Judge Emin (“Eminent”) Toro treads into the underbrush of dealing with the overall foreign loss (OFL) of a CFC when its American controller disposes of the CFC. And there we find Liberty Global, Inc., 161 T. C. 10, filed 11/8/23.  Lib had a $474 million OFL in the CFC, but unloaded the CFC for $2.8 billion. Lib and IRS agree Section 904(f)(3)(A) requires recapture of the OFL as recognized gain and recharacterized foreign-source income.

But what happens to the rest of Lib’s gain?

Lib’s trusty attorneys (whom I’ll call Raj and Nat) go for the green off the tee on a par-5. They claim “…Section 904(f)(3) not only operates to recapture its… 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.” 161 T. C. 10, at p. 3.

IRS says only conversion of enough to cover the OFL gets converted to foreign-source, with foreign tax credit to match; the rest is US-sourced, no foreign tax credit for that.

To avoid double taxation, Section 904 gives a credit against US tax for tax paid or accrued to a foreign authority. But since this opens up gameplaying,  the credit is limited to the ratio of foreign source income to worldwide income, times US tentative tax. So more foreign-source income, greater credit.

Section 904 includes various mechanisms to prevent US from losing tax revenue due to mismatches between foreign tax computations and US tax computations. See 161 T. C. 10, at pp. 7-10. But what happens when the US controller disposes of a CFC prior to complete recapture of accumulated foreign losses? Section 904(f)(3) recharacterizes what would be foreign-source income (gain on disposition) to US-source, to the extent of the lesser of the accumulated OFL or gain realized.

But the Libs say Section 904(f)(3) exempts all their gain from US tax, not just the recapture of OFL, and policy considerations fall to the express language of the statute.

OK, says Judge Eminent, but the statute doesn’t say what the Libs say it says.

Section 904(f)(3)(A)(i) “… 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.” 161 T. C.10, at p. 15 (citations omitted).

And statutory construction requires reading each part of a statute as part of the overall statutory scheme.

“… 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.” 161 T. C. 10, at p,. 16. (Citation omitted, but it says Congress doesn’t hide elephants in mouseholes).

The Libs can deduct all the foreign taxes they paid per Section 164, even if they don’t get the credit.

And Raj and Nat get a Taishoff “Good Try, First Class, with Brass Appendages.”