[00:00:00] Speaker 01:
And with that, I'll call the first case, Liberty Global versus United States, case number 23-14-10.

[00:00:12] Speaker 00:
LGI is entitled to a deduction for the sale of TGH by operation of sections 245A, 964E, and 1248J.

[00:00:21] Speaker 00:
The regulations can't override that result because Treasury can't rewrite the statute.

[00:00:26] Speaker 00:
And I'd like to make four points about why the economic substance doctrine can't do so either.

[00:00:31] Speaker 00:
Those four points provide a narrow roadmap for resolving this case.

[00:00:35] Speaker 00:
First, the sale reflected the real appreciation and economic value of Telenet Group's Belgian telecommunications business.

[00:00:43] Speaker 00:
Indeed, that's exactly what the IRS wants to tax.

[00:00:47] Speaker 00:
Second, that real economic value... Would you pull that microphone right in front of your face?

[00:00:54] Speaker 00:
Thank you.

[00:00:54] Speaker 00:
That real economic value, real gain, distinguishes this case from every other decision that has applied the economic substance doctrine to disregard transactions.

[00:01:04] Speaker 00:
no decision has applied the doctrine to disregard real gain.

[00:01:08] Speaker 00:
That's because the doctrine isn't relevant when the taxpayer's economic position is what the taxpayer claims and what a code provision requires.

[00:01:17] Speaker 00:
Third, a taxpayer can choose when and how to recognize real gain for tax-motivated reasons.

[00:01:25] Speaker 00:
That's why, for example, there would be no problem with selling stock now and buying it back to avoid paying tax in the future at possibly higher rates.

[00:01:34] Speaker 00:
Simply put, the economic substance doctrine isn't relevant to tax-motivated choices that the code allows to be tax-motivated, like how to classify or capitalize an entity that a taxpayer uses to recognize real gain.

[00:01:49] Speaker 00:
Finally, applying those principles here makes clear that the economic substance doctrine isn't relevant, and the IRS can't use it to disregard LGI's 245 cap A deduction.

[00:02:01] Speaker 00:
The government, again, doesn't dispute that the deduction reflects real gain, and that's what it wants to tax.

[00:02:07] Speaker 00:
LGI chose to recognize that gain by converting Telenet Group into a regarded Belgian corporation and issuing non-qualified preferred stock and debt, and then selling TGH.

[00:02:20] Speaker 00:
The tax code permits all of those choices for tax reasons to recognize real gain, and the tax code dictated their consequences, a 245 cap a deduction.

[00:02:31] Speaker 00:
the economic substance doctrine can't unwind those choices or override how the court treats them?

[00:02:42] Speaker 01:
I understand, I think, your four points.

[00:02:44] Speaker 01:
But I guess I'd like you to kind of get down to what I think the real issue is here, which is the statutory interpretation of the codified economic substance doctrine.

[00:02:59] Speaker 01:
And as I understand it, you concede, essentially, the two prongs of the statute, which is that the transactions change in a meaningful way, the taxpayers, whether it changes in a meaningful way, your economic position, and whether you have a substantial purpose for entering into the transaction.

[00:03:21] Speaker 01:
And as I understand it, the only thing you're really disputing about the application of Section O

[00:03:29] Speaker 01:
is what the meaning of the word relevance is.

[00:03:34] Speaker 01:
Is that right?

[00:03:35] Speaker 00:
That's not quite right, Judge Moritz.

[00:03:38] Speaker 00:
We do concede the second prong of the economic substance test, that if the economic substance doctrine applies, that the purpose here was tax motivated.

[00:03:49] Speaker 01:
You don't concede the first prong?

[00:03:51] Speaker 00:
We don't concede that there is no economic substance here.

[00:03:54] Speaker 01:
Again... What is the economic substance?

[00:03:59] Speaker 00:
This was a transaction that, again, recognized real gain.

[00:04:03] Speaker 00:
And what it did was it got Telenet Group, a Belgian telecommunications company, out from under the US company.

[00:04:13] Speaker 00:
That transaction reflects real gain and has real substance.

[00:04:18] Speaker 00:
On the relevance inquiry, there is, as a matter of statutory language, a threshold relevance inquiry.

[00:04:25] Speaker 00:
7701 says, in the case of any transaction to which the economic substance doctrine is relevant, and looking at both pre and post 7701 case, 77010 case law, there is no case that has used the economic substance doctrine to disregard real gain.

[00:04:43] Speaker 00:
That's because what the economic substance doctrine is doing

[00:04:47] Speaker 00:
is it is helping the court determine whether the taxpayer actually has what it claims that it has.

[00:04:55] Speaker 04:
Does I understand it, underlying your position is a plain meaning of the text of 945, correct?

[00:05:04] Speaker 00:
Or 245.

[00:05:05] Speaker 04:
245 cap a. Right.

[00:05:06] Speaker 04:
Isn't that underlying your claim, the plain language of the text of 245a?

[00:05:14] Speaker 04:
Yes, the operation of the code, 245A, along with the account.

[00:05:19] Speaker 04:
Then let me direct your attention to subsection 5 of the economic substance rule, and specifically 5B.

[00:05:33] Speaker 04:
And it talks about application, which to me means relevance.

[00:05:42] Speaker 04:
And it states when it is not relevant.

[00:05:46] Speaker 04:
Now, doesn't that suggest by the plain meaning that that's when it does not apply?

[00:05:52] Speaker 04:
Otherwise it applies.

[00:05:55] Speaker 04:
Applying plain meaning to the text of that statute.

[00:06:01] Speaker 00:
Judge Murphy, let me just clarify.

[00:06:02] Speaker 00:
Are you asking about 5B or are you asking about 5C?

[00:06:08] Speaker 04:
I'm talking about 5b, the exception for personal transactions of individuals.

[00:06:15] Speaker 04:
What it says is that's the case when it's irrelevant.

[00:06:22] Speaker 04:
It says it was not entered into by a trade or a business.

[00:06:30] Speaker 00:
So Judge Murphy, 5b does make the economic substance doctrine categorically inapplicable to personal transactions, but 5c

[00:06:38] Speaker 00:
also explains that the determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.

[00:06:48] Speaker 00:
And so that's directing the court to look at pre- How do you explain B that expressly states when it is irrelevant?

[00:07:01] Speaker 04:
And that it's relevant.

[00:07:04] Speaker 04:
when the entity is not an individual, but instead a trader or a business.

[00:07:10] Speaker 00:
Again, I think the plain language of 5C, 5B is one category.

[00:07:18] Speaker 04:
You want to ignore, I can read 5C.

[00:07:20] Speaker 04:
I've looked at it.

[00:07:21] Speaker 04:
You're ignoring 5B, and that's my question.

[00:07:26] Speaker 00:
So I'm not ignoring 5B.

[00:07:27] Speaker 00:
5B is creating one categorical exclusion.

[00:07:31] Speaker 00:
But 5C has a separate inquiry.

[00:07:34] Speaker 00:
that explains, referring back to 01, what the relevance inquiry is.

[00:07:41] Speaker 00:
And the relevance inquiry looks to pre-77010 case law to see which sorts of cases the economic substance doctrine applied to.

[00:07:52] Speaker 00:
looking both pre and post-77010, there is no case that applied the economic substance doctrine where you had a real gain.

[00:08:01] Speaker 00:
The cases that apply the economic substance doctrine are ones where the taxpayer didn't have what it claimed to have.

[00:08:08] Speaker 00:
So in this court's cases like Sala or Keeler or Borah, the taxpayer claimed a loss, but in economic reality, it didn't have one because they were actually offsetting options there.

[00:08:19] Speaker 00:
in cases like Gregory, where the Supreme Court looked at a reorganization.

[00:08:23] Speaker 00:
The taxpayer claimed to have a reorganization, but it didn't really, because the statutory language there called for an inquiry into the purpose of the transaction, which the taxpayer didn't satisfy.

[00:08:33] Speaker 00:
Cases involving indebtedness or interest payments, where something was called a loan, but in actuality it wasn't.

[00:08:40] Speaker 00:
To use the language of the Sixth Circuit from Summa Holdings, the question is whether a transaction's dollars and cents reality

[00:08:47] Speaker 00:
matches the label that the taxpayer has put on it.

[00:08:50] Speaker 00:
And here, again, that's satisfied because there was real gain in the Belgian telecommunications business.

[00:08:56] Speaker 01:
Did any of those cases that you're referring to, including SUMA, consider whether there's a threshold determination of relevance?

[00:09:09] Speaker 01:
And if so, what that threshold determination is?

[00:09:14] Speaker 01:
That was not an issue in any of those cases, correct?

[00:09:16] Speaker 00:
So they didn't because almost all of the cases that I mentioned were pre-77010 cases.

[00:09:22] Speaker 00:
77010 is what... It has the relevance.

[00:09:26] Speaker 00:
It's what has the relevance.

[00:09:26] Speaker 01:
What about SUMA?

[00:09:27] Speaker 01:
Wasn't that a totally different doctrine altogether?

[00:09:30] Speaker 01:
It certainly didn't consider the economic substance doctrine.

[00:09:34] Speaker 00:
So that was a substance over form case rather than an economic substance case.

[00:09:38] Speaker 01:
It was totally different.

[00:09:39] Speaker 00:
It's not totally different.

[00:09:40] Speaker 00:
They're related doctrines.

[00:09:41] Speaker 00:
This court in Rogers said that substance over form, economic substance, these are all related concepts.

[00:09:48] Speaker 00:
SUMA relied on economic substance doctrine cases in its analysis of the substance over form doctrine.

[00:09:55] Speaker 00:
And the key point that comes out of SUMA, again, SUMA says you look at whether the dollars and cents reality matches the label.

[00:10:02] Speaker 00:
If it does, if the taxpayer has what it claims to have, the IRS and a court can't override the operation of the tax code.

[00:10:12] Speaker 00:
And that's what's happening here.

[00:10:13] Speaker 00:
LGI has what it claims to have.

[00:10:16] Speaker 00:
It has a real gain.

[00:10:17] Speaker 00:
It recognized that by making capitalization choices and election choices.

[00:10:23] Speaker 00:
It's allowed to make those for tax purposes under the code.

[00:10:27] Speaker 00:
And under 245 CAPA and the related provisions,

[00:10:31] Speaker 00:
The consequence of that is this deduction that LGI has claimed.

[00:10:35] Speaker 00:
Now, the government obviously doesn't like that result.

[00:10:38] Speaker 00:
It's seeking to override it.

[00:10:39] Speaker 00:
It sought to do that first through regulations and now through the economic substance doctrine.

[00:10:43] Speaker 00:
But what the economic substance doctrine doesn't allow you to do is to change the operation of the tax code where the taxpayer has the right inputs that go into the code.

[00:10:54] Speaker 02:
Council can I just get you to address the statutory language again sure?

[00:11:01] Speaker 02:
How how do you think the statutory language should be?

[00:11:05] Speaker 02:
Interpreted can I just get you to focus on that of course so under?

[00:11:10] Speaker 00:
77010 there is a threshold Relevance inquiry we get that from the introductory language of that provision in the case of any Transaction to which the economic substance doctrine is relevant

[00:11:23] Speaker 00:
So the economic substance doctrine is not relevant to every transaction.

[00:11:26] Speaker 00:
It's only relevant to some.

[00:11:28] Speaker 04:
Give us an example of when it's not relevant.

[00:11:32] Speaker 04:
I mean, when it is relevant.

[00:11:34] Speaker 04:
Excuse me.

[00:11:36] Speaker 00:
So I mentioned the cases earlier from this circuit.

[00:11:39] Speaker 04:
Give me a hypothetical that can give us some direction of when it's relevant.

[00:11:48] Speaker 00:
I mean, it is part of the code.

[00:11:51] Speaker 00:
So it's relevant in cases like Sala or Borer or Keeler, where a taxpayer claimed a loss, but it actually didn't have a loss because it had offsetting options, calls, and puts.

[00:12:06] Speaker 00:
And so economically, the taxpayer's position was that the calls and puts

[00:12:11] Speaker 00:
offset one another's economic value.

[00:12:14] Speaker 00:
But the taxpayer nonetheless claimed a loss even though it had the offset.

[00:12:19] Speaker 04:
Isn't that just the same as... Here you have earnings and profits.

[00:12:27] Speaker 04:
And isn't that the same thing?

[00:12:28] Speaker 04:
Is it you're trying to avoid a gain by offsetting them with the earnings and profits under 245?

[00:12:37] Speaker 00:
It's not the same thing because you actually have the real gain that triggers the earnings and profits.

[00:12:44] Speaker 00:
The offsetting deduction is simply something that's by operation of the tax code.

[00:12:50] Speaker 00:
In cases like Sala and Keillor and Borer, the taxpayer actually had two economic things that offset one another.

[00:12:59] Speaker 00:
Here, that's not what you have.

[00:13:01] Speaker 00:
Here, you have real gain.

[00:13:02] Speaker 00:
And the offsetting deduction arises only by operation of the code.

[00:13:08] Speaker 00:
That's why in Borer, for example, the taxpayers engaged in straddle trades of futures and options

[00:13:14] Speaker 00:
the transactions were structured and the court said, quote, so the investor could realize and deduct an ordinary loss in year one and could then recoup the loss in year two with the income tax, the lower long-term capital gains rate.

[00:13:28] Speaker 04:
If you had the privilege of writing this decision and the decision favored your position, how would you write it to

[00:13:42] Speaker 04:
state a rule, a standard, to determine relevance.

[00:13:50] Speaker 00:
So the relevance inquiry requires the court to look at cases in which the economic substance doctrine applied or didn't apply pre-7701.

[00:14:00] Speaker 00:
The economic substance doctrine has never been understood to apply to a case where the taxpayer has ruled.

[00:14:03] Speaker 04:
I'm asking you, tell me how you would articulate the rule

[00:14:09] Speaker 04:
on when a transaction, when the economic substance rule is relevant and when it's irrelevant.

[00:14:22] Speaker 00:
It is not relevant when the taxpayer has real gain.

[00:14:25] Speaker 00:
It is relevant for determining.

[00:14:27] Speaker 00:
It is relevant when the taxpayer doesn't have what it claims to have.

[00:14:30] Speaker 00:
I'm happy to continue answering the question.

[00:14:33] Speaker 04:
What you're saying is that this applies

[00:14:38] Speaker 04:
only when you're talking about losses, not when you're talking about gains.

[00:14:46] Speaker 00:
Is that your rule?

[00:14:47] Speaker 00:
No.

[00:14:47] Speaker 00:
The rule is that it applies when the taxpayer doesn't have what it claims to have.

[00:14:53] Speaker 00:
So if the taxpayer claims a loss or claims a gain, but economically it doesn't really have one, then the economic substance doctrine would apply.

[00:15:00] Speaker 04:
And you're saying there were real earnings and profits here.

[00:15:04] Speaker 00:
there was real, yes, there was real gain that was reflected in the earnings and profits.

[00:15:11] Speaker 00:
I don't know if the court will allow me any time for rebuttal, but.

[00:15:13] Speaker 01:
No, we will not.

[00:15:15] Speaker 01:
Sorry.

[00:15:15] Speaker 01:
I apologize.

[00:15:18] Speaker 01:
Your time is up, counsel.

[00:15:19] Speaker 01:
Thank you.

[00:15:19] Speaker 01:
Thank you.

[00:15:27] Speaker 03:
Good morning, may it please the court.

[00:15:29] Speaker 03:
Judith Hagley from the Department of Justice representing the United States.

[00:15:33] Speaker 03:
We are here today because Liberty Global is asking this court to change how economic substance cases are analyzed.

[00:15:45] Speaker 03:
Liberty Global has conceded that the steps that it took to inflate its 245A deduction by more than $2 billion lacks economic substance

[00:15:56] Speaker 03:
and business purpose, both punks the economic substance test in this case.

[00:16:02] Speaker 03:
And for almost 100 years, courts have disregarded such transactions for tax purposes, even when they comply with little terms of the code, because tax law is generally designed for economically meaningful transactions.

[00:16:16] Speaker 02:
Counsel, can I just stop you there?

[00:16:18] Speaker 02:
Sure.

[00:16:18] Speaker 02:
So was there no real gain here?

[00:16:22] Speaker 02:
And can you discuss that argument?

[00:16:26] Speaker 03:
Sure, TGH, Belgian sub, owns Telenet Group, separate sub.

[00:16:35] Speaker 03:
Telenet Group has appreciated assets.

[00:16:38] Speaker 03:
Those assets reflect real built-in gain.

[00:16:42] Speaker 03:
The steps that Liberty Global took to trigger recognition of that gain lacked any economic substance.

[00:16:50] Speaker 02:
So you reject their argument that if there is real gain, the doctrine doesn't apply?

[00:17:00] Speaker 03:
That's correct.

[00:17:01] Speaker 03:
We dispute that it's real gain from business earnings that's here, but even if it were, that doesn't mean economic substance doctrine doesn't apply.

[00:17:09] Speaker 03:
Neither 7701 nor the case law exempt transactions with real gain from the economic substance doctrine.

[00:17:17] Speaker 03:
Transactions involving real gain

[00:17:20] Speaker 03:
have been disregarded under the economic substance doctrine.

[00:17:23] Speaker 03:
Gregory itself involved a corporation held an appreciated asset and the taxpayer created a reorganization to transfer that appreciated asset so that the taxpayer could trigger the real gain as a capital gain rather than an ordinary dividend.

[00:17:39] Speaker 03:
And because the reorganization lacked in the economic substance, it was disregarded.

[00:17:45] Speaker 01:
I assume that this argument, of course, wasn't made in the Gregory South case.

[00:17:52] Speaker 03:
Correct.

[00:17:53] Speaker 03:
Yes, the taxpayer didn't make that type of a relevance argument in that case.

[00:17:58] Speaker 03:
The gains in the stock straddle trade in this court's cure decision, those were real gains.

[00:18:03] Speaker 03:
Real gains in real economic losses were disregarded there because the taxpayer had relied on the artificial device of triggering economic losses in one year, economic gains

[00:18:14] Speaker 03:
in a separate year and then together, you know, it had provided no economic benefit.

[00:18:19] Speaker 01:
And then finally... What was the second case you mentioned?

[00:18:21] Speaker 03:
I'm sorry.

[00:18:21] Speaker 03:
What was that case?

[00:18:23] Speaker 03:
Keillor.

[00:18:23] Speaker 03:
Keillor, the Saddle Trades.

[00:18:25] Speaker 03:
And we see real gain that was triggered in the Tucker case.

[00:18:28] Speaker 03:
That was the relatively recent tax court case affirmed by the Fifth Circuit there.

[00:18:33] Speaker 03:
A CFC sold some sort of euro options for $51 million in gain and then elected to

[00:18:43] Speaker 03:
change from being a corporation to a partnership to avoid paying tax on that gain.

[00:18:47] Speaker 03:
But again, that was real gain that was disregarded.

[00:18:49] Speaker 03:
It was one of four steps that together lacked any economic substance.

[00:18:54] Speaker 03:
Now the district court in this case correctly followed section 77015C and determined the relevance of the economic substance doctrine as courts have been doing for decades.

[00:19:08] Speaker 01:
Do you agree with the district court's rationale as to how it got there?

[00:19:12] Speaker 01:
I mean, didn't the district court basically say that the test itself was coexistent with the economic substance test, the doctoral test was coexistent with the term relevance, which would make one or the other superfluous?

[00:19:32] Speaker 03:
I think there is a great deal of overlap, but I do think that with the term relevance, there are situations where Congress has said that the economic substance doctrine

[00:19:42] Speaker 03:
It's not relevant, but that's part of looking at the facts and circumstances in every single case.

[00:19:47] Speaker 03:
Suma Holdings and Vinson are an example where Congress said, we're providing a tax benefit for economically meaningless transactions.

[00:19:55] Speaker 03:
And in that circumstance, the economic substance charging is not relevant, which is why it was not invoked in those cases.

[00:20:02] Speaker 03:
There are other rare instances like that.

[00:20:04] Speaker 03:
Congress provided benefits for Alaska Native corporations.

[00:20:08] Speaker 03:
That was the situation discussed in the Federal Circuit doyan case and said, even in economically meaningless transactions, we want these corporations to get this benefit.

[00:20:18] Speaker 03:
Similar situation, the DC Circuit's decision horn, where Congress provided benefits for commodities dealers in economically empty transactions.

[00:20:28] Speaker 03:
I mean, in short, the way to summarize the relevance question is,

[00:20:32] Speaker 03:
Whenever a taxpayer claims a tax benefit from a transaction lacking economic substance, it is relevant.

[00:20:38] Speaker 03:
unless Congress has provided that it wants to provide tax benefits for economically meaningless transactions.

[00:20:45] Speaker 02:
Well, aren't you, and I think the district court recognized this, aren't you suggesting it always applies?

[00:20:51] Speaker 02:
I mean, you're defining where it doesn't.

[00:20:55] Speaker 02:
In such an extremely narrow way, it just would never apply, hardly ever, right?

[00:21:02] Speaker 03:
Two points to that.

[00:21:02] Speaker 03:
I mean, under the common law, the economic substance doctrine has been presumed

[00:21:07] Speaker 03:
to apply to all transactions that generate tax benefits unless Congress has provided otherwise.

[00:21:13] Speaker 03:
That's why this court has referred to it in the QR case as the cardinal principle of the tax code.

[00:21:20] Speaker 03:
Professor Bidker in his well-known treatise referred to the long-standing economic substance doctrine as the preamble to the code that applies to all, creates the framework from which all tax benefits are to be understood.

[00:21:34] Speaker 03:
And of course now it is

[00:21:36] Speaker 03:
part of the code itself since it's been codified in 2010.

[00:21:40] Speaker 03:
And so the relevance in any given case, you know, so it's presumed to be potentially relevant in all cases unless Congress provides otherwise.

[00:21:47] Speaker 03:
And the relevance in any given case can be determined only after examining, you know, the material and facts in law.

[00:21:55] Speaker 03:
And Congress explained this in the codifications history citing the ACM case.

[00:22:01] Speaker 03:
Relevance has been determined under the common law, and Congress didn't mean to upset that in any way, because the doctrine does need to remain flexible.

[00:22:09] Speaker 03:
That's a point that this court made in the Blum case, and Congress reiterated it in the codification history, because abusive tax shelters are always changing.

[00:22:18] Speaker 03:
And so it's not the case that it never applies here or always applies there.

[00:22:22] Speaker 03:
Each case is contextual and depends on the facts and circumstances.

[00:22:27] Speaker 04:
Are you saying that it's always relevant

[00:22:31] Speaker 04:
Unless subsection 5B, applying to individuals, applies?

[00:22:37] Speaker 03:
That is one of the instances where Congress has said that the economic substance doctrine is not relevant.

[00:22:43] Speaker 03:
But there have been others where the DISC situation addressed in the Summa Holdings and Benson case and DISC are domestic international sales corporations.

[00:22:53] Speaker 03:
Congress wanted to provide

[00:22:55] Speaker 03:
a tax benefit for export sailors in economically meaningless transactions as a way to further exports.

[00:23:02] Speaker 03:
And in those situations, as in Horn, as in Doyan, it's categorically not relevant.

[00:23:09] Speaker 03:
As in 77015B, as you pointed out, Judge Murphy.

[00:23:13] Speaker 03:
In other instances, you should determine whether it's relevant and applicable in any given case

[00:23:18] Speaker 03:
by analyzing the facts and circumstances.

[00:23:21] Speaker 03:
It's always been applied that way.

[00:23:23] Speaker 01:
And looking to Congress's intent, even if you don't have an expression of that intent?

[00:23:28] Speaker 01:
That's where I struggle with this.

[00:23:29] Speaker 03:
Sure.

[00:23:30] Speaker 03:
Looking at intent is that Congress generally intends the code provisions to apply to transactions that are economically meaningful.

[00:23:42] Speaker 03:
What the economic substance doctrine does is it filters out

[00:23:46] Speaker 03:
transactions that don't have any economic meaning.

[00:23:49] Speaker 03:
Because the code provisions and regulatory provisions are normally written from economically meaningful transactions.

[00:23:56] Speaker 04:
Let me ask you this.

[00:23:58] Speaker 04:
It's a hypothetical, although it's reality.

[00:24:01] Speaker 04:
Assume the facts in Marion Medical Systems, the tax court case.

[00:24:09] Speaker 04:
Why doesn't the economic substance rule apply in that hypothetical?

[00:24:13] Speaker 03:
It doesn't apply in what is invoked by the government in that case because that was just a transaction where it was economically meaningful and the taxpayer took advantage of a gap in the statute.

[00:24:27] Speaker 03:
And the economic substance section is not invoked whenever a taxpayer is claiming a windfall.

[00:24:31] Speaker 03:
We've explained in this case, I've used the hypothetical in the front part of our brief, between taxpayer B and taxpayer C, and taxpayer B has

[00:24:42] Speaker 03:
regular earnings and profits from business operations and wants to take advantage of the gap in the statute in this case, but doesn't engage in economically meaningless transaction, economic substance doctrine would not apply there.

[00:24:55] Speaker 03:
The economic substance doctrine applies when a taxpayer engages and creates a contrived economically meaningless transaction to sort of supersize the tax benefit that's derived from the gap.

[00:25:07] Speaker 04:
What was the economic substance invariant?

[00:25:11] Speaker 03:
I think it was just a regular business transaction where the taxpayer claimed foreign tax credits.

[00:25:19] Speaker 03:
And when you claim foreign tax credits, there's like a gross, it's a very complicated case.

[00:25:25] Speaker 03:
But there wasn't any allegation that anything had been contrived and was economically meaningless to take advantage of the gap.

[00:25:33] Speaker 04:
Was it in the context of repatriation of foreign income?

[00:25:40] Speaker 04:
I don't recall.

[00:25:41] Speaker 03:
It may have been.

[00:25:44] Speaker 02:
Help me understand then, under your test, why this isn't the taxpayer taking advantage of a gap and getting a windfall.

[00:25:52] Speaker 02:
Why is that not the case?

[00:25:56] Speaker 03:
The reason why is because the steps that the taxpayer took on December 26, 2018, the profit certificates, the springing of life debt, those steps lacked economic substance.

[00:26:10] Speaker 03:
Congress did not intend the 245A deduction to apply to economically meaningless transactions.

[00:26:16] Speaker 03:
We would not be here today if Liberty Global had not engaged in steps one through three of Project Soy, but just had sold TGH on December 28th and had claimed a dividend received deduction for its real earnings and profits, which I think TG's real earning profits were about $400 million.

[00:26:35] Speaker 03:
had been satisfied with a limited deduction of the gain in that amount, we wouldn't be here.

[00:26:42] Speaker 04:
So why then shouldn't you also ignore step four?

[00:26:53] Speaker 03:
Because step four was an economically meaningful stock sale.

[00:26:58] Speaker 03:
And then the economic substance doctrine, you disregard the steps that

[00:27:03] Speaker 03:
create the disputed tax benefits.

[00:27:06] Speaker 03:
Here, step four was an economically meaningful sale.

[00:27:10] Speaker 03:
It provides lasting benefits that the government respects for Liberty Global.

[00:27:15] Speaker 03:
It no longer has to pay tax on TGH's earnings and profits from 2018 going forward.

[00:27:21] Speaker 03:
And as I mentioned before, it is entitled to the limited dividends received deduction triggered by that sale.

[00:27:29] Speaker 03:
to the extent of TGH's actual earnings and profits from its regular business operations.

[00:27:34] Speaker 04:
Do you have any case authority in a multi-step transaction where the economic substance rule applied to some but not all of the steps in the transaction like here?

[00:27:53] Speaker 03:
Sure, and we rely on Coltech, which this court relied on in the Sawa decision,

[00:27:58] Speaker 03:
In that case, it was a multi-step transaction where the taxpayer tried to generate high basis, low value stock through a 351 organization that it could later sell for a large loss.

[00:28:13] Speaker 03:
And the court analyzed the steps that generate the high basis, which was the exchange of contingent liabilities for a note, disregard of that, which reduced the basis

[00:28:22] Speaker 03:
but respected the stock sale, which was legitimate, to allow the taxpayer the limited loss once the basis was reduced.

[00:28:30] Speaker 04:
Were there real earnings and profits here?

[00:28:34] Speaker 03:
Yes, they had about $400 million in real earnings and profits from their business operations, TGH.

[00:28:42] Speaker 03:
The artificial earnings and profits generated by the steps 1 through 3 of Project Soy.

[00:28:48] Speaker 04:
You call them artificial.

[00:28:50] Speaker 03:
Were they real?

[00:28:51] Speaker 03:
Non-economic.

[00:28:52] Speaker 03:
They were generated by mechanical operation of the tax rules.

[00:28:55] Speaker 04:
So it wasn't the earnings and profits were not the result of

[00:29:01] Speaker 04:
sales of products or services or capital gain?

[00:29:04] Speaker 03:
No, not at all.

[00:29:05] Speaker 03:
And in fact, if this had been provided real economic gain for TGH, Liberty Global wouldn't have conceded the first prong of the economic substance test that this transaction had absolutely no economic effect.

[00:29:19] Speaker 03:
Unless the Court has any further questions, we ask that you affirm the District Court's decision and we rest our brief.

[00:29:28] Speaker 01:
Thank you, Council.

[00:29:30] Speaker 01:
Appreciate your arguments today.

[00:29:32] Speaker 01:
They've been very helpful The case will be submitted and counsel excused.

[00:29:38] Speaker 01:
Thank you