HMRC has published a consultation on proposals to modernise the UK tax framework for distributions and repayments of capital made by companies to individual and trust shareholders. A key feature of the consultation is a proposal to align the income tax treatment of distributions made by UK and non-UK resident companies by bringing distributions from non-UK resident companies within the statutory distributions regime. This proposal is likely to be of particular interest to private equity sponsors, investment fund managers, family offices and other investors using Luxembourg, Jersey or other non-UK companies where value may be returned to UK-resident individual or trust shareholders otherwise than on a liquidation. The consultation forms part of the Government’s wider programme to modernise the UK’s distributions framework. HMRC’s stated objectives are to improve clarity and consistency, reduce unintended differences in tax treatment and ensure that economically similar transactions are taxed consistently. Alongside the proposals on distributions from non-UK resident companies, HMRC is also consulting on extending the loans to participators regime to non-UK resident close companies, together with a number of other reforms to the taxation of distributions and returns of capital. While the proposals are not intended to affect corporate shareholders directly, they could have significant implications for private companies, owner-managed businesses, private equity-backed groups and other structures involving individual and trust shareholders. Aligning the taxation of distributions from non-UK resident companies Under the current rules, distributions made by UK resident companies are subject to the statutory distributions regime, which contains a broad definition of what constitutes a taxable distribution. Such distributions are generally subject to income tax in the hands of UK-resident individual shareholders. By contrast, distributions from non-UK resident companies are generally charged to income tax only where they constitute dividends other than dividends of a capital nature. The consultation highlights that this distinction can produce different tax outcomes for economically similar transactions depending on the residence of the distributing company. In particular, certain returns of value, including some returns of capital, share repurchases and stock dividends, may be subject to income tax as distributions if made by a UK resident company but instead be taxed under the capital gains tax regime when made by a non-UK resident company. As a result, the tax treatment of the same return of value may currently differ depending on which regime applies, with current rates of up to 39.35% for dividend income and 24% for capital gains. The consultation therefore seeks views on bringing distributions from non-UK resident companies within the statutory distributions regime so that, broadly, the same income tax rules would apply regardless of where the distributing company is resident. HMRC’s stated objective is to create a single, more coherent framework for taxing company distributions in which equivalent returns of value are taxed consistently. The consultation does not include draft legislation and acknowledges that careful consideration will be required to ensure that applying the UK’s statutory distributions regime to non-UK resident companies does not produce unintended consequences. This is particularly important given the differences between UK company law and overseas corporate regimes, including how concepts such as dividends, share capital, share premium and repayments of capital operate in different jurisdictions. If implemented, the proposals could have implications for future distribution planning, shareholder returns, capital extraction and wider transaction structuring involving non-UK holding companies. Loans to participators The consultation also proposes extending the loans to participators regime to loans made by non-UK resident close companies to UK participators. The existing regime is intended to discourage the extraction of value from close companies by way of loans rather than taxable dividends and currently operates by imposing a corporation tax charge on UK resident close companies where loans to participators remain outstanding beyond the relevant repayment period. As non-UK resident companies are outside the UK corporation tax regime, HMRC is consulting on an equivalent income tax charge on the UK participator, together with an appropriate mechanism for collecting that charge. The consultation contains relatively little detail on how the proposed regime would operate in practice, with HMRC instead seeking views on the overall policy approach before developing draft legislation. The consultation also seeks views on better aligning the loans to participators and distributions regimes, including introducing a priority rule where both regimes could potentially apply. While the detailed mechanics remain to be developed, the proposals would represent a significant extension of the existing regime for businesses using non-UK holding company structures. Other proposals The consultation also seeks views on a number of related proposals, including: Purchase of own shares – reforming the conditions for qualifying for capital treatment on company share buybacks, including replacing the existing “trade benefit” test with more objective conditions. Returns of capital – reviewing the “new consideration” and repayments of capital rules to reduce inconsistent outcomes between income and capital treatment. Demergers – abolishing the capital reduction demerger regime and expanding the statutory demerger rules. Transactions in Securities – considering whether the existing anti-avoidance regime should be modernised or replaced. Next steps The consultation is open until 14 September 2026, with HMRC inviting feedback on both the policy objectives and the practical operation of the proposed reforms before legislation is developed. Although the consultation is framed as a modernisation exercise, it signals HMRC’s intention to revisit several long-standing features of the UK’s distributions framework. Businesses and investors using non-UK holding structures should consider whether existing or planned distributions, loans, share buybacks, returns of capital or shareholder exits could be affected if the proposals are taken forward. We will continue to monitor developments and provide updates as the Government’s proposals evolve.

The Supreme Court has handed down its judgment in HMRC v BlueCrest Capital Management (UK) LLP, dismissing BlueCrest’s appeal and providing important clarification on the application of the salaried members rules to investment management LLPs. The decision is particularly significant for asset managers, hedge fund managers and other investment management businesses operating through LLPs. Many such businesses have members who are economically important to the firm, make substantial investment decisions and may be responsible for significant profits. The Supreme Court has confirmed, however, that this will not necessarily mean those members have “significant influence” for the purposes of the salaried members rules. In broad terms, the Court confirmed that influence must be grounded in the member’s legally enforceable rights and duties as a member of the LLP. Informal or de facto influence arising from a member’s performance, commercial importance, client relationships or investment responsibilities will not, by itself, be enough. The case will now return to the First-tier Tribunal to be reconsidered in light of the Supreme Court’s judgment. Overview of the salaried members rules The salaried members rules were introduced to prevent individuals who are, in substance, closer to employees from being taxed as self-employed LLP members. Where the rules apply, an individual member of a UK LLP is treated as an employee for income tax and NICs purposes. The rules apply where three conditions are met: Condition A: broadly, at least 80% of the individual’s expected remuneration is “disguised salary” which is not variable in relation to the profits and losses of the LLP; Condition B: the mutual rights and duties of the members do not give the individual significant influence over the affairs of the LLP; and Condition C: the individual’s capital contribution to the LLP is below the relevant threshold. An individual only needs to fail one of the three conditions to fall outside the salaried members rules. In practice, many investment management LLPs have placed particular focus on Condition B, especially where senior portfolio managers, traders or desk heads have substantial responsibility for investment decisions but may not contribute sufficient capital to fail Condition C. The BlueCrest litigation, including the appeal to the Supreme Court, concerned Conditions A and B, with the main practical focus of the Supreme Court’s judgment on Condition B. Background to BlueCrest BlueCrest was an investment management LLP with individual members including portfolio managers, traders and non-portfolio managers. HMRC argued that many of those members should be treated as employees under the salaried members rules. BlueCrest’s position was that certain members were not salaried members because they failed Condition B. In particular, BlueCrest argued that portfolio managers who were responsible for significant capital allocations, and desk heads, had significant influence over the affairs of the LLP by reason of their investment responsibilities and their importance to the business. As we have previously reported, the First-tier Tribunal and Upper Tribunal had accepted, in broad terms, that certain portfolio managers and desk heads had significant influence. The Court of Appeal disagreed, holding that the earlier tribunals had taken too broad an approach to Condition B. The Supreme Court has now dismissed BlueCrest’s appeal and confirmed that the case should be remitted to the First-tier Tribunal to apply the correct interpretation. Condition A: individual performance is not enough Although the Supreme Court’s judgment is most important for Condition B, it also confirmed HMRC’s position on Condition A. Condition A is concerned with whether a member’s remuneration is, in substance, more like a salary than a true share of partnership profits. In BlueCrest, much of the relevant remuneration was calculated by reference to individual portfolio performance rather than the overall profits or losses of the LLP. The Court confirmed that remuneration linked primarily to an individual’s own performance can be “disguised salary” even if the total amount available for allocation is subject to an overall profits cap. A cap by reference to the LLP’s profits does not, by itself, make the remuneration a genuine share of overall partnership profits. For investment management LLPs, this is an important reminder that remuneration arrangements based on individual book, desk or portfolio performance may be vulnerable under Condition A unless they are genuinely affected by the overall profits or losses of the LLP. Condition B: what counts as significant influence? The central issue in the Supreme Court was the proper interpretation of Condition B. Condition B is met if the mutual rights and duties of the members of the LLP, and of the LLP and its members, do not give the individual significant influence over the affairs of the LLP. In other words, to fail Condition B, the member must have significant influence over the LLP’s affairs. The Supreme Court confirmed a number of important points. First, the relevant influence must derive from the member’s legal and contractual rights and duties. In most cases, this means starting with the LLP agreement and any other binding governance documents or legally effective arrangements. Influence which arises only from personal status, commercial importance, strong performance, relationships with clients or colleagues, or the fact that the individual generates significant profits will not be qualifying influence for this purpose. However, the Court confirmed that qualifying influence is not limited to rights expressly set out in the LLP agreement. It may also arise through delegated authority or appointment to a particular role, provided that the delegation or appointment can ultimately be traced back to legally enforceable rights and duties under the LLP’s constitutional or governance framework. This is a key point for investment managers. A portfolio manager may make very substantial investment decisions and may be highly valuable to the business, but that does not necessarily mean they have significant influence over the LLP’s affairs for Condition B purposes. Secondly, the influence must be over the affairs of the LLP as a whole. The Court indicated that influence is more likely to qualify where the member has a voice in high-level, strategic or managerial decision-making about the LLP’s affairs. By contrast, day-to-day operational decision-making is less likely to be sufficient, particularly where it relates only to part of the LLP’s business. That distinction is particularly relevant in an asset management context. Responsibility for a portfolio, strategy, book or desk may involve significant financial authority and commercial judgment, but it may still be viewed as operational influence over part of the business rather than influence over the affairs of the LLP as a whole. Thirdly, “influence” does not mean control. A member does not need to be able to dictate the LLP’s decisions. However, the influence must still be significant. It must have practical and commercial substance in the conduct of the LLP’s affairs in the real world. Finally, the existence of reserved powers or veto rights in favour of particular members does not automatically prevent other members from having significant influence. The question remains fact-specific. However, where the LLP agreement centralises decision-making in a board, executive committee or corporate member, it may be harder for individual members outside that governance structure to demonstrate significant influence. How does the Supreme Court decision differ from the Court of Appeal? The Supreme Court did not fundamentally depart from the Court of Appeal’s approach. It agreed that significant influence for Condition B purposes must be grounded in the member’s legal and contractual rights and duties, rather than informal or de facto influence arising from performance, seniority or commercial importance. However, the Supreme Court added useful clarification on how that test should be applied in practice. In particular, it confirmed that strategic or managerial influence is more likely to qualify, but that the question remains fact-specific; that delegated authority or appointment to a role may be relevant where it can be traced back to legal and contractual rights and duties; and that the existence of reserved powers or veto rights in favour of certain members does not automatically prevent other members from having significant influence. For investment management LLPs, the practical point is that the Supreme Court has reinforced the Court of Appeal’s narrower approach, while giving more guidance on the limited circumstances in which portfolio managers, desk heads or other senior individuals may still be able to demonstrate qualifying influence. What this means for investment management LLPs The decision narrows the practical scope for relying on Condition B in investment management structures. Investment managers often have individuals whose contribution to the business is substantial: portfolio managers may deploy significant capital, desk heads may supervise investment teams, and senior traders may have considerable day-to-day autonomy. The Supreme Court has made clear that this kind of commercial importance is not enough if it is not supported by formal rights or legally effective governance arrangements. LLPs that currently rely on Condition B should therefore consider whether the relevant members’ influence is properly evidenced by the LLP agreement, committee terms of reference, delegated authority framework, appointment documents and governance records. It will not be sufficient simply to point to the member’s seniority, profitability or responsibility for substantial investment decisions. In practice, investment management LLPs may need to review: which members are said to have significant influence; whether that influence relates to the LLP’s affairs as a whole, rather than only a portfolio, desk or business line; whether the influence derives from legal and contractual rights and duties which can be traced back to the governing documents of the LLP; whether committee memberships, delegated authorities and management roles are properly documented; whether members’ remuneration is genuinely linked to overall LLP profits or instead primarily reflects individual performance; and whether the LLP’s historic and current salaried members analysis remains supportable in light of the Supreme Court’s judgment. The decision does not mean that portfolio managers, traders or desk heads can never have significant influence. The Court expressly recognised that the answer will depend on the facts and the legal rights in place. However, the judgment makes clear that the evidential and legal threshold is higher than simply showing that an individual is senior, profitable or commercially important. Key takeaway BlueCrest confirms that, for Condition B purposes, significant influence means more than influence over investments or commercial outcomes. The relevant influence must have legal substance, be grounded in the LLP’s rights and governance framework, and relate to the affairs of the LLP as a whole. Investment management LLPs that rely on Condition B should review their governance arrangements and salaried members analysis carefully, particularly where senior portfolio managers, traders or desk heads are treated as self-employed members on the basis of their influence within the business.

HMRC has published updated guidance on the revised share reorganisation anti-avoidance rules following the changes introduced by Finance Act 2026. The guidance provides welcome confirmation that standard private equity management rollover arrangements should continue to benefit from share-for-share exchange relief despite concerns raised by the widening of the anti-avoidance provisions. Previous Concern In order to achieve management re-investment in the buyer’s structure, which is a typical feature of private equity transactions, management shareholders will often exchange a portion of their sale shares for shares in the acquisition structure as part of a UK private equity buyout.  These arrangements, which usually involve a series of exchanges for shares and/or loan notes, typically rely on the rollover provisions in section 135 TCGA 1992.  Under that provision, the exchange is not treated as a disposal for capital gains tax purposes and the replacement shares effectively step into the shoes of the original shares. Rollover treatment is subject to an anti-avoidance test. Previously, rollover treatment was not available unless the exchange was effected for bona fide commercial purposes and was not part of arrangements of which the main or one of the main purposes was tax avoidance. The changes made by Finance Act 2026 removed the “bona fide commercial reasons” condition and refocused the test on whether particular arrangements have been put in place to reduce or avoid a liability to tax on chargeable gains. This created concern that ordinary management rollover arrangements could be caught by the revised anti-avoidance rule, particularly where managers are given a choice between rolling over on a tax-neutral basis and receiving cash proceeds and reinvesting on a post-tax basis. HMRC’s Clarification The updated guidance clarifies that standard management rollover arrangements should generally continue to benefit from the share exchange rules in the way the market has historically expected.  In particular, HMRC states that: “HMRC does not consider that the share reorganisation anti-avoidance rules will be relevant where private equity transactions are structured to allow management shareholders a degree of choice in their investment.  A common example is where managers are required to re-invest, but an arrangement is put in place to allow a choice of a tax-deferred basis (using the share reorganisation rules) or a post-tax basis (reinvesting cash proceeds)”. This is a helpful confirmation that the revised rules are not intended to apply merely because management shareholders are offered flexibility as to how they structure their reinvestment, or because the rollover treatment produces the tax outcome contemplated by section 135. Key Takeaway For sponsors, management teams and advisers, the guidance provides welcome comfort that ordinary management rollover arrangements are not intended to fall within the scope of the revised anti-avoidance provisions merely because they achieve the rollover treatment contemplated by the share exchange regime. While the revised rule remains broader than its predecessor, HMRC’s comments should significantly reduce concerns that routine private equity rollover structures have been brought into scope. The analysis will still depend on the facts and the way the transaction is structured, so rollover mechanics and management reinvestment arrangements should continue to be reviewed carefully as part of transaction planning.

On May 5, 2026, the Internal Revenue Service (“IRS”) released Revenue Procedure 2026-21 (the “Rev. Proc.”), which reinstates a program under which taxpayers may request private letter rulings (“PLRs”) on “significant issues” arising in certain corporate transactions[1] without asking the IRS to rule on the entire integrated transaction.[2] Although ruling opportunities remain limited under the Rev. Proc., the IRS’s resumption of this program is welcome, and it follows calls from practitioners for the IRS to reinstate significant issue rulings for corporate transactions. Background The IRS’s approach to ruling requests for corporate transactions has changed several times over the past two decades. As discussed in the new Rev. Proc., the IRS has a general policy against issuing letter rulings on only one part of an integrated transaction. The historical predecessors to the new Rev. Proc. carved out a number of different exceptions to this policy and focused on whether parts of the larger transaction presented “significant issues.” Under Rev. Proc. 2001-3, the IRS would rule on an entire transaction if it determined that a significant issue had to be resolved. In 2009, the IRS began a pilot program for Section 355 distributions (spinoffs), and that program allowed for rulings on specific parts of larger transactions. By 2013, the IRS shifted its focus toward significant issue rulings and updated that guidance again in 2017. In 2024, however, the IRS generally ended significant issue rulings and instead permitted taxpayers to seek “comfort rulings” for certain transactions under Subchapter C.[3] For the last few years, taxpayers who have desired clarity from the IRS via issue-specific ruling requests for corporate transactions have had few to no options. The new Rev. Proc. creates a limited exception allowing the IRS to issue rulings on significant issues, although the program is narrower than its prior iterations. The new guidance only applies to ruling requests made solely under the jurisdiction of the Associate Chief Counsel (Corporate),[4] and which involve the tax consequences or characterization of a transaction, or part of a transaction, described in Sections 332, 351, 355, 368, or 1036. In other words, the program appears directed at issues arising in liquidations, formations, reorganizations, spinoffs, and related consequences, including Section 358 basis issues in connection with Section 351 exchanges. The Rev. Proc. expressly states that it “does not diminish the availability of letter rulings under existing programs.”[5] By its plain terms, the relief the Rev. Proc. offers is quite limited. We do not expect that the new Rev. Proc. will reverse the overall trend away from ruling requests or signal a greater receptiveness from other divisions of IRS Associate Chief Counsel to ruling requests. What Counts as a “Significant Issue” A significant issue, generally, is a “germane and specific issue of law.” The Rev. Proc. provides the usual limitations against both comfort rulings and rulings that are not essentially free from doubt.[6] An issue is germane if the issue’s resolution is necessary to determine the correct tax treatment of a transactional element. An issue is specific if it is the narrowest articulation of the otherwise germane issue.[7] This scope makes clear that the Rev. Proc.’s intention is to offer rulings on narrow, unresolved legal issues that affect the transaction’s tax treatment, as opposed to broad, generalized transactional comfort. The Rev. Proc. includes examples of issues the IRS thinks are appropriate for the program, including examples in which the ruling would not necessarily address the transaction’s overall treatment.[8] The Rev. Proc. notes that the IRS may also rule on issues related to the significant issue, such as the basis consequences of a nonrecognition transaction, where a significant issue is presented under a related section.[9] Before taxpayers embark upon the ruling process, they should confer with the IRS to get a sense of whether the IRS agrees that an issue is significant, germane, and specific. The way to do this is through the pre-submission conference process referenced in the Rev. Proc. (as well as in Revenue Procedures 2026-1 and 2023-26). In addition to answering the question of whether the ruling request is worth a taxpayer’s time and effort at all, the pre-submission conference is important to clarify the scope of the request. Scope and Process Any PLR issued under the new procedure will still be limited in scope. The IRS is not required to rule on the overall tax consequences of the transaction, or on any issue or transaction step not specifically addressed.[10] The IRS also retains substantial discretion under the Rev. Proc. to decline to rule where it determines that a ruling would not be in the interest of sound tax administration (including because of resource constraints), and it may rule on other issues related to the transaction, including adversely, if it believes doing so is appropriate.[11] Accordingly, taxpayers should address process considerations early. Before preparing a request, taxpayers must follow the outlined procedures to discuss whether the Office of Associate Chief Counsel (Corporate) will issue a ruling.[12] If the request concerns part of an integrated transaction, the taxpayer also must provide a representation regarding the relevant tax consequences of the integrated transaction, assuming the IRS issues the requested ruling. Taxpayers requesting rulings on a significant issue under a particular section or regulation also must represent that, to the best of their knowledge and belief, the transaction otherwise satisfies the requirements of that section or, as applicable, the relevant definitional section. Practical Implications The Rev. Proc. is a positive development for taxpayers contemplating corporate reorganizations, spin-offs, and related transactions. In many cases, taxpayers may not need a ruling on the entire transaction but may still value IRS guidance on a specific legal issue that is material to the transaction’s tax treatment. The procedure could be particularly helpful for taxpayers where published guidance does not clearly resolve a narrow legal issue, and where an IRS ruling could further support an opinion of counsel on the topic. It could also help taxpayers avoid the cost, delay, and complexity of seeking a ruling on a broader transaction when the real uncertainty concerns only one component of the transaction. The Rev. Proc. opens a door that has effectively been closed to taxpayers for some time, although only slightly. The IRS continues to face significant administrative backlogs and serious staffing shortages, and the IRS still retains substantial discretion under the Rev. Proc. to determine whether a ruling request is actually significant. In other words, in this era of resource constraints, the IRS has many reasons to keep the door closed to significant issue ruling requests, but the IRS has chosen not to do so. It is possible that the new policy will result in beneficial rulings for taxpayers, but it remains to be seen how many ruling requests the IRS will accept, how quickly rulings will be processed, and how the IRS will apply the “significant issue” standard in practice. [1] Taxpayers may request a ruling on part of an integrated transaction described in Sections 332, 351, 355, 368, or 1036. [2] References to “section” are to sections of the Internal Revenue Code. [3] “Comfort rulings” are letter rulings on issues which are already clearly and adequately addressed by statute, regulation, court decision, or authority published in the Internal Revenue Bulletin. [4] Associate Chief Counsel (Corporate) generally provides published guidance, field support, and taxpayer advice on tax matters involving corporate organizations, reorganizations, liquidations, spin-offs, transfers to controlled corporations, distributions to shareholders, debt vs. equity determinations, bankruptcies, and consolidated return issues affecting groups of affiliated corporations among other matters. [5] Rev. Proc. 2026-21, 1. [6] Id. at 7. [7] Id. [8] Id. at 6. For example, a Section 351 exchange that does not present any significant issues under Section 351 may present a significant issue regarding the application of Section 358 to the transferor in the exchange. [9] Id. at 2. [10] Id. at 7. [11] Id. at 6. [12] A request must include a narrative description of the transaction, a statement identifying the issue, an analysis of the relevant law and why existing authorities do not resolve the issue, applicable information and representations from relevant revenue procedures to the extent they relate to the significant issue, the precise ruling requested, and a statement that no rulings outside Associate Chief Counsel’s jurisdiction are requested.

On April 21, 2026, in Liberty Global, Inc. v. United States, the Tenth Circuit held that the economic substance doctrine was “relevant” and applied to deny Liberty Global, Inc. a $2.4 billion deduction and imposed a 40% penalty with respect to a transaction known as “Project Soy”. The Tenth Circuit’s decision was highly anticipated, as various courts have differed on whether a separate relevancy determination is required before the doctrine is applied to a transaction, and, if so, what that relevancy determination entails.[i] The Tenth Circuit held that, at the very least, the economic substance doctrine is “relevant” to any attempt by a taxpayer to “mechanically utilize” the provisions of the Code “to obtain a benefit not intended by Congress.” In the Tenth Circuit’s view, mere compliance with the Code is not enough to satisfy the doctrine; however, the test enunciated by the court provides limited guidance for future cases and further encourages debates about legislative intent. Uncertainty as to the proper application of the doctrine persists for taxpayers, who could face strict-liability penalties of 40% of an alleged understatement of tax in transactions which are found to lack economic substance. Background Economic Substance Doctrine As codified in section 7701(o)(1) of the Code, the economic substance doctrine applies to transactions “to which the economic substance doctrine is relevant.” The statute then contains a two-prong test: (i) the transaction must meaningfully change the taxpayer’s economic position; and (ii) the taxpayer must have a substantial non-tax business purpose for entering into the transaction. Case law differs on whether or not the prefatory language in the statute regarding relevance is a distinct element to be satisfied under the doctrine. In 2010, the Joint Committee on Taxation released guidance that the economic substance doctrine is not relevant to “basic business transactions,” though this is not part of the statutory language.[ii] See our prior blog post about the economic substance doctrine for more details about the codified doctrine and its history. Procedural History – the District Court Opinion The set of transactions at issue in Liberty Global sought to exploit a last day of the year rule/mismatch in the international tax provisions of the Tax Cuts and Jobs Act (“TCJA”). The initial litigation focused on whether the regulations pursuant to Section 245A were legitimately enacted due to lack of adherence to notice-and-comment requirements. The question of economic substance was not raised by the government until late in the summary judgment process. Deciding the issue of economic substance, the district court held that Section 7701(o) does not require a threshold relevancy inquiry, and that the economic substance doctrine is relevant whenever the two-prong statutory test is satisfied. In so holding, the district court relied on Tenth Circuit cases that did not engage in an independent relevancy analysis prior to the application of the doctrine. See our prior blog post for more detail about the district court decision. Tenth Circuit Opinion Majority The Tenth Circuit framed the question for decision narrowly as whether the economic substance doctrine was relevant to Project Soy, and if so, did Project Soy meet the requirements of the economic substance doctrine and section 7701. The Tenth Circuit concluded “yes” and “no”, respectively, but its analysis was mostly focused on rejecting two limited taxpayer counterarguments.   First, the taxpayer conceded that the first three steps of Project Soy did not have economic substance, arguing instead that the economic substance doctrine was not relevant to the transaction because it complied with the mechanical requirements of the Code. The Court rejected this argument, citing a string of cases which demonstrate that courts will not uphold transactions which “comply with the literal terms of the tax code” but which lack economic substance. Despite the opinion’s conclusion that the taxpayer sought benefits unintended by Congress, the opinion does not discuss how Project Soy failed to comply with Congressional intent under any particular provision of the Code—seemingly relying on the taxpayer’s failure to meaningfully contest the district court’s determination of Congressional intent.[iii]   Second, the taxpayer contended that the economic substance doctrine is not relevant to basic business transactions. According to the taxpayer, because the first three steps of Project Soy constituted basic business transactions, the doctrine could not apply to them. The Tenth Circuit concluded that Project Soy must be analyzed as a whole, and as such was a complex tax-structuring transaction and not a “basic business transaction” that might be excluded from the economic substance analysis. The Tenth Circuit held that the relevancy question was a “red herring” in this case, in part because the Court read the district court’s opinion as imposing a relevancy requirement, contrary to the interpretation offered by the taxpayer.[iv] The Court held the economic substance doctrine was clearly relevant to Project Soy. The Tenth Circuit did acknowledge that the doctrine was irrelevant to certain economically meaningless transactions, such as DISC transactions, but did not significantly elaborate on the scope of this potential rule.[v] Dissent The dissent analyzed historical case law and the statutory text to find that section 7701(o) requires a threshold relevancy analysis.  The dissent would have found that the economic substance doctrine is not applicable “when economic reality and taxpayer motive are not relevant to the statutory text.”[vi] The dissent concluded that the tax benefits from Project Soy arose from the interlocking application of seven different Code provisions and resulted in “actual gain” from the sale of the controlled foreign corporation (“CFC”) at issue.[vii]  The dissent characterized the remaining elements of Project Soy as permissible taxpayer decisions relating to how and when the gain from the sale of the CFC would be recognized under the relevant statutes, and concluded that these decisions did not implicate the economic substance doctrine.[viii]   Analysis As the majority opinion describes it, Project Soy was not a “basic business transaction” because it “was a tightly integrated series of transactions that took place over a short, four-day period for the specific purpose of taking advantage of an unintended ‘mismatch’ in the international tax provisions of the TCJA.” In other words, the taxpayer in this case structured a convoluted transaction to generate a deduction that the literal words of the statute permitted, but the taxpayer could not support the transaction by citing any specific tax policy or legislative history that could justify it. The majority opinion states the following principle, in interpreting the requirement of relevance in the statute: “[t]he economic substance doctrine codified in § 7701(o) is relevant to attempts by taxpayers to mechanically utilize the provisions of the Tax Code to obtain a benefit not intended by Congress.” That statement, however, must be viewed through the lens of the Project Soy transaction that the Court reviewed, and may become difficult to apply beyond this case. This is because Project Soy itself had several steps which would otherwise qualify as “basic business transactions,” but which, when taken as a whole, failed to meet standards for economic substance. There are numerous other instances in the Code where Congress clearly intended rules to apply mechanically even when economic justifications for the transactions are limited or nonexistent. The Tenth Circuit’s framing of the issue, focusing on whether the benefit was intended by Congress, seems to exclude application of the doctrine to those situations: the majority’s citation to Summa Holdings and DISC transactions seems to suggest that this is where “relevance” plays a role. However, the majority mostly avoided the question as to how to determine whether particular tax results are really within the Congressional intent—relying on the district court’s analysis of Congressional intent and combined with the taxpayer’s general failure to contest this analysis on appeal.   As such, application of the majority’s test to other Code provisions or other transactions is unclear. In short, the Tenth Circuit opinion stands for a few propositions: first, that a “tightly integrated” series of transactions taking place over a short period of time needs to be tested as a whole against the economic substance doctrine (and that it is improper to break individual steps apart and approve of them as “basic business transactions”); and second, that the economic substance doctrine is relevant at the very least where tax benefits are claimed in situations inconsistent with Congressional intent.  The Tenth Circuit opinion is not so clear, however, on applying its analysis beyond its facts. Conclusion Although this opinion was highly anticipated in the tax community, the Tenth Circuit provided little guidance that could be applied beyond the confines of the reviewed transaction. Despite the Tenth Circuit being sympathetic, in principle, with the existence of a relevance threshold, it does not provide much clarity about how such relevance determination should be made in other, future cases, particularly where other elements of the doctrine are contested. Courts will continue to grapple with this question in the future. For taxpayers, application of the economic substance doctrine remains uncertain. [i] No. 23-1410, affirming the U.S. District Court for the District of Colorado. The district court in Liberty Global found that the relevancy inquiry was essentially coterminous with the other elements of the statute. In contrast, in Patel v. Commissioner, the Tax Court held that a separate relevancy determination is a threshold requirement prior to the application of the economic substance doctrine. [ii] It is worth reviewing the relevant passages of the Joint Committee Report: The provision is not intended to alter the tax treatment of certain basic business transactions that, under longstanding judicial and administrative practice are respected, merely because the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages. Among these basic transactions are (1) the choice between capitalizing a business enterprise with debt or equity; (2) a U.S. person’s choice between utilizing a foreign corporation or a domestic corporation to make a foreign investment; (3) the choice to enter a transaction or series of transactions that constitute a corporate organization or reorganization under subchapter C; and (4) the choice to utilize a related-party entity in a transaction, provided that the arm’s length standard of section 482 and other applicable concepts are satisfied. Leasing transactions, like all other types of transactions, will continue to be analyzed in light of all the facts and circumstances. As under present law, whether a particular transaction meets the requirements for specific treatment under any of these provisions is a question of facts and circumstances. Also, the fact that a transaction meets the requirements for specific treatment under any provision of the Code is not determinative of whether a transaction or series of transactions of which it is a part has economic substance. The provision does not alter the court’s ability to aggregate, disaggregate, or otherwise recharacterize a transaction when applying the doctrine. For example, the provision reiterates the present-law ability of the courts to bifurcate a transaction in which independent activities with non-tax objectives are combined with an unrelated item having only tax-avoidance objectives in order to disallow those tax-motivated benefits. [P.L. 111-152; JCX-18-10]. Internal citations above have been omitted, but each of the examples are supported by at least one citation (and in many instances multiple citations) to cases decided by the U.S. Supreme Court, U.S. Tax Court, and federal district courts and appellate courts. The report further stated that enactment of the codified economic substance doctrine “does not change present law standards in determining when to utilize an economic substance analysis.” [iii] Liberty Global, No. 23-1410 at n.2. [iv] Liberty Global, No. 23-1410 at n.6 (“In the context of this case, the issue is a red herring. Ultimately, the district court concluded the doctrine was relevant because Project Soy was an attempt by LGI to mechanically utilize the provisions of the TCJA to obtain a benefit not intended by Congress. . . . This understanding of the relevance of the doctrine is entirely consistent with extant precedent.”) [v]Liberty Global, No. 23-1410 at n.10. [vi] Liberty Global, No. 23-1410, Eid, J., dissenting, at 12. [vii] Id. at 17. [viii] Id. at 18-19.

The Court of Appeal has confirmed in HMRC v M R Currell Ltd that, prior to the introduction of the disguised remuneration rules, a genuine and repayable loan made via an employee benefit trust (EBT) is not taxable as employment income. Although the decision relates to a pre-Part 7A regime, EBT arrangements continue to present complex and often contentious issues in practice – particularly in the context of historic planning and transactions. The case underlines the importance of careful, fact-specific analysis in this area. Part 7A (the “disguised remuneration rules”) was introduced to counter arrangements which seek to provide employees with rewards or benefits through third parties – such as EBTs – in a way that avoids income tax and NICs. Broadly, it imposes an income tax charge where funds or assets are made available to employees through such structures, even if not provided as salary. In a case such as Currell, where funds were routed through an EBT and made available by way of a loan, Part 7A would now typically impose a tax charge at that point. Background A company (MRCL) contributed £800,000 to an EBT, which then loaned the funds to its principal shareholder and director (MC). The loan was fully repayable, secured, and accepted to be genuine. MC used the funds for personal purposes, with the wider arrangement recycling funds back into the company. HMRC argued that the arrangement was, in substance, remuneration and should be subject to PAYE and NICs. The Court of Appeal disagreed. Court of Appeal decision The Court emphasised that the reason a payment is made does not determine its tax treatment. The key question is whether the payment itself constitutes earnings. A loan made to an employee by reason of their employment is not, in itself, taxable as remuneration where it is a genuine loan subject to a real and enforceable obligation to repay. The Court also declined to extend the Rangers decision (which concerned payments made through employee benefit trusts) into a broader principle that any payment connected with employment is taxable. On the facts, the loan was genuine, secured, and repayable. There was therefore no basis for treating it as earnings. The Court noted that, although the arrangements enabled MC to access funds in a tax-efficient manner, this did not justify recharacterising the loan as employment income. It also observed that such arrangements would now likely fall within the disguised remuneration rules, and cautioned against applying the spirit of those rules to earlier periods. Why this matters For historic arrangements, the decision confirms that genuine, enforceable EBT loans may fall outside PAYE and NICs. However, the outcome is highly fact-specific and will depend on whether there is a real repayment obligation with legal effect. For current structures, Part 7A will typically counter similar arrangements by imposing a tax charge when funds are made available through an EBT. Legacy EBT arrangements remain an area of HMRC focus and can give rise to complex issues, particularly in transactions and historic planning. In short, Currell confirms that, before the introduction of Part 7A, a genuine loan could not be recharacterised as earnings simply because it was connected with employment or delivered a tax advantage. Given the continued complexity and HMRC focus in this area, businesses dealing with EBT arrangements – particularly in a transactional or historic context – should take advice on their specific position.

The Court of Appeal has confirmed in Burlington Loan Management DAC v HMRC that “obtaining the benefit of” a tax treaty is not the same as “taking advantage of” it. The treaty anti-abuse rule will only apply where the taxpayer seeks to obtain that benefit in a way that is contrary to the object and purpose of the treaty. This is a helpful decision for taxpayers and their advisers, particularly in cross-border financing arrangements where treaty relief is an important consideration. The specific issue before the Court was whether Article 12(1) of the UK–Ireland DTT could apply to exempt an Irish resident’s receipt of interest, or whether the anti-abuse provision in Article 12(5) applied to disapply that exemption where one of the main purposes of the relevant arrangements was “to take advantage of” Article 12(1). An Irish-resident company (BLM) was assigned by a Cayman-resident company (SICL) a debt receivable payable by a UK resident company. The principal had already been repaid, so BLM acquired only the right to future interest payments, which would ordinarily have been subject to UK withholding tax. BLM expected to obtain treaty relief and priced the transaction accordingly. HMRC argued that Article 12(5) should apply because the transaction was only commercially viable as a result of the anticipated treaty benefit, such that obtaining that benefit must have been at least one of BLM’s main purposes. The Court held that “to take advantage of” a provision such as Article 12(1) cannot simply mean obtaining its benefit. To interpret it in that way would undermine the purpose of the treaty. Rather, it requires obtaining that benefit in a manner that conflicts with the treaty’s object and purpose. The Court found that BLM’s reliance on Article 12(1) was consistent with the treaty’s aims, including the elimination of double taxation and the facilitation of cross-border investment. Article 12(1) reflects the UK’s agreement that interest beneficially owned by an Irish resident should be taxed only in Ireland, and BLM was entitled to structure its affairs on that basis. A key aspect of the judgment is the distinction between motive and purpose. The Court explained that motive concerns the broader reasons why a transaction is attractive (including tax outcomes), whereas purpose concerns the objective the taxpayer seeks to achieve. Identifying a “main purpose” therefore requires examining the taxpayer’s intentions, not simply the economic drivers of the transaction. The Court found that although SICL was motivated by the disadvantage of irrecoverable withholding tax, it did not have the specific purpose of taking advantage of Article 12(1). Tax formed part of the commercial background, but there was no treaty-focused purpose. As for BLM, the Court accepted that the expected availability of treaty relief was economically important and may have formed part of its purpose. However, Article 12(5) would only apply where that purpose involved obtaining the benefit in a way that is contrary to the treaty’s object and purpose. The Court therefore distinguished between a purpose of obtaining a benefit that the treaty is intended to confer, and a purpose of exploiting the treaty in a way that is inconsistent with its aims. Why this matters The decision provides useful clarification on the scope of treaty anti-abuse rules: Taxpayers may take treaty benefits into account when structuring transactions without this, in itself, triggering anti-abuse provisions. A transaction does not become abusive simply because it is commercially viable only as a result of the expected tax treatment. The key question is whether the arrangement is consistent with the object and purpose of the treaty, not whether tax was an important factor. The Court did also confirm that anti-abuse rules are not limited to artificial arrangements, and in that context careful analysis of purpose remains important. In summary, Burlington confirms that a taxpayer may be motivated by, and even intend to obtain, a treaty benefit. However, the anti-abuse rule will only apply where one of the main purposes is to obtain that benefit in a way that is contrary to the treaty’s object and purpose.

Update: The National Taxpayer Advocate has published a blog post urging taxpayers to evaluate whether they have claims for refund based on the recent Abdo and Kwong decisions. Importantly, the Taxpayer Advocate suggests that the argument for penalty and interest relief based on the COVID pandemic disaster declarations is substantial enough to warrant providing for additional time for claims thereunder to be filed. While the decision in Kwong is still being litigated, the IRS should raise awareness about taxpayers’ rights to a refund and provide an additional six months for them to file a claim, Collins said. “That would give taxpayers more time to learn about the issue, reduce the risk of unintentionally losing their rights, and promote fair and consistent treatment,” she wrote. Read our original blog post here.

On March 19, 2026, in Jones Bluff, LLC v. Commissioner, 166 T.C. No. 6 (2026), the Tax Court held that a partnership could not assert due process claims to invalidate an IRS adjustment on behalf of its partners under the Bipartisan Budget Act of 2015 (the “BBA”) regime. The decision does not rule on whether any particular aspect of the BBA is consistent with the Due Process Clause of the U.S. Constitution, but it does provide guidance on how due process claims would be received in the future – in particular, how a proceeding under the BBA procedures likely will not be an avenue for bringing a due process claim. Background Under the prior Tax Equity and Fiscal Responsibility Act (“TEFRA”) regime, partnership items were determined at the partnership level, but tax was generally assessed and collected at the partner level; in addition, certain partners had rights to notice and participation in administrative and judicial proceedings as parties to those proceedings.[1] In 2015, the BBA replaced TEFRA.[2] By contrast, the BBA centralizes audit, adjustment, and collection at the partnership level and vests exclusive authority in the partnership representative, whose actions bind all partners.[3] Individual partners are not entitled to participate directly in partnership-level proceedings and generally cannot initiate litigation with respect to partnership adjustments.[4] Under many circumstances, the partnership representative may elect to “push out” the final tax liabilities from a BBA audit so that they become the direct obligations of the partners rather than the partnership.[5] The Case This case arose after a limited liability company that is treated as a partnership[6] for tax purposes claimed a charitable contribution deduction for a conservation easement under section 170.[7] The IRS issued a Notice of Final Partnership Adjustment (“FPA”), disallowing the deduction and asserting tax and penalties on the partnership.[8] The partnership argued that the BBA audit regime violates the individual partners’ due process rights under the Fifth Amendment because it does not provide them with notice or an opportunity to be heard before they are economically affected by partnership-level determinations.[9] The Tax Court disagreed. Although the Tax Court found that the partnership could, in theory, raise a due process claim on its own behalf, it found that the partnership lacked standing to raise the rights of its partners. The Tax Court reasoned that third-party standing was generally disfavored, and the fact that the partners may be able to raise their own constitutional claims in subsequent refund or collection proceedings was enough to deny third-party standing here.[10] The Tax Court also concluded that the claims were not ripe under Article III of the U.S. Constitution.[11] Any alleged injury to the partners was contingent on future events, including whether the partnership ultimately elects to push out or otherwise pass through the liability to its partners. The Tax Court reasoned that because those events had not yet occurred, the constitutional challenge was premature.[12] Practical Implications The most direct consequence of Jones Bluff is that partner-specific due process challenges to partnership BBA proceedings will be very difficult to bring. Jones Bluff concludes that these challenges simply cannot be brought in the partnership-level BBA proceeding. Although the Tax Court did suggest some alternative processes for partners (such as partner-level refund actions, or bringing claims during collection proceedings), it pointedly did not say that these processes would actually be available; the Tax Court only stated that these processes “may” or “might” be available to partners to bring due process claims. This limited language does not provide much certainty to any partner who may want to bring a due process challenge. Additionally, the concurrence (representing three judges on the Tax Court) suggests that there would be no viable due process claim at all, as it references and relies upon prior case law affirming the validity of the TEFRA process even as to non-notice partners (and considers these authorities relevant in interpreting the BBA).[13] [1] IRC § 6223. [2] See generally BBA § 1101, 129 Stat. at 625. [3] IRC § 6223(a). [4] The Tax Court had previously ruled in Blonien v. Commissioner, 118 T.C. 541 (2002) that the TEFRA provisions limiting the notice and participation rights of individual partners “normally satisfy the requirements of due process because the tax matters partner, who receives notice and has the right to petition the Tax Court to reconsider the FPAA, acts as the agent for the other partners.” [5] See IRC § 6226(a). [6] The limited liability company and its members are hereinafter referred to as “the partnership” and “the partners.” [7] References to section are to the Internal Revenue Code. [8] Jones Bluff, LLC v. Commissioner, 166 T.C. No. 6 (2026). [9] Id. at 2. [10] Id. at 6. [11] Id. at 7. [12] Id. at 6. [13] Id. at 8.

Many of our clients and readers will be familiar with the “loan to participator” rules. These rules apply to loans made by close companies, which in general terms are companies which are controlled by five or fewer participators (or by any number of participators who are also shareholders), to their participators. The word “participator” includes shareholders and other holders of certain interests, including some creditors. Companies with private capital investment are often close because partners in a partnership can be treated as connected with each other for these purposes. Where the loan to participator rules apply, a tax charge of 33.75% (increasing to 35.75% from 6 April 2026) arises when the loan in question remains outstanding more than 9 months after the end of the accounting period in which the loan was made. Although the tax charge is refundable when the loan is released or written off, these rules can cause significant cash flow issues for impacted businesses, and writing off loans can also trigger income tax charges for the borrowers concerned. The UK government has now launched a consultation on proposals to require close companies to report payments made to and other transactions involving their participators. The proposals form part of HMRC’s wider efforts to modernise tax administration and close the tax gap in respect of smaller businesses. Scope of the consultation There is currently no specific reporting regime for close company transactions, with transactions instead being disclosable as part of ordinary course corporation tax reporting. This consultation, first announced as part of the Autumn 2025 Budget, seeks views on a specific reporting regime for loans to participators and certain other transactions between close companies and their participators, including: sales and purchases of assets between the company and participators; dividends or other distributions; and other payments and other transfers of value. The consultation additionallyconsiders whether further information should be reportable in connection with loan to participator tax reclaims, which may require companies to provide further detail on the timing and amounts of any loan repayments, releases and write offs. Key considerations While still at an early stage, a number of points will be particularly relevant for close companies: Scope of application: the consultation does not specify how broadly the regime will apply, and seeks views on the scope of reportable transactions and any potential exclusions, as well as the method and frequency of reporting requirements. Compliance framework: HMRC currently expect that the normal corporation tax penalty regime will apply to reporting errors or omissions but is considering whether specific penalties will apply. Administrative impact: in practice, companies may need to implement systems and processes to identify, track and report participator transactions, although those well-advised will already be doing so. Next steps The consultation is open for responses until 10 June 2026, with draft legislation expected following stakeholder feedback. We will keep clients and readers informed of future developments.