Court Opinion

ID: 4486577
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:32.496354+00
Date Added: 2024-06-11T15:03:51.145695
License: Public Domain

PARKER, J. dissenting: This case impacts the income-sourcing rules for all natural resources located within the United States. The majority invalidates section 1.863-l(b), Income Tax Regs., because of a perceived conflict between the regulation and section 863(b), concluding that section 1.863-l(b) is not a proper exercise of the Secretary’s rule-making authority. In my opinion, the majority ignores a clear contemporaneous expression of Congressional intent supporting the regulation, the contemporaneity of the enactment of the statutory language (1921) and the promulgation of the regulatory language (1922), the longevity of the regulatory language (69 years) and the Congress’ long-continued silence in regard thereto, and the consistency of the administrative pronouncements interpreting the regulation. I cannot ignore these factors, and I must respectfully dissent. The majority views Phillips’ liquified natural gas as “personal property” once removed from the ground. The majority observes that section 863(b) specifically treats income from the sale of personal property produced in the United States and sold outside the United States as partly U.S. source and partly foreign source income. The majority concludes that section 863(b) modifies the general delegation of rule-making authority contained in section 863(a). Having reached this construction of the statute, the majority finds that the language of section 1.863-l(b), Income Tax Regs., conflicts with the language of section 863(b)(2) and holds that the regulation is invalid. However, for the last 69 years, income from the natural resources “located in the United States” has been treated as income “from sources within the United States.” The Congress has never indicated that its original legislative intent was to the contrary, and until today no other court has questioned the sourcing rules for natural resources. As applied to natural resources, the statute is silent and possibly ambiguous: section 863(a) gives the Secretary wide latitude to promulgate sourcing rules. Section 863(b)(2) appears to restrict the Secretary’s discretion, directing him to treat income from the foreign sale of domestically produced personal property as dual-source income. Does the power the Congress granted the Secretary under section 863(a) authorize him to promulgate sourcing rules for natural resources irrespective of the restrictions contained in section 863(b)? I think the answer is “yes,” as shown by the history of the sourcing rules. The concept of “source” entered the . tax laws with sections 1(a) and 10 of the Revenue Act of 1916, ch. 463, 39 Stat. 756, 765-766. Section 1(a) provided: That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. [Emphasis supplied.] Section 10 provided a similar rule for foreign corporations. In the Revenue Act of 1918, 40 Stat. 1057, 1066, and 1077, the Congress incorporated taxation of the U.S. source income of nonresident aliens and foreign corporations in sections 213(c) and 233(b) of the act, respectively. Section 213(c) provided: In the case of nonresident alien individuals, gross income includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. [40 Stat. 1066. Emphasis supplied.] Again, section 233(b) provided a similar rule for foreign corporations. The origin of what is now section 863 is section 217(e) of the Revenue Act of 1921, 42 Stat. 227, 244-245.1 The act’s final form follows the Senate’s version of the bill, H.R. 8245 (67th Cong., 1st Sess. (November 4, 1921)).2 The version of H.R. 8245 passed by the House (67th Cong., 1st Sess. (Aug. 20, 1921)) (reproduced in the appendix attached to this dissenting opinion), contained express sourcing rules for the production and sale of natural resources. Under the House’s version “Gains, profits, and income from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or timber, located in the United States, and from any sale by the producer of the products thereof” was U.S. source income for nonresident alien individuals and foreign traders. Appendix, sec. 217(a)(5). The converse was true for farms, mines, etc. located outside the United States. Appendix, sec. 217(c)(5). The House’s version also contained similar express sourcing rules for personal property both “produced” and “sold” within or without the United States. Appendix, sec. 217(a)(7), sec. 217(c)(7). The House’s version also contained language as to personal property produced (in whole or in part) within and sold without the United States, language which was retained in section 217(e) of the Revenue Act of 1921 as enacted and language now in section 863(b)(2) upon which the majority relies. Appendix, sec. 217(e); appendix II to majority opinion. The House’s version defined the term “produced” to include “extracted” and “processed.” Amendment No. 3: The House bill consisted of specified amendments to the revenue act of 1918 and continued that act in force without repeal. The Senate amendments propose an entirely different method — namely, to repeal the revenue act of 1918 (with certain exceptions) and to reenact it with certain changes. The conferees having agreed upon the general plan of the Senate amendments as to the form of the bill, it is necessary for the House to recede on a large number of formal amendments required by the change in the form of the bill. The Senate’s version of H.R. 8245 eliminated the express sourcing rules for natural resources, i.e., the House’s sections 217(a)(5), 217(c)(5). The Senate’s version also eliminated the express sourcing rules for personal property both “produced” and “sold” within or without the United States, i.e., the House’s sections 217(a)(7) and 217(c)(7). The Senate instead gave the Secretary wide latitude to promulgate sourcing rules (section 217(e), now section 863(a)), as to both natural resources and certain personal property. The Senate’s version retained the House’s language as to “personal property produced (in whole or in part) by the taxpayer within the United States and sold without the United States,” the section 863(b)(2) language which the majority now regards as limiting the Secretary’s rule-making authority in regard to natural resources. The Senate version also maintained the House’s definition of the word “produced.” The Senate’s version was adopted in conference. H.R. 8245 (67th Cong., 1st Sess. (Nov. 19, 1921)). The Senate Finance Committee held hearings on H.R. 8245 between September 1, 1921, and October 1, 1921, and these hearings provide an explanation of the above amendments. The principal witness at the hearings was Dr. Thomas Sewall Adams, the Economic Advisor of the Treasury Department, who is considered to have been the “father” of the Senate bill.3 During the course of the hearings, Dr. Adams testified, in part, as follows: Dr. Adams. Page 48, lines 5 to 8: This is the foreign traders. It is proposed to strike out paragraphs 5 and 7. Paragraph 5 relates to “gains, profits, and income from the ownership or operation of any farm, mine, oü or gas well, other natural deposits, or timber, located in the United States, and from any sale by the producer of the products thereof.” This says that the gains or profits and all that kind of thing shall be taxed in the United States if the property is here. That is a sound rule and will go without saying in the average case. There are some cases where possibly it ought not to apply. For instance, we have a number of important American business enterprises at the present time owning mines in Canada which have their factories over here and bring this stuff over. This would deprive us of any tax in that case. Senator Reed. The present language? Dr. Adams. The present language would. The present language puts favor on the situs of the mine or property; that is the general rule and will be followed, but there is occasionally a case where the factory is located elsewhere or where the element of location is very important, and I think we should be silent on it. This present thing is what might be called a natural rule applied absolutely in every case. There will be no trouble about the way the average case is decided; it will take care of itself.[4] But I think there is a case where you want to temper it. The Chairman. If there is no objection, the amendment will be adopted. Dr. Adams. * * * I suggest that [this paragraph] be stricken out, with the similar paragraph on page 49, which relates to the foreigner and applies the same rule to business without the United States. My suggestion is that this be stricken out to leave it a little more elastic. [Emphasis supplied.] Hearings before the Committee on Finance, U.S. Senate, H.R. 8245, 67th Cong., 1st Sess. (Sept. 1, 1921, tó Oct. 1, 1921), 309-310. Dr. Adams’ testimony reveals that the intent underlying the amendments was to allow the Secretary more flexibility through legislative silence. This flexibility would preserve what Dr. Adams called “the natural rule” or the general rule — sourcing of income from the production and sale of natural resources would depend on the situs of the resources in the ground — while simultaneously allowing room for the development of rules allocating income between foreign and domestic sources where significant production took place outside the taxing jurisdiction where the resources were located. The same statutory scheme introduced in the Revenue Act of 1921 exists today without any material change or modification. Apart from the items expressly sourced in the statute itself (section 217(a) and (c), now sections 861 and 862), the Secretary was given the power to allocate or apportion items of gross income to sources within or without the United States (section 217(e) — now section 863(a)). As to those items of gross income “separately allocated to sources within the United States,” all of the net income therefrom was U.S. source income (section 217(e), now section 863(a)). Here the regulations “separately allocated to sources within the United States,” the gross income from natural resources located within the United States, and all net income therefrom is U.S. source income. It is only as to items of gross income not already “separately allocated” to either sources within or sources without the United States that the Secretary allocates or apportions between U.S. source and foreign source income. It is only in this dual-source apportionment context that the language in regard to “the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States” (section 863(b)(2)) comes into play. Accordingly, I am satisfied that natural resources are not “personal property” as that term is used in section 863(b), and that section 1.863-l(b), Income Tax Regs., is a valid exercise of the rule-making authority granted the Secretary under section 863(a). The majority observes that the statutory language found in present sections 863(a) and (b) originated in section 217(e) of the Revenue Act of 1921. The majority fails to point out, however, that the regulatory language found in present section 1.8634(b), Income Tax Regs., originated in Reg. 62, Art. 326, first promulgated in 1922 as T.D. 3295. It seems safe to call this regulatory language “a substantially contemporaneous construction of the statute by those presumed to have been aware of congressional intent.” National Muffler Dealers Association Inc. v. United States, 440 U.S. 472, 477 (1979); Rowan Cos. v. United States, 452 U.S. 247, 253 (1981). Moreover, this regulatory language has remained in effect for 69 years without any material change or modification. The Congress and the Department of the Treasury put the issue to rest in 1921 and 1922, and until now there has been no need to revisit it. See supra, p. 47 note 4. As the Supreme Court has held: Treasury regulations and interpretations long continued without substantial change, applying to unamended or substantially reenacted statutes, are deemed to have received Congressional approval and have the effect of law. [Fn. omitted.] Helvering v. Winmill, 305 U.S. 79, 83 (1938) and its progeny. Finally, respondent has consistently applied the regulation. See generally Rev. Rul. 71-198, 1971-1 C.B. 210; Rev. Rul. 67-194, 1967-1 C.B. 183; G.C.M. 36328, CC:I-5103 (July 1, 1975); G.C.M. 34971, CC:I:I-4331 (July 31, 1972); I.T. 2440, VII-2 C.B. 282 (1928). To recapitulate, the statute is silent and possibly contains an ambiguity as to natural resources. I look to the history of the sourcing rules and the origins of section 863 in section 217(e) of the Revenue Act of 1921. Dr. Adams’ testimony before the Senate Finance Committee answers my inquiry. In passing section 217(e) of the Revenue Act of 1921, the Congress intended to give the Secretary flexibility to draft a regulation which would preserve the “natural rule” or the general rule — -sourcing of income from the production and sale of natural resources would depend on the situs of the resources in the ground — but which would simultaneously allow for fine tuning in specific situations where significant production took place outside the taxing jurisdiction where the resources were located. Reg. 62, Art. 326 carried out the Congress’ intent; similarly, present day section 1.863-l(b), Income Tax Regs., still carries out the Congress’ intent under the authority given the Secretary in section 863(a). The language contained in section 1.863-l(b), Income Tax Regs., was drafted immediately after the enactment of the Revenue Act of 1921, has been in effect for 69 years, and has been consistently administered. This Court should not invalidate it at this late date. Swift and Parr, JJ., agree with this dissent. APPENDIX As it passed the House, section 217 of H.R. 8245 provided, in part, as follows: Sec. 217. (a) In the case of a nonresident alien individual or foreign trader, the following items of gross income shall be treated as derived in full from sources within the United States: (1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise (except interest received from foreign traders or foreign trade corporations, and interest on deposits in banks, hanking associations, and trust companies paid to persons not engaged in business within the United States and not having an office or place of business therein); (2) Dividends from domestic corporations other than foreign trade corporations; (3) Compensation for labor or personal services performed in the United States; (4) Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulae, good will, trade-marks, trade brands, franchises, and other like property; (5) Gains, profits, and income from the ownership or operation of any farm, mine, oil or gas well, other natural deposit, or timber, located in the United States, and from any sale by the producer of the products thereof; (6) Gains, profits, and income from the sale of real property located in the United States; (7) Gains, profits, and income from the sale of personal property, both purchased and sold, or both produced and sold by the taxpayer within the United States. ‡ ‡ ‡ ‡ ‡ ‡ ‡ (c) The following items of gross income shall not be included as income from sources within the United States: (1) Interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a); (2) Dividends from foreign corporations and from foreign trade corporations; (3) Compensation for labor or personal service performed without the United States; (4) Rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States, patents, copyrights, secret processes and formulae, good will, trade-marks, trade brands, franchises, and other like property; (5) Gains, profits, and income from the ownership or operation of any farm, mine, oil or gas well, other natural deposit or timber, located without the United States, and from any sale by the producer of the products thereof; (6) Gains, profits, and income from the sale of real property located without the United States; (7) Gains, profits, and income from the sale of personal property both purchased and sold or both produced and sold by the taxpayer without the United States. * * * * * * * (e) Except as otherwise provided in subdivisions (a) and (c), gains, profits, and income are (for the purposes of this title) derived partly from sources within and partly from sources without the United States, when derived (1) from transportation or other services rendered partly within and partly without the United States, or (2) from the sale of personal property produced (in whole or part) by the taxpayer within the United States and sold without the United States, or produced (in whole or part) by the taxpayer without the United States and sold within the United States. In the case of such income and of any other income (except that specified in subdivisions (a) and (c)) the net income shall first be, computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto, and a ratable part of any expense, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The portion of such net income attributable to the sale, production, or service rendered within the United States (which shall be taxed as income from sources within the United States) shall be determined by reasonable processes of allocation or’apportionment under regulations to be prescribed by the commissioner with the approval of the Secretary. (f) As used in this section the words “sale” or “sold” include “exchange” or “exchanged”; and the word “produced” includes “created,” “fabricated,” “manufactured,” “extracted,” “processed,” “cured,” or “aged.”  Sec. 217(e) of the Revenue Act of 1921 is reproduced in full in appendix II of the majority opinion.   A brief history of the Revenue Act of 1921 appears in the Statement of the Managers on the Part of the House, in Conf. Rept. 486, 67th Cong., 1st Sess. (Nov. 19, 1921), at 14:    Du Pont de Nemours & Co. v. United States, 200 Ct. Cl. 391, 398 and n.6, 471 F.2d 1211, 1214 (1973); United States v. Rogers, 122 F.2d 485, 491 (9th Cir. 1941) (dissenting opinion); Ohio Nat Life Ins. Co. v. United States, 11 Cl. Ct. 477, 479 (1986), affd. 807 F.2d 1577 (Fed. Cir. 1986), which clearly identify Dr. Adams as “the Treasury expert” and the “father” of the 1921 Act.   4Dr. Adams could not anticipate, of course, that the first case would be heard in the Tax Court 70 years after the 1921 Act’s enactment when no one alive remembers the “natural rule.”