“Notwithstanding” Does Not Trump the Default Sourcing Rule:
Liberty Global v. Commissioner and the Limits of I.R.C. § 904(f)(3)

Introduction

In Liberty Global, Inc. v. Commissioner of Internal Revenue, the United States Court of Appeals for the Tenth Circuit confronted a $240-million question: when a domestic corporation sells stock in a foreign subsidiary at a gain that vastly exceeds its accumulated “overall foreign losses,” does I.R.C. § 904(f)(3)(A)(i) convert all of the gain into foreign-source income—thereby inflating the foreign-tax-credit limitation—or only so much of the gain as is necessary to recapture those prior losses?

Liberty Global argued for the broader reading, relying on the subsection’s opening phrase, “notwithstanding any other provision of this chapter,” and on Treasury regulations it claimed filled any statutory silence. The Commissioner countered that the “notwithstanding” clause displaces other provisions only in the event of a conflict, and that because § 904(f)(3) is silent on excess gain, the default sourcing rule of § 865(a) governs.

Affirming the Tax Court, the Tenth Circuit adopted the Commissioner’s position, holding that the excess gain is U.S.-source income. The decision crystallises a new precedent on the interpretive reach of “notwithstanding” clauses in the Tax Code and delineates the boundary between statute and regulation in foreign-tax-credit calculations.

Summary of the Judgment

• Holding: Only the portion of Liberty Global’s gain equal to its outstanding overall foreign loss ($474 million) may be treated as foreign-source income under § 904(f)(3)(A)(i). The remaining $2.3 billion is U.S.-source under the general rule of § 865(a). Accordingly, Liberty Global is ineligible for the $240 million foreign-tax-credit it claimed.
• Key Determination: The phrase “notwithstanding any other provision of this chapter” in § 904(f)(3)(A)(i) overrides conflicting Code sections only to the extent of the explicit statutory command. Where the statute is silent, no conflict exists and background rules remain operative.
• Regulatory Role: Treasury Regulation § 1.904(f)-2(d) cannot be read to contradict or enlarge the statute; therefore it does not convert the excess gain into foreign-source income.

Analysis

1. Precedents Cited and Their Influence

The court anchored its reasoning in a trilogy of interpretive authorities on “notwithstanding” clauses:

• NLRB v. SW General, Inc., 580 U.S. 288 (2017) – “Notwithstanding” indicates which provision controls in the event of a clash.
• Cisneros v. Alpine Ridge Group, 508 U.S. 10 (1993) – Similar holding; the clause prevails only over conflicting text.
• United States v. Dolan, 571 F.3d 1022 (10th Cir. 2009), aff’d 560 U.S. 605 – The Tenth Circuit’s own application of the same principle.

By invoking these cases, the panel portrayed its conclusion as the natural extension of existing Supreme Court and circuit doctrine: a “notwithstanding” clause is a targeted, not wholesale, repealer.

Additional authorities buttressed textual canons:

• TRW Inc. v. Andrews, 534 U.S. 19 (2001) – Reinforced the presumption against reading statutory language as superfluous.
• Joy Technologies, Inc. v. Secretary of Labor, 99 F.3d 991 (10th Cir. 1996) – Regulations must harmonise with, not contradict, the statute.
• Whirlpool Financial Corp. v. Commissioner, 19 F.4th 944 (6th Cir. 2021) – An inter-circuit nod that regulations cannot circumvent clear statutory text.

2. Court’s Legal Reasoning

1. Statutory Text Controls – Section 904(f)(3)(A)(i) explicitly limits the amount of “recognized taxable income from sources without the United States” to the “lesser of” (a) the built-in gain or (b) the remaining overall foreign loss. Anything beyond that threshold is simply not addressed by the subsection.
2. No Conflict, No Displacement – Silence is not conflict. Because § 904(f)(3) is silent as to excess gain, it does not collide with § 865(a). Therefore, § 865(a)’s default rule—income from the sale of personal property by a U.S. resident is U.S.-source—fills the gap.
3. Limit of Regulatory Authority – The regulation relied upon by Liberty Global (§ 1.904(f)-2(d)) mentions that “gain will be recognized” and “treated as foreign source income,” but must be read in pari materia with the statute. The court interpreted “such gain” to mean the gain up to the statutory ceiling, not all gain.
4. Avoidance of Superfluity – Reading the “notwithstanding” clause to globalise foreign-source treatment would render the “lesser of” limitation meaningless, violating the canon against superfluity (TRW).

3. Impact on Future Litigation and Tax Practice

The decision closes a perceived loophole that could have permitted multinational groups to balloon their foreign-tax-credit capacity by selling highly-appreciated foreign subsidiaries after utilising foreign losses. Anticipated consequences include:

• Tax Planning Adjustments – Corporations contemplating dispositions of foreign affiliates will need to recalibrate credit projections; excess gains over the OFL balance cannot be relied upon to enlarge the numerator of the § 904 limitation fraction.
• Regulatory Interpretation – Treasury may revisit the wording of Reg. § 1.904(f)-2(d) to eliminate ambiguity, but any revision must now respect the Tenth Circuit’s construction.
• Litigation Strategy – The opinion furnishes clear precedent for government litigators resisting aggressive sourcing arguments hinged on generalized “notwithstanding” language.
• Inter-Circuit Coherence – Although a Tenth Circuit case, the opinion aligns with Supreme Court precedent and is likely persuasive authority nationwide unless another circuit splits.

Complex Concepts Simplified

• Foreign-Tax Credit (FTC) – A dollar-for-dollar reduction in U.S. tax for taxes paid to foreign jurisdictions. Limited by § 904: FTC ≤ (Foreign Source Income ÷ Worldwide Income) × U.S. tax.
• Overall Foreign Loss (OFL) – The running tally of prior-year foreign-source losses that reduced U.S. taxable income. When foreign income later arises, an equal amount is “re-sourced” to U.S. income (recapture) before any FTC may be claimed.
• Section 904(f)(3) “Notwithstanding” Clause – Grants temporary foreign-source character to gain from disposing of foreign-use property only up to the remaining OFL balance, ensuring recapture can occur.
• Default Sourcing Rule ( § 865(a) ) – Gain from the sale of personal property is sourced to the seller’s residence: U.S.-source for domestic corporations, foreign-source for non-residents.
• “Notwithstanding” Clauses – Directional tools; they instruct courts which provision prevails when texts conflict but do not erase unrelated statutory commands.

Conclusion

The Tenth Circuit’s opinion in Liberty Global v. Commissioner carefully limits the disruptive potential of a broadly-phrased “notwithstanding” clause, reinforcing two foundational interpretive norms: (1) silence does not equal conflict, and (2) regulations cannot outrun the statute they implement.

Practitioners must now treat excess gain arising from the sale of foreign subsidiaries as U.S.-source unless Congress amends § 904(f) to say otherwise. By foreclosing expansive foreign-source characterisation strategies, the decision safeguards the integrity of the § 904 limitation and curtails the risk of revenue loss through over-claimed foreign-tax-credits.

© 2025 – Commentary prepared for educational purposes. All errors are the author’s own.