Document: 537 U.S. 437 BOEING CO. ET AL.v.UNITED STATES No. 01-1209. Supreme Court of United States. Argued December 9, 2002. Decided March 4, 2003* Under a 1971 statute providing special tax treatment for export sales made by an American manufacturer through subsidiary that qualified as "domestic international corporation" (DISC), no is payable on the DISC's retained income until it distributed. See 26 U. S. C. §§ 991-997. The thus provides incentive to maximize share—and minimize parent's share—of parties' aggregate from sales. three alternative ways parent divert limited portion its DISC. 994(a)(1)-(3). Boeing Company chose taxable little over half parties "combined income" (CTI). In 1984, "foreign (FSC) provisions replaced DISC provisions. As under regime, in interest FSC's share generated Because most differences between these regimes are immaterial this suit, Court's analysis focuses mainly Treasury Regulation at issue, CFR § 1.861-8(e)(3) (1979), governs accounting research and development (R&D) expenses when taxpayer elects take current deduction, telling taxpaying "what" must be treated cost calculating CTI, "how" those costs should (a) allocated among different products (b) apportioned parent. With respect question, regulation includes list Standard Industrial Classification (SIC) categories (e.g., transportation equipment) requires R&D any product within same category exported taken into account. regulations use gross receipts basis both questions. organized internal operations along lines aircraft model 767) management purposes, each which constituted separate "program" organization; $3.6 billion were spent "Company Sponsored Product Development," i.e., product-specific research. Boeing's accountants all directly related single program unrelated other program. nearly issue was programs had year conducted, amount deducted currently years but never affected calculation CTI derived Internal Revenue Service reallocated 1979 1987, thereby decreasing untaxed profits subsidiaries increasing After paying additional taxes, filed refund suit. granting summary judgment, District found invalid, reasoning categorical conflicted with congressional intent there direct relationship items thereto, specific giving right group allocate or line. Ninth Circuit reversed. Held: Section proper exercise Secretary Treasury's rulemaking authority. Pp. 446-457. relevant statutory text does not support argument certain give unqualified they factually exclude such product. method determine sale's transfer price allowed "to derive attributable [an sale] exceed ... 50 percent combined [the parent] property result sale plus 10 promotion ...." 994(a)(2) (emphasis added). define specifically mention expenditures. Secretary's deference, see Cottage Savings Assn. v. Commissioner, 499 554, 560-561, places some limits interpretive First, "does exceed" upper limit can assigned gives methods setting price. Second, makes clear domestic part equation. Third, "attributable" CTI. classification indirect broadly defined SIC arbitrary. It consistent used computing taxpayer's CTI; allocation expenditures even intended improve only one few more tenuous than chief executive officer's salary every company sells he devotes virtually his time Edsel. Reading 994 light 861, general provision dealing distinction foreign source income, contrary view. If reasonably determines properly basis, 861(b) deducts "a ratable cannot definitely item class inapplicable. 446-451. arguments based also unavailing. Language 1.994-1(c)(6)(iii), rule describing computation, prohibit "definitely related" particular Whether expense determined rules set forth very challenges, 1.861-8. Moreover, could 767 conducted before 767's sold sales, producing planes equipment category. Nor do 1.994-1(c)(7)(i) (ii)(a), control grouping transactions determining property, 1.994-1(c)(6)(iv), used, speak questions whether how apportioned. 451-455. (c) What legislative history suit weighs Government's favor. 455-457. 258 F. 3d 958, affirmed. STEVENS, J., delivered opinion Court, REHNQUIST, O'CONNOR, KENNEDY, SOUTER, GINSBURG, BREYER, JJ., joined. THOMAS, dissenting opinion, SCALIA, joined, post, p. 457. CERTIORARI TO THE UNITED COURT OF APPEALS FOR NINTH CIRCUIT. Kenneth Geller argued cause petitioners 01-1209 respondents 01-1382. him briefs Charles Rothfeld, David M. Gossett, Alan I. Horowitz, Joel V. Williamson, Wayne Kaplan, Roger J. Jones, Patricia Anne Yurchak, Marjorie Margolies, John B. Magee. Kent L. Jones States cases. brief Solicitor General Olson, Assistant Attorney O'Connor, Deputy Wallace, English Carmack, Frank P. Cihlar.† JUSTICE STEVENS Court. 1 This concerns enacted Congress provide incentives manufacturers increase their exports 1984 modify incentives. question presented involves interpretation (26 (1979)) promulgated 1977 schemes.1 We shall explain outlines two statutes we focus regulation. 2 provided (DISC).2 itself taxpayer; deemed have been distributed shareholders, shareholders pay taxes portion, actually Typically, wholly owned corporation." Senate Finance Committee, Deficit Reduction Act 98th Cong., 630, n. (Comm. Print 1984) (hereinafter Committee Print). 3 not, however, allow simply assign Rather, avoid undue advantages,"3 may Each alternatives assumes has hypothetical "transfer price" produced profit seller buyer resold customer. (CTI).4 4 Soon after enactment, became "the subject ongoing dispute signatories Agreement Tariffs Trade (GATT)" regarding impermissible subsidies violated our treaty obligations. 634. "To remove contentious further disputes retaliation, commitment GATT Council October 1, 1982, propose legislation would address members." Id., 634-635. ultimately resulted replacement Code. Pub. 98-369, 801-805, 98 Stat. 985.5 5 Unlike DISC, FSC corporation, ibid.; Bittker & Eustice, Federal Income Taxation Corporations Shareholders ¶ 17.14 (5th ed. 1987). Whereas deferred, exempted taxation. Compare 991-997 921, 923 (1988 ed.). Hence, will provisions.6 6 Code election either capitalize amortize period deduct currently. U.S.C. 174. here, deals deduction. tells parent.7 7 might adopted broad approach defining including products, narrow being exported. Instead, two-digit (examples "chemicals allied products" "transportation equipment"), account.8 ibid. explains "is inherently speculative activity" sometimes contributes unexpected benefits "that successful bear unsuccessful development." Ibid. 8 questions, allocating apportioning Thus, if constitutes 20 total category, And represent 70 product, amount, 14 R&D, 9 * Petitioners (and cross-respondents) include FSC. For 40 world leader commercial major exporter aircraft. During litigation, dollar volume amounted about $64 billion, 67 DISC-eligible during approximately $4.6 billion. (e. g., models 727, 737, 747, 757, organization. divided categories: "Blue Sky" Development." former broad-based aimed generally advancing state aviation technology developing designs new planes. latter pertaining board directors given approval production model. $1 essentially (1979).9 Its Sponsored" gave rise litigation. 11 program, totally model, example, effect models. because immense routinely incurred while completed occurred, effectively "disappeared" related.10 Almost conducted. That (approximately $1.75 billion) 12 Pursuant audit, paid obligation $419 million seeking refund. Relying decision Eighth St. Jude Medical, Inc. 34 1394 (1994), entered judgment favor Boeing. held (1979) invalid applied regulation's "direct" "related thereto," Appeals reversed, 958 (2001), granted certiorari resolve conflict Circuits, 535 1094 (2002). now affirm. II 13 861 distinguishes several purposes. 861. pursuant statute. Separate statute, 991-997, incorporate reference. 1.994-1(c)(6)(iii) (citing incorporating 1.861-8). claim complied 1.861-8(e)(3). argues so plainly inconsistent validly computation argues, essence, "factually argument. 15 already mentioned, choice good. elected second described following text: "Inter-company pricing 16 "(a) 17 "In case person section 482, upon (regardless charged) greatest of— 18 "(1) receipts, 19 "(2) "(3) charged (but 482). 21 "(b) Rules commissions, rentals, marginal costing 22 "The prescribe 23 . 24 subsection (a)(2) cases where establish maintain market property." 994(a)(1)-(3), (b)(2) 25 term income," nor R&D. did grant express authority contexts. See, e. 994(b)(1)-(2). Yet promulgating 1.861-8 exercised 7805(a), "prescribe needful enforcement" 41 Fed. Reg. 49160 (1976) ("The proposed issued contained 7805 Code"). Even regard challenged 7805(a)'s rather authority, still treat deference. 560-561 (1991). words emphasized place phrase unfettered select price." equation produce recognizes, charitable contribution Seattle Symphony reduces earnings Brief 01-1209, 8, 7. word position. 27 reading manufacturing selling 767's, anything else. classify 767, conclusive. asserts claims divide way creates segments: (1) Blue Sky; (2) year; (3) Boeing, like Secretary, treats Sky segment, uses reduce sells, eliminates entirely charging without third segment related." 28 category—in words, sales—is surely virtue 29 On hand, fully justified certainly produces anomalies Most obvious fact enabled 174 penny earnings" 11. Less obvious, nevertheless significant, assumed airplane and—at time—assumed likely models, 737 767.11 30 events, mere qualify decide deductible expenditure sufficiently read income. 31 Title contains sentences: 32 "Taxable sources 33 "From specified expenses, losses, deductions thereto remainder, any, included full States." (Emphasis added.) Focusing interprets having created background dividing cannot. "Ratable" permissible first, according view, first ratably across classes 35 There least flaws although authorize apportionment sentence whole be, perhaps fairness costs. 7805(a). italicized 36 sum, insufficient overcome deference entitled. III 37 advances regulations. resembles relies decisions controlling. 38 1.994-1 intercompany DISCs. They describe price, noting choose favorable method, another others. rule, 1.994-1(c)(6), describes defines supplier excess "which relate receipts."12 Subdivision (iii) relies, provides: 39 "Costs (other goods sold) relating related, therefore apportioned, manner 1.861-8." prohibiting response final paragraph. seems quite expressly apportion groups industry usage categories. strongest purpose used.13 1.994-1(c)(7) reads, part, follows: "Grouping transactions. (i) Generally, determinations transaction-by-transaction basis. However, annual consisting lines. 42 "(ii) A determination line accepted district director conforms standards: recognized trade usage, 2-digit ." 43 understand regulatory scheme, controlling important choices taxpayer. elect instead capitalizing amortizing 174(a)(1). engaging 994(a). best purposes applying methods. (1979). Conceivably, account separately, lines, together. These confirm finality type (i. e., evaluated methods), answered suit—namely, 44 1.994-1(c)(6)(iv) "taxpayer's accordance subparagraph (7) paragraph controlling, resulting grouping." selects (as did), then codes, establishes year. Notably, once (pursuant 1.994-1(c)(6)) receipts. fills gap connected "allocable (or categories)." IV 45 heavily history, particularly statements Reports prepared tax-writing committees House Those identical terms discussion H. R. Rep., 58-95; 90-129. Neither says contain supporting proposition calculate qualifies benefit, "directly 74; 107. promulgate indirectly 46 anything, what position respects. whereas level attributed lowered maximum allowable percent. 925(a)(2) dramatizes point though firms exports, intend "undue advantages" firms. 13. formulas designed ceilings benefits. 636 ("[T]he corporation prices bill: actual unrelated, independent or, parties, formula comply GATT's requirement arm's-length prices"). 47 seven legislatively override enacting fact, moratorium placed application sourcing 1981,14 conference agreement "not apply FSC) supplier." Conf. Rep. 98-861, 1263 (1984). serves persuasive evidence regarded correct implementation intent. Lorillard Pons, 434 575, 580-581 (1978). 48 49 ordered. Notes: Together 01-1382,United Sales Corp. et al., court. &#x2020; Briefs amici curiae urging reversal Caterpillar, Inc., al. Swenson; National Foreign Council, Stephen D. Gardner; Tax Executives Institute, Fred Murray Mary Fahey. 1996, amended, renumbered, republished 1.861-17. 1.861-17 (2002); 60 66503 (1995) To 95 corporation's arise 992(a)(1)(A). addition, assets related. 992(a)(1)(B) 92-437, (1971) Rep.) precise, example illustrated $816 $1,000 $650. margin $350 reduced $180 (including $90, administrative $60, prorated $30), $170. Half ($85) ($9) $94, leaving $76 immediately $184 amounts (promotion $90 $94 CTI) subtracted receipt $816. 108, 7; 92-533, 74, Rep.). 2000, repealed "extraterritorial exclusion 114 Two aspects significance discussed Part IV,infra. specifies treated. See,e. 1.861-8(e)(2) (interest fees); 1.861-8(e)(5) (legal 1.861-8(e)(6) (income taxes). original narrower three-digit categories, 1.861-17(a)(2)(ii) (2002), change equipment" meaning Regulation, programs, Government, erroneously hours labor When sense accounted assumption, course, runs products. 1.861-8(e)(3)(i)(A) 1.994-1(c)(6) part: "Combined section, 993(f)) Gross sale. Combined taking (e)(2) adjustments required 482 applicable. applied: "(i) Subject subdivisions (ii) (v) subparagraph, depreciation) 1.991-1(b)(2) DISC." 1.994-1(c) conflict, points various regulations, 1.861-8(g). pp. 22-26. dissent, seepost, 458-459 (opinion J.), find consequence nothing proposals. 1972—when governing DISCs proposed—the suggestions whatever govern. Technical Memorandum accompanying Notice Proposed Rulemaking, 1972 T. Lexis 14, *8-*9 (June 29, 1972) (providing form notice prepared"). 1981, imposed temporary solely geographic Economic Recovery 97-34, 223, 249. result, against only—not 1262 (1984) whom SCALIA joins, dissenting. 51 Before placing hand pocket, Government finger law authorizing action. Dominion Industries, States, 532 822, 839 (2001) (THOMAS, concurring) Leavell Blades, 237 Mo. 695, 700-701, 141 W. 893, 894 (1911)). Despite failure holds favor; I respectfully dissent. 52 majority think perfectly scheme petitioners/cross-respondents Boeing) utterly support. Nothing facts Indeed, (IRS) initially here permit precisely do.1 53 1972, IRS received public comments recommending amplified examples supplier. IRS, declined recommendations explaining 1.861-8, published 1973, ample guidance subject. 7364, 1974 30, *20-*21 (Oct. 1974). 54 1.861-8(e)(3), turn, explained "research expected improvement properties processes, connection considered allocable processes rise." 15843 (1973). went note "other cases, basic research, benefit Example 1.861-8(g) principle considering four-, six-, eight-cylinder gasoline engines. engine-specific that, types engines, engine arising engine. 15846 ("X's cylinder rise, i. engines ."). 55 IRS' explains, ante, 440, companies engaged activities. end, permits compute (and, relatedly, liability) computed usual transfer-pricing 56 Department framework applied. 1.994-1(c)(7), taxpayers make 1.994-1(c)(7)(i). Specifically, states: 57 "A inferior classifications combinations thereof, group) [SIC] [Office Management Budget]." 1.994-1(c)(7)(ii). 58 "[t]he [§ 1.994-1(c)(7)] tandem, case-by-case transactions, grouped together codes lesser subgroups. 59 Although 1.991-1(c)(7) expenses), selection "controlling," takes away 1.991-1 provides. told group—which happens options 1.991-1(c)(7). my eviscerates 1.991-1. despite efforts show complement, contradict, other, 453-455, irreconcilable.2 facts, permitted liability 1.991-1, one.3 Morales Trans World Airlines, 504 374, 384 (1992); Crawford Fitting Co. Gibbons, 437, 445 (1987); (CA8 1994). disapproves because, sees it, results "disappear[ance]" costs, 445, [R&D costs] [combined income]," 10. troubled `combined earnings' statute." Ante, 450. But "disappearance" Congress' encourage making them approved remedy alleged problem disappearing expenses. decides enter existing business remains free offset products.4 Finally, neither satisfactory explanation why see, 1.861-8(d)(1) ("Each deduction bears definite though, year, accrued .... deductions, residual grouping), grouping)"); Isenbergh, International Taxation: Persons 21.10 (3d 2003) ("[I]f another, belongs loss year"), disallow 61 believe need am puzzled, assertion "can basis," 451, implication require "ratable costs." By terms, appears contemplate expenses: added)). face, appear "deemed" Yet, notion "deemed relationships." states established "recognize activity, findings contribute benefits, proceeds groups. attempt reconcile admittedly 62 short, conclude here. reverse Appeals. concludes otherwise, Because, notes,ante, 442, corporations (DISCs) affect outcome too wishing practice, models,and so. falling doing model's earned applies DISCs, sets illustrates example: Suppose athletic clothing (SIC 23) invest develop 39). clothing, equipment, $500,000 equipment-related Code, eligible clothing. "disappear." 37,

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