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Taxpayer Defense Center Urges Narrow Application of Economic Substance Doctrine in Liberty Global Inc. v. United States

On May 7, NTUF’s  Taxpayer Defense Center filed an amicus curiae (“friend of the court”) brief with the U.S. Court of Appeals for the Tenth Circuit in Liberty Global Inc. v. United States, which involves the scope of the Economic Substance Doctrine. 

The Economic Substance Doctrine is a judge-created principle of the tax law that requires that  a transaction must have both a “substantial purpose” aside from reduction of tax liability and the transaction must change  in a “meaningful way” the economic position of the taxpayer.

In our brief, we argue that the District Court’s application of the Economic Substance Doctrine was flawed and instead it should be applied narrowly and only after a clear determination of its relevance, aligning with Congressional mandate under the language of  26 U.S.C. § 7701(o).

This threshold relevance determination is necessary to avoid unjustly penalizing taxpayers for legitimate activity. Many tax incentives, such as S corporation status for small businesses, environmental investments, and home buying, are intentionally designed by Congress to influence economic behavior. Merely seeking these benefits should not automatically invalidate a transaction as lacking economic substance.

We warn against the broad application of the Economic Substance Doctrine, as applied by the District Court, because it could lead to excessive governmental interference in ordinary business decisions. We contend that the District Court’s interpretation invites the IRS to second-guess legitimate transactions simply because they offer tax advantages. 

Therefore we urge the Tenth Circuit to establish a clear threshold for determining the relevance of the Economic Substance Doctrine before applying it. We ask the court to reverse and remand the District Court’s decision, instructing it to make a threshold inquiry into the relevance of the Economic Substance Doctrine. A narrowly tailored application of this doctrine will protect taxpayers from unwarranted scrutiny of ordinary economic decisions and preserve the integrity of tax incentives designed to foster economic growth and stability.

The case is Liberty Global, Inc. v. United States of America, 10th Cir. No. 23-1410.