Tenth Circuit affirms IRS in Liberty Global foreign tax credit dispute
Liberty Global, Inc. v. Commissioner, No. 24-9004, 2025 BL 298335 (10th Cir. Aug. 22, 2025), Court Opinion
On August 22, 2025, the U.S. Court of Appeals for the Tenth Circuit affirmed a Tax Court decision in Liberty Global, Inc. v. Commissioner, holding that Liberty Global could not treat the bulk of its gain from a 2010 sale of Japanese stock as foreign-source income for foreign tax credit purposes.
The court read the statute to source only the portion needed to recapture Liberty Global’s overall foreign loss, with the remaining gain sourced to the United States, eliminating the claimed $240 million credit.
Why It Matters
The ruling applies the foreign loss recapture rules in section 904(f) and the general sourcing rule in section 865 to large stock dispositions by U.S. multinationals. It reinforces that section 904(f)(3) deems foreign-source income only up to the overall foreign loss balance, and that excess gain remains subject to the default U.S. sourcing rule.
Key Facts
Parties: Liberty Global, Inc. (petitioner-appellant) vs. Commissioner of Internal Revenue (respondent-appellee).
Court: U.S. Court of Appeals for the Tenth Circuit, appeal from the U.S. Tax Court (CIR No. 341-21).
Transaction: In February 2010, Liberty Global sold its controlling stake in Jupiter Telecommunications (J:COM), a Japanese company, for about $3.9 billion, realizing a gain of about $3.2 billion.
Return positions:
About $438 million is characterized as a foreign-source dividend under section 1248.
About $2.8 billion was treated as foreign-source capital gain, of which about $474 million was re-sourced to U.S. income to recapture overall foreign loss, leaving about $2.3 billion as foreign-source capital gain.
IRS determination: The Commissioner issued a notice of deficiency contending the excess $2.3 billion was U.S.-source under section 865(a), so Liberty Global had no foreign-source income available to support the $240 million foreign tax credit.
Core legal question: Whether section 904(f)(3)(A)(i)’s “notwithstanding” clause sources the entire stock-sale gain as foreign, beyond the amount needed to recapture overall foreign loss.
Timeline
February 2010: Liberty Global sells its J:COM interest, recognizing about $3.2 billion of gain.
2010: Liberty Global files its return reflecting the dividend and gain sourcing positions and claims a foreign tax credit of about $240 million.
After filing, the IRS issues a notice of deficiency disallowing the credit based on the excess gain's U.S. sourcing.
Tax Court: Liberty Global challenges the notice on a stipulated record; the Tax Court agrees with the IRS.
August 22, 2025: The Tenth Circuit affirms the Tax Court’s decision in No. 24-9004.
Court Findings
Section 904(f)(3)(A)(i) deems foreign-source income from a disposition only up to “the lesser of” the gain or the remaining overall foreign loss, for purposes of recapture.
The statute is silent on the source of any gain that exceeds the overall foreign loss balance.
In the absence of a conflict, the “notwithstanding any other provision of this chapter” language does not displace background rules.
Section 865(a) supplies the background sourcing rule for personal property sales. For a U.S. resident seller, excess gain is U.S.-source.
Treasury regulations cannot expand section 904(f)(3) beyond its text and must be read in harmony with the statute. The regulation’s reference to “gain” treated as foreign-source is limited to the amount recognized under section 904(f)(3)(A)(i).
Applying these rules, Liberty Global’s excess stock-sale gain above the overall foreign loss balance is U.S.-source and cannot support the foreign tax credit claimed.
Judgment Details
Sale proceeds: About $3.9 billion from the 2010 J:COM stock sale.
Recognized gain: About $3.2 billion.
Characterization reported by Liberty Global:
About $438 million as a foreign-source dividend under section 1248.
About $2.8 billion as foreign-source capital gain, with about $474 million re-sourced to U.S. income to recapture overall foreign loss, leaving about $2.3 billion as foreign-source capital gain.
IRS position: The $2.3 billion excess gain is U.S.-source under section 865(a), so no foreign-source income remained to support the $240 million foreign tax credit under section 904(a).
Holding: The Tenth Circuit affirmed that section 904(f)(3) sources only up to the overall foreign loss balance and that section 865(a) sources the balance of the gain to the United States.
Result: Liberty Global is not eligible for the $240 million foreign tax credit claimed for 2010.
Outcome
The Tenth Circuit affirmed the Tax Court’s judgment for the Commissioner and held that Liberty Global could not treat the excess gain as foreign-source for the foreign tax credit limitation purposes.
The Takeaway
Section 904(f)(3) creates foreign-source income only to the extent necessary to recapture overall foreign loss. Amounts beyond that threshold revert to the default rule in section 865(a) and are U.S.-source for a domestic seller, which can eliminate or reduce the foreign tax credit under section 904’s limitation.
List of citations
I.R.C. § 904(a): Sets the foreign tax credit limitation formula used by the court to frame why sourcing matters.
Theo. H. Davies & Co. v. Commissioner, 75 T.C. 443: Cited for articulating the foreign tax credit limitation formula.
Motors Ins. Corp. v. United States, 530 F.2d 864, and Mo. Pac. R.R. v. United States, 392 F.2d 592: Cited for the principle that the credit cannot reduce U.S. tax on U.S.-source income.
I.R.C. § 904(f)(1): Provides the overall foreign loss recapture rule central to re-sourcing foreign income to U.S. income.
I.R.C. § 904(f)(3): Provides the disposition rule that deems a limited amount of gain as foreign-source to enable recapture.
52 Fed. Reg. 31992-01 (Aug. 25, 1987); Treas. Reg. § 1.904(f)-2(d)(1)(i)-(iii): Cited as the then-applicable regulation implementing overall foreign loss recapture on dispositions.
I.R.C. §§ 861–865; 26 C.F.R. § 1.861-1 et seq.: Cited as the general statutory and regulatory sourcing framework.
I.R.C. § 865(a): Supplies the default rule that a U.S. resident’s gain from the sale of personal property is U.S.-source.
True Oil Co. v. Commissioner, 170 F.3d 1294: Cited for de novo review of statutory interpretation on appeal from Tax Court.
N.L.R.B. v. SW Gen., Inc., 580 U.S. 288; Cisneros v. Alpine Ridge Grp., 508 U.S. 10; United States v. Dolan, 571 F.3d 1022, aff’d 560 U.S. 605: Cited for the interpretive rule that “notwithstanding” clauses resolve conflicts, not create blanket preemption.
TRW Inc. v. Andrews, 534 U.S. 19: Cited for the canon against surplusage, supporting a limited reading of section 904(f)(3).
Whirlpool Fin. Corp. v. Commissioner, 19 F.4th 944: Cited for the principle that regulations cannot vary from the statute’s commands.
Joy Techs., Inc. v. Sec’y of Labor, 99 F.3d 991: Cited for reading regulations to harmonize with the governing statute.
I.R.C. § 1248: Cited to explain Liberty Global’s separate treatment of about $438 million as dividend income on the sale of a controlled foreign corporation.