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).

Schedule UTP and Penalties (9/21/13)

Lee Sheppard has an interesting article on privileges addressing issues in Wells Fargo & Company v. United States, 2013 U.S. Dist. LEXIS 78714 (D MN 2013).  See Lee A. Sheppard, The New Look of Privilege, 140 Tax Notes 1159 (Sept. 16, 2013).  Wells Fargo is a lengthy opinion with extensive analysis of privileges for Uncertain Tax Positions and tax accrual workpapers.  I do not link the opinion here or otherwise discuss it  because it is not relevant to the subject of this blog entry.

Addressing the Schedule UTP, Lee says in the article:

There is no penalty for failure to file a complete or accurate Schedule UTP. Indeed, there is no penalty for failure to file a complete return, as the IRS discovered during the offshore account imbroglio. There is a statutory penalty for failure to file a return at all (section 6651).

I want to address that statement, but first briefly describe the Schedule UTP.  See the IRS website for the Schedule UTP Form 1120, here.  The instructions provide:

Reporting Uncertain Tax Positions on Schedule UTP 

Tax positions to be reported.   

Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which two conditions are satisfied. 

1. The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year. 

2. Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. 

A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP).

I want to question Lee's statement quote above.  As to a direct penalty for failure to file a complete or accurate Schedule UTP, this is the jurat for the Form 1120, corporate return: