Liberty Global Confirms the Saying that, for Forum Choice, Taxpayers Should Avoid the Tax Court When Claims Lack Technical Merit (12/1/23; 3/9/24)

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).

Revision to Texts on Tax Shelters and Case Assignment (9/24/15)

I have assigned in Unit/Class 10 the following case (trial and appellate level opinions):  Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).   I have revised the text on p. 544 of the student edition and p. 783 of the practitioner edition as follows:

Eliminate the last four sentences (beginning The Compaq case) in the carryover paragraph to p. 544 of the student edition in the paragraph beginning "Tax shelters are" of the practitioner edition.  After that elimination add the following paragraph as a new paragraph:

A good example of a classic tax shelter is Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002).  Please read both the Tax Court and the Appellate opinions now.  In net, a classic abusive tax feature present in the case is that, except for the benefit of the foreign tax credit for foreign taxes paid that Compaq did not bear the economic burden, the deal was a money-loser.  The Tax Court viewed the transaction as abusive and imposed penalties; the Fifth Circuit blessed the transaction.  It was a tax shelter; it was just a tax shelter that, at least the appellate court, believed – or at least held, regardless of what it believed – was legal and not abusive.  Both the Tax Court and the Fifth Circuit are good courts, with good judges having radically different views of what is an abusive tax shelter and where to draw the line.  (Note the Fifth Circuit’s opinion, however, has not worn well with time.)

For practitioners, the only footnote in the paragraph is at the end to support the statement that the Fifth Circuit decision has not worn well with time.  The footnote is:

fn E.g., Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015) (“In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively));” Lee A. Sheppard, The Fun Goes Out of Foreign Tax Credit Planning, 148 Tax Notes 1283 (Sept. 21, 2015) (hyperbolically, as is her wont, “The Second Circuit essentially reversed the Compaq and IES decisions.”)