Opinion ID: 774226
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: 3 From 1972 to 1984, Boeing exported commercial airplanes through its subsidiary, Boeing International Sales Corporation, which qualified as a DISC under Internal Revenue Code (I.R.C.) §§ 992. After 1984, Boeing exported commercial airplanes through its subsidiary, Boeing Sales Corporation, which qualified as a FSC under I.R.C. §§ 922. 4 During the relevant period, Boeing maintained separate programs for each of its major commercial airplane product lines. 2 Each of Boeing's programs constitutes a separate product or product line under industry practice and trade usage in the commercial airplane business. 5 In developing these programs, Boeing segregated its R&D costs into two broad categories. The first category, Blue-Sky R&D, was for R&D costs incurred prior to Boeing's Board of Directors giving approval for a new airplane model, which approval was referred to as Program Go Ahead.  Blue Sky R&D included basic research relating to commercial airplanes that might be the precursor to a specific program. The second category, Company Sponsored Product Development, was for costs incurred for a specific program after Program Go Ahead had been given for a particular airplane model and included the R&D cost of designing, developing, testing and qualifying that airplane. Approximately 77 percent of the R&D costs in the tax years at issue in this case fall within the Company Sponsored Product Development category. 6 For accounting purposes, Boeing apportioned Blue Sky R&D to all of its airplane programs, but allocated Company Sponsored Product Development R&D directly to the particular program for which those costs were incurred. Boeing deducted all R&D costs in the period in which they were incurred, regardless of whether there were any corresponding sales during that period. This meant that significant R&D costs for any new program could be allocated to that program in years prior to any sales of airplanes within that program. 7 Boeing used the combined taxable income method (CTI) to calculate the intercompany price and profits from its export sales. See I.R.C. §§§§ 994(a)(2) & 925(a)(2). Pursuant to Treas. Reg. §§ 1.994-1(c)(7), Boeing grouped its export sales by program and apportioned costs, including R&D costs, to the particular airplane program for which those costs were incurred. If those R&D costs exceeded the amount of sales for the airplane program to which those costs were allocated, the excess of costs over sales, according to the IRS, simplydisappeared, in that those costs were not accounted for by Boeing in computing its CTI. 8 During an audit, the IRS determined that Boeing's method of allocating its R&D costs to its DISC and FSC sales violated Treas. Reg. §§ 1.861-8(e)(3), which requires all R&D costs to be allocated to and apportioned among all sales within the broad product categories set forth in the Office of Management and Budget's Standard Industrial Classification (SIC). Because all of Boeing's commercial airplane sales fell within SIC code 37 (Transportation Equipment), the IRS allocated all of Boeing's R&D costs in a given period to all of Boeing's commercial airplane sales in that period. By this method of allocation, none of the R&D expenses disappeared (the government's characterization); instead, all of such expenses were charged to sales in the relevant period. 9 This method of allocation by the IRS caused a substantial decrease in Boeing's net income from its DISC and FSC sales. Because net income from such sales is accorded favorable tax treatment, Boeing's overall income tax liability, according to the IRS, was substantially understated. 10 Boeing paid the amount of additional tax required by the IRS, and timely filed claims for refund. When those claims were denied or not acted upon, Boeing filed this suit seeking a refund of corporate income taxes and interest in the total amount of $458,609,373. Both sides moved for summary judgment. The district court, relying on St. Jude Medical, Inc. v. Commissioner, 34 F.3d 1394 (8th Cir. 1994), accepted Boeing's method of allocating R&D, and granted judgment in favor of Boeing for $419,110,539. This appeal followed.