IRS Blocks Project Soy Tax Strategy, Targeting Liberty Global Inc. Under Section 245A

(COLORADO) — The Internal Revenue Service won a $109 million federal court victory against Liberty Global Inc. after a judge in Colorado rejected the company’s “Project Soy” tax maneuver and ruled that it lacked economic substance under U.S. tax law.

The U.S. District Court for the District of Colorado granted summary judgment to the government on October 31, finding that Liberty Global’s 2018 transaction was built to exploit a gap created by the 2017 Tax Cuts and Jobs Act. The ruling handed the government a broad win in a dispute over the reach of Section 245A and the limits imposed by the economic substance doctrine.

Liberty Global had filed suit on November 27, 2021, seeking a $104 million refund for 2018 taxes it had paid. Instead, the government prevailed outright, with the court siding with the IRS on its view that the arrangement did not qualify for the tax treatment the company claimed.

At the center of the case was a sale by a foreign subsidiary of Liberty Global Inc., which is based in the United States, of its interest in Telenet Group Holding, a Belgian telecom firm, to Liberty Global’s UK-based parent company, Liberty Global. The company recognized gain from that sale, then claimed a full deduction under Section 245A of the Internal Revenue Code by treating the gain as a dividend eligible for the dividends-received deduction added by the Tax Cuts and Jobs Act.

The transaction carried the internal name Project Soy. The court concluded that the structure did not operate as a normal business deal, but as a tax-driven arrangement assembled to fit within a provision Congress enacted for certain foreign-source dividends.

Section 245A allows a dividends-received deduction for certain foreign-source dividends. The government argued, and the court agreed, that Liberty Global’s steps were engineered to turn sale gain into a dividend for tax purposes while avoiding the economic reality that would ordinarily govern the transaction.

The ruling also turned on Section 7701(o), the part of the tax code that sets out the economic substance doctrine. Under that doctrine, the court rejected Liberty Global’s position that the transaction should stand as a “basic business transaction,” holding instead that the deal lacked the substance required to survive scrutiny.

Before the sale, Liberty Global used a series of steps that the court treated as part of the larger design. Those steps included capitalizing a disregarded entity with non-qualified preferred stock, restructuring with intercompany debt, and converting a Belgian BVBA subsidiary to an NV so it would be reclassified as a foreign corporation for U.S. tax purposes.

Those moves were disregarded for tax reporting, yet they enabled the claimed Section 245A deduction. That combination sat at the core of the government’s challenge: the company had arranged the form of the transaction to produce the deduction while the underlying economics remained unchanged.

The court also tied its reasoning to the GILTI regime and to congressional intent behind the Tax Cuts and Jobs Act. In the judge’s view, the Liberty Global structure conflicted with how Congress intended Section 245A and the broader post-2017 international tax rules to work together.

That mattered because the company’s refund suit aligned with temporary regulations issued in June 2019 under Section 245A that applied retroactively to post-2017 distributions. Liberty Global sought to fit its 2018 transaction within that framework, but the court found that the larger arrangement still failed under the economic substance test.

The opinion also pointed to the transaction’s multi-step complexity and the involvement of sophisticated tax advisors. Those features, combined with the mismatch between the claimed deduction and the deal’s economics, helped persuade the court that Project Soy was a tax maneuver rather than a conventional internal restructuring.

The dispute gives the IRS a court victory in a fight over corporate planning that arose soon after Congress rewrote large parts of the international tax code in 2017. Companies and tax advisers spent the years that followed testing how far new provisions, including Section 245A, could reach when paired with internal transfers among foreign and domestic affiliates.

Liberty Global’s structure became one of the sharper examples of that effort. A foreign subsidiary sold a Belgian telecom stake to a UK-based parent, recognized gain on the sale, and then claimed that the gain should receive the same treatment as a qualifying dividend under Section 245A.

The IRS challenged that result, and the Colorado court agreed with the government’s basic theory that form alone could not carry the day. A transaction built to manufacture a deduction, the court held, could still fail even if the taxpayer aligned its steps with language found in the statute and later regulations.

Robert Kovacev, a tax expert, said the ruling was “a harbinger of a newly aggressive tactic that the IRS will be using more and more.” He tied that shift to enhanced enforcement funding, saying the government now has more room to pursue cases against intricate corporate tax structures that once might have escaped a direct challenge.

His comment tracks one of the broader consequences of the Liberty Global decision. The ruling gives the IRS support as it presses attacks on similar corporate maneuvers that rely on dense internal restructurings, favorable classification changes and deductions that depend on a narrow reading of post-2017 tax law.

The court’s use of the economic substance doctrine also stands out because it reached past the technical design of Project Soy and tested the transaction against its actual business effect. That approach can be harder for taxpayers to overcome in refund litigation, especially where a judge sees a deal as assembled around a tax result first and a business result second.

In Liberty Global’s case, the government did not need a trial. Summary judgment on October 31 ended the dispute in the IRS’s favor at the district court level and left the company without the $104 million refund it had sought for its 2018 tax year.

The numbers in the case are large, but the legal fight centered on a narrow question with wide reach: whether a company can use a chain of internal steps to convert sale gain into a deductible dividend under Section 245A. The Colorado court answered no, at least on the facts presented by Liberty Global Inc. and its Project Soy structure.

That answer gives the IRS more than a dollar figure. It gives the agency a federal court ruling that a heavily planned corporate tax arrangement, tied to TCJA changes, a Belgian telecom asset, intercompany debt, preferred stock and entity reclassification, still failed when measured against economic substance.

Project Soy now stands as a warning from the District of Colorado that complex tax engineering alone does not secure the result a corporation wants. In the court’s view, Liberty Global’s 2018 arrangement did not qualify for the deduction it claimed under Section 245A, and the IRS kept its $109 million win.