On November 12, 2025, the U.S. Tax Court delivered a significant ruling in Patel v. Commissioner, determining that the taxpayers’ arrangement failed to meet the criteria for economic substance. The case centered on micro-captive insurance structures through which the individuals sought deductions for insurance premiums. The Internal Revenue Service had previously rejected these claims, asserting the transactions lacked genuine economic purpose beyond tax savings, a position upheld by the court.
A key takeaway from the decision is the court’s clarification that the applicability of the economic substance doctrine must first be assessed as a threshold issue. While no definitive test was provided for this preliminary determination, the ruling emphasizes that relevance is a separate consideration from the two-pronged economic substance analysis—namely, whether a transaction meaningfully alters the taxpayer’s financial position outside of tax consequences and whether it serves a substantial non-tax objective.
This procedural distinction could influence ongoing litigation, particularly Liberty Global’s appeal before the Tenth Circuit, where the central debate revolves around whether the doctrine applies at all to certain tax-advantaged arrangements. By isolating the question of relevance, the Patel decision may empower taxpayers to challenge the doctrine’s reach, especially in cases involving transactions explicitly designed with favorable tax treatment under law, such as reorganizations.
Enacted in 2010 to counter abusive tax shelters, the codified version of the doctrine remains unchanged in standard, but Patel introduces uncertainty about its scope. It raises important questions: Does the presence of a legitimate business purpose automatically trigger the doctrine? Or do some legislatively sanctioned tax benefits lie beyond its domain entirely?
The broader implications for future tax planning remain uncertain, particularly how appellate courts will interpret this gating function. Observers will be watching closely as the Tenth Circuit weighs in, potentially shaping how aggressively taxpayers can structure deals without triggering scrutiny.
— news from JD Supra
— News Original —
Economic Substance Back on the Docket
On November 12, 2025, the Tax Court issued its opinion in Patel v. Commissioner, holding that the taxpayers’ transaction lacked economic substance. n nThe 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. n nIn 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. n nThat 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. n nThe 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.” n nThe 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. n nWhether (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.