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Telecommunications Company Seeks $109 Million Tax Refund

NOV. 27, 2020

Liberty Global Inc. v. United States

DATED NOV. 27, 2020
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Liberty Global Inc. v. United States

LIBERTY GLOBAL, INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO

COMPLAINT

Plaintiff, Liberty Global, Inc., on behalf of itself and its consolidated subsidiaries (collectively, “LGI”), alleges and states the following:

NATURE OF THE ACTION

1. This is an action arising under the Internal Revenue Code of 1986, as amended and codified in Title 26 of the United States Code, for recovery of $104,487,574 in federal income taxes, $2,175,147 in penalties, and $2,627,128 in interest erroneously collected with respect to LGI's tax year ending December 31, 2018 (the “2018 Tax Year”), plus interest thereon as provided by law.

JURISDICTION AND VENUE

2. This Court has jurisdiction over this matter pursuant to 26 U.S.C. § 7422 and 28 U.S.C. § 1346(a)(1).

3. Prior to the filing of this Complaint, LGI has made full payment of all U.S. federal income tax liabilities that the government has assessed for LGI's 2018 Tax Year. See Flora v. United States, 362 U.S. 145 (1960).

4. LGI has complied with the statutory requirements of exhausting its administrative remedies. See 26 U.S.C. §§ 6532, 7422. On December 23, 2019, LGI timely filed an amended 2018 tax return seeking a refund of taxes paid (the “Claim for Refund”). The Internal Revenue Service (“IRS”) has not paid any refund or otherwise acted on the Claim for Refund. More than six months have expired since LGI filed the Claim for Refund. 26 U.S.C. § 6532(a)(1).

5. Venue for this action properly lies in this District pursuant to 28 U.S.C. § 1402(a)(2).

PARTIES

6. LGI is a corporation organized under the laws of the State of Delaware with a principal place of business at 1550 Wewatta Street, Suite 1000, Denver, Colorado 80202. LGI's Employer Identification Number is 46-1947033.

7. LGI is the common parent of an affiliated group of corporations, as defined by 26 U.S.C. § 1504(a)(1). The LGI consolidated group uses a calendar year as its taxable year for U.S. federal income tax purposes. For convenience, we refer to the LGI consolidated group as LGI in this Complaint.

8. LGI is wholly owned by Liberty Global plc (“Liberty Global”), a U.K. public limited company.

9. Liberty Global, LGI, and their affiliates operate one of the world's largest telecommunications businesses, providing broadband, cable, and communications services to millions of customers.

10. Defendant is the United States of America.

FACTUAL ALLEGATIONS

Issue 1: The Section 245A Deduction

11. The primary issue in this case is whether LGI is entitled to claim a deduction on its 2018 corporate income tax return under 26 U.S.C. § 245A (the “Section 245A Deduction”).1 The Section 245A Deduction is allowed when a corporate taxpayer, such as LGI, recognizes certain types of income.

12. For LGI, the Section 245A Deduction arose as a result of a transaction we refer to as the “TGH Transaction.” In the TGH Transaction, an LGI affiliate sold its interest in a publicly-traded, Belgian telecommunications company, Telenet Group Holding NV (“TGH”), to LGI's parent, Liberty Global. The TGH Transaction was executed on December 28, 2018.

13. While the TGH Transaction involved a sale between two affiliated entities, the transaction generated taxable income for LGI. The Internal Revenue Code sets forth detailed rules governing the tax treatment of the TGH Transaction. Under those rules, LGI was required to recognize income equal to its share of the gain arising from the TGH Transaction on its 2018 corporate tax return.

14. As a result of LGI recognizing income from the TGH Transaction, LGI was entitled to the Section 245A Deduction under the relevant federal statutes, including 26 U.S.C. § 245A and 964.

15. Although LGI met all statutory requirements for claiming a Section 245A Deduction in connection with the TGH Transaction, Defendant takes the position that LGI should be denied the vast majority of its Section 245A Deduction because of “interim-final” or “temporary”2 Treasury Regulations issued in June 2019. See 26 C.F.R. § 1.245A-5T (the “Section 245A Temporary Regulations”). The Section 245A Temporary Regulations set forth new rules — not found in or supported by the statute — under which the Section 245A Deduction is disallowed.

16. Moreover, the Section 245A Temporary Regulations purport to apply retroactively to January 1, 2018. Thus, Defendant takes the position that the Section 245A Temporary Regulations apply to LGI's Section 245A Deduction even though those regulations were issued almost six months after both the TGH Transaction was executed and the close of LGI's 2018 Tax Year.

17. The Section 245A Temporary Regulations are invalid for multiple reasons discussed below and, as a result, cannot be applied to LGI in this case.

18. Accordingly, LGI is entitled to a Section 245A Deduction consistent with the application of the relevant tax statutes.

A. LGI's Entitlement to the Section 245A Deduction

19. The plain language of the relevant statutes permits LGI to claim a Section 245A Deduction with respect to the income that LGI recognized in connection with the TGH Transaction.

20. Specifically, 26 U.S.C. § 245A(a) mandates that a domestic corporation (like LGI) “shall be allowed . . . a deduction” with respect to income of the type that LGI recognized in connection with the TGH Transaction. (Emphasis added.)

21. Moreover, 26 U.S.C. § 964(e)(4) directly addresses LGI's specific circumstances. That section provides that the income generated from the TGH Transaction must be treated by LGI as if it “were a dividend” and that “the deduction under section 245A(a) shall be allowable” in an amount equal to that deemed dividend. See 26 U.S.C. 964(e)(4)(A)(iii) (emphasis added). 22. As applied here, these rules mandate that LGI be allowed to claim a Section 245A Deduction in connection with the TGH Transaction.

23. Defendant, however, takes the position that LGI should be denied the vast majority of its Section 245A Deduction because of the application of the Section 245A Temporary Regulations.3

24. In particular, the Section 245A Temporary Regulations provide that certain dividends (or portions of those dividends) are “ineligible” for the Section 245A Deduction. In so doing, the Section 245A Regulations create new, extra-statutory conditions on the ability to claim a Section 245A Deduction.

B. The Section 245A Temporary Regulations Are Invalid

25. The Section 245A Temporary Regulations are substantively and procedurally invalid and, therefore, are inapplicable to LGI.

26. As a substantive matter, the Section 245A Temporary Regulations are contrary to the controlling statutes. See, e.g., Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).

27. Treasury acknowledged when it issued the Section 245A Temporary Regulations that the regulations are inconsistent with “a literal application of section 245A.” Limitation on Deduction for Dividends Received From Certain Foreign Corporations and Amounts Eligible for Section 954 Look-Through Exception, 84 Fed. Reg. 28,398, 28,400 (June 18, 2019) (the “Preamble”). Treasury further acknowledged that, “when the requirements of section 245A as properly construed are satisfied, it would not be permissible under the statute for the [S]ection 245A [D]eduction to be denied . . . even if, for example, taxpayers choose to generate such income to avail themselves of the benefits of the deduction.” Id.

28. As a procedural matter, Treasury also failed to comply with several administrative law requirements, including requirements under the Administrative Procedure Act, 5 U.S.C. § 551, et seq. (the “APA”).

29. First, the Section 245A Temporary Regulations were issued without an opportunity for pre-promulgation notice and comment, as required by the APA (the “Notice-and-Comment Requirement”). 5 U.S.C. § 553(b).

30. Second, the Section 245A Temporary Regulations violate the general prohibition on retroactive rulemaking. See 5 U.S.C. § 553(d). The APA generally requires that substantive rules can be effective no earlier than 30 days after the rules are first promulgated (the “Prospective Rulemaking Requirement”). See id. The Section 245A Temporary Regulations were issued on June 18, 2019, yet those rules are purportedly effective immediately and retroactively to transactions that occurred nearly 18 months earlier.

31. Under applicable law, Treasury was required to follow the Notice-and-Comment Requirement and the Prospective Rulemaking Requirement unless it had “good cause” within the meaning of 5 U.S.C. § 553(b)(3)(B) and 5 U.S.C. § 553(d)(3).

32. In the Preamble to the Section 245A Temporary Regulations, Treasury asserted that it had the necessary “good cause” for not complying with the Notice-and-Comment Requirement and the Prospective Rulemaking Requirement. 84 Fed. Reg. 28,398, 28,405 (June 18, 2019).

33. None of the reasons set forth in the Preamble, individually or collectively, constitutes “good cause” within the meaning of 5 U.S.C. § 553(b)(3)(B) and 5 U.S.C. § 553(d)(3).

34. Even if Treasury had “good cause” and possessed the substantive authority to promulgate the 245A Temporary Regulations, Treasury had no authority to make those regulations retroactively effective.

35. The retroactive application of the Section 245A Regulations also violates the due process clause of the Fifth Amendment. See, e.g., United States v. Carlton, 512 U.S. 26 (1994).

36. Finally, Treasury failed to provide an adequate explanation for its rulemaking in the Section 245A Temporary Regulations as required under Motor Vehicle Manufacturers Ass'n of the United States v. State Farm Mutual Auto Insurance Co., 463 U.S. 29 (1983), and its progeny.

C. LGI's Tax Reporting

37. LGI timely filed its original 2018 U.S. corporate income tax return on October 11, 2019 (the “2018 Original Return”).

38. At the time that it filed its 2018 Original Return, LGI intended to challenge the validity of the Section 245A Temporary Regulations. For procedural reasons, however, LGI filed its 2018 Original Return consistent with the Section 245A Temporary Regulations and paid the additional tax that would be due under those regulations.

39. On its 2018 Original Return, LGI also made an election under 26 C.F.R. § 1.245A‐5T(e)(3)(i) (a “Closing Election”) to close TGH's taxable year on the date of the TGH Transaction. The Closing Election is a new, extra-statutory election created in the Section 245A Temporary Regulations. Making a Closing Election allowed LGI to claim a portion of the Section 245A Deduction, mitigating the adverse effects of the Section 245A Temporary Regulations.

40. Even with the Closing Election, Defendant's application of the Section 245A Temporary Regulations causes LGI to improperly owe more than $104 million in additional U.S. federal income tax than LGI would have otherwise owed under the relevant statutes.

41. To the extent the Section 245A Temporary Regulations are invalid, then LGI's Closing Election also has no effect.

42. On December 23, 2019, LGI filed its Claim for Refund, seeking a refund on the basis that the Section 245A Temporary Regulations are invalid.

43. By first paying all tax owed under the Section 245A Temporary Regulations and then filing the Claim for Refund, LGI complied with statutory prerequisites for exhausting administrative remedies before filing this lawsuit. See 26 U.S.C. §§ 6532, 7422.

Issue 2: Additional Penalties and Interest Improperly Assessed

A. The November 2019 Assessment

44. On or around November 25, 2019, the IRS sent LGI a notification that it had assessed penalties under 26 U.S.C. § 6651 and interest under 26 U.S.C. § 6601 related to LGI's 2018 Tax Year (the “November 2019 Assessment”).

45. The IRS asserted that LGI was liable for such penalties and interest, because LGI had failed to pay the full amount of taxes owed for its 2018 Tax Year — including taxes owed because of the application of the Section 245A Temporary Regulations — by April 15, 2019.

46. In other words, the November 2019 Assessment reflects the IRS's imposition of penalties and interest on LGI for its failure to pay taxes by April 15, 2019, that were owed under retroactive regulations first issued two months after that date (i.e., the Section 245A Temporary Regulations).

47. LGI paid its purported liability under the November 2019 Assessment on December 23, 2019.

B. The September 2020 Assessment

48. On or about September 21, 2020, the IRS made an additional assessment of $8,704,337 in tax, $22,955 in penalties, and $666,037 in interest with respect to LGI's 2018 Tax Year (the “September 2020 Assessment” and, collectively with the November 2019 Assessment, the “Additional Amounts”).

49. The taxes assessed through the September 2020 Assessment relate to a reduction in the amount of foreign tax credits that LGI is allowed to claim for its 2018 Tax Year. Should the Section 245A Temporary Regulations be determined to be invalid, LGI would be entitled to a refund of the taxes, penalties, and interest assessed in the September 2020 Assessment.

50. LGI paid its purported liability under the September 2020 Assessment on November 4, 2020.

C. LGI Is Not Liable for the Penalties and Interest Assessed by the IRS as Part of the Additional Amounts

51. If the Section 245A Temporary Regulations are invalid, then LGI did not underpay its taxes for the 2018 Tax Year and there is no basis for imposing the penalties and interest reflected in the Additional Amounts.

52. LGI had reasonable cause within the meaning of 26 C.F.R. § 301.6651-1(c)(1) for its failure to pay the taxes that gave rise to the penalties and any interest thereon reflected in the Additional Amounts.

53. For the portion of the Additional Amounts that is interest under 26 U.S.C. § 6601, even if the 245A Temporary Regulations were valid, interest cannot accrue on amounts that, as of the relevant date (here, April 15, 2019), were not legally due.

54. Even if the Temporary Regulations are valid, the imposition of the Additional Amounts in the context of retroactive regulations that were issued nearly two months after the relevant payment date violates the due process clause of the Fifth Amendment.

COUNT ONE

55. LGI incorporates herein by reference and realleges all allegations in Paragraphs 1 through 43.

56. The Section 245A Temporary Regulations are invalid in whole or in part and, as a result, cannot be applied to LGI in this case.

57. Accordingly, LGI is entitled to a refund in the amount of $104,487,5744 for taxes paid for its 2018 Tax Year, or such greater amount of taxes and interest, including overpayment interest thereon, as provided by law.

COUNT TWO

58. LGI incorporates herein by reference and realleges all allegations in Paragraphs 1 through 54.

59. LGI should be refunded the penalties and interest assessed as part of the Additional Amounts.

60. Accordingly, LGI is entitled to a refund in the amount of $4,802,274, including overpayment interest thereon, as provided by law.

PRAYER FOR RELIEF

WHEREFORE, LGI prays for judgment in its favor and against Defendant as follows:

1. That LGI be refunded the total sum of $109,289,849 in federal income tax, penalties, and deficiency interest as described above for the 2018 Tax Year, or such greater amount as is legally refundable, plus statutory interest as allowed by law;

2. That LGI be awarded its costs of this action; and

3. That LGI be granted such other and further relief as this Court deems appropriate.

Respectfully submitted this 27th day of November 2020.

Rajiv Madan
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
Washington, DC 20005
Telephone:(202) 371-7020
E-mail:raj.madan@skadden.com
Attorney for Plaintiff Liberty Global, Inc.

FOOTNOTES

1Unless otherwise specified, all “section” references herein are to sections of the U.S. Internal Revenue Code of 1986, as amended, and all “Treasury Regulation” references herein are to sections of the Treasury Regulations promulgated under the Internal Revenue Code.

2Interim-final regulations issued by the U.S. Department of the Treasury (“Treasury”) are referred to as “temporary regulations.”

3On August 21, 2019, Treasury issued final regulations under section 245A that contain many of the same rules set forth in the Section 245A Temporary Regulations. Those final regulations, however, are applicable only prospectively from June 14, 2019 — i.e., the same date that the Section 245A Temporary Regulations were issued. 26 C.F.R. § 1.245A-5(k)(1).

4This amount reflects that LGI would also be entitled to a refund of the additional taxes assessed by the IRS in the September 2020 Assessment if the Section 245A Regulations are invalid. See Paragraphs 48-49.

END FOOTNOTES

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