On August 22, 2025, the Tenth Circuit issued an opinion in Liberty Global, Inc. v. Commissioner, upholding the U.S. Tax Court's determination that Liberty Global Inc. (LGI) was not entitled to characterize the entire amount of gain recognized on the sale of stock of a controlled foreign corporation (CFC) as foreign source income. The central issue involved the application of the overall foreign loss (OFL) recapture rules under section 904(f)(3) and whether these provisions allowed LGI to treat the entire amount of its gain from the sale of CFC stock as foreign source income or only the amount needed to eliminate the OFL account balance. (See our prior coverage here.)

On appeal, LGI and the Commissioner both submitted stipulated records, and the 10th Circuit limited its review to whether section 904(f)(3) applies to the excess gain above the OFL account balance. LGI proffered three arguments in support of its position: (1) section 904(f)(3) is silent as to the treatment of gain in excess of the OFL account, (2) the use of the phrase "notwithstanding any other provision of this chapter" in section 904(f)(3) indicates that section 904(f)(3) is intended to preempt the normal sourcing rules in section 865, and (3) the regulations implementing section 904 states that "gain will be treated as foreign source income," without any limitation to the amount of the OFL account. The Tenth Circuit rejected all of these arguments, finding that the plain text of section 904(f)(3) "limits its own applicability" to treat as foreign source income only the "lesser of the gain from the sale" or the remaining amount of the OFL account balance and that section 865(a) applies to treat the gain in excess of such as amount as U.S. source income. As such, the Tenth Circuit upheld the Tax Court's determination and held that "[section] 904(f) requires the gain remaining after the overall foreign loss account is zeroed out to be treated as U.S.-sourced income." 

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Layla J. Asali, lasali@milchev.com, 202-626-5866

Omar M. Hussein, ohussein@milchev.com, 202-626-1578

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