrict the applicability of the provision to certain transaction types.


Instead, the Court determined that there is no “relevance” assessment before applying the economic substance test. In the decision, the Court stated that Liberty Global had “not created a genuine issue as to whether the entire transaction took place for any substantial reason other than tax evasion” and concluded that the steps giving rise to the gain did not have economic substance, thus confirming that the income arising from the transaction could not be offset by the Section 245A deduction. Furthermore, the Court stated that “even if an isolated step did provide objective benefits for [Liberty Global], it does not follow that the achievement of that outcome was a ‘substantial’ non-tax purpose for the entire scheme.”


Liberty Global has indicated it intends to challenge the Court's ruling by filing an appeal with the Tenth Circuit Court of Appeals.



Cory Perry

Washington DC, Washington DC

  • Manufacturing, Transportation & Distribution
  • Technology, media & telecommunications
  • Private equity
Service Experience
  • Tax
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