United States: Economic Substance Doctrine after Liberty Global

In brief

Recent court decisions, including Liberty Global v. United States, Patel v. Commissioner, and Otay v. Commissioner, addressing the economic substance doctrine (ESD) have exceeded and distorted the codified language of section 7701(o) such that the resulting doctrine begins to more closely resemble a general anti avoidance rule (GAAR) rather than the narrowly tailored rule enacted by Congress. These decisions raise concerns regarding judicial overreach and further embolden the Internal Revenue Service (IRS) to take more aggressive positions on the ESD in audit and in litigation. The resulting legal environment makes it more important for taxpayers to build a contemporaneous record showing both why the doctrine should not apply and the transaction’s non-tax business purpose.

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