Source: https://m.openjurist.org/986/f2d/60/black-decker-corporation-v-commissioner-of-internal-revenue
Timestamp: 2019-11-12 18:54:30
Document Index: 5231389

Matched Legal Cases: ['§ 901', '§ 901', '§ 904', '§ 863', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1']

986 F2d 60 Black Decker Corporation v. Commissioner of Internal Revenue | OpenJurist
986 F. 2d 60 - Black Decker Corporation v. Commissioner of Internal Revenue
986 F2d 60 Black Decker Corporation v. Commissioner of Internal Revenue
986 F.2d 60
71 A.F.T.R.2d 93-964, 93-1 USTC P 50,125
The BLACK & DECKER CORPORATION, Petitioner-Appellant,
No. 92-1188.
The Internal Revenue Code of 1954 ("the Code")1 provided Black & Decker the opportunity to claim a foreign tax credit against its domestic tax liability in 1981. 26 U.S.C. § 901(a). The credit could equal the total income, war profits, and excess profits taxes paid to any foreign country, id. § 901(b)(1), but could not exceed the proportion of net foreign-source income to total taxable income, id. § 904(a). Therefore, reductions in Black & Decker's foreign-source income would decrease its allowable foreign tax credit proportionally.
Congress has authorized the Secretary of the Treasury to prescribe regulations specifying allocation methods for expenses, losses, and deductions derived from domestic and foreign sources. 26 U.S.C. § 863(a). These regulations emphasize the factual relationship between the deduction and a given class of gross income, allowing deductions only against the class of gross income to which the deduction is definitely related. 26 C.F.R. § 1.861-8(b)(1). The relationship need not be contemporaneous; in other words, the deduction may relate to gross income received or accrued in past taxable years or expected in future taxable years although the taxpayer never actually realizes that income. Id. § 1.861-8(b)(2). Gross income is classified on an objective basis; if a taxpayer could reasonably expect a particular class to generate gross income, the class can support offsetting deductions. A taxpayer shall consider a deduction definitely related to a hypothetical class of gross income whether or not the taxpayer recognizes "any item of gross income in such class which is received or accrued during the taxable year and whether or not the amount of deductions exceeds the amount of the gross income in such class." Id.
Id. § 1.861-8(e)(7)(i).
A loss from the disposition of an asset may be applied proportionately against more than one class of income when the loss relates to each class definitely. Id. § 1.861-8(e)(7)(ii). Typical situations calling for apportionment include disposition of a tangible or intangible asset used both inside and outside the United States.2 Id.
If a deduction does not bear a definite relationship to a given class of gross income, Black & Decker may treat the deduction as definitely related and allocable to all of Black & Decker's gross income, on a pro rata basis. Id. § 1.861-8(b)(5). Deductions outlined in the regulations as not definitely related to any gross income are personal interest expense, real estate and sales taxes, medical expenses, charitable contributions, and alimony payments. 26 C.F.R. § 1.861-8(e)(9)(i)-(v).
The redetermination of a tax deficiency involves the application of these legal standards for allocation to factually determined classifications of income. In this case, the parties agree on the tax court's essential findings, but differ over the court's application of the treasury regulations to those facts. Black & Decker argues that the tax court's holding is a conclusion of law reviewable de novo, while the Commissioner argues that the holding hinges on a factual determination and "shall not be set aside unless clearly erroneous." Fed.R.Civ.P. 52(a). We find that the holding involves a mixed question of law and fact, and therefore review it de novo. Dobson v. Commissioner, 320 U.S. 489, 500-502, 64 S.Ct. 239, 246-47, 88 L.Ed. 248 (1943); Rawl v. United States, 778 F.2d 1009, 1014 & n. 9 (4th Cir.1985), cert. denied, 479 U.S. 814, 107 S.Ct. 67, 93 L.Ed.2d 25 (1986).
Black & Decker offers alternative justifications for worldwide allocation of its worthless-stock loss on a proportional basis: (1) the loss bears a close factual relationship to worldwide income because the NBD investment was geared to enhance worldwide competitiveness; or (2) the loss bears no definite relationship to any one class of gross income and therefore should be apportioned to all income. Black & Decker argues that section 1.861-8(e)(7) of the Treasury Regulations, which deals with the allocation of losses on the sale, exchange, or other disposition of property, is controlling. We reject Black & Decker's proposed allocations on three grounds.
* First, Black & Decker properly asserts that section 1.861-8(e)(7) of the regulations controls this dispute. Black & Decker fails, however, to understand how the provision should correctly be applied in the circumstances before us. The section guides allocation of a specific type of loss--one from the sale, exchange, or other disposition of property--to the appropriate class of income. Black & Decker's loss resulted from the devaluation of Black & Decker's equity stock in NBD, an asset disposition. The corollary class of gross income deriving from the NBD stock would be dividends, not the intangible benefits that increased market share in Japan might represent.3
In addition, Black & Decker contends that its desire to protect its worldwide market through developing market share in the power-tool market in Japan represents a worldwide use of its NBD investment. Black & Decker claims that NBD therefore has the international quality of an asset used both inside and outside the United States, so that its liquidation gives rise to apportionable deductions pursuant to 26 C.F.R. § 1.861-8(e)(7)(ii). We reject this contention. Section 1.861-8(e)(7)(ii) recognizes only those unusual situations when an asset is used and generates income globally. Black & Decker's argument demonstrates no nexus between its worldwide income and the NBD worthless-stock loss beyond the boost an increased Japanese market share could give to Black & Decker's worldwide competitiveness. Moreover, Black & Decker has identified no worldwide income that its directly attributable to the NBD assets.
Second, Black & Decker suggests that the worthless-stock loss is not related to any particular class of income and therefore should be allocated between all classes of income. This argument relies on section 1.861-8(b)(5) of the Treasury Regulations. Section 1.861-8(b)(5) must be read together with section 1.861-8(e)(9), which gives examples of deductions that generally are not definitely related to gross income. The examples in section 1.861-8(e)(9) all represent deductions that are personal in nature; the deductions relate to a taxpayer herself rather than to her assets. Home mortgage interest, taxes on items purchased for personal use, and medical expenditures relate to a taxpayer's nonbusiness activities and do not represent expenses incurred in the production of income. A worthless-stock loss cannot logically be included on this list of personal deductions because it derives from a particular asset capable of income production; therefore, the loss is in fact related to one class of gross income--dividend income.
Finally, Black & Decker challenges the tax court's allocation as one based on "hypothetical income," not actual realized income. Black & Decker draws its actual income argument from 26 C.F.R. § 1.861-8(e)(7)(i), which relates losses to "income to which such asset or property ordinarily gives rise in the hands of the taxpayer." Black & Decker asserts that, since the NBD stock did not give rise to any dividend income, the loss cannot be allocated to this class of income.
Black & Decker's interpretation would permit tax allocation only to income that Black & Decker has generated and collected, but not to an expectancy of income. This reading of section 1.861-8(e)(7)(i) ignores section 1.861-8(b)(2)'s admonition that an allocation may be made whether or not income has accrued or been received. The absence of recognizable gross income from the class to which the loss bears relation does not mandate allocation to another class of Black & Decker's income. The provision for worldwide income allocation comes into play only when "a deduction does not bear a definite relationship to a class of gross income constituting less than all of gross income." 26 C.F.R. § 1.861-8(b)(5). When a class of gross income exists or could reasonably be expected to exist, any deductions relating to that income must be allocated to it. Accordingly, only those deductions that bear no relation to any class of income will be allocated proportionally to all income.
Black & Decker's insistence on actual income within a class also contravenes basic principles of regulatory construction. Regulations, like statutes, are interpreted according to canons of construction. Chief among these canons is the mandate that "constructions which render regulatory provisions superfluous are to be avoided." Hart v. McLucas, 535 F.2d 516, 519 (9th Cir.1976) (citing Jay v. Boyd, 351 U.S. 345, 360, 76 S.Ct. 919, 928, 100 L.Ed. 1242 (1956) ("We must read the body of regulations ... so as to give effect, if possible, to all of its provisions.")). Interpreting the loss allocation provision to require allocation only against actual income would obviate any need for language that approved of allocations against a hypothetical class of income, even though no income was received. See 26 C.F.R. §§ 1.861-8(b)(1) & (2). The tax court recognized this incongruity by interpreting the full text of the regulations, not just isolated provisions.
The regulations suggest, for example, that when the class of gross income to which the deduction is allocable consists of royalty income derived from an intangible asset used both inside and outside the United States, the taxpayer may apportion the deduction between domestic- and foreign-source income. See 26 C.F.R. § 1.861-8(e)(7)(ii)