Tenth Circuit Limits Reach of Treasury Regulations in Liberty Global Case
Reliance on regulatory text alone no longer ensures safety—courts are reasserting the statute as the ultimate boundary for tax outcomes.
The Tenth Circuit’s ruling in Liberty Global Inc. v. Commissioner underscores a growing judicial trend: courts are less willing to defer to Treasury regulations when statutory text is clear.
The case, involving the foreign tax credit limitation under IRC §904(f)(3), rejected the taxpayer’s reliance on pre-2012 regulations that treated all gain from the sale of certain foreign stock as foreign source income.
This outcome aligns with recent cases such as Whirlpool Financial Corp. and TBL Licensing LLC, showing that courts are prioritizing statutory interpretation over regulatory guidance.
Treasury’s recent pullback from its own expansive rulemaking reflects an acknowledgment of this shift.
The Law in Play
IRC §904(f)(3), which governs how taxpayers recapture prior overall foreign losses (OFLs), was at issue.
When a U.S. taxpayer sells property or stock of a controlled foreign corporation (CFC) used predominantly outside the United States, the statute deems part of the gain as foreign source income (FSI) up to the amount of the taxpayer’s unused OFL.
Liberty Global argued that pre-2012 Treasury regulations broadened this rule, allowing all gain—not just the amount equal to the OFL—to be treated as FSI. The IRS countered that the statute itself caps the FSI recharacterization at the OFL amount. The Tenth Circuit agreed with the IRS, holding that regulations cannot expand statutory reach.
Timeline
Pre-2012 – Treasury regulations under §904(f) stated that gain from the disposition of a CFC produced FSI, without explicit limitation to the OFL amount.
2012 – Treasury issued T.D. 9595, revising the rules to “clarify” that only gain up to the OFL may be treated as FSI.
Transaction Year: Liberty Global sold its Japanese CFC, Jupiter Telecommunications Co. Ltd., recognizing a $2.8 billion gain with an OFL of about $474 million.
Tax Return – Liberty Global treated the entire gain as FSI. The IRS limited the FSI amount to the OFL under §904(f)(3).
Appeal – The Tenth Circuit upheld the IRS, ruling that the statute was unambiguous and Treasury lacked authority to expand it through regulation.
The Larger Story
Liberty Global fits within a broader judicial retreat from deference to Treasury rulemaking. After Whirlpool (6th Cir.) and TBL Licensing (1st Cir.), courts increasingly treat regulations as persuasive only to the extent they track statutory text.
The Supreme Court’s decision in Loper Bright formally ended Chevron deference, signaling that even detailed Treasury regulations face stricter scrutiny.
This trend cuts both ways: It limits regulatory overreach but also reduces predictability for taxpayers who rely on longstanding regulations. Treasury’s recent restraint in rulemaking—visible in its 2024 and 2025 proposals—suggests a recalibration toward statutory fidelity.
What It Means in Practice
Review reliance on older regulations that interpret ambiguous statutory language. Courts may now give them minimal weight.
In planning cross-border transactions, ensure sourcing positions can stand on statutory grounds without assuming regulatory protection.
Reassess §904(f) and §865 positions in light of Liberty Global’s narrow reading of foreign source income recharacterization.
Expect more challenges where regulations go beyond explicit statutory command, particularly in Subpart F and FTC computations.
Next Steps
No further appeal is pending. Treasury’s next revision to the §904 regulations may attempt to reconcile existing text with the narrower judicial interpretation.
Meanwhile, related FTC and sourcing issues will likely surface in pending cases such as 3M v. Commissioner.