Tenth Circuit: Sale of Stock in Foreign Company Generated U.S.-Source Income

(Parker Tax Publishing September 2025)

The Tenth Circuit affirmed the Tax Court and held that all of the gain from a United States company's sale of a controlling interest in a Japanese company for $3.9 billion was U.S.-source income under Code Sec. 865 and therefore the taxpayer was not eligible to claim a $240 million foreign tax credit. The court rejected the taxpayer's argument that Code Sec. 904(f) and Reg. Sec. 1.904(f)-(2)(d)(1) overrode the default sourcing rule under Code Sec. 865(a). Liberty Global, Inc. v. Comm'r, 2025 PTC 291 (10th Cir. 2025).

Background

Liberty Global is a U.S. corporation and the parent company of other corporations around the world. Liberty Global owned a controlling majority stake in Jupiter Telecommunications (J:COM), a Japanese company, making J:COM a controlled foreign corporation for tax purposes.

In February 2010, Liberty Global sold its entire interest in J:COM for $3.9 billion, realizing a gain of $3.2 billion. Liberty Global timely filed its 2010 taxes and reported the gain as follows

(1) $438 million was characterized as a foreign-source dividend under Code Sec. 1248, and

(2) $2.8 billion was treated as foreign source capital gain. Of that, (i) $474 million was re-sourced to the United States to recapture overall foreign losses, and (ii) $2.3 billion remained foreign-source capital gain.

Because Liberty Global claimed $2.3 billion in foreign-sourced income, it also claimed a $240 million foreign tax credit under Code Sec. 904(a).

The IRS issued a notice of deficiency for the $240 million credit. According to the IRS, the $2.3 billion in excess of Liberty Global's overall foreign loss account balance was U.S.-sourced under Code Sec. 865(a) because Liberty Global is a U.S. resident. In Liberty Global, Inc. v. Comm'r, 161 T.C. 153 (2023), the Tax Court agreed with the IRS and held that Liberty Global's excess gain was U.S.-sourced under Code Sec. 865(a).

Liberty Global appealed to the Tenth Circuit, offering a three-step argument in support of its position that the $2.3 billion was foreign sourced under Code Sec. 904(f)(3)(A) and Reg. Sec. 1.904(f)-2(d)(1). First, it argued that Code Sec. 904(f)(3)(A) is silent about the treatment of the gain in excess of the overall loss account balance. Second, Liberty Global argued that the phrase "notwithstanding any other provision of this chapter" in Code Sec. 904(f)(3)(A)(i) meant that the default sourcing rules in Code Sec. 865(a) did not apply. Third, Liberty Global said that Reg. Sec. 1.904(f)-2(d)(1) treated the gain as foreign-sourced since the income from J:COM was considered foreign-sourced.

The IRS countered that the "notwithstanding" clause only overrides other Code provisions if there is a conflict, and that there was no conflict here. The IRS also asserted that Reg. Sec. 1.904(f)-2(d)(1) could not be read to conflict with the statute, so the regulation could not support Liberty Global's interpretation.

Analysis

The Tenth Circuit agreed with the IRS and affirmed the Tax Court's judgment. The court found two problems with Liberty Global's reading of Code Sec. 904(3)(A)(i) as preempting all other provision of the Code: (1) Code Sec. 904(f) limits its own applicability, and (2) Liberty Global did not entirely embrace its own interpretation.

First, the court found that Code Sec. 904(f)(3)(A)(i) expressly applies only to "an amount equal to the lesser of" the gain or the overall foreign loss account. In the court's view, applying Liberty Global's interpretation would mean the statute always applies to the full value of the sale, not the lesser of the two, making much of the provision superfluous.

Second, the court said that Liberty Global's argument was that the rest of the Code was displaced by Code Sec. 904(f)(3)(A)(i) while at the same time, it still applied other provisions. The court noted that Liberty Global treated an additional $438 million of its gain from the sale as a foreign-source dividend under Code Sec. 1248. In the court's view, applying Code Sec. 1248 in this fashion conflicted with Liberty Global's argument that the "notwithstanding" clause displaced the entirety of the Code.

The court reasoned that, since Code Sec. 904(f)(3)(A)(j) is silent about the excess gain's sourcing, it cannot possibly conflict with any other provisions. The court said that was the fatal flaw in Liberty Global's argument. Liberty Global tried to argue both that (1) Code Sec. 904(f) is silent so that Reg. Sec. 1.904(f)-2(d)(1) applied, and (2) Code Sec. 904(f) conflicts with Code Sec. 865(a) so it does not apply. The court found that Liberty Global could not have it both ways. In conclusion, the court agreed with the IRS and the Tax Court that Code Sec. 865(a) applied, and the excess gain was U.S.-sourced.

For a discussion of the source-of-income rules for corporations, see Parker Tax ¶101,815.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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