On November 12, 2025, the Tax Court issued its opinion in Patel v. Commissioner, holding that the taxpayers' transaction lacked economic substance.
The case arose from a series of micro-captive insurance arrangements under which the taxpayers claimed insurance premium deductions. The IRS disallowed the deductions on the ground that the arrangements lacked economic substance. The Tax Court agreed and concluded that the claimed deductions did not reflect a transaction with meaningful non-tax effects.
In reaching that conclusion, the Tax Court held that it must first determine whether the economic substance doctrine is relevant to the transaction at issue. Although the Tax Court declined to articulate a specific test for determining relevance, it made clear that relevance is a distinct gating inquiry rather than part of the overall economic substance analysis.
That distinction may prove significant for Liberty Global, the closely watched litigation currently pending before the Tenth Circuit, which squarely addresses the question of whether the economic substance doctrine applies (as discussed here). By separating relevance from the economic substance analysis, Patel reinforces the argument that the doctrine does not apply to every transaction that produces tax benefits and may further embolden taxpayers engaged in aggressive tax planning to argue that the doctrine does not apply.
The economic substance doctrine was codified by Congress in 2010 in response to concerns about tax shelters. As codified, the doctrine generally provides that a transaction has economic substance only if it meaningfully changes the taxpayer's economic position apart from federal income tax effects and the taxpayer has a substantial non-tax purpose for entering into the transaction. Patel does not alter that standard, but clarifies that the doctrine applies only where "relevant."
The decision raises the question of whether relevance turns solely on the presence of a non-tax business purpose or whether certain transactions—including transactions Congress has expressly structured to be tax-advantaged, such as tax-free reorganizations—may fall outside the doctrine's reach altogether.
Whether (and to what extent) the relevance inquiry will shape the Tenth Circuit's analysis in Liberty Global remains to be seen, and we will continue to provide updates in Brass Tax.
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