Court Opinion

ID: 8996850
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:46:16.968648+00
Date Added: 2024-06-11T17:11:05.417828
License: Public Domain

DAVID A. NELSON, Circuit Judge,
dissenting.
The taxpayer raises two issues in this appeal. The first involves the proper construction of the “overall profit percentage limitation” that the Commissioner’s marginal costing rules (Treas.Reg. § 1.994-2) purport to impose for purposes of applying the combined taxable income price rule of 26 U.S.C. § 994(a)(2).
The Commissioner interprets his marginal costing rules as imposing a profit limitation determined by taking worldwide taxable income from the product line in question, dividing this income by worldwide gross receipts that include a domestic excise tax component, and applying the resultant fraction to gross receipts from export sales. The taxpayer, on the other hand, would have us interpret the rules as permitting domestic excise taxes to be deducted from worldwide gross receipts.
The Tax Court and the panel majority agree with the Commissioner’s interpretation of the regulations. So do I. The regulations may be complicated, but it seems to me they are clear enough in saying that worldwide gross receipts include whatever portion of such receipts is attributable to domestic excise taxes.
The second issue raised by the taxpayer is, for me, a more difficult one. The issue is this: Assuming the Commissioner’s marginal costing rules say what the Commissioner says they say, do the rules represent a rational method of carrying out the task assigned to the Commissioner by Congress? On this issue I part company with my colleagues.
In 26 U.S.C. § 994(b)(2), Congress directed the Commissioner to prescribe special rules for the allocation of expenditures “in those cases where a DISC is seeking to establish or maintain a market for export property.” The statute furnishes the Commissioner no guidance on the content of the expenditure-allocation rules he is to prescribe for this class of cases, but the congressional committee reports furnish rather precise guidance. The reports of both the House Ways and Means Committee and the Senate Finance Committee have this to say on the subject:
“It is expected that in the appropriate cases [i.e., “those cases where a DISC is seeking to establish or maintain a market for export property”] the regulations will allow, for purposes of applying the [26 U.S.C. § 994(a)(2) ] pricing rule, the combined taxable income on the sale of export property to reflect a profit equal to that which the DISC and a related party would earn if they took into account only the marginal costs of producing the property. The production expenses not considered marginal costs in this case would, of course, be allocable to the production of the related party which is not sold to the DISC.” H.R.Rep. No. 92-533 at 75 (1972-1 Cum.Bull. at 538); S.Rep. No. 92-437 at 108 (1972-1 Cum.Bull. at 619) (emphasis supplied).
What this says to me — and what I think it should have said to the Commissioner — is that the committees expected the Commissioner’s marginal costing rules to allow export property income to reflect the income that would result if “only the marginal costs of producing the [export] property” were taken into account. (Emphasis supplied.) All other costs, the committee reports say, would “of course” be allocated to non-export property.1
By no stretch of the imagination can excise taxes paid on products sold domestically be considered part of the marginal costs of producing property for sale abroad. Yet as the Tax Court specifically *1043acknowledged at page 29 of its opinion in this case, “the fact” is that the application of the Commissioner’s overall profit percentage limitation “results in the allocation of some excise tax costs to gross receipts from export sales....”
In computations submitted to the Tax Court on behalf of the Commissioner after the Tax Court opinion was issued (Jt.App. p. 84), the Commissioner set forth the exact dollar amount of the taxpayer’s domestic excise taxes “[a]llocable” to export sales under the marginal cost method endorsed by the Tax Court. (Jt.App. p. 93.) For tax year 1981, the excise taxes thus allocable to export sales came to $1,311,137.45— which is more than 22 percent of the total costs considered allocable to export sales. Id.
The Commissioner contends that his marginal costing rules do not really result in the allocation of excise taxes to export sales, despite what his own computations show, because excise taxes are merely included in an overall profit percentage formula used “to limit the amount of profit that could be earned by the DISC from export sales under the marginal costing method.” Brief of respondent-appellee, p. 15. The Commissioner may be correct in a purely formal sense, but not, I think, in any substantive sense.
The entire purpose of the marginal cost regulations — or so Congress thought — was to provide for the allocation of expenditures under a method showing what the DISC and its parent would earn if they took into account “only” the marginal costs of producing the property. It seems to me indisputable that the practical effect of the non-statutory “overall profit percentage limitation” adopted by the Commissioner is to allocate to export sales not only the marginal costs of producing the export property, but also a portion of the excise taxes paid on property sold in this country.
My colleagues suggest that other exclusively domestic costs may also play a part in lowering export earnings, under the Commissioner’s rules. If so, it seems to me that the rules are even more irrational than the taxpayer has claimed. The taxpayer having challenged only the inclusion of excise taxes, however, I would not go beyond those taxes in granting relief.
Because of the way in which it disposed of this case, the Tax Court did not find it necessary to address the issue of whether the taxpayer’s domestic international sales corporation was a qualified DISC during the years at issue. I would therefore remand the case for a resolution of this issue. Should the Tax Court conclude that the DISC was in fact qualified, I would ask the court to compute the combined taxable export income of the DISC and its parent without taking into account the excise taxes paid by the parent on its domestic production.

. Committee reports are not legislation, to be sure, but the Commissioner makes no contention here that the very general language of 26 U.S.C. § 994(b)(2) should not be read in light of the very specific language of the committee reports.