Liberty Glob. v. United States
| Decision Date | 04 April 2022 |
| Docket Number | Civil Action 1:20-cv-03501-RBJ |
| Parties | LIBERTY GLOBAL, INC., Plaintiff, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — District of Colorado |
ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
This is before the Court on plaintiff Liberty Global, Inc.'s motion for summary judgment, ECF No. 32. For the reasons outlined below, the motion is GRANTED in part and DENIED in part.
Liberty Global, Inc. (LGI) argues that the § 245A temporary regulations (the temporary regulations) adopted by the Treasury Department on June 18, 2019 are invalid, and that it is entitled to a refund of the $104, 487, 574 it paid in taxes for the 2018 tax year. LGI also asserts it is entitled to a refund of $4, 802, 274 in penalties and interest it was assessed in the process of challenging the temporary regulations.
The income at issue was income from the “TGH transaction.” In that transaction, which occurred in December 2018, an LGI affiliate sold its interest in Telenet Group Holding (TGH), a Belgian company, to LGI's parent company, Liberty Global (based in the UK). Under the relevant tax laws at the time, LGI was required to recognize income equal to its share of gain from the TGH transaction. It sought to deduct that income using § 245A of the Tax Cuts and Jobs Act of 2017 (TCJA), Pub. L. No. 115-97, 131 Stat. 2054 (2017). LGI claims that it met the requirements to receive the § 245A deduction for the TGH transaction. However, because the temporary regulations, adopted in June 2019, were made retroactive, LGI did not receive the full deduction.
Under the statutory scheme of § 245A, domestic corporations are eligible for a dividend-received deduction for the portion of dividends paid to a U.S. shareholder from a controlled foreign corporation (CFC). Section 245A was designed to help transition the U.S. tax system into a participation-exemption system. Section 245A allows corporations to avoid U.S. residual tax when they repatriate certain foreign earnings, allowing U.S. corporations to better compete with foreign companies by eliminating an additional level of tax. This section works in concert with a global intangible low-taxed income (GILTI) tax, which deems a fixed percentage of CFC income to be taxable as if it were earned in the United States. In sum, GILTI taxes a fixed percentage of CFC income deemed earned in the U.S., and §245A exempts the remainder of CFC income from U.S. residual taxes when it is repatriated-these sections combine to form the basis of the new participation-exemption tax system.
Congress realized that §245A's dividend-received deduction might incentivize taxpayers to “allocate income that would otherwise be subject to the full U.S. corporate tax rate to foreign affiliates . . . where the income could potentially be distributed back to the U.S. with no U.S. tax imposed.” See Senate Budget Committee Report, S. Prt. 115-20, at 370. Based on the legislative history, it appears that Congress intended that only earnings that are exempt from GILTI would be eligible for the § 245A dividend-received deduction. Otherwise, some taxable foreign-source income might escape both current taxation and taxation as a dividend.
But the effective dates of various sections in the TCJA did not achieve the desired interaction between GILTI and § 245A for CFCs with non-calendar year ends. The TCJA was enacted on December 22, 2017 and § 245A was effective for distributions made after December 31, 2017. As a result, a U.S. shareholder of stock in a CFC with a non-calendar year end could receive dividends from that CFC and take the § 245A deduction beginning January 1, 2018. However, the GILTI rules were not effective until the CFC's first tax year beginning after December 31, 2017.
For corporations that have a non-calendar tax year, a U.S. shareholder's earnings from a CFC may not have been subject to GILTI until some later date in 2018, even though they could take the § 245A deduction for those earnings. Because of the lack of uniformity in the effective dates between the GILTI regime and § 245A, a CFC's earnings that would have been subject to tax under the GILTI regime (if it had been effective at that time) were able to be paid as a dividend that was eligible for deduction under § 245A. That would mean that as foreign-source income was being repatriated for corporations with non-calendar tax years, it would not be subject to any taxation because of the § 245A deduction.
According to the Treasury Department, it promulgated the temporary regulations to address the mismatch between the effective dates for the GILTI regime and § 245A. The temporary regulations were promulgated to prevent transactions just like the TGH transaction. The Treasury Department knew of transactions like the TGH transaction as early as October 2018-Treasury Department assistant deputy Chip Harter discussed the need for retroactive regulations to prevent these transactions under § 245A because they undermined anti-base erosion policies. See ECF No. 32-1. Specifically, the temporary regulations limited “the availability of the § 245A deduction . . . exception in specific and narrow cases where the deduction or exception, respectively, effectively eliminates subpart F income or income subject to tax under § 951A from the U.S. tax system.” Limitation on Deductions for Dividends Received From Certain Foreign Corporations (hereinafter “Temporary Regulations”), 84 Fed.Reg. 28398 (June 18, 2019) ().
The temporary regulations were promulgated with retroactive effect under 26 U.S.C. 7805(b)(2), which allows Treasury Department regulations to apply retroactively when promulgated within eighteen months of the enactment of the underlying statute (here, the TCJA). The temporary regulations were promulgated on June 18, 2019, days before the § 7805(b)(2) eighteen-month deadline would have passed. LGI moved for summary judgment on the issue of the validity of the temporary regulations. Oral argument on that motion was held on February 25, 2022.
A motion for summary judgment should be granted where there is “no genuine dispute of material fact and the movant is entitled to judgement as a matter of law.” Fed.R.Civ.P. 56(a). A dispute is genuine if there is “sufficient evidence on each side so that a rational trier of fact could resolve the issue either way.” Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998). An issue of fact is material if it is essential to the proper disposition of the claim. Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The party moving for summary judgment bears the burden of showing a lack of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). When determining a motion for summary judgment, the Court must view the record and draw all reasonable inferences from the record in the light most favorable to the nonmoving party. Adler, 144 F.3d at 670.
Plaintiffs advance several theories under which the temporary regulations are invalid. First, it argues that the Treasury Department did not have authority to issue the temporary regulations because they were contrary to the express language of the statute, and because there was no ambiguity in the language of the statute that would give the Treasury Department gap-filling authority to promulgate regulations. Second, it argues that the temporary regulations are invalid because the Treasury Department did not have authority to make the temporary regulations retroactive. Third, it argues that the temporary regulations are invalid because they were not promulgated in compliance with the Administrative Procedure Act's (APA) notice and comment requirements.
The parties recognized at oral argument that there is still an issue of fact that must be resolved: whether the TGH transactions and the actions LGI took to attempt to receive the § 245A deduction complied with the applicable tax laws. However, that issue is not material to the determination of the validity of the temporary regulations-it only affects whether LGI is entitled to judgment as a matter of law on that issue.
Any of LGI's arguments, if correct, could be sufficient to show the invalidity of the temporary regulations. In this order I do not reach or decide LGI's first or second arguments, because I conclude that LGI has shown that it is entitled to judgment as a matter of law on the invalidity of the temporary regulations on the basis that they were promulgated without notice and comment. To find the temporary regulations invalid for improper promulgation, I must address three issues relating to notice and comment: (1) whether the Treasury Department was required to comply with APA notice and comment procedures in promulgating the temporary regulations, (2) whether the Treasury Department had good cause in this instance to depart from the requirement to comply with notice and comment procedures, and (3) whether the Treasury Department's failure to comply with notice and comment procedures was harmless error. I address these issues in turn.
LGI argues that although the Internal Revenue Code (IRC) contemplates Treasury Department authority to issue temporary regulations in § 7805, that contemplation does not, without a clear expression from Congress, excuse temporary regulations from the requirements of the APA; namely, pre-promulgation notice and comment. Id. at 18.
LGI cites two cases to support its position that the grant of authority to issue temporary...
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