01-1209 Boeing Co. v. U.S.

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The relevant statutory text does not support Boeing’s argument that the statute and certain regulations give it an unqualified right to allocate its Company Sponsored R&D expenses to the specific products to which they are factually related and to exclude such R&D from treatment as a cost of any other product. The method that Boeing chose to determine an export sale’s transfer price allowed the DISC “to derive taxable income attributable to [an export sale] in an amount which does not exceed … 50 percent of the combined taxable income of [the DISC and the parent] which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts … .” 26 U.S.C. º994(a)(2). The statute does not define “combined taxable income” or specifically mention R&D expenditures. The Secretary’s regulation must be treated with deference, see Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561, but the statute places some limits on the Secretary’s interpretive authority. First, “does not exceed” places an upper limit on the share of the export profits that can be assigned to a DISC and gives three methods of setting the transfer price. Second, “combined taxable income” makes it clear that the domestic parent’s taxable income is a part of the CTI equation. Third, “attributable” limits the portion of the domestic parent’s taxable income that can be treated as a part of the CTI. The Secretary’s classification of all R&D as an indirect cost of all export sales of products in a broadly defined SIC category is not arbitrary. It provides consistent treatment for cost items used in computing the taxpayer’s domestic taxable income and CTI; and its allocation of R&D expenditures to all products in a category even when specifically intended to improve only one or a few of those products is no more tenuous than the allocation of a chief executive officer’s salary to every product that a company sells even when he devotes virtually all of his time to the development of the Edsel. Reading º994 in light of º861, the more general provision dealing with the distinction between domestic and foreign source income, does not support Boeing’s contrary view. If the Secretary reasonably determines that Company Sponsored R&D can be properly apportioned on a categorical basis, the portion of º861(b) that deducts from gross income “a ratable part of any expenses … which cannot definitely be allocated to some item or class of gross income” is inapplicable.

258 F.3d 958, affirmed.

Local effect:

Although the Seventh Circuit has not directly addressed the regulation in question, the decision in this case is consistent with the Seventh Circuit’s giving broad deference to the Secretary in interpreting 26 U.S.C. secs. 991-997, ADM v. U.S. 37 F.3d 321 (7th Cir. 1994).

Stevens, J.; Thomas, J., dissenting.