United States Tax Court

161 T.C. No. 10

LIBERTY GLOBAL, INC.,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 341-21. Filed November 8, 2023.

—————

At the beginning of 2010, P had an overall foreign 

loss (OFL) account balance of approximately $474 million. 

That year, P sold all its stock in a controlled foreign 

corporation (CFC), realizing gain of more than 

$3.25 billion.

On its 2010 return, P reported approximately 

$438 million of the gain as dividend income pursuant to 

I.R.C. § 1248 and approximately $2.8 billion as foreignsource income, taking the view that Treas. Reg. § 1.904(f)-

2(d)(1) required this result. The increased foreign-source 

income allowed P to claim foreign tax credits of more than 

$240 million for the year.

R examined P’s 2010 return and eventually issued a 

Notice of Deficiency determining that P overstated its 

foreign-source income for the year and consequently 

overstated its foreign tax credit. 

P timely petitioned our Court for redetermination of 

the deficiency. The case is before us for decision under 

Rule 122. The parties agree that I.R.C. § 904(f)(3) applied 

to P’s sale of CFC stock. Furthermore, they agree that 

I.R.C. § 904(f)(3)(A) recaptured P’s OFL through the 

recognition of gain in an amount equal to P’s OFL 

Served 11/08/23
2

($474 million) and recharacterization of that amount as 

foreign-source income. But they disagree regarding the 

implications of I.R.C. § 904(f)(3) for P’s gain beyond the 

amount needed to accomplish its OFL recapture.

P contends that I.R.C. § 904(f)(3)(A), when 

applicable, is the only mechanism for recognizing gain from 

the disposition of CFC stock, overriding all other 

recognition provisions in chapter 1 of the Internal Revenue 

Code. As a result, P claims that it was not required to 

recognize any gain that exceeded what was necessary to 

recapture its OFL balance. Alternatively, P argues that 

I.R.C. § 904(f)(3)(A) is ambiguous and that Treas. Reg. 

§ 1.904(f)-2(d)(1) requires treating the gain as foreignsource income. Further in the alternative, P elects to 

deduct its foreign taxes under I.R.C. § 164(a)(3).

R maintains that I.R.C. § 904(f)(3)(A) does not 

govern the treatment of the remaining $2.8 billion in gain, 

which is instead subject to the rules of I.R.C. §§ 865, 1001, 

and 1248. R disagrees that I.R.C. § 904(f)(3)(A) is 

ambiguous and also disagrees with P’s reading of Treas. 

Reg. § 1.904(f)-2(d)(1). R agrees, however, that P is entitled 

to elect to deduct its foreign taxes under I.R.C. § 164(a)(3).

Held: I.R.C. § 904(f)(3)(A) speaks only to the gain 

necessary to recapture the OFL, and no more.

Held, further, I.R.C. § 904(f)(3)(A) does not override 

any recognition provisions under chapter 1. 

Held, further, I.R.C. § 904(f)(3)(A) is not ambiguous 

and does not recharacterize as foreign source gain in excess 

of that necessary to recapture the OFL.

Held, further, Treas. Reg. § 1.904(f)-2(d)(1) does not 

recharacterize as foreign source gain in excess of that 

necessary to recapture the OFL.

Held, further, for 2010, P may deduct its foreign 

taxes under I.R.C. § 164(a)(3).

—————
3

Rajiv Madan and Nathan P. Wacker, for petitioner.

Matthew J. Avon and Timothy L. Smith, for respondent.

OPINION

TORO, Judge: This deficiency case calls on us to confront an issue 

of first impression regarding the scope of section 904(f)(3).1 As relevant 

here, that provision governs the recapture2 of an overall foreign loss

(OFL) (a concept we discuss in detail below in Discussion Part I.C), when 

a taxpayer disposes of shares of stock in a controlled foreign corporation 

(CFC) in certain types of transactions. The parties offer competing 

interpretations of the statute. 

Petitioner, Liberty Global, Inc., the successor to Liberty Global, 

Inc., and Liberty Global, Inc. & Subsidiaries (collectively, Liberty 

Global), maintains that section 904(f)(3) not only operates to recapture 

its 2010 OFL beginning account balance of some $474 million, but also 

exempts from U.S. taxation altogether some $2.8 billion of the gain 

Liberty Global realized (and ordinarily would recognize) when disposing 

of the stock of one of its CFCs. Alternatively, Liberty Global maintains 

that section 904(f)(3) coupled with Treasury Regulation § 1.904(f)-2(d)(1) 

operates to convert more than $2.8 billion from U.S.-source income to 

foreign-source income, increasing Liberty Global’s foreign tax credit by 

more than $240 million and offsetting its federal income tax liability 

accordingly. 

The Commissioner of Internal Revenue counters that 

section 904(f)(3) and the relevant regulations have a much more modest 

scope. In his view, they serve to recapture Liberty Global’s OFL of about 

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation 

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all 

relevant times, and Rule references are to the Tax Court Rules of Practice and 

Procedure.

2 In tax parlance, the term “recapture” typically refers to a scenario where a 

taxpayer has received a tax benefit in a prior year and circumstances change such that, 

in the current year, the taxpayer is required to “recapture”—i.e., give back—that 

benefit.
4

$474 million, but otherwise neither exempt from taxation the remaining 

portion of Liberty Global’s gain nor change its source.

As we explain below, the text of the relevant statutory and 

regulatory provisions, the structure of the Code, and policy 

considerations all favor the Commissioner’s interpretation.3

Background

The parties submitted this case fully stipulated under Rule 122. 

The facts below are based on the pleadings and the parties’ Stipulation 

of Facts (including the Exhibits attached thereto). The parties’ 

Stipulation of Facts with the accompanying Exhibits is incorporated 

herein by this reference.

Liberty Global is a Delaware corporation with its principal place 

of business in Colorado. It is the ultimate U.S. parent company, and the 

direct or indirect owner, of an affiliated group of U.S. and foreign 

corporations. Liberty Global, together with its affiliates, operated 

converged video, broadband, and communications businesses during 

2010. 

In January 2010, Liberty Global indirectly owned more than 50% 

of the voting interests in Jupiter Telecommunications Co. Ltd. (J:COM), 

a Japanese entity, making J:COM a CFC, as defined in section 957, for 

2010.4 In a series of transactions that took place on February 18, 2010, 

Liberty Global’s interests in J:COM were transferred to an unaffiliated 

foreign corporation for $3,961,608,988 in a transaction treated as a sale

for U.S. federal income tax purposes.5 Liberty Global did not own any 

stock in J:COM following the sale.

3 In the event the Court agrees with the Commissioner on the primary issues 

in the case, Liberty Global elects to deduct its foreign taxes under section 164(a)(3) for 

one of the years at issue. The Commissioner does not dispute that Liberty Global may 

do so. Given our disposition, Liberty Global’s election shall be taken into account when 

the parties prepare the computations under Rule 155.

4 Liberty Global indirectly owned and eventually disposed of the J:COM stock 

through a complex network of affiliates. Because this organizational structure does 

not affect our analysis, we do not discuss it further.

5 To simplify our discussion, we refer to these transactions collectively as 

Liberty Global’s sale of the stock of J:COM, even though Liberty Global transferred its 

ownership interests in J:COM in transactions involving various indirectly owned 

entities.
5

Liberty Global timely filed its 2010 U.S. consolidated income tax 

return. That return reported recognized gain of $3,256,557,143 from the 

sale of the J:COM stock and showed a beginning balance of $474,372,166 

for Liberty Global’s general limitation category OFL account. Liberty 

Global characterized $438,135,179 of the gain as dividend income

pursuant to section 1248 and the remaining $2,818,421,964 as capital 

gain. It treated the capital gain as foreign-source income.

Liberty Global attached to its 2010 return Schedule UTP

(Form 1120), Uncertain Tax Position Statement. The Schedule UTP 

stated as follows:

[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.

The Commissioner examined Liberty Global’s 2010 return and 

issued a Notice of Deficiency, in which he determined a deficiency of 

$241,791,309. In relevant part, the Commissioner determined that

Liberty Global overstated its foreign-source income and was not entitled 

to any foreign tax credit for the year. The Notice of Deficiency explained 

the determination as follows:

It is determined that no foreign tax credit is allowed due to 

adjustments affecting foreign source income. The amount 

of U.S. source gain that is recharacterized as foreign source 

under [I.R.C. §] 904(f)(3) is limited to the amount necessary 

to recapture of the Overall Foreign Losses (“OFLs”) in the 

OFL account at the beginning of the year. . . . [Y]our 

foreign tax credit allowed for [the] tax year ended 

December 31, 2010 is $0.00 rather than . . . 

$241,791,309.00.
6

Liberty Global timely petitioned our Court for redetermination of 

the deficiency.6

Discussion

I. The Foreign Tax Credit

A. General Principles

The United States generally taxes the worldwide income of its 

citizens and domestic corporations. See, e.g., Cook v. Tait, 265 U.S. 47, 

56 (1924); Huff v. Commissioner, 135 T.C. 222, 230 (2010). This policy 

choice creates the potential for double taxation—that is, the taxation of 

the same income by both the United States and another country. See 

AptarGroup Inc. v. Commissioner, 158 T.C. 110, 112 (2022). To address 

the risk of double taxation, the Code allows U.S. citizens and domestic 

corporations to elect to claim a credit for income tax paid to a foreign 

country. I.R.C. § 901(a); see also Am. Chicle Co. v. United States, 316 

U.S. 450, 451 (1942). A domestic corporation may also claim a credit for 

a tax that it is deemed to have paid or accrued. I.R.C. § 960; AptarGroup 

Inc., 158 T.C. at 112. 

For almost as long as the foreign tax credit has been part of the 

U.S. tax system, Congress has expressed concern that the foreign tax 

credit might be misused to reduce U.S. tax due on U.S.-source income. 

See Dirk J.J. Suringa, The Foreign Tax Credit Limitation Under Section 

904 (Section 904 Portfolio), 6060-1st Tax Mgmt. (BNA) at III (setting out 

an abbreviated history of the foreign tax credit and highlighting 

Congress’s addition of limitations on the credit); see also 1 Joel D. Kuntz 

& Robert J. Peroni, U.S. International Taxation ¶ B4.16[1], at B4-185–

86 (2022). Several Code provisions address this concern, chief among 

them, section 904. See AptarGroup Inc., 158 T.C. at 112 (citing Theo. H. 

Davies & Co. v. Commissioner, 75 T.C. 443, 446 n.9 (1980), aff’d per 

curiam, 678 F.2d 1367 (9th Cir. 1982)). 

6 The Commissioner also issued to Liberty Global a Notice of Deficiency for 

2014, and Liberty Global timely sought redetermination of that deficiency. Because 

the Commissioner’s determination concerning 2014 flows directly from his 

determination with respect to 2010, we do not discuss it separately. 
7 

B. Section 904(a)—The Foreign Tax Credit Limitation

The principal rule in section 904 appears at subsection (a), which 

provides as follows: 

The total amount of the credit taken under section 901(a) 

shall not exceed the same proportion of the tax against 

which such credit is taken which the taxpayer’s taxable 

income from sources without the United States (but not in 

excess of the taxpayer’s entire taxable income) bears to his 

entire taxable income for the same taxable year.

We have previously expressed the limitation set out in section 904(a) as 

an equation:

Maximum credit = Taxable income from without U.S.

Worldwide taxable income

× U.S. tentative tax

Theo. H. Davies & Co., 75 T.C. at 444. As the formula makes clear, the 

amount of taxable income from sources without the United States (also 

known as foreign-source income) is a key driver of the section 904(a) 

limitation. All else being equal, the higher the foreign-source income, 

the higher the foreign tax credit a taxpayer may be entitled to take. 

C. Section 904(f)—OFL Recapture

The provision at the core of this case—section 904(f)—also sets 

out rules intended to protect the right of the United States to impose 

U.S. tax on U.S.-source income. Some background may be helpful to 

understand how section 904(f) operates and the potential issues an OFL 

presents. We find it easiest to provide that background through an 

example. 

1. The OFL Problem

Imagine that USCo, a U.S. corporation with existing 

U.S. operations, opens a branch in Country A at the beginning of 

Year 1.7 Now assume that, by the end of Year 1, USCo’s U.S. operations 

generate taxable income of $300 (or, in tax parlance, $300 of U.S.-source 

7 Generally speaking, a branch is a division of a business within a corporation. 

See Dover Corp. & Subs. v. Commissioner, 122 T.C. 324, 351 (2004). As relevant here, 

the U.S. tax system generally requires that a U.S. parent include in its taxable income 

the profits earned by its foreign branches. See Columbian Rope Co. v. Commissioner, 

42 T.C. 800, 817 (1964).
8

income), while the branch’s operations result in a loss of $100. 

Assuming that USCo has no other foreign operations, the $100 loss 

comprises its OFL for the year. See I.R.C. § 904(f)(2) (generally 

providing that an OFL exists when a taxpayer’s gross foreign-source

income for the year is less than the deductions properly apportioned or 

allocated to that income).

Under our regime of worldwide taxation, USCo must report in its 

Year 1 U.S. federal income tax return both the income from its 

operations in the United States and the loss from the branch’s 

operations in Country A. Thus, USCo’s overall taxable income for Year 1 

would be $200 ($300 U.S.-source income less the $100 foreign-source 

loss). Assuming a tax rate of 35%, USCo’s Year 1 return would show 

$70 of tax due ($200 taxable income × 35%).

Imagine further that in Year 2 USCo’s U.S. operations again 

generate U.S.-source income of $300, but this time the branch’s 

operations turn profitable, generating foreign-source income of $100. 

Once again, under our regime of worldwide taxation, USCo must report 

in its Year 2 return the results of its U.S. and Country A operations, and 

its overall taxable income would be $400 ($300 U.S.-source income plus 

$100 foreign-source income). Assuming a tax rate of 35%, one would 

expect USCo’s Year 2 return to show $140 of tax due ($400 taxable 

income × 35%).

Here is where the foreign tax credit may complicate things. 

Assume that, under Country A’s rules, USCo’s branch is not permitted 

to use prior year losses to offset current year income and that Country A

imposes a 35% tax on income from Country A sources. Under these 

rules, the branch would be required to pay to Country A $35 of tax for 

Year 2 ($100 of Country A source income × the 35% Country A tax rate). 

If the usual foreign tax credit rules were applied without modification 

for Year 2, under the section 904(a) formula discussed above, USCo

would be allowed a foreign tax credit of $35, computed as follows: 

Taxable income from without the United States (i.e., foreign-source 

income) ($100) / worldwide income ($400) × U.S. tentative tax ($140) = 

Maximum credit of $35. Thus, taking into account the foreign tax credit, 

USCo would be required to pay only $105 in U.S. tax for Year 2 (U.S. 

tentative tax of $140 less $35 foreign tax credit).

Considering the two years together, we notice that USCo earned 

$600 in U.S.-source income ($300 in each year) and no income from the 

Country A branch (the $100 income in Year 2 is offset by the $100 loss 
9

in Year 1). Given these results, one would have expected USCo to have 

paid $210 in U.S. tax ($600 × 35%) and no tax in Country A. But, as the 

example shows, the combined effect of (a) Country A’s decision not to 

permit branch losses to be carried forward and offset future income and 

(b) the ordinary application of section 904(a) would lead to the United 

States collecting only $175 in tax ($70 in Year 1 and $105 in Year 2), 

while Country A would collect $35 in tax (all in Year 2). 

Congress did not believe this outcome to be consistent with the 

objectives of the foreign tax credit, see Hershey Foods Corp. v. 

Commissioner, 76 T.C. 312, 322–23 (1981) (citing Staff of J. Comm. on 

Tax’n, 94th Cong., General Explanation of the Tax Reform Act of 1976, 

at 236 (J. Comm. Print), as reprinted in 1976-3 C.B. (Vol. 2) 1, 248; 

S. Rep. No. 94-938, at 236 (1976), as reprinted in 1976-3 C.B. (Vol. 3) 

248, 274); Section 904 Portfolio at III.J.2; James P. Fuller & Robert 

Feinschreiber, The New Foreign Tax Credit Rules: Analysis and 

Planning, 3 Int’l Tax J. 393, 394 (1977), and in 1976 added a new section 

904(f) to address the issue, see Tax Reform Act of 1976, Pub. L. No. 94-

455, § 1032(a), 90 Stat. 1520, 1624–25; Hershey Foods Corp., 76 T.C. 

at 322; Section 904 Portfolio at III.J.2. As relevant here, Congress 

proceeded in two steps.

2. Section 904(f)(1)—OFL Recapture from Future 

Income

First, in section 904(f)(1), Congress addressed the fact pattern 

illustrated by the example—a taxpayer that earns foreign-source income 

after having incurred a foreign-source loss that previously offset 

U.S.-source income (i.e., an OFL).8 See Hershey Foods Corp., 76 T.C. 

8 In 2010, section 904(f)(1) read as follows:

(1) General rule.—For purposes of this subpart and 

section 936, in the case of any taxpayer who sustains an overall foreign 

loss for any taxable year, that portion of the taxpayer’s taxable income 

from sources without the United States for each succeeding taxable 

year which is equal to the lesser of—

(A) the amount of such loss (to the extent not used 

under this paragraph in prior taxable years), or

(B) 50 percent (or such larger percent as the taxpayer 

may choose) of the taxpayer’s taxable income from sources 

without the United States for such succeeding taxable year,

shall be treated as income from sources within the United States (and 

not as income from sources without the United States).
10

at 322–23. Section 904(f)(1) requires such taxpayers to recharacterize, 

for purposes of determining their foreign tax credit, some or all of the 

foreign-source income as U.S.-source. This resourcing reduces the 

amount reflected in the numerator of the section 904(a) formula, thus 

reducing the foreign tax credit available to the taxpayer. Put another 

way, section 904(f)(1) recaptures the prior benefit of permitting USCo to 

offset its U.S. income with the foreign-source loss, so that “when the 

year(s) of excess loss and the year(s) of recharacterization are viewed 

together, U.S. source income will bear its full tax share.” See Hershey 

Foods Corp., 76 T.C. at 323.9 

Congress recognized, though, that a taxpayer might dispose of the 

assets used in its foreign operations before an OFL had been fully 

recaptured. See id. The disposition of those assets would leave the 

mechanism reflected in section 904(f)(1) ineffectual as the taxpayer 

would no longer have any foreign-source income that might be 

recharacterized as U.S.-source. 

3. Section 904(f)(3)—OFL Recapture from Asset 

Dispositions

That led Congress to its second step: adding rules that govern the 

disposition of assets used in foreign operations in section 904(f)(3). The

provision “accelerates the recapture process upon such disposition by 

requiring recognition at the time of disposition of an amount of income 

equal to the lesser of the gain realized or the amount of any previously 

unrecaptured excess foreign loss.” Hershey Foods Corp., 76 T.C. at 323; 

see also Harvey P. Dale, The Reformed Foreign Tax Credit: A Path 

Through the Maze, 33 Tax L. Rev. 175, 217 (1978) (“[Section 904(f)(3)’s] 

evident purpose is to prevent avoidance of [section 904(f)(1)’s] rule by 

transfer or abandonment of a business which is pregnant with OFL

recapture.”). 

Following passage of the Tax Reform Act of 1976, 

section 904(f)(3)(A) read in relevant part:

With exceptions not pertinent to our discussion, section 904(f)(2) defined the 

term “overall foreign loss” to mean “the amount by which the gross income for the 

taxable year from sources without the United States . . . for such year is exceeded by 

the sum of deductions properly apportioned or allocated thereto.”

9 To maintain fairness, section 904(g) now includes similar rules allowing 

taxpayers to recapture “overall domestic losses” that limited the availability of foreign 

tax credits in prior years.
11

In general.—For purposes of this chapter, if property which 

has been used predominantly without the United States in 

a trade or business is disposed of during any taxable year—

(i) the taxpayer, notwithstanding any other 

provision of this chapter (other than paragraph (1)), 

shall be deemed to have received and recognized 

taxable income from sources without the United 

States in the taxable year of the disposition, by 

reason of such disposition, in an amount equal to the 

lesser of the excess of the fair market value of such 

property over the taxpayer’s adjusted basis in such 

property or the remaining amount of the overall 

foreign losses which were not used under 

paragraph (1) for such taxable year or any prior 

taxable year, and

(ii) paragraph (1) shall be applied with respect 

to such income by substituting “100 percent” for 

“50 percent”.[10]

In 2004, Congress amended section 904(f)(3) to cover certain 

dispositions of stock in a CFC.11 See American Jobs Creation Act of 

2004, Pub. L. No. 108-357, § 895, 118 Stat. 1418, 1647; I.R.C. 

§ 904(f)(3)(D). That amendment made section 904(f)(3) applicable to 

Liberty Global’s sale of J:COM stock in 2010, giving rise to the dispute 

before us.

10 Section 904(f)(3)(B)(i) provides that “[f]or purposes of this subsection, the 

term ‘disposition’ includes a sale, exchange, distribution, or gift of property whether or 

not gain or loss is recognized on the transfer.” Under section 904(f)(3)(B)(ii), “[a]ny 

taxable income recognized solely by reason of subparagraph (A) shall have the same 

characterization it would have had if the taxpayer had sold or exchanged the property.”

11 As relevant to our discussion, in 2010, section 904(f)(3)(D) read as follows:

(i) In general.—This paragraph shall apply to an applicable 

disposition in the same manner as if it were a disposition of property 

described in subparagraph (A) . . . .

(ii) Applicable disposition.—For purposes of clause (i), the term 

“applicable disposition” means any disposition of any share of stock in 

a controlled foreign corporation in a transaction or series of 

transactions if, immediately before such transaction or series of 

transactions, the taxpayer owned more than 50 percent (by vote or 

value) of the stock of the controlled foreign corporation.
12

II. Application of Section 904(f) to the Sale of J:COM Stock

The parties agree on many of the issues in this case. They agree, 

for example, that Liberty Global realized gain of more than $3.25 billion 

on its sale of J:COM stock. They further agree that, absent 

section 904(f)(3), the Code’s normal rules would require the gain to be 

fully recognized under section 1001, would treat the gain as U.S.-source 

income under section 865, and would recharacterize approximately 

$438 million of the gain as dividend income under section 1248.

Even regarding the application of section 904(f)(3), the parties 

agree on a great deal. They agree that Liberty Global’s sale of J:COM 

stock was a qualifying disposition under section 904(f)(3)(D) and 

therefore that section 904(f)(3)(A) applied to recharacterize at least a 

portion of the gain from that transaction. They further agree that 

section 904(f)(3) operated as intended to the extent of Liberty Global’s

beginning OFL balance of $474,372,166—i.e., that the provision

recaptured the OFL by (1) recharacterizing $474,372,166 of gain from 

the J:COM stock sale as foreign-source income, see I.R.C. 

§ 904(f)(3)(A)(i), and (2) applying paragraph 904(f)(1) with respect to 

that income, substituting 100% for 50%, see I.R.C. § 904(f)(3)(A)(ii).

Where the parties diverge is on the implications of 

section 904(f)(3) for Liberty Global’s remaining gain—in other words,

gain beyond the amount needed to accomplish the OFL recapture.

According to the Commissioner, section 904(f)(3) has no further 

implications. Once it recaptures the outstanding OFL, its work is done

and it does not affect the balance of a taxpayer’s gain. Instead, the

remaining gain is taxed under other Code provisions, which in this case

require the gain to be fully recognized (section 1001), to some extent 

recharacterized (section 1248), and treated as U.S.-source income 

(section 865).

Liberty Global, on the other hand, says that section 904(f)(3) does 

a great deal more than recapture the beginning balance of its OFL 

account, offering two competing interpretations. First, Liberty Global 

contends that, when section 904(f)(3) applies, it is the only mechanism 

for recognizing gain from a transaction, overriding section 1001 and any 

other gain recognition provisions in chapter 1 of the Code. As a result, 

Liberty Global says it was not required to recognize any gain on its sale

of J:COM stock beyond the $474,372,166 needed to recapture its OFL. 

In other words, Liberty Global’s first argument is that section 904(f)(3) 
13

completely exempted its remaining $2.8 billion of gain from U.S. federal 

income tax.12

Second, in the event we disagree with this outcome, Liberty 

Global argues that section 904(f)(3) is by necessity ambiguous and that

Treasury Regulation § 1.904(f)-2(d)(1) requires it to treat all its gain as 

foreign-source income. In combination with the section 904(a) formula

we have already discussed, this view results in Liberty Global being 

allowed foreign tax credits totaling more than $240 million for 2010, 

permitting it to offset U.S. tax on gain that, absent the proposed

recharacterization, would have been U.S.-source. 

Notably, Liberty Global makes no attempt to explain why, in a 

rule that it agrees was adopted “to prevent a taxpayer from offsetting 

U.S.-source income in one year, then claiming foreign tax credits on 

positive foreign-source income in a subsequent year,” Pet’r’s Opening Br. 

9–10, Congress would have provided for either one of these rather 

remarkable results. Indeed, it seems to acknowledge the absence of any 

potential rationale in its briefing. Pet’r’s Opening Br. 23 (“[Liberty 

Global] acknowledges that this results in no tax on approximately 

$2.8 billion of income that would otherwise be taxed under other 

provisions of the Code. . . . However, ‘the best evidence of Congress’s 

intent is the statutory text.’” (quoting Nat’l Fed’n of Indep. Bus. v. 

Sebelius, 567 U.S. 519, 544 (2012))). The Court agrees that policy 

arguments cannot override clear text. See United States ex rel. Schutte

v. SuperValu Inc., 143 S. Ct. 1391, 1404 (2023) (“Nor do we need to 

address any of the parties’ policy arguments, which ‘cannot supersede 

the clear statutory text.’” (quoting Universal Health Servs., Inc. v. 

United States ex rel. Escobar, 579 U.S. 176, 192 (2016))). But we 

disagree with Liberty Global’s reading of the text. We take its two 

arguments in turn.

A. Section 904(f)(3) Does Not Cap Liberty Global’s Recognized 

Gain.

Liberty Global first argues that section 904(f)(3)(A)(i) served to 

limit the gain it recognized on the stock sale to $474,372,166—i.e., the 

12 The parties appear to disagree about whether, if Liberty Global were to 

prevail on either of its arguments, amounts effecting OFL recapture under 

section 904(f)(3) could also be recharacterized as dividends under section 1248, 

essentially performing double duty. Because we reject both of Liberty Global’s 

arguments, this dispute does not affect the outcome of the case, and we do not address 

it further.
14

amount of its OFL balance. “As in all statutory construction cases, we 

begin with the language of the statute.” Barnhart v. Sigmon Coal Co., 

534 U.S. 438, 450 (2002). And as the Supreme Court has explained:

In statutory interpretation disputes, a court’s proper 

starting point lies in a careful examination of the ordinary 

meaning and structure of the law itself. Schindler Elevator 

Corp. v. United States ex rel. Kirk, 563 U.S. 401, 407 (2011). 

Where . . . that examination yields a clear answer, judges 

must stop. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 

438 (1999). 

Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct. 2356, 2364 (2019).

In 2010, section 904(f)(3)(A) read the same as it did following the 

passage of the Tax Reform Act of 1976. In relevant part, 

section 904(f)(3)(A)(i) says that upon the disposition of certain property,

the taxpayer, notwithstanding any other provision of this 

chapter (other than paragraph (1)), shall be deemed to have 

received and recognized taxable income from sources 

without the United States in the taxable year of the 

disposition, by reason of such disposition, in an amount 

equal to the lesser of the excess of the fair market value of 

such property over the taxpayer’s adjusted basis in such 

property or the remaining amount of the overall foreign 

losses which were not used under paragraph (1) for such 

taxable year or any prior taxable year . . . .

In other words, when a taxpayer disposes of the right kind of property, 

the taxpayer, notwithstanding any other provision of chapter 1, is

deemed to recognize foreign-source income in an amount sufficient to 

offset its remaining OFL, but only to the extent of the taxpayer’s actual 

gain from the transaction.

As the quoted text demonstrates, section 904(f)(3)(A) mandates

specific treatment for a portion of a taxpayer’s gain from a disposition

(i.e., an amount equal to the lesser of the taxpayer’s remaining OFL and 

its actual gain). But the provision is silent as to the treatment of any 

gain beyond that amount.

The parties infer very different outcomes from this silence. The 

Commissioner posits that existing Code provisions continue to apply to 

the remaining gain, while Liberty Global contends that 
15

section 904(f)(3)(A)(i) supplants all other Code sections, precluding the 

taxation of any gain beyond the amount it specifies. The statute 

provides a clear answer to this dispute, which we resolve in the 

Commissioner’s favor.

To begin with, the Commissioner’s interpretation adheres to the 

text of section 904(f)(3)(A)(i), which provides no instruction at all 

regarding amounts in excess of the gain necessary to recapture an OFL 

balance. Nor does that provision say that any amount from an 

applicable disposition is exempt from recognition. We take the statute 

at its word: If the text does not speak to the excess gain, then it does 

not control the treatment of that gain. Silence is insufficient to create a

new exclusion. Cf. Commissioner v. Schleier, 515 U.S. 323, 328 (1995) 

(noting that “exclusions from income must be narrowly construed”

(quoting United States v. Burke, 504 U.S. 229, 248 (1992) (Souter, J., 

concurring in the judgment)). Instead, we read section 904(f)(3)(A)(i) as 

doing exactly what it purports to do regarding excess gain—nothing. 

And the provision’s inaction leaves other applicable Code sections (here, 

sections 865, 1001, and 1248) to operate unimpeded. 

Adopting Liberty Global’s opposing interpretation would require 

us to infer a limiting principle that is not present in the statute’s text. 

Specifically, we would need to read the provision as requiring gain 

recognition that is limited to the amount specified therein. But neither 

those words nor similar ones appear in section 904(f)(3), and we decline 

Liberty Global’s invitation to add them. See, e.g., Bates v. United States, 

522 U.S. 23, 29 (1997) (“[W]e ordinarily resist reading words or elements 

into a statute that do not appear on its face.”).

Liberty Global might counter that the statute mandates its 

preferred result by negative inference. In other words, in Liberty 

Global’s view, because section 904(f)(3)(A) requires a taxpayer to 

recognize a specified amount of gain as taxable income, it must follow 

that the remaining gain need not be recognized. But what the statute 

actually says is that, with respect to the specified gain, “the taxpayer . . . 

shall be deemed to have received and recognized taxable income from 

sources without the United States.” I.R.C. § 904(f)(3)(A)(i) (emphasis 

added). Thus, even if one were to accept an argument by negative 

inference, the more natural inference would be that there is no deeming 

with respect to the excess gain. Or, put differently, that existing Code 

provisions continue to apply with respect to the excess gain.
16

Importantly, our interpretation is far more consistent with the 

broader statutory scheme. See West Virginia v. EPA, 142 S. Ct. 2587, 

2607 (2022) (“It is a fundamental canon of statutory construction that 

the words of a statute must be read in their context and with a view to 

their place in the overall statutory scheme.” (quoting Davis v. Mich.

Dept. of Treasury, 489 U.S. 803, 809 (1989))). In order to apply

section 904, generally a taxpayer must first elect to claim the foreign tax 

credit. See I.R.C. § 901(a). And, even when applying section 904, a 

taxpayer turns to subsection (f) only if it has an outstanding OFL 

balance, and to paragraph (f)(3) only if, in addition to having an 

outstanding OFL balance, it also disposes of qualifying foreign property.

One would not expect such a narrow rule, helpfully titled “Recapture of 

overall foreign loss” and adopted to limit a taxpayer’s foreign tax credit,

to serve the dual function of exempting billions of dollars of gain from 

U.S. taxation. As the Supreme Court has said, “Congress does not ‘hide 

elephants in mouseholes’ by ‘alter[ing] the fundamental details of a 

regulatory scheme in vague terms or ancillary provisions.” Sackett v. 

EPA, 143 S. Ct. 1322, 1340 (2023) (quoting Whitman v. Am. Trucking 

Ass’ns, 531 U.S. 457, 468 (2001)).

Consider the following example, which illustrates the 

implications of Liberty Global’s interpretation: Assume that, in the 

same tax year, taxpayer A and taxpayer B each sell 100% of their stock

in separate CFCs.13 Each taxpayer realizes $500 million of gain from 

its respective sale. Taxpayer A has a beginning OFL balance of $10, and 

taxpayer B has no OFL. Because taxpayer A has an OFL and made a 

qualified disposition of CFC stock, section 904(f)(3) would apply. Under 

our reading of that section, $10 of taxpayer A’s gain would be 

recharacterized as foreign-source income and subject to the recapture 

rule in section 904(f)(1). I.R.C. § 904(f)(3). And that is where the reach 

of section 904(f)(3) would end. But, in Liberty Global’s view, the mere 

fact that section 904(f)(3) applies also means that all of taxpayer A’s 

remaining gain ($499,999,990) would not be recognized and would 

therefore be exempt from U.S. tax. By contrast, because taxpayer B had 

no OFL to implicate section 904(f)(3), all $500 million of its gain would 

be recognized and taxable. We see nothing in the statute, nor indeed in 

common sense, to support these drastically disparate results.

Liberty Global makes much of section 904(f)(3)(A)(i)’s prefatory 

language, which states that the provision applies “notwithstanding any 

13 For simplicity, we assume that there is no dividend recharacterization under 

section 1248 for either transaction.
17

other provision of this chapter.” To Liberty Global, this text signals that

section 904(f)(3) turns off all other recognition provisions. But Liberty 

Global overreads the text.

“In statutes, the word [‘notwithstanding’] ‘shows which provision 

prevails in the event of a clash.’” NLRB v. SW Gen., Inc., 580 U.S. 288, 

301 (2017) (quoting Antonin Scalia & Bryan A. Garner, Reading Law: 

The Interpretation of Legal Texts 126–27 (2012)). On the facts before us, 

there is no conflict between section 904(f)(3) and section 1001 or any 

other provision requiring recognition. Rather, section 904(f)(3) operates 

to ensure the minimum amount of recognition necessary to recapture a

taxpayer’s OFL. It does not prevent recognition beyond the minimum

amount and, as a result, does not conflict with provisions that require

additional recognition. The text of section 904(f)(3)(A)(i) confirms this 

point, as Liberty Global itself appears to acknowledge in its brief: 

Indeed, the statute does refer to the “deem[ing]” of income 

and uses “fair market value” of property to measure 

income. That language makes more sense in the context of 

nonrecognition transactions; for recognition transactions, 

income would not be deemed, and income would be 

measured using [the] amount realized (or purchase price) 

rather than fair market value. 

Pet’r’s Opening Br. 31.

Section 904(f)(3) does, however, sometimes conflict with 

nonrecognition provisions (e.g., section 351). And it does sometimes 

conflict with sourcing rules (e.g., section 865), as in the case before us. 

And in those circumstances, the rule of section 904(f)(3) prevails over 

the conflicting rule elsewhere in the Code. In short, although the 

inclusion of “notwithstanding” in the statute makes perfect sense, it does 

not support Liberty Global’s reading.

Liberty Global’s argument that the Commissioner’s and our 

interpretation of the statute impermissibly creates different rules for 

recognition and nonrecognition transactions fails for similar reasons. 

When it applies, section 904(f)(3) ensures an amount of recognition 

sufficient to recapture a taxpayer’s OFL. This rule, by its nature, has 

different implications for recognition transactions, where no 

recharacterization is required to effect recapture (at least as to 

recognition), and nonrecognition transactions, where at least some 

recharacterization is required. Nothing about this result is 
18

impermissible; rather, it reflects the statute operating as drafted. And 

this result is fully consistent with this Court’s interpretation of 

section 904(f)(3) shortly after it was adopted. See Hershey Foods Corp., 

76 T.C. at 323 (“Section 904(f)(3) accelerates the recapture process upon 

such disposition by requiring recognition at the time of disposition of an 

amount of income equal to the lesser of the gain realized or the amount 

of any previously unrecaptured excess foreign loss.”). Liberty Global’s 

reading, on the other hand, would result in different recognition rules 

being applied to taxpayers with OFL balances and those without, giving 

the taxpayers with OFL balances much more beneficial tax treatment, 

as our example above illustrates. Moreover, as the Commissioner points 

out, Liberty Global’s reading is internally inconsistent when it comes to 

recognition and nonrecognition transactions. See Resp’t’s Answering 

Br. 24–25 (“Under [Liberty Global’s] interpretation, in the case of 

recognition transactions, taxpayers would be exempt from realizing and 

recognizing the excess gain, while, in the case of non-recognition 

transactions, the unrecognized portion of the gain would merely be 

deferred until the property is disposed of in a recognition transaction.”).

In summary, we disagree that section 904(f)(3) exempts the 

excess gain from Liberty Global’s sale of J:COM stock and decide this 

issue in the Commissioner’s favor.

B. Treasury Regulation § 1.904(f)-2(d)(1) Does Not Permit

Liberty Global to Treat All of Its Gain on the J:COM Stock 

Sale as Foreign-Source Income.

Alternatively, Liberty Global argues that the statute is 

ambiguous and that, because of the ambiguity, Treasury Regulation 

§ 1.904(f)-2(d)(1) applies to treat all of its gain on the J:COM stock sale 

as foreign-source income. If Liberty Global were correct, then any gain 

in excess of its remaining OFL balance, which would otherwise be U.S.-

source income under section 865, would become foreign-source income. 

As a result, the numerator in its foreign tax credit computation under 

section 904(a) would increase, allowing it to use more than $240 million 

in additional foreign tax credits.

As we have already discussed, however, the statute is not 

ambiguous. By its plain terms, the statute directs a taxpayer to deem

amounts necessary to recapture an OFL as recognized foreign-source 

taxable income. It does not speak to gain beyond that amount because 

it has no reason to. And silence in this instance, where other Code 
19

provisions address the salient points, is not ambiguity; rather, 

section 904(f)(3)(A)(i) leaves those other provisions to do their work.

Even assuming, however, for the sake of argument only, that the 

statute were ambiguous, we do not read the regulations as supplying the 

rule that Liberty Global attempts to draw from them.

We begin with the observation that the regulatory text Liberty 

Global relies on was adopted in 1987, long before Congress enacted the 

statutory provision applicable here.14 It would be unusual for a 

regulation to speak with specificity regarding an issue not implicated at 

all by the then-existing statute. And, indeed, the regulation did not 

address sales of CFC stock. Instead, paragraph (d)(1) at the time read 

the same as it did in 2010. Specifically, it instructed taxpayers on what 

to do “[i]f [the] taxpayer disposes of property used or held for use

predominantly without the United States in a trade or business.” Treas. 

Reg. § 1.904(f)-2(d)(1). Needless to say, Liberty Global did not dispose 

of such property in 2010, calling into question the relevance of the 

regulation to the facts before us.

Even more problematic for Liberty Global’s position, the 

regulations, like the statute, speak to the amount of gain necessary to 

effect the recapture of an OFL, nothing more. This is evident from both 

the text of the specific rule on which Liberty Global relies and the overall 

regulatory context. 

Starting with the former, the text of the relevant regulation reads 

as follows:

Treas. Reg. § 1.904(f)-2(d)(1) In general. If a taxpayer 

disposes of property used or held for use predominantly 

without the United States in a trade or business during a 

taxable year and that property generates foreign source 

taxable income subject to a separate limitation to which 

paragraph (a) of this section is applicable, (i) gain will be 

recognized on the disposition of such property, (ii) such 

gain will be treated as foreign source income subject to the 

14 We refer to section 904(f)(3)(D), which (as we have already noted) was added 

in 2004 to apply existing rules to certain dispositions of stock in a CFC. See American 

Jobs Creation Act of 2004, § 895, 118 Stat. at 1647; see also Section 904 Portfolio

at XII.E.4.e (“Until 2004, § 904(f)(3) did not apply to gain realized on the transfer of 

corporate stock held for investment purposes, which covered most types of stock 

ownership.”).
20

same limitation as the income the property generated, and 

(iii) the applicable overall foreign loss account shall be 

recaptured as provided in paragraphs (d)(2), (d)(3), and 

(d)(4) of this section. 

Liberty Global asks us to read paragraph (d)(1), and in particular 

paragraph (d)(1)(ii), of the regulation in isolation, a method prohibited 

by our caselaw.15 But even if we were to take this approach, all it would 

tell us, in plain terms, is that when a taxpayer disposes of qualifying 

property (1) some amount of gain is recognized, (2) “such [recognized] 

gain will be treated as foreign source income,” and (3) any OFL balance 

will be recaptured. Treas. Reg. § 1.904(f)-2(d)(1). It does not specify the

amount of gain to be recognized nor, by implication, the amount of gain 

to be treated as foreign-source income. And it certainly does not say that 

it applies to amounts beyond those necessary for recapturing an OFL

balance.

Moreover, when we read the regulation in the context of the 

greater regulatory scheme, its meaning becomes even more apparent. 

Treasury Regulation § 1.904(f)-2(d)(1) directs us to paragraph (a) for the 

portion of income to which it applies. Treasury Regulation § 1.904(f)-

2(a) says that “[r]ecapture is accomplished by treating as United States 

source income a portion of the taxpayer’s foreign source taxable income

of the same limitation as the foreign source loss that resulted in an overall 

foreign loss.” (Emphasis added.) In other words, the regulation speaks

only to the portion of gain necessary to recapture an OFL balance. See

also, e.g., Treas. Reg. § 1.904(f)-2(a) (“A taxpayer shall be required to 

recapture an overall foreign loss as provided in this section.”); id.

para. (b)(1) (explaining how to determine the amount of a taxpayer’s 

“overall foreign loss subject to recapture”); id. para. (d)(4)(iii) (“The 

provisions of paragraphs (a) and (b) of this section shall be applied to the 

extent of 100 percent of the foreign source taxable income which is 

recognized under paragraph (d)(4)(i) of this section.”); id. subpara. (7) 

(example 3). The broad sourcing rule that Liberty Global advances is 

nowhere to be found in the regulation.

Finally, it is worth noting that Liberty Global’s preferred reading 

of the regulation is disfavored under general rules of interpretation. We 

15 We interpret regulations using canons of statutory construction, beginning

with the text of the regulation, and giving effect to its plain meaning. See, e.g., Austin 

v. Commissioner, 141 T.C. 551, 563 (2013). To determine a regulation’s plain meaning, 

we look to its text as well as the text and design of the regulation as a whole. See, e.g.,

id. 
21

interpret regulations in a manner that avoids conflicts with the 

corresponding statute. See, e.g., Austin, 141 T.C. at 563 (citing Phillips 

Petroleum Co. & Affiliated Subs. v. Commissioner, 97 T.C. 30, 35 (1991), 

aff’d without published opinion, 70 F.3d 1282 (10th Cir. 1995)). Because 

the statute applies only to amounts necessary to recapture an OFL

balance, Liberty Global’s reading of the regulation is directly at odds 

with the statutory text.16

In summary, section 904(f)(3)(A)(i) is not ambiguous, and 

Treasury Regulation § 1.904(f)-2(d)(1) does not support Liberty Global’s 

position. We therefore find for the Commissioner on this issue as well.

III. Election to Deduct Foreign Taxes

Because we decide against Liberty Global with respect to both its 

arguments under section 904(f)(3), it alternatively wishes to deduct its 

foreign taxes under section 164(a)(3), which it says will also cause the 

reversal of income recognized for its 2010 tax year under section 78.17 

The Commissioner has conceded that Liberty Global may deduct its

foreign taxes in lieu of claiming a foreign tax credit. Therefore, we have 

no occasion to discuss the matter further and conclude that Liberty 

Global may deduct its foreign taxes and reverse the income recognized 

under section 78.

IV. Conclusion

For the reasons stated above, we resolve the case as it relates to 

section 904(f)(3) in favor of the Commissioner, but conclude that Liberty 

Global may deduct its foreign taxes for 2010.

To reflect the foregoing,

Decision will be entered under Rule 155.

16 Liberty Global argues that subsequent amendments to the regulation in 

2012 support its interpretation. See T.D. 9595, 2012-30 I.R.B. 71, 71. But the fact that 

the regulation was later clarified does not change our reading of the plain text for the 

years at issue, for the reasons we have already discussed. Moreover, for the same 

reasons, we find unpersuasive Liberty Global’s argument that the Commissioner is 

improperly attempting to apply here a regulatory rule that did not become effective 

until after 2010.

17 For a general description of the objective and operation of section 78, see 

Champion International Corp. v. Commissioner, 81 T.C. 424, 426–27 & n.6 (1983).