Report: After A Deloitte Client’s $2.4B Tax Dodge Faltered, The Accounting Giant Won’t Say If It Helped Others Exploit The Same Loophole

ICIJ reviewed hundreds of pages of court records to examine the Big Four firm’s role in a controversial tax maneuver, which one expert labeled “easily replicable.”

Courtesy: International Consortium Of Investigative Journalists(ICIJ)

Late last year, the Internal Revenue Service notched a significant win in its fight against high-end tax dodging when a federal judge in Colorado upheld the agency’s challenge to a $2.4 billion tax deduction claimed by Liberty Global, a multinational telecommunications firm. The case, which centered on a complex offshore tax maneuver that generated the huge write-off for the corporation, was described by one industry observer as the “worst nightmare for tax planners” who seek out vulnerabilities in federal tax law. Yet the role of Liberty Global’s own tax advisor — the accounting giant Deloitte — has received little scrutiny, despite U.S. authorities describing the firm as playing a key role in designing the scheme.

Liberty Global’s controversial tax maneuver, code-named “Project Soy,” shuffled assets between the firm’s companies in countries such as Belgium, the Netherlands and Slovakia in order to exploit a loophole in a landmark Trump-era tax law, according to court filings. The Justice Department asserted that Deloitte had approached Liberty Global with the original idea for Project Soy, a claim Liberty Global has denied in multiple court filings.

If Deloitte did market the loophole, as the Justice Department suggested, it could add to a rich history of Big Four accounting firms selling their well-heeled clients on complex and aggressive ways to avoid tax. It would also raise questions about whether other multinationals received the same advice as Liberty Global — and whether additional challenges could be coming.

"Sophisticated And ggressive":

ICIJ reviewed hundreds of pages of court records from the two disputes that center on Project Soy to examine Deloitte’s role in the controversy. However, details of the collaboration remain scarce and, in some instances, incomplete due to withheld or lacking records. According to court filings, Liberty Global refused to provide the Justice Department its initial correspondences with Deloitte about Project Soy, claiming they were privileged, and then produced no records from a key meeting about the project with seven Deloitte employees and executives.

"It’s sophisticated and aggressive, but it’s easily replicable. The vast majority of American multinationals could have benefited from this"—Tax law expert Reuven Avi-Yonah

Deloitte did not respond to ICIJ’s repeated questions about whether it advised other clients on the same type of tax maneuver that landed Liberty Global in court. Several Deloitte tax advisors named in the court records as having worked on Project Soy declined to comment or did not respond to questions from ICIJ about how widely the loophole was used.

“I think it’s quite likely this was used by other firms as well,” Reuven Avi-Yonah, a tax law professor at the University of Michigan said of the tax maneuver after reviewing the case. “It’s sophisticated and aggressive, but it’s easily replicable. The vast majority of American multinationals could have benefited from this.” Avi-Yonah added that many firms may have shied away from the maneuver due to fears of it being challenged by the IRS.

Designing ‘Project Soy’:

Liberty Global’s chairman John C. Malone is listed by Bloomberg as the second largest private landowner in the U.S., holding some two million acres across the country. Forbes estimates Malone’s net worth at roughly $9.8 billion. Malone has a history of deploying creative strategies to avoid tax, according to a 2014 story from Bloomberg News, which reported on a massive tax dodge from more than a decade ago that saved Liberty Global’s U.S. shareholders a billion dollars in taxes and saved Malone $200 million on his personal tax bill.

Deloitte has worked with Liberty Global on tax and other matters for years. The court filings provide conflicting accounts of how Deloitte became involved in Project Soy. Although Liberty Global told the Justice Department that its tax department came up with the tax maneuver before seeking Deloitte’s help, the telecom firm also said it could find no records of the plan existing prior to communicating with Deloitte on June 20, 2018 — the first day it discussed the series of transactions with the accounting giant.

Avi-Yonah said that because Liberty Global’s transactions were highly sophisticated, he would expect to see a paper trail of planning even in the early stages unless there was an intentional effort to avoid record-keeping. “If you’re going to engage in something you know might be challenged, it makes sense to try to avoid having discoverable material,” Avi-Yonah said. “Things you write down can become available to the IRS.”

Citing attorney-client privilege, Liberty Global withheld its June 20 correspondences with Deloitte from the Justice Department. The firm also said it produced no written notes or minutes from a July 2018 meeting with Deloitte that kicked off the Project Soy plan, according to a 2022 filing. Seven senior Deloitte tax advisors, including a director of national tax at Deloitte, a “tax principal” at the firm, and Deloitte tax officials in the U.K. and Belgium attended the meeting. (In a March 2023 hearing, a Justice Department lawyer indicated that the government also requested documents relating to the case directly from Deloitte.)

By December 2018, the plan had advanced to the point where a top Liberty Global executive spoke with Malone and then gave the green light to “execute on Project Soy,” according to the deposition of a tax executive at Liberty Global. In 2020, Liberty Global sued the government for a $110 million tax refund. The massive refund request was all the result of Project Soy, which the Justice Department alleges exploited a loophole inadvertently included in Donald Trump’s Tax Cuts and Jobs Act of 2017.

The two sides have been litigating the claim since. The IRS argued that the tax maneuver violated the so-called “economic substance doctrine” — a 2010 law meant to combat sophisticated tax shelters. The law prohibits shifting money around for the sole purpose of avoiding taxes and is considered a potentially powerful tool to take on the complex transactions involving shell companies, sham trusts and dubious intercompany loans that the rich use to avoid billions in taxes each year.

Last October, a federal judge in Colorado sided with the IRS, denying Liberty Global the massive refund it had requested and asserting that “it appears that the only substantial purpose of the transaction was tax evasion.” The related case, in which the IRS is seeking not only unpaid taxes but also civil penalties from Liberty Global related to Project Soy, remains pending in the same Colorado federal court. Liberty Global maintains that its tax reporting in connection with the case was correct.

A New Era Of Enforcement:

Deloitte has not been accused of any wrongdoing in the Liberty Global case, but its key role in the controversial tax maneuver is repeatedly discussed in the court records, and fits a pattern of prior work for its wealthy clients.

In the early 2000s, Deloitte reportedly formed a team informally called the “Predator Group,” according to Forbes, that would “pitch aggressive tax transactions to large businesses and wealthy individuals.” Last year, as part of its Cyprus Confidential investigation, ICIJ reported extensively on the activities of a Cypriot corporate services firm called MeritServus, which was founded by a former Deloitte partner and sometimes worked in tandem with the accounting giant. MeritServus is now sanctioned by U.K. authorities who accused its founder of “crafting the murky offshore structures” to hide the wealth of politically connected Russian billionaire Roman Abramovich.

For years ICIJ has reported on the dealings of the Big Four accounting firms. The 2014 Lux Leaks investigation revealed the secretive and complex tax strategies involving webs of Luxembourg shell companies that Ernst & Young crafted for its corporate clients. ICIJ’s Paradise Papers investigation showed Deloitte and PwC’s role in an aggressive tax scheme by an American private equity firm in the U.K. ICIJ’s subsequent Cyprus Confidential investigation showed PwC’s role in helping Russian elites rapidly shift assets between shell companies as sanctions loomed after Russia’s 2022 invasion of Ukraine.

Because they design complex offshore tax arrangements, the Big Four took notice when the U.S. Congress passed the 2010 law taking aim at these kinds of schemes — and took steps to shield themselves from its impact.

In August, an investigation by ICIJ showed how in 2011, after coming under pressure from the industries that help wealthy people and corporations avoid taxes, the IRS’s Large Business and International Division, or LB&I, issued a directive that blocked agents from using the economic substance doctrine.

Industry players cheered the directive for placing near-insurmountable hurdles in the way of IRS agents seeking to use the new law. But in April of 2022 — after receiving an extensive complaint from an IRS whistleblower over the restrictions — the IRS reversed course. The agency replaced the strict directive with a more permissive set of rules that give its agents greater discretion to use the 2010 law.

This shift came as the IRS seeks to take a stronger stance toward enforcement of tax laws on the ultrawealthy. This year, the IRS announced an initiative to tackle tax abuse in investment partnerships, which have become a favorite means for the wealthiest Americans to avoid taxes.

The Liberty Global dispute is seen as an important early test case of the IRS’s use of the 2010 law to help accomplish this difficult task. The IRS has argued, so far successfully, that Project Soy had no business purpose other than to avoid tax. Liberty Global is appealing the 2023 decision, and experts say the result of this appeal could have major consequences for how the IRS uses the doctrine moving forward.

Citing the pending litigation, Liberty Global declined to comment on this story.