10th Circuit Supports IRS’s Expansive Use of Economic Substance Doctrine While Giving Taxpayers a Roadmap to Narrow its Application

When a series of transactions technically comply with the letter of our nation’s tax laws, but the Internal Revenue Service (“IRS”) deems it substantively abusive, the IRS has a variety of doctrines at its disposal to attempt to disregard or recharacterize the transactions for federal income tax purposes. One such doctrine is the economic substance doctrine.

In recent years, the IRS has broadly applied the economic substance doctrine to various types of transactions in an effort to invalidate otherwise proper tax treatment and punish taxpayers with severe penalties. The recent opinion of Liberty Global, Inc. v. United States, 174 F.4th 1208 (10th Cir. 2026) supports the IRS’s practice in the Tenth Circuit in a vague and uncertain way, while simultaneously providing taxpayers with a road map for attempting to narrow its application of the economic substance doctrine in other jurisdictions.      

The economic substance doctrine finds its roots in the landmark case of Gregory v. Helvering, 293 U.S. 465 (1935). In that case, the Supreme Court held that the transaction at issue should be disregarded because, although it complied with the literal provisions of the Internal Revenue Code, the taxpayer obtained benefits beyond what the statute intended. In so holding, it noted that the transaction had no purpose other than to avoid tax.

Over time, the economic substance doctrine evolved into a two-pronged analysis that asked:

1. Objectively, whether the transaction had economic substance beyond the tax benefits;
2. Subjectively, whether the taxpayer had a nontax business purpose for entering into the transaction.

However, courts have not always applied this test uniformly. Prior to 2010, some circuits applied the test in the conjunctive, while others in the disjunctive. This led to significant confusion as to whether transactions fell within its scope of the doctrine.

In 2010, in an attempt to clarify the proper application of the economic substance doctrine, Congress enacted Section 7701(o). It states in pertinent part:

In the case of any transaction to which the economic substance doctrine is relevant, such transaction shall be treated as having economic substance only if:

• the transaction changes in a meaningful way (apart from the Federal income tax effects) the taxpayer's economic position, and
• the taxpayer had a substantial purpose (apart from the Federal income tax effects) for entering into such transaction.

In recent years, the IRS and practitioners have sparred over the issue of when the “economic substance doctrine is relevant” to a particular transaction.

In the recent case of Liberty Global, Inc. v. United States, 174 F.4th 1208 (10th Cir. 2026), the Tenth Circuit staked its opinion of when the “economic substance doctrine is relevant” for Section 7701(o) purposes. In that case, the Court found that the taxpayer undertook a series of integrated steps for the purpose of taking advantage of a mismatch in the international tax provisions. Despite each part of the transaction technically complying with the tax code and most of the steps involving basic business transactions, the Tenth Circuit found the economic substance doctrine to be "relevant." It reasoned that this was so because the transactions were an attempt by the taxpayer "to mechanically utilize the provisions of the Tax Code to obtain a benefit not intended by Congress." In so holding, the court noted that the taxpayer “cannot escape the application of [Section] 7701(o) by including within its integrated structure steps that might, if standing alone, be considered basic business transactions."

Not convinced by the majority’s opinion, Judge Eid issued a scathing dissent in Liberty Global, Inc. The dissent reasoned that "[i]f Congress meant the economic substance doctrine to apply to all transactions like the district court suggests, it would not have included the prefatory language in [Section] 7701(o)(1) referencing the relevancy of the doctrine." Judge Eid characterized the majority's interpretation as "not only wrong" but "border[ing] on the absurd." She stated that "the economic substance doctrine can be relevant only when there is a dispute about whether the taxpayer actually has done in substance what a Code provision—from an economic perspective—requires." Judge Eid posited that, when "economic reality and taxpayer motive are not relevant to the statutory text, neither is the economic substance doctrine."

It is likely that the result in Liberty Global will embolden the IRS to continue to apply the economic substance doctrine expansively throughout the country. While the opinion is generally unfavorable for taxpayers, Judge Eid’s dissent gives taxpayers a roadmap for challenging similar issues in other circuits and hope that judges in other jurisdictions may disagree with the Tenth Circuit majority. Additionally, the opinion leaves uncertainty and provides little guidance concerning future applications of this tortured doctrine. Given this, taxpayers who have participated in transactions the IRS has or may deem abusive should proactively seek out experienced tax controversy and litigation attorney for review and evaluation. This is the case regardless of whether they think the transaction at issue technically complies with the literal letter of the Internal Revenue Code or not. By working with experienced tax counsel early on, taxpayers and their advisors can develop the facts, arguments, and strategy necessary to defend (or in some cases remediate) the transactions in form and substance, and mitigate potential penalties the IRS could seek to impose.      

Reprinted with permission from the October 20, 2026, edition of The Legal Intelligencer © 2026 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.