Opinion ID: 701380
Heading Depth: 2
Heading Rank: 3

Heading: R.C. Sec. 892 during the tax years in question provided:

Text: 10 The income of foreign governments or international organizations received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments or by international organizations, or from interest on deposits in banks of the United States of moneys belonging to such foreign governments or international organizations, or from any other source within the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle. 11 26 U.S.C. (I.R.C.) Sec. 892 (1982). 12 Thus I.R.C. Sec. 892 provided a broad exemption to foreign governments or international organizations from United States income taxation. That section, however, does not define a foreign government for purposes of this exemption, nor does any other applicable statutory provision give such a definition. 13 The history of I.R.C. Sec. 892 also sheds little light on what Congress intended by using the term foreign governments. Section 892 had its origins in the War Revenue Act of 1917, ch. 63, Sec. 1211, 40 Stat. 300, 336-337. The original version of the statute exempted foreign governments from income taxation on certain investment income earned in the United States but it did not define foreign governments. The statute was later modified in the Revenue Act of 1918, ch. 18, Sec. 213(b)(5), 40 Stat. 1057, 1066 (1919), broadening the exemption by adding the statutory language regarding income from any other source. No language was added to define foreign governments and nothing in the legislative history revealed any congressional intent on its meaning. 14 The statute was amended again in 1945, Act of December 29, 1945, ch. 652, Sec. 4(a), 59 Stat. 669, 670, extending the Sec. 892 exemption to international organizations as well as foreign governments. Nothing in the 1945 amendment or legislative history defined foreign governments, although the term international organization was defined. See I.R.C. Sec. 7701(a)(18). 15 Congress made no further amendments to Sec. 892 until 1986, after the tax years in question. Although the provision had been the subject of several I.R.S. rulings, it was not until 1980 that the Secretary issued a regulation interpreting the statute. That regulation, Treas.Reg. Sec. 1.892-1, included the Secretary's definition of foreign governments for purposes of qualifying for the Sec. 892 exemption: 16 (b) Foreign government defined--(1) Classes of a foreign government. For purposes of this section, a foreign government consists only of integral parts or controlled entities of a foreign sovereign to the extent not engaged in commercial activities in the United States. 17 Treas.Reg. Sec. 1.892-1(b) (1982). This regulation interpreted foreign governments to include both integral parts and controlled entities of a foreign sovereign, but qualified the definition to include them only to the extent they were not engaged in commercial activities in the United States. Integral parts and controlled entities are defined at Sec. 1.892-1(b)(2) and (b)(3) respectively. It is not contested that Qantas is a controlled entity within the meaning of Treas.Reg. 1.892-1(b)(3) (1982). 18 We conclude the regulation is a reasonable interpretation of the statute. I.R.C. Sec. 892 sets forth an exemption for foreign governments without ever expressly defining what one is. As there is no evidence that Congress intended any special definition for the term, it is proper to consider the term's ordinary meaning. The word foreign, as used in this context, plainly means a sovereign nation other than the United States. The word government has several definitions, but among the most appropriate in this context is the organization, machinery, or agency through which a political unit exercises authority and performs functions and which is usually classified according to the distribution of power within it. Webster's Third New International Dictionary 982 (G & C Merriam Co. 1971). Nothing in this definition suggests a corporation that exists solely to operate an international airline that competes with private ones, even if the airline corporation is owned and controlled by a foreign sovereign. 19 The Secretary, however, defined foreign governments in Sec. 1.892-1(b) more broadly than the ordinary meaning would require. The regulation included controlled entities, such as a government-owned corporation, within the statutory definition of foreign governments. But in the regulatory language the Secretary expressly limited the Sec. 892 exemption only to controlled entities to the extent they are not engaged in commercial activities in the United States. 20 Qantas argues that once controlled entities were acknowledged to be within the statutory definition of foreign governments, I.R.C. Sec. 892 foreclosed the Secretary from limiting the activities of controlled entities that would be considered exempt. We disagree. The statute does not require that controlled entities be covered within the meaning of foreign governments. When the Secretary defined foreign governments, he chose to include controlled entities but only to the extent they were not engaged in commercial activities in the United States. This limitation is a part of the Secretary's definition of controlled entities that may be deemed to be treated as a foreign government. We agree with the government that this limitation is reasonable under I.R.C. Sec. 892. Accordingly, we sustain the validity of Treas.Reg. Sec. 1.892-1 (1982) and reverse the decision of the Court of Federal Claims.