Dated 21 September 2023
The U.S. Court of Appeals for the Federal Circuit overturned a lower court decision in a case involving GSS Holdings (Liberty) Inc. The original issue centered around a taxpayer who is the managing member and owner of an investment fund. Between 2006 and 2011, this investment fund engaged in a series of transactions which led them to claim a tax loss for the year 2011. They tried to carry this loss back to the tax year 2009. However, the IRS did not allow this, suggesting that all these transactions should be seen as one under the "step transaction doctrine." This would make the loss claim invalid under specific tax code provisions.
The taxpayer, not satisfied with this decision, sought a tax refund or credit for the year 2009 in the federal claims court. This court sided with the government. Upon appealing to the Federal Circuit, the taxpayer argued that the claims court incorrectly blended two separate legal concepts: the step transaction doctrine and the economic substance doctrine. The Federal Circuit agreed with this assessment. They found that the claims court should have evaluated the taxpayer's intent from the beginning of the series of transactions, rather than focusing only on the particular transaction that resulted in the tax benefit.
Therefore, the Federal Circuit has sent the case back to the claims court, instructing them to reevaluate it using the proper legal standard. The main task for the claims court now is to determine if the series of transactions were part of a single larger transaction planned from the start. If so, the step transaction doctrine would apply. The outcome of this reevaluation is uncertain, as the government believes the result will be the same, but the taxpayer thinks otherwise due to varying intents at different times.