By Richard Rubin
The Internal Revenue Service won another significant battle in its fight against tax-motivated business transactions as a federal appeals court backed the government over telecommunications company Liberty Global.
In a 2-1 ruling on Tuesday, the 10th U.S. Circuit Court of Appeals upheld a lower-court decision against Liberty Global's "Project Soy," a series of maneuvers that the company used to exploit gaps in the 2017 tax law.
The ruling bolstered the government's use of what is known as the economic substance doctrine, a concept that Congress incorporated into the tax code in 2010. The basic idea is that companies can't engage in tax-reducing maneuvers that lack a substantial business purpose, and the IRS has been using the doctrine to attack transactions during audits.
The doctrine "is relevant to attempts by taxpayers to mechanically utilize the provisions of the Tax Code to obtain a benefit not intended by Congress," wrote Judge Michael Murphy. "That is exactly what [Liberty Global] did with Project Soy."
Companies and tax lawyers have been watching the case closely for clues on how much leeway the courts will give the government. Liberty Global enjoyed support from business groups, including the U.S. Chamber of Commerce and the American Forest & Paper Association.
"The IRS will definitely be emboldened to be more aggressive in asserting economic substance arguments," said Robert Kovacev, an attorney at Miller & Chevalier. Given the IRS's shrinking enforcement budget, the government may be tempted to assert violations and let courts sort it out, said Kovacev, who co-authored a brief for the National Foreign Trade Council but wasn't speaking for that group.
The IRS and Liberty Global didn't respond to requests for comment. The company can appeal.
The Liberty Global case stemmed from changes that Congress made in 2017 to how the U.S. taxes foreign earnings. The law left a gap where companies could claim a new deduction for certain foreign profits without paying other taxes that were supposed to apply.
Liberty Global, advised by Deloitte, planned a series of internal transactions involving a Belgian company that were choreographed to occur in December 2018 and take advantage of that opening. Billionaire John Malone, then the company's chairman, was included in the discussions, according to court filings. Liberty Global sued for a $110 million refund; the exact cost of this week's ruling isn't clear.
"This case is about whether compliance with the literal words of the tax law is sufficient to uphold artificial transactions that have no purpose other than tax minimization," said Reuven Avi-Yonah, a law professor at the University of Michigan. "The court answered with a resounding no, dealing a blow to renewed efforts by large corporate taxpayers to use artificial tax maneuvers to shelter their profits."
In dissent, Judge Allison Eid wrote that Project Soy didn't lack economic substance, partly because the government was just objecting to the timing of the transaction.
"The decision of when to sell property has routinely been deemed to be within the taxpayer's province even when the sale does not change the economic position of the taxpayer and lacks a nontax business purpose," Eid wrote.
One problem with the appeals court's ruling is that it doesn't fully address the part of the tax code that says the economic substance doctrine applies only when it is relevant, said Tyler Martinez, director of litigation at the National Taxpayers Union Foundation, which filed a brief in favor of Liberty Global.
The court, he said, reduced that to a tautology.
"It's going to be hard for taxpayers going forward to know what the rules are beforehand," Martinez said. "'I know it when I see it' isn't viable in tax law."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
April 22, 2026 09:19 ET (13:19 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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