In Liberty Global Inc. v. Commissioner, 161 T.C. ___ No. 10 (11/8/23), GS here, the Court held against the taxpayer on its claims based the Overall Foreign Loss (“OFL”) provisions of the Code. Judge Toro does a nice job of explaining the provisions (with some easy (relatively) to understand examples, so I won’t attempt to here).
I post the case here because I have related cases which involved tax procedure issues. Given the amounts involved discussed in the Tax Court case, it is not surprising that Liberty Global left no stone unturned to avoid the result the Tax Court now delivered. The prior postings are (in reverse chronological order):
- Liberty Global Court Holds that Government May Proceed by Collection Suit without a Notice of Deficiency (Federal Tax Procedure Blog8/13/23), here.
- Further Commotion in Liberty Global Collection Suit Over Whether a Notice of Deficiency Is Required Before Collection Suit (Federal Tax Procedure Blog1/16/23; 1/19/23), here.
- Government Files Collection Suit in Liberty Global Raising Procedural Issues (Federal Tax Procedure Blog 10/8/22; 10/12/22), here.
- Court Invalidates Regulation for Invalidity of Good Cause Statement (Federal Tax Procedure Blog 4/6/22), here.
JAT Comments:
1. The taxpayer reported the transaction on 2010 return Schedule UTP (Form 1120), Uncertain Tax Position Statement as follows (Slip Op. 5):
[Liberty Global] entered into a transaction to sell its entire interest in its Japanese subsidiary, [J:COM], during the year. [Liberty Global] recognized a gain on the sale and due to recharacterization of the gain also recognized deemed section 902 credits as part of the overall transaction. The issues are the application of the rules under section 904 to the transaction and whether the amount of the foreign tax credit taken as a result of the transaction is appropriate.
I presume that the disclosure got the IRS’s attention. At least in this case UTP worked.
Added 3/9/24 9:00 pm: The UTP disclosure apparently avoided the IRS assertion of a penalty. For a good discussion of this case, see Lee A. Sheppard, Foreign Tax Credit Recapture and Schedule UTP, 113 Tax Notes Int'l 421 (1/22/24).
2. On the merits, of one of Liberty Global’s claims, the Court notes (Slip Op. 13):
Notably, Liberty Global makes no attempt to explain why, in a rule that it agrees was adopted “to prevent a taxpayer from offsetting U.S.-source income in one year, then claiming foreign tax credits on positive foreign-source income in a subsequent year,” Pet’r’s Opening Br. 9–10, Congress would have provided for either one of these rather remarkable results. Indeed, it seems to acknowledge the absence of any potential rationale in its briefing. Pet’r’s Opening Br. 23 (“[Liberty Global] acknowledges that this results in no tax on approximately $2.8 billion of income that would otherwise be taxed under other provisions of the Code. . . . However, ‘the best evidence of Congress’s intent is the statutory text.’” (quoting Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 544 (2012))). The Court agrees that policy arguments cannot override clear text. See United States ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391, 1404 (2023) (“Nor do we need to address any of the parties’ policy arguments, which ‘cannot supersede the clear statutory text.’” (quoting Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 U.S. 176, 192 (2016))). But we disagree with Liberty Global’s reading of the text.
So, Liberty Global had neither technical arguments (text) nor policy in its favor. Of course, in terms of taxpayer-favorable venue choices, that phenomenon did not bode well in the Tax Court. [Revised 3/9/24 9:00 pm: I have deleted a sentence because it confused this case with Liberty Global's Colorado District Court cases involving a different tax gambit in a later year.}
3. The Tax Court notes (Slip. Op. 20-21) that Liberty Global’s “preferred reading” of the regulations would create a conflict between the statute and the regulation, and invokes the interpretive strategy to avoid the conflict. “Because the statute applies only to amounts necessary to recapture an OFL balance, Liberty Global’s reading of the regulation is directly at odds with the statutory text.” I am not sure why exactly, Liberty Global chose to litigate in the Tax Court. [Revised 3/9/24 9:00 pm: I deleted the concluding part of the last sentence.]
4. Added 3/9/24 9:00 pm: As originally written, I confused the Tax Court case with the Colorado District Court case discussed in the prior blog entries linked above. The Tax Court case involved an earlier year year and a different aggressive tax gambit than the Colorado District Court cases. Both choices of venue proved to be ineffective for the aggressive tax strategies. Hence, the lesson is really that for bad tax strategies that exude an odor piscatorial, neither forum may be very good. Perhaps the CFC would be the best forum because of the phenomenon that my friend Professor Ira Shepard observed that the CFC might issue opinions that the Tax Court or a District Court would not in aid of its jurisdiction (to encourage taxpayers to litigate there).
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