Swallows Holding, Ltd. v. Commissioner , 126 T.C. No. 6 ( 2006 )

126 T.C. No. 6UNITED STATES TAX COURT
SWALLOWS HOLDING, LTD., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8045-02. Filed January 26, 2006.
P is a foreign corporation whose only substantial
asset is unimproved land in the United States. On its
1994, 1995, and 1996 Federal income tax returns, P
recognized rent and option income and claimed
deductions for taxes and licenses, the result of which
was a reported loss for each year. P filed each return
after its due date, but before any contact from R. R
determined that sec. 882(c)(2), I.R.C., precluded P
from deducting its expenses because it filed its
returns untimely. In Anglo-Am. Direct Tea Trading Co.
v. Commissioner, 38 B.T.A. 711 (1938), a setting
similar to that here, the Board held that sec. 233 of
the Revenue Act of 1928, ch. 852, 45 Stat. 849, and the
Revenue Act of 1932, ch. 209, 47 Stat. 230, an almost
verbatim predecessor to sec. 882(c)(2), I.R.C., did not
include a timely filing requirement and rejected R’s
contrary interpretation. Subsequently, the Court of
Appeals for the Fourth Circuit construed like
predecessor text similarly, also in rejection of R’s
contrary interpretation. See Blenheim Co. v.
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Commissioner, 125 F.2d 906 (4th Cir. 1942), affg.
42 B.T.A. 1248 (1940); Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941), modifying and remanding
on other grounds 41 B.T.A. 910 (1940). R continues to
adhere to his rejected interpretation and now attempts
to support that interpretation by citing Treasury
regulations issued in 1990. Those regulations
interpret sec. 882(c)(2), I.R.C., to provide that a
foreign corporation generally is entitled to deduct its
expenses only if it files a timely return.
Held: A timely filing requirement is not found in
a plain reading of sec. 882(c)(2), I.R.C.
Held, further, the timely filing requirement in
the regulations is invalid in that it is unreasonable
under a plain reading of sec. 882(c)(2), I.R.C., and an
application of the considerations set forth in Natl.
Muffler Dealers Association v. United States, 440 U.S.
472 (1979).
Phillip L. Jelsma, for petitioner.
Thomas A. Dombrowski and Nina E. Chowdhry, for respondent.
LARO, Judge: Petitioner petitioned the Court to redetermine
respondent’s determination of deficiencies in its Federal income
taxes for its taxable years ended May 31, 1994, 1995, and 1996
(1994, 1995, and 1996 taxable years, respectively; collectively,
subject years), and additions thereto under section 6651(a)(1).1
The deficiencies and additions to tax are as follows:
1
Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code of 1986. Rule
references are to the Tax Court Rules of Practice and Procedure.
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Addition to tax
Taxable Year Deficiency Sec. 6651(a)(1)
1994 $7,200 $1,800.00
1995 5,850 1,462.50
1996 1,800 450.00
We decide whether petitioner may deduct the ordinary and
necessary expenses it incurred during the subject years. The
expenses relate to income treated as effectively connected to the
conduct of a trade or business in the United States (effectively
connected income), and petitioner claimed the expenses on its
Federal income tax returns, which it filed before any contact
from respondent. Respondent determined in the notice of
deficiency that section 882(c)(2) precludes petitioner from
deducting its expenses because it did not file its returns
timely. Respondent concedes that the expenses are deductible if
section 882(c)(2) does not include a timely filing requirement.
In Anglo-Am. Direct Tea Trading Co. v. Commissioner,
38 B.T.A. 711 (1938), the Board of Tax Appeals (Board) held that
section 233 of the the Revenue Act of 1928, ch. 852, 45 Stat.
849, and the Revenue Act of 1932, ch. 209, 47 Stat. 230, an
almost verbatim predecessor to section 882(c)(2), did not include
a timely filing requirement.2 In so holding, the Board construed
2
As will be discussed, the relevant text of sec. 882(c)(2),
“in the manner prescribed in subtitle F”, is substantially the
same as the related text of the predecessors to sec. 882(c)(2).
We refer interchangeably to the relevant text of sec. 882(c)(2)
and the related text of its predecessors as the relevant text.
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the earlier section's requirement that a foreign corporation file
a true and accurate return “in the manner prescribed in this
title” and rejected respondent’s argument that the word “manner”,
as it appeared in the quoted text, meant that the foreign
corporation could deduct its expenses only if it filed its
returns timely; i.e., before the time set forth in a predecessor
to section 6072.3 Subsequently, the Court of Appeals for the
Fourth Circuit in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th
Cir. 1941), modifying and remanding on other grounds 41 B.T.A.
910 (1940), quoted and applied the Anglo-Am. Direct Tea Trading
Co. holding favorably and without reservation. The Court of
Appeals for the Fourth Circuit in Blenheim Co. v. Commissioner,
125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940), also
acknowledged the Anglo-Am. Direct Tea Trading Co. holding,
construed the relevant text not to contain any reference to time,
and stated that Congress had enacted the relevant text in 1928
intending to allow a foreign corporation to deduct its expenses
upon its filing of a tax return.
In 1990, the Secretary issued section 1.882-4(a)(2) and
(3)(i), Income Tax Regs. (disputed regulations). The disputed
regulations interpret section 882(c)(2) to provide that a foreign
corporation generally is entitled to deduct its expenses only if
3
Sec. 6072, entitled “Time For Filing Income Tax Returns”,
provides dates by which an income tax return must be filed in
order to be timely.
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it files a timely return. Under the relevant part of the
disputed regulations, a return is timely if it is filed before an
arbitrary 18-month deadline (18-month deadline) devised by the
Secretary.4 The Secretary issued the disputed regulations
stating that section 882(c)(2) contains a “clear” requirement
that a foreign corporation file its return timely in order to
deduct its expenses. The Secretary made no mention of the
consistent interpretation of the relevant text by the Court of
4
The regulations explain the 18-month deadline as follows:
For taxable years of a foreign corporation ending after
July 31, 1990, whether a return for the current taxable
year has been filed on a timely basis is dependent upon
whether the foreign corporation filed a return for the
taxable year immediately preceding the current taxable
year. If a return was filed for that immediately
preceding taxable year, or if the current taxable year
is the first taxable year of the foreign corporation
for which a return is required to be filed, the
required return for the current taxable year must be
filed within 18 months of the due date as set forth in
section 6072 and the regulations under that section,
for filing the return for the current taxable year. If
no return for the taxable year immediately preceding
the current taxable year has been filed, the required
return for the current taxable year (other than the
first taxable year of the foreign corporation for which
a return is required to be filed) must have been filed
no later than the earlier of the date which is 18
months after the due date, as set forth in section
6072, for filing the return for the current taxable
year or the date the Internal Revenue Service mails a
notice to the foreign corporation advising the
corporation that the current year tax return has not
been filed and that no deductions (other than that
allowed under section 170) or credits (other than those
allowed under sections 33, 34 and 852(b)(3)(D)(ii)) may
be claimed by the taxpayer. [Sec. 1.882-4(a)(3)(i),
Income Tax Regs.]
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Appeals for the Fourth Circuit and the Board not to include any
timely filing requirement.
Petitioner argues that section 882(c)(2) does not contain a
timely filing requirement and that the disputed regulations are
invalid as inconsistent with that section.5 Respondent argues
that section 882(c)(2) provides clearly that a foreign
corporation must file its return timely in order to deduct its
expenses and that the disputed regulations are a proper
interpretation of that provision. Respondent asks the Court now
to accept his interpretation, which he acknowledges is the same
as that rejected in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, supra, and its progeny, and to disavow all contrary
interpretations expressed by the Court of Appeals for the Fourth
Circuit and the Board.
We agree with petitioner that section 882(c)(2) does not
contain a timely filing requirement and that the disputed
regulations are invalid to the extent discussed herein. We hold
that petitioner may deduct its expenses. On the basis of our
holding and a concession by respondent that section 6651(a) is
inapplicable if petitioner is entitled to deduct its expenses, we
also hold without further discussion that petitioner is not
5
Petitioner also makes numerous other arguments which are
pertinent only if the disputed regulations are valid. Given our
holding herein that the disputed regulations are invalid, we need
not and do not decide any of petitioner’s other arguments.
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liable for any addition to tax determined by respondent under
section 6651(a).
FINDINGS OF FACT
Many facts were stipulated and are found accordingly. We
incorporate herein by this reference the stipulated facts and the
exhibits submitted therewith.
I. Background
Petitioner is a Barbados corporation whose mailing address
was in Bridgetown, Barbados, when its petition was filed with the
Court. It is an accrual method taxpayer that for Federal income
tax purposes files a Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation (Form 1120-F), on the basis of a fiscal year
ending on May 31. Its sole activity during the subject years was
owning 160 acres of unimproved real estate (U.S. real estate) in
San Diego County, California, and receiving option and rental
income from the U.S. real estate. Petitioner has never engaged
in a trade or business in the United States, and it does not have
a separate business activity in Barbados.
II. Petitioner’s Formation and Issuance of Additional Shares
Raimundo Arnaiz-Rosas (Rosas) is a citizen and resident of
Mexico. He acquired the U.S. real estate on December 30, 1986.
In June 1991, he formed petitioner as his wholly owned
corporation. He transferred the U.S. real estate to petitioner
on November 21, 1991.
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Aurora Elsa Arnaiz (Arnaiz) is the sister of Rosas. She is
a citizen and resident of Mexico. On June 1, 1992, petitioner
issued additional shares of its stock to Arnaiz. Afterwards,
Arnaiz owned 52 percent of petitioner’s stock, and Rosas owned
the remaining 48 percent.
III. Petitioner’s Initial Tax Return
On September 14, 1992, petitioner filed a Form 1120-F with
respondent’s service center in Philadelphia, Pennsylvania
(Philadelphia Service Center), for its short taxable year from
June 27, 1991, through May 31, 1992 (1992 taxable year). The
return (petitioner’s initial return) was petitioner’s first
Federal income tax return. That return was prepared by Francisco
A.F. Cervantes (Cervantes), petitioner’s tax adviser and
certified public accountant in California. As to petitioner’s
1992 taxable year, petitioner’s initial return reported that
petitioner had no income or expense, that it had not engaged in a
trade or business in the United States, and that it had no
effectively connected income. Petitioner’s initial return also
reported that petitioner’s business activity was real estate and
that its product or service was investment. Petitioner’s initial
return also reported that petitioner was incorporated in Barbados
and that petitioner was subject to income tax under the laws of
Barbados.
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IV. U.S. Real Estate
The U.S. real estate has been vacant land throughout the
subject years. During the subject years, an apparently unrelated
entity leased from petitioner approximately 10 acres of the U.S.
real estate for use as a skydiving landing zone. Pursuant to the
lease agreements, the lessee was responsible for maintenance
costs, utilities, license fees, personal property taxes, and
other costs associated with its use of the leased property.
Between March 16, 1993, and April 1, 1996, another apparently
unrelated entity held an option to purchase a portion of the U.S.
real estate.
During the respective subject years, petitioner realized
rental income of $12,000, $18,000, and $12,000 as to the lease
and $36,000, $21,000, and zero dollars as to the option. During
the same respective years, petitioner incurred expenses totaling
$77,059, $62,418, and $40,041 for real property taxes payable to
the County of San Diego, franchise taxes payable to the State of
California, and other fees.
V. Petitioner’s Tax Returns Other Than the Initial Return
On July 23, 1999, petitioner filed with the Philadelphia
Service Center a Form 1120-F for its taxable year ended May 31,
1993 (1993 taxable year). Also on that date, petitioner
voluntarily (before any contact from respondent) filed with the
Philadelphia Service Center a Form 1120-F for each of the subject
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years (collectively, subject returns). Cervantes first advised
petitioner in 1999 that it had to file the four returns, and
Cervantes prepared those returns shortly after giving this
advice.6 Petitioner had no communications with Cervantes as of
the time of this advice going back to the earlier time at which
petitioner’s initial return was filed. When the four returns
were filed, respondent had no knowledge that the returns were
overdue.
The four returns filed in 1999 each listed petitioner’s U.S.
employer identification number and reported that petitioner was
incorporated in Barbados, that petitioner was subject to income
tax under the laws of Barbados, and that petitioner was not
liable for a United States branch profits tax. Each return also
reported that petitioner’s business activity was real estate and
that its product or service was investment. Each return also
reported that petitioner had not engaged in a trade or business
in the United States, but that petitioner had realized a taxable
loss effectively connected with the conduct of a trade or
business in the United States. None of the returns included a
statement under section 1.871-10(d)(1)(ii), Income Tax Regs.,
reporting that petitioner was making an election under section
882(d)(1). Because respondent with petitioner’s acquiescence has
6
Cervantes also prepared petitioner’s Federal income tax
returns for several years following the subject years.
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treated the subject returns as such an election, petitioner’s
income from the U.S. real estate for the subject years is treated
as effectively connected income.
On its Form 1120-F for its 1993 taxable year, petitioner
recognized option income of $16,290 and deducted an expense for
taxes of $52,081, resulting in a reported taxable loss of
$35,791. On the respective subject returns, petitioner
recognized rental income of $12,000, $18,000, and $12,000 and
option income of $36,000, $21,000, and zero dollars. Petitioner
also on the respective subject returns deducted expenses for
taxes and licenses in the total amounts of $77,059, $62,418, and
$40,041, resulting in reported losses (without consideration of
any net operating loss (NOL) carryforward) of $29,059, $23,418,
and $28,041. Petitioner reported on its Form 1120-F for its 1994
taxable year that it had available as an NOL carryover its prior
year’s loss of $35,791. Petitioner reported on its Form 1120-F
for its 1995 taxable year that it had available as an NOL
carryover its prior years’ losses totaling $64,850 ($29,059 +
$35,791). Petitioner reported on its Form 1120-F for its 1996
taxable year that it had available as an NOL carryover its prior
years’ losses totaling $88,268 ($23,418 + $29,059 + $35,791).
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VI. Respondent’s Determination
On January 31, 2002, respondent issued the notice of
deficiency to petitioner for the subject years.7 Respondent
determined the deficiencies shown therein by disallowing all of
the deductions claimed on the subject returns and applying the
corporate income tax rates of section 11 to petitioner’s gross
income, as reported. Respondent disallowed the deductions
because none of the returns was filed timely.
OPINION
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency
are generally presumed correct, and taxpayers generally bear the
burden of proving those determinations wrong. See Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). In
certain cases, section 7491(a) places the burden of proof upon
the Commissioner. Given the manner in which we decide this case,
we need not and do not decide which party bears the burden of
proof in this case.
II. Parties’ Arguments
The parties disagree on the section 882(c)(2) requirements
which serve as a prerequisite to a foreign corporation’s
deducting its expenses. Petitioner argues that it meets those
7
Neither party has explained why the notice of deficiency
does not address petitioner’s 1993 taxable year.
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requirements in that it filed true and accurate Federal income
tax returns. According to petitioner, section 882(c)(2) does not
require that the subject returns be filed timely, and the
disputed regulations are invalid to the extent they impose such a
requirement. Respondent argues that section 882(c)(2) includes a
clear timely filing requirement and that the disputed regulations
are a valid construction of that requirement. According to
respondent, petitioner may not deduct its expenses because it did
not file the subject returns timely.
We agree with petitioner. To best understand our decision,
we first discuss the relevant provisions and developments in the
law which preceded the issuance of the disputed regulations. We
then address our interpretation of the relevant text and the
standard by which we judge the disputed regulations to be
invalid.
III. Relevant Filing Requirements
Every corporation subject to Federal income tax must file a
Federal income tax return with respect to that tax. See sec.
6012(a)(2). The regulations interpret section 6012(a)(2) to
require that such a corporation file a Federal income tax return
even if it does not have any gross or taxable income for the
year. See sec. 1.6012-2(a)(1), Income Tax Regs. The regulations
interpret section 6012(a)(2) to apply to foreign corporations to
the extent set forth in section 1.6012-2(g)(1), Income Tax Regs.
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See id. Section 1.6012-2(g)(1), Income Tax Regs., generally
requires that a foreign corporation file a Federal income tax
return on Form 1120-F if it “is engaged in trade or business in
the United States at any time during the taxable year or * * *
has income which is subject to taxation under subtitle A of the
Code (relating to income taxes)”.
Section 6072 sets the time for the filing of Federal income
tax returns required by section 6012. A corporation generally
must file its return by the 15th day of the third month following
the close of its taxable year. See sec. 6072(b); see also sec.
1.6072-2(a), Income Tax Regs. An exception to this rule is found
in the case of a foreign corporation without an office or place
of business in the United States. In such a case, the foreign
corporation may file its tax return up until the 15th day of the
sixth month following the close of its taxable year. See sec.
6072(c); see also sec. 1.6072-2(b), Income Tax Regs.
Petitioner did not conduct a trade or business in the United
States at any time from its inception through the close of the
last subject year. Thus, but for an election under section
882(d)(1), petitioner was required by section 6012(a), as
interpreted by section 1.6012-2(a)(1) and (g)(1), Income Tax
Regs., to file a Federal income tax return for a taxable year
included within that period only if it had income subject to
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Federal income tax.8 Petitioner had no such income for its first
taxable year but did have such income for each of its taxable
years thereafter through the close of the last subject year. For
each of the subject years, therefore, petitioner was required to
file a Form 1120-F with the Commissioner. Because petitioner was
within the rule of section 6072(c) for each of those years, the
due dates of the subject returns were November 15, 1994, 1995,
and 1996, respectively.
IV. Place for Filing Returns
Section 6091(b)(2) sets forth the rules concerning the place
where a corporation must file its Federal income tax returns.
That section was enacted as part of the Internal Revenue Code of
1954 (1954 Code), ch. 736, 68A Stat. 752, to replace section
53(b)(2) of the Internal Revenue Code of 1939 (1939 Code), ch. 2,
53 Stat. 28. Former section 53(b)(2), which also appeared in the
Revenue Act of 1928, 45 Stat. 808, and the Revenue Act of 1932,
47 Stat. 189, provided:
(2) CORPORATIONS.--Returns of corporations shall
be made to the collector of the district in which is
located the principal place of business or principal
office or agency of the corporation, or, if it has no
principal place of business or principal office or
agency in the United States, then to the collector at
Baltimore, Maryland.
8
Petitioner would have been required by sec. 6012(a), as
interpreted by sec. 1.6012-2(a)(1) and (g)(1), Income Tax Regs.,
to file a return for any taxable year in which it had a sec.
882(d)(1) election in effect. Such an election was in effect as
to petitioner only during the subject years.
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Thus, before the enactment of the 1954 Code, a foreign
corporation such as petitioner was required to file its Federal
income tax returns at Baltimore, Maryland.
Since the enactment of the 1954 Code, a corporation
generally must file its Federal income tax returns with the
District Director for the internal revenue district in which is
located the corporation’s principal place of business, principal
office, or agency. See sec. 6091(b)(2)(A); see also sec.
1.6091-2(b), Income Tax Regs. The rule is different where a
foreign corporation has no principal place of business, principal
office, or agency in any internal revenue district. See sec.
6091(b)(2)(B)(i), (iii). In that case, section 6091(b)(2)(B)(i)
and (iii) allows the Secretary to designate by regulation the
place where the foreign corporation’s return will be filed.
As relevant here, section 1.6091-3(f), Income Tax Regs.
(before amendment on September 15, 2004, by T.D. 9156, 2004-2
C.B. 669, 671), generally required that a foreign corporation
file its Federal income tax returns with the “Director of
International Operations, Internal Revenue Service, Washington,
D.C. 20225, or the district director, or the director of the
service center, depending on the appropriate officer designated
on the return form or in the instructions issued with respect to
such form”. That section was issued by the Secretary in 1959.
See T.D. 6364, 1959-1 C.B. 546, 604. In the 1972 instructions
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for Form 1120-F, the Commissioner directed that “All foreign
corporations (whether or not engaged in a trade or business
within the U.S.) must file their return with the Internal Revenue
Service Center * * * [in] Philadelphia, Pennsylvania 19155”.
Previously, the instructions for Form 1120-F had stated that “All
foreign corporations (whether or not engaged in a trade or
business within the United States) must file their return with
the “Director of International Operations, Internal Revenue
Service Center, Washington, D.C. 20225”. See, e.g., the 1971
instructions for Form 1120-F.
The instructions for the subject returns state that
taxpayers must file their Forms 1120-F “with the Internal Revenue
Service Center, Philadelphia, PA 19255”. In accordance with
these instructions, petitioner filed the subject returns with the
Philadelphia Service Center.9
9
Sec. 7482(b)(1)(B) provides rules as to venue for appeal
by a corporation without a principal place of business, principal
office, or agency in a judicial circuit. In such a case, venue
is the United States Court of Appeals for the circuit in which is
located “the office to which was made the return of the tax in
respect of which the liability arises”. Id. Because petitioner
filed the subject returns in Philadelphia, Pa., an appeal of this
case would appear to be to the Court of Appeals for the Third
Circuit. As noted supra pp. 15-16, a foreign corporation such as
petitioner was required before the enactment of the 1954 Code to
file its Federal income tax returns at Baltimore, Md. Venue for
appeal in that case was the Court of Appeals for the Fourth
Circuit.
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V. Section 882
A. Overview
A foreign corporation engaged in a trade or business within
the United States is taxable under section 11, 55, 59A, or
1201(a) on its taxable income that is effectively connected
income, see sec. 882(a)(1); such taxation is consistent with that
of a domestic corporation. A foreign corporation not engaged in
a trade or business within the United States is taxable at a flat
rate of 30 percent of the amount received from “interest (other
than original issue discount as defined in section 1273),
dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, and other fixed or
determinable annual or periodical gains, profits, and income”,
but only to the extent that the income is received from sources
within the United States (U.S. source income). Sec. 881(a)(1).
A foreign corporation is not taxable in the United States on its
income that is neither effectively connected income nor U.S.
source income. See id.
A foreign corporation that realizes U.S. source income that
is not effectively connected income may elect to treat the U.S.
source income as effectively connected income if the U.S. source
income is derived from real property located in the United
States. See sec. 882(d)(1). The Commissioner has ruled that a
foreign corporation may not make such an election for a taxable
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year in which it does not derive income from real property in the
United States. See Rev. Rul. 91-7, 1991-1 C.B. 110; see also
sec. 1.871-10(a), Income Tax Regs.
For purposes of section 882(a)(1), a foreign corporation
generally determines its taxable income by including in its gross
income only its effectively connected income. See sec.
882(a)(2). Whether the foreign corporation may claim deductions
against its gross income to arrive at taxable income depends on
section 882(c)(2). Under that section, a
foreign corporation shall receive the benefit of the
deductions and credits allowed to it in this subtitle
only by filing or causing to be filed with the
Secretary a true and accurate return, in the manner
prescribed in subtitle F, including therein all the
information which the Secretary may deem necessary for
the calculation of such deductions and credits. * * *
B. History of Relevant Provisions
1. Predecessors to Section 882(c)(2)
We trace section 882(c)(2) to its origin in section 233 of
the Revenue Act of 1928. There, Congress provided:
SEC. 233. ALLOWANCE OF DEDUCTIONS AND CREDITS.
A foreign corporation shall receive the benefit of
the deductions and credits allowed to it in this title
only by filing or causing to be filed with the
collector a true and accurate return of its total
income received from all sources in the United States,
in the manner prescribed in this title; including
therein all the information which the Commissioner may
deem necessary for the calculation of such deductions
and credits.
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Congress enacted section 233 of the Revenue Act of 1928 in the
same form as the related bill had been introduced in the House of
Representatives. See H.R. 1, sec. 233, 70th Cong., 1st Sess.
(1927). The committee reports underlying this enactment do not
explain the section’s intent or breadth.
Section 233 of the Revenue Act of 1928 was reenacted
verbatim in the Revenue Act of 1932, 47 Stat. 230, the Revenue
Act of 1934, ch. 277, 48 Stat. 737, the Revenue Act of 1936, ch.
690, 49 Stat. 1717, and the Revenue Act of 1938, ch. 289,
52 Stat. 531. The same provision also was codified verbatim in
the 1939 Code, 53 Stat. 79, except that Congress placed the word
“chapter” in the two places where the word “title” had appeared
in the previous statute.10 Compare section 233 of the 1939 Code
with section 233 of the Revenue Act of 1938.
In the 1954 Code, Congress recodified section 233 of the
1939 Code in former section 882(c)(1), 68A Stat. 282, with slight
modifications. Section 882(c)(1) of the 1954 Code provided:
10
The 1939 Code was approved and published on Feb. 10,
1939. See 53 Stat. iii. The 1939 Code “is an enactment without
change of the 1939 edition of the Codification of Internal
Revenue Laws prepared by * * * the staff of the Joint Committee
on Internal Revenue Taxation, with the assistance of the
Department of the Treasury and the Department of Justice.”
53 Stat. iii. The underlying bill was introduced in the House
Committee on Ways and Means on Jan. 18, 1939. See 53 Stat. iii.
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(c) Allowance of Deductions and Credits.--
(1) Deductions allowed only if return
filed.--A foreign corporation shall receive
the benefit of the deductions allowed to it
in this subtitle only by filing or causing to
be filed with the Secretary or his delegate a
true and accurate return of its total income
received from all sources in the United
States, in the manner prescribed in subtitle
F, including therein all the information
which the Secretary or his delegate may deem
necessary for the calculation of such
deductions.
The House committee report underlying the 1954 Code stated as to
this action: “Subsection (c), relating to necessity for filing
of returns by foreign corporations in order to secure allowance
of deductions and credits, is, in substance, identical with
sections 232, 233, and 234, 1939 Code.” H. Rept. 1337, 83d
Cong., 2d Sess. A246 (1954); see also S. Rept. 1622, 83d Cong.,
2d Sess. 417 (1954) (same statement except omits the words “and
credits”).
Section 882 of the 1954 Code was next amended in the Foreign
Investors Tax Act of 1966, Pub. L. 89-809, sec. 104(b)(1), 80
Stat. 1555. A stated purpose of that act was “To provide
equitable tax treatment for foreign investment in the United
States”. Foreign Investors Tax Act of 1966, 80 Stat. 1539. To
that end, Congress renumbered section 882(c)(1) of the 1954 Code
with slight modification as section 882(c)(2) and added a new
section 882(d). Foreign Investors Tax Act of 1966, sec.
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104(b)(1), 80 Stat. 1556. As to the first action, the House
committee report stated:
Deductions and credits allowed only if return filed.
Paragraph (2) of section 882(c) continues the
substance of the rule contained in section 882(c)(1) of
existing law that a foreign corporation is to receive
the benefit of the allowable deductions only by filing
a true and accurate return of its total income
(including income subject to tax under section 881(a));
a technical amendment has been provided, however, to
make clear that the return must also include the income
derived from sources without the United States which is
effectively connected with the conduct of a trade or
business within the United States. This rule has also
been extended to apply to credits against tax, such as
the foreign tax credit, other than the credit provided
by section 32 for tax withheld at the source or the
credit provided by section 39 for certain users of
gasoline and lubricating oil. As so amended, section
882(c)(2) is consistent with section 874(a) of the
code, as amended by section 3(d) of the bill. [H.
Rept. 1450, 89th Cong. 2d Sess. 90 (1966).]
As to the addition of section 882(d), the Senate committee report
stated:
As a general rule, the bill provides that income of a
nonresident alien or foreign corporation will be
subject to the flat 30-percent (or lower treaty) rate
if it is not effectively connected with the conduct of
a trade or business within the United States. The
regular individual or corporate rates apply to income
which is effectively connected to the conduct of a U.S.
trade or business. However, the foreigner may elect to
treat real property income as if it were income
effectively connected with a U.S. business. This is to
permit the deductions attributable to this real
property income to be deducted from it. * * * [S.
Rept. 1707, 89th Cong., 2d Sess. 19 (1966), 1966-2 C.B.
1059, 1071.]
-23-
Cf. id. at 26, 1966-2 C.B. at 1076-1077, where the Senate
committee noted as to nonresident aliens owning property in the
United States that
Taxing income on real property at a flat 30-percent
rate without the allowance of allocable
deductions--which in the case of this type of income
may be relatively large--may result in quite heavy tax
burdens on this type of income. Your committee agrees
with the House that the law in this area should be
clarified and doubts whether the disallowance of
deductions in such cases is appropriate. Moreover, the
disallowance of deductions in such cases would tend to
discourage foreign investment in U.S. realty.
2. Section 217 of the Revenue Act of 1918
a. Overview
Ten years before the Revenue Act of 1928, 45 Stat. 791,
Congress enacted in section 217 of the Revenue Act of 1918, ch.
18, 40 Stat. 1069, a provision applicable to nonresident aliens.
This provision was substantially similar to section 233 of the
Revenue Act of 1928, except that section 217 used the words
“nonresident alien individual” rather than the words “foreign
corporation”. Section 217 of the Revenue Act of 1918 provided:
NONRESIDENT ALIENS--ALLOWANCE OF DEDUCTIONS AND
CREDITS.
Sec. 217. That a nonresident alien individual
shall receive the benefit of the deductions and credits
allowed in this title only by filing or causing to be
filed with the collector a true and accurate return of
his total income received from all sources corporate or
otherwise in the United States, in the manner
prescribed by this title, including therein all the
information which the Commissioner may deem necessary
for the calculation of such deductions and credits:
* * *
-24-
Section 217 of the Revenue Act of 1918 was reenacted in
subsequent revenue acts, see, e.g., Revenue Act of 1924, ch. 234,
sec. 217(g), 43 Stat. 275; Revenue Act of 1926, ch. 27, sec.
217(g), 44 Stat. 32; Revenue Act of 1928, ch. 852, sec. 215(a),
45 Stat. 848; Revenue Act of 1932, ch. 208, sec. 215(a), 47 Stat.
229, and was codified in the 1939 Code as section 215(a), ch. 2,
53 Stat. 77. It was recodified in the 1954 Code as section
874(a), 68A Stat. 281. Section 874 of the 1954 Code was
identical in substance with sections 215 and 216 of the 1939
Code, H. Rept. 1337, 83d Cong., 2d Sess., supra at A245, and is
virtually identical to section 882(c)(2) except that the latter
section uses the words “foreign corporation” instead of the words
“nonresident alien individual”.
From the outset, the Secretary interpreted section 217 of
the Revenue Act of 1918 as providing that a nonresident alien was
allowed deductions upon the alien’s filing of a true and accurate
Federal income tax return and that the alien’s tax liability
would be assessed without the benefit of deductions if the
Commissioner had to prepare a substitute return for the alien.
That interpretation was set forth in Article 311 of Regulations
45 as follows:
Art. 311. Allowance of deductions and credits to
nonresident alien individual.--Unless a nonresident
alien individual shall render a return of income as
required in article 404 [i.e., “a full and accurate
return on form 1040 (revised) or form 1040 A (revised)
of his income received from sources within the United
-25-
States, regardless of amount”], the tax shall be
collected on the basis of his gross income (not his net
income) from sources within the United States. Where a
nonresident alien has various sources of income within
the United States, so that from any one source or from
all sources combined the amount of income shall call
for the assessment of a surtax, and a return of income
shall not be filed by him or on his behalf, the
Commissioner will cause a return of income to be made
and include therein the income of such nonresident
alien from all sources concerning which he has
information, and he will assess the tax and collect it
from one or more of the sources of income within the
United States of such nonresident alien, without
allowance for deductions or credits. * * *
b. Relationship to Former Section 233
The Court of Appeals for the Fourth Circuit has observed
that Article 311 of Regulations 45 contains the Secretary’s
longstanding construction of section 217 of the Revenue Act of
1918. See Blenheim Co. v. Commissioner, 125 F.2d at 910. That
court has stated that Congress is presumed to have included that
construction in section 233 as enacted as part of the Revenue Act
of 1928 and as later reenacted. See id. (citing Brewster v.
Gage, 280 U.S. 327 (1930); Morgan v. Commissioner, 309 U.S. 78(1940)).
3. Section 235 of the Revenue Act of 1928
Section 235 of the Revenue Act of 1928, 45 Stat. 849, was a
predecessor to section 6072 and provided the due date for filing
the Federal income tax returns of a foreign corporation without
an office or place of business in the United States. Section 235
of the Revenue Act of 1928 provided:
-26-
SEC. 235. RETURNS.
In the case of a foreign corporation not having
any office or place of business in the United States
the return, in lieu of the time prescribed in section
53(a)(1), shall be made on or before the fifteenth day
of the sixth month following the close of the fiscal
year, or, if the return is made on the basis of the
calendar year then on or before the fifteenth day of
June. If any foreign corporation has no office or
place of business in the United States but has an agent
in the United States, the return shall be made by the
agent.
Section 235 of the Revenue Act of 1928 was reenacted verbatim in
the Revenue Act of 1932, 47 Stat. 230. Compare section 235 of
the Revenue Act of 1932 with section 235 of the Revenue Act of
1928.
VI. Relevant Caselaw
A. Overview
This Court has observed that sections 874(a) and 882(c)(2),
because similar in text and legislative intent, are to be
interpreted in pari materia. See Espinosa v. Commissioner,
107 T.C. 146, 152 (1996). The Court has also observed that few
opinions discuss the text of these sections in the context of
Federal income tax returns submitted to the Commissioner
untimely.11 Id. at 152-153. All of the cases discussing the
11
The paucity of cases is not surprising. Before the
enactment of the 1954 Code, all cases interpreting the
predecessors of sec. 882(c)(2) were appealable to the Court of
Appeals for the Fourth Circuit. See supra note 9. As will be
discussed, the view of that court was set forth by the end of
1942 in three opinions. In addition, as also will be discussed,
(continued...)
-27-
relevant text are in the setting of former section 233. Only one
case discusses the text of section 874(a), and no case discusses
the predecessors of that section.
B. Anglo-Am. Direct Tea Trading Co.
In the seminal case of Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), the taxpayer was a foreign
corporation with no offices or agents in the United States, and
it did not transact any business in the United States. During
its taxable years ended November 30, 1932 and 1933, the taxpayer
received gross income in the form of dividends from a wholly
owned domestic corporation. In March 1935, the Commissioner
learned of the dividends, determined that the taxpayer had not
filed Federal income tax returns for its taxable years of
receipt, and discussed this matter with one of the taxpayer’s
officers. On or about April 15, 1935, without informing the
taxpayer that he was doing so, the Commissioner’s revenue agent
prepared substitute Federal income tax returns for those taxable
years of receipt. Before the substitute returns were accepted by
the Commissioner, the taxpayer on April 18, 1935, filed
delinquent Federal income tax returns that included the dividends
in its gross income and claimed corresponding deductions for
11
(...continued)
the Secretary’s regulations construing the relevant text did not
state until 1990 that a timely filed return was required as a
condition to a foreign corporation’s deducting its expenses.
-28-
dividends received. The Commissioner denied the deductions
reported on those returns.
Section 23 of the Revenue Act of 1928, 45 Stat. 799, and the
Revenue Act of 1932, 47 Stat. 179, allowed the taxpayer to deduct
from its gross income any dividend received from a domestic
corporation. The Commissioner argued that notwithstanding this
law, the phrase in section 233 of the 1928 and 1932 Revenue Acts
that conditioned the allowance of deductions on the filing of
returns “in the manner prescribed in this title” meant that
deductions were allowable to a foreign corporation only if it
filed its return before the time specified in section 235 of the
1928 and 1932 Revenue Acts. Under section 235 of the 1928 and
1932 Revenue Acts, the taxpayer’s returns had to be filed by May
30, 1933 and 1934, respectively, in order to be timely. The
Commissioner argued more specifically that Congress intended that
the word “manner” be construed broadly as including a timeliness
requirement or, in other words, a reference to the timely filing
requirements found elsewhere in the applicable revenue acts.
The Board, in a reviewed opinion with no recorded dissent,
disagreed with the Coommissioner’s interpretation of the relevant
text and held that the taxpayer was entitled to its deductions
even though its returns had been filed untimely. See Anglo-Am.
Direct Tea Trading Co. v. Commissioner, supra at 716. The Board
reached this holding by carefully examining Congress’s use in the
-29-
revenue acts of the words “manner” and “time” and by literally
applying the word “manner” in accordance with the word’s “usual
and ordinary meaning of ‘mode, method, mien, style, or way’”.
Id. at 715. The Board concluded that the word “manner” was not
intended by Congress to, and thus did not, include any element of
time, let alone impose a requirement that a foreign corporation
file its return by a certain date in order to deduct its
expenses. Id. at 714-716. The Board stated: “A careful reading
of sections 233 and 235 discloses no indication of a legislative
intent to extend the meaning of ‘manner’ so as to include ‘time’.
Neither section provides that the deductions may not be allowed
unless the return is filed within the time prescribed.” Id. at
715. The Board added that if Congress had intended to deprive a
foreign corporation of its right to a deduction when it did not
file a timely Federal income tax return, it would have said so.
Id. The Board also supported its conclusion by analyzing the
“structure” of the revenue acts. The Board concluded from that
analysis:
They seem to have a more or less common pattern. Thus
section 52 governs the manner of filing corporation
returns, section 215(a) deals with the manner of filing
returns by or for nonresident aliens, section 251(f)
the manner of filing returns by citizens of the United
States who are in receipt of income from sources within
possessions of the United States, and section 233 the
manner of filing returns for a foreign corporation.
Sections 53, 217, and 235 deal with the time and place
of filing returns, while sections 56, 218, and 236 deal
with payment. Inasmuch as separate sections deal with
“manner” and “time”, we think it highly improbable that
-30-
Congress ever intended to include the element of time
in the section dealing primarily with the manner of
filing. * * * [Id. at 715-716.]
C. Mills, Spence & Co.
In Mills, Spence & Co. v. Commissioner, a Memorandum Opinion
of the Board of Tax Appeals dated Oct. 5, 1938, the Board
followed its decision in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, supra. In Mills, Spence & Co., the taxpayer was a
foreign corporation that had no offices in the United States but
derived income from sources within the United States, thus
requiring it to file Federal income tax returns. On July 19,
1934, the Commissioner informed the taxpayer that it had to file
tax returns for 1930 through 1933 because it had received during
those years gross income subject to Federal income tax. The
taxpayer filed those returns on February 21, 1936, reporting net
losses for each year. Subsequently, the Commissioner issued a
notice of deficiency to the taxpayer that disallowed all of the
deductions claimed on the returns. The Commissioner argued
before the Board that the taxpayer’s failure to file its tax
returns timely meant that it was precluded by section 233 of the
1928 and 1933 Revenue Acts from deducting its expenses. The
Board disagreed, stating:
That the petitioner received the gross incomes,
incurred the expenses, and sustained the net losses as
set out in the tabulation is not in dispute. The
contention of respondent is that such expenses are not
deductible, for the sole reason that the petitioner,
being a foreign corporation, is prohibited from
-31-
receiving the benefit of such deductions by the
provisions of section 233 of the Revenue Acts of 1928
and 1932, because none of its returns for the periods
involved was timely filed. The gist of his contention
is that the words in those sections “in the manner
prescribed in this title” embrace timely filing of
returns within their meaning and that, consequently,
deductions are allowable to a foreign corporation only
when its returns are filed within the time specified in
section 235 of the Revenue Acts of 1928 and 1932,
supra. Under this section, 235, petitioner should have
filed its returns for the periods involved on or before
June 15 of each of the years 1931, 1932, 1933, and
1934, but did not file any returns until February 21,
1936, when it filed returns for all the periods. The
respondent argues that as a consequence of such
untimely filing of the returns the petitioner is not
entitled to the deductions of the expenses involved and
that the tax should be computed upon its gross income.
We do not agree with respondent’s contention. It
is unnecessary to assign any reason for such conclusion
other than to say that our decision on this point is
clearly controlled by the holding of the Board in
Anglo-American Direct Tea Trading Co., Ltd.,
promulgated October 4, 1938, 36 B.T.A. No. 94.
Accordingly we hold that petitioner is entitled to the
deduction of the expenses as set out in the above
tabulation and that respondent erred in computing
petitioner’s taxes on the basis of its gross income.
[Mills, Spence & Co. v. Commissioner, supra; fn. ref.
omitted.]
D. Am. Inv. and Gen. Trust Co.
In Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum
Opinion of the Board of Tax Appeals dated April 13, 1939, the
Board again applied its holding in Anglo-Am. Direct Tea Trading
Co. v. Commissioner, 38 B.T.A. 711 (1938). The Board found that
the taxpayer, a foreign corporation, had not filed its 1929 and
1930 Federal income tax returns timely. The Commissioner again
-32-
argued that this finding meant that the taxpayer was not entitled
to its deductions. The Board disagreed, stating:
this is not a “no return” case. It is obvious,
however, that the petitioner was delinquent in filing
its returns. The returns were due not later than
June 15, 1930 and June 15, 1931, whereas they were not
filed until after June 12, 1934. The Commissioner
argues that this foreign corporation can not receive
the benefit of the deductions and credits allowed under
Title I of the Revenue Act of 1928 because the filing
of the delinquent returns was not the filing of returns
“in the manner prescribed” in Title I. This same
argument has been considered and rejected by the Board
in the case of Anglo-American Direct Tea Trading Co.,
Ltd., 38 B.T.A. 711. It is rejected here on authority
of that case. [Am. Inv. and Gen. Trust Co., Ltd. v.
Commissioner, supra.]
E. Taylor Sec., Inc.
Next, the Board decided Taylor Sec., Inc. v. Commissioner,
40 B.T.A. 696 (1939). There, the Commissioner issued a notice of
deficiency to the foreign corporation taxpayer on March 23, 1937.
That notice reflected substitute returns that the Commissioner
had prepared for the taxpayer’s 1930 through 1935 taxable years,
using only the taxpayer’s income. On June 16, 1937, the taxpayer
petitioned the Board as to the notice of deficiency, and the
Commissioner answered the petition shortly thereafter. On
October 20, 1938, the taxpayer was notified by the Board that a
hearing was set for a stated session of the Board beginning
December 5, 1938. Subsequently, after the Board continued the
date of that hearing until January 16, 1939, the taxpayer filed
its 1930 through 1935 tax returns on December 13, 1938.
-33-
The Board held that the taxpayer was not entitled to its
claimed deductions because it had not filed a return as required
by the statute. In rejecting any argument that the taxpayer’s
returns were “returns” for this purpose, the Board distinguished
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, on the
grounds that there the taxpayer had filed its returns before the
notice of deficiency was issued, those returns had been audited
(not the returns prepared by the revenue agent), and the returns
prepared by the revenue agent had never been accepted by the
Commissioner. See Taylor Sec., Inc. v. Commissioner, supra at
702-703. The Board stated:
Here the question is whether the petitioner, by
filing returns after the respondent made his
determination of deficiencies under the circumstances
presented, relieved itself of the adverse condition in
which it was situated by reason of section 233 and is
entitled to the benefits to which it would otherwise
have been entitled by the timely filing of returns. In
our opinion it may not.
* * * we are unable to conclude that in enacting
section 233, supra, it was the intention of Congress
that delinquent returns filed by a foreign corporation
after the respondent’s determination should constitute
the returns required as a prerequisite to the allowance
of the credits and deductions ordinarily allowable to
the corporations. * * * By section 233 the allowance
to foreign corporations of the credits and deductions
ordinarily allowable is specifically predicated upon
such corporations filing returns. In view of such a
specific prerequisite it is inconceivable that Congress
contemplated by that section that taxpayers could wait
indefinitely to file returns and eventually when the
respondent determined deficiencies against them they
could then by filing returns obtain all the benefits to
which they would have been entitled if their returns
had been timely filed. Such a construction would put a
-34-
premium on evasion, since a taxpayer would have nothing
to lose by not filing a return as required by statute.
[Id. at 703-704.]
F. Ardbern/Blenheim
One year later, the Board decided Ardbern Co. v.
Commissioner, 41 B.T.A. 910 (1940), and Blenheim Co. v.
Commissioner, 42 B.T.A. 1248 (1940). In Ardbern, the taxpayer
was a foreign corporation that attempted to file Federal income
tax returns for 1929 through 1932 in June 1937. The taxpayer
tendered those returns to the Commissioner’s revenue agent, but
the agent refused to accept them believing that the returns had
to be filed with the Collector of Internal Revenue at Baltimore,
Maryland. The agent did not inform the taxpayer how to file
those returns properly. On July 3, 1937, the Commissioner issued
a notice of deficiency to the taxpayer for the years in question
and, 6 days later, prepared substitute returns for the taxpayer.
On September 29, 1937, the taxpayer petitioned the Board with
respect to the matter, and the Commissioner answered that
petition on December 7, 1937. On October 28, 1938, the taxpayer
filed its 1929 through 1932 Federal income tax returns with the
Collector of Internal Revenue at Baltimore, Maryland, claiming
deductions and reporting no tax due.
The Board applied Taylor Sec., Inc. v. Commissioner, supra,
and sustained the Commissioner’s disallowance of deductions. The
Board stated:
-35-
Petitioner did not, by the lodgment of returns
with * * * [the revenue agent], discharge the duty
which the statute laid upon it. Also, the action of
petitioner in filing returns with the collector at
Baltimore on October 28, 1938, was ineffective to bring
it within the limitations of the statute so as to
entitle it to the benefit of deductions. These returns
were filed (a) after respondent had determined the
deficiencies and prepared returns for petitioner under
section 3176 of the Revised Statutes, as amended, and
(b) after the petition and answer had been filed and
the case was at issue before the Board, and only
approximately two and one-half months prior to the
hearing. Returns filed under such circumstances do not
meet the requirements of section 233. Taylor
Securities, Inc., 40 B.T.A. 696. On the point under
discussion, the facts of the instant proceeding are not
distinguishable in any material respect from those of
the Taylor case. On authority of that decision and for
the reasons therein stated, which need not be repeated
here, respondent’s action in computing the present
deficiencies without the allowance of deductions is
approved. [Ardbern Co. v. Commissioner, 41 B.T.A at
919-920.]
Upon appeal, the Court of Appeals for the Fourth Circuit
modified and remanded the Board’s decision on the authority of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711(1938). The court stated:
fair dealing between the Government and a taxpayer
would require the agent to whom the returns were
improperly tendered for filing to advise the taxpayer
as to the official and place where the returns should
be filed. Here the agent Muller rejected the returns
on the sole ground that they were improperly executed
and did not notify the taxpayer that the returns could
in no event be filed with him. Soon after the refusal
to accept the returns the deficiency was determined
against the taxpayer.
It is conceded that, if the return which taxpayer
attempted to file before Muller in June 1937 had been
properly filed before the Collector at Baltimore,
taxpayer would have been entitled to the deductions
-36-
claimed, which represented expense incurred in
connection with the earning of the income taxed. The
deductions are denied merely because they were not
claimed in a return properly filed until after the
deficiency assessment had been made against taxpayer
upon a return filed for him by the Commissioner in
which no deductions were allowed. We think, however,
that when return was filed by the Commissioner for the
taxpayer, he should have given him the benefit of
proper deductions for expense of doing business, of
which he had been notified by the return which taxpayer
had attempted to file with his agent, or, at least,
that taxpayer should be allowed such deductions when,
upon the assessment of a deficiency against him, he
shows that prior to its assessment he attempted in good
faith to file a return in which such deductions were
claimed. This is nothing but elementary justice, and
we find nothing in the statute which forbids it. The
return made by the Commissioner was clearly not based
upon the best available information.
While there is a specific penalty of 25 per centum
fixed for failure to file tax returns, Section 291,
Revenue Act of 1928, * * * there is no provision that
there shall be an added penalty in the form of not
allowing the delinquent taxpayer deductions to which it
otherwise would be entitled. The Board held in
Anglo-American Direct Tea Trading Co. v. Commissioner,
38 B.T.A. 711: “Inasmuch as separate sections deal
with “manner” and “time,” we think it highly improbable
that Congress ever intended to include the element of
time in the section dealing primarily with the manner
of filing. We hold, therefore, that the mere fact the
return was not filed within the time prescribed by
section 235 does not, under the circumstances here
presented, preclude the allowance of deductions
claimed.” [Ardbern Co. v. Commissioner, 120 F.2d at
426.]
The Board also followed Taylor Sec., Inc. v. Commissioner,
40 B.T.A. 696 (1939), in Blenheim Co. v. Commissioner, 42 B.T.A.
1248 (1940). There, the taxpayer was a foreign corporation that
on June 15, 1935, filed a 1934 personal holding company return
(Form 1120H) reporting income consisting only of dividends
-37-
received from domestic corporations. The Commissioner learned
that the taxpayer had not filed a corporate income tax return
(Form 1120) for that year and asked the taxpayer to do so. The
taxpayer declined. On April 28, 1938, the Commissioner prepared
a substitute return for the taxpayer and, on May 18, 1938, issued
to it a notice of deficiency. On August 9, 1938, the taxpayer
filed a Form 1120 for 1934.
The Board held that the filing of Form 1120H did not satisfy
the requirements of section 233 of the 1928 and 1932 Revenue Acts
because the personal holding company surtax was separate and
distinct from the corporate income tax. Id. at 1251-1252. As to
the Form 1120 filed by the taxpayer for 1934, the Board stated:
Undoubtedly a taxpayer may litigate a
determination of respondent on the basis of a return
made by * * * [the Commissioner]. But, a “return”
filed by a taxpayer after such a return has been
prepared and filed for him by respondent, under the
circumstances existing here, is a nullity and does not
comply with section 233, supra. The taxpayer can not
thus take advantage from an alleged return submitted by
the taxpayer not only after respondent’s filing of its
return * * * but also after the issuance of a notice of
deficiency. Taylor Securities, Inc., 40 B.T.A. 696.
* * * [Id. at 1251.]
On appeal, the Court of Appeals for the Fourth Circuit
affirmed. The court first quoted section 233 of the 1928 and
1932 Revenue Acts and then stated with respect thereto: “It is
true that this section contains no reference to a time element.”
Blenheim Co. v. Commissioner, 125 F.2d at 908. The court then
noted that section 233 of the 1928 and 1932 Revenue Acts applied
-38-
only to foreign corporations and explained that Congress intended
to impose special conditions on foreign corporations vis-a-vis
domestic corporations. The court stated:
The difficulty here encountered by the
Commissioner in attempting to ascertain the
petitioner’s correct income tax is a striking example
of the many administrative problems inherent in the
application of the federal income tax to foreign
corporations. This has prompted Congress to impose
special conditions on such corporations. Indeed,
unless a foreign corporation is induced voluntarily to
advise the Commissioner of all of its income
attributable to sources within the United States and of
the exact nature of all deductions from such income,
the Commissioner may never learn even of the
corporation’s existence, and, in any event, he will
probably be unable to determine the correct amount of
its taxable income.
The situation is pregnant with possibilities of
tax evasion. In express recognition of this fertile
danger to the orderly administration of the income tax
as applied to foreign corporations, Congress
conditioned its grant of deductions upon the timely
filing of true, proper and complete returns. This is
in addition, of course, to the 25% penalty provided by
Section 291 of the 1934 Act for both foreign and
domestic corporations which either file no return or a
late return unless “reasonable cause” for the failure
to file a timely return is shown. * * * [Id. at 909.]
As to the “terminal date” that the Board had adopted in
Taylor Sec., Inc. v. Commissioner, supra, the Court of Appeals
for the Fourth Circuit explained that this date was justified
notwithstanding the absence in the statute of a time element.
The court stated:
The conclusion that the preparation of a return by
the Commissioner a reasonable time after the date it
was due terminates the period in which the taxpayer may
enjoy the privilege of receiving deductions by filing
-39-
its own return, is consistent not only with the
intention of Congress * * * but also with
considerations of sound administrative procedure and
the generally accepted rule concerning the number of
returns which may be filed.
This terminal date, which the Board of Tax Appeals
first adopted in Taylor Securities v. Commissioner,
40 B.T.A. 696 (1939), is directed against those foreign
corporations which instead of being induced voluntarily
to advise the Commissioner of their domestic
operations, might find their interests best served by
filing no return whatever, and then waiting until such
time, if any, as the Commissioner discovers their
existence and acquires sufficient information about
their income on which to base a return. Unless they
are precluded from then obtaining the deductions and
credits under such circumstances, such foreign
corporation can, if detected, come in for the first
time after the Commissioner has made a return and
suffer no economic loss other than the general 25% late
filing penalty which applies to domestic as well as
foreign corporations.
Without prescribing an absolute and rigid rule
that whenever the Commissioner files a return for a
foreign corporation the taxpayer is completely and
automatically denied the benefit of deductions or
credits, we yet hold that the facts of the instant case
justify a disallowance of deductions which petitioner
might otherwise have been entitled to claim, had it
filed a timely return in compliance with the statutory
requirement. [Blenheim Co. v. Commissioner, 125 F.2d
at 910.]
The Court of Appeals for the Fourth Circuit also found in the
legislative history of section 217 of the Revenue Act of 1918
further support for that conclusion and its reading of the
statute to the effect that a foreign corporation was entitled to
deduct its expenses upon the filing of an accurate and complete
return:
-40-
It will thus be noted that Section 233 relating to
foreign corporations, which made its first appearance
in the Revenue Act of 1928, 26 U.S.C.A. Int. Rev. Acts,
page 419, is almost verbally identical with this
section governing nonresident aliens which has been a
part of the revenue laws since 1918. The application
of Section 217 of the 1918 Act is clear. From the
outset the Treasury Regulations have expressly provided
that no deductions were allowable to nonresident aliens
unless an accurate and complete return was filed, and
the filing of the return by the Commissioner fixed the
tax liability. * * *
* * * * * * *
The foregoing regulation [Article 311 of Treasury
Regulations 45] states specifically that deductions are
allowable to a nonresident alien only if a return is
filed, and, if no return has been filed at the time the
Commissioner prepares a return for the taxpayer, the
tax shall be assessed with no allowance for deductions.
Congress may be presumed to have adopted this
longstanding administrative construction when it
enacted and reenacted Section 233. Brewster v. Gage,
1930, 280 U.S. 327, 50 S. Ct. 115, 74 L.Ed. 457, Morgan
v. Commissioner, 1940, 309 U.S. 78, 626, 60 S. Ct. 424,
84 L.Ed. 585, 1035. [Id. at 910.]
The Court of Appeals for the Fourth Circuit distinguished its
holding in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir.
1941), stating:
A substantially different factual situation is
presented in the case before us. Here the Commissioner
prepared a return only after he had unsuccessfully made
repeated requests to the taxpayer to do so, and only
after the taxpayer had flouted all of these requests.
Then, after the Commissioner had assessed a deficiency
on the basis of his return, but only then, the
petitioner filed its petition for review by the Board
and also a return.
Unless the deductions are here denied, Section 233
will become a meaningless provision, for if, after the
Commissioner has earnestly attempted to obtain a return
by the taxpayer and has waited a reasonable time before
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filing his own return, the taxpayer may still enjoy the
privilege of all deductions and credits, there is then
no inducement to foreign corporations voluntarily to
file timely returns. In the absence of demonstrable
fraud, they will, by self-serving uncooperative
conduct, suffer no loss other than the general late
filing penalty which is applicable to domestic as well
as foreign corporations. Such a construction of the
statute would put a premium on tax evasion and would
reduce the administration of the tax laws to mere idle
activity. [Id. at 909-910.]
G. Georday Enters.
In Georday Enters. v. Commissioner, 126 F.2d 384 (4th Cir.
1942), affg. a Memorandum Opinion of the Board of Tax Appeals, a
companion case to Blenheim Co. v. Commissioner, 125 F.2d 906 (4th
Cir. 1942), the Court of Appeals for the Fourth Circuit affirmed
the Board’s denial of deductions under section 233 of the 1928
and 1932 Revenue Acts. The court noted that the case for the
disallowance was even stronger than in Blenheim because the
taxpayer did not attempt to file a return voluntarily until after
a petition had been filed with the Board. The court stated:
On the issues of the timeliness of Georday’s federal
income tax return and the imposition of a 25% penalty,
our decision in the Blenheim case is determinative.
The case for disallowance of Georday’s deductions is
even stronger here because Georday failed to file a
return voluntarily not only after a return had been
filed for it by the Commissioner and after a deficiency
letter had been sent to it, but even after a petition
to the Board had been filed. In point of time, Georday
filed its return more than five years after the date on
which it was due.
Georday, therefore, clearly failed to file its
return within the reasonable terminal period prescribed
in the Blenheim case and is now precluded from
obtaining the benefits of any deductions it might have
-42-
otherwise been entitled to claim had it filed a timely
return. * * * [Georday Enters. v. Commissioner, supra
at 388.12]
H. Espinosa
While each of the previously discussed cases dealt with the
applicability of former section 233 to a foreign corporation,
Espinosa v. Commissioner, 107 T.C. 146 (1996), involved the
applicability of section 874(a) to a nonresident alien taxpayer.
In Espinosa, the Commissioner had mailed a letter to the taxpayer
on November 13, 1992, asking him if he had filed returns and, if
he had not, instructing him to file returns or otherwise respond.
The letter stated that the Commissioner would file substitute
returns for the taxpayer if the taxpayer did not respond by
December 1, 1992. On January 12, 1993, the taxpayer had not yet
responded, and the Commissioner wrote the taxpayer a second
request, adding that “your tax liability [will be determined]
based on the information we have” if the taxpayer did not respond
within 20 days.
On February 3, 1993, after the taxpayer had again failed to
respond, the Commissioner notified the taxpayer that the
Commissioner had filed substitute returns for the taxpayer for
1987 through 1991. On March 23, 1993, the Commissioner notified
the taxpayer that the substitute returns had been computed
12
The “terminal period prescribed in the Blenheim case”
(emphasis added) is the point where the Commissioner prepared a
substitute return for the taxpayer.
-43-
without the benefit of any deductions. On October 7, 1993, the
taxpayer submitted Federal income tax returns for 1987 through
1991; apparently, these returns were never filed by the
Commissioner. The returns reported net losses from rental
properties located in the United States. On January 13, 1994,
the Commissioner issued a notice of deficiency to the taxpayer
for 1987 through 1991. The Commissioner determined in the notice
of deficiency that the taxpayer was liable for deficiencies and
additions to tax as ascertained from the substitute returns.
Pursuant to section 874(a), the Commissioner did not allow the
taxpayer to deduct any of his related expenses.13
This Court upheld the Commissioner’s determination, deciding
that a nonresident alien may not avoid the sanctions of section
874(a) by filing returns after the Commissioner has prepared
returns for the taxpayer, but before the Commissioner has issued
a notice of deficiency. See Espinosa v. Commissioner, supra at
150, 158. The Court noted that the Commissioner before preparing
the substitute returns had informed the taxpayer that he had not
filed a Federal income tax return and had given him a reasonable
time to do so. Id. at 157.
13
Although the Commissioner in the notice of deficiency had
characterized the taxpayer’s rental income as effectively
connected income, the Court was careful to note that neither
party in that case had questioned whether the taxpayer had made a
valid election to support that characterization. See Espinosa v.
Commissioner, 107 T.C. 146, 150 (1996).
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Respondent argues in this case that the Court in Espinosa v.
Commissioner, supra at 156, interpreted Anglo-Am. Direct Tea
Trading Co. v. Commissioner, 38 B.T.A. 711 (1938), to hold solely
that a foreign corporation’s (or nonresident alien’s) filing of a
Federal income tax return after the due date set forth in section
6072 (and its predecessors) is not the only factor to consider in
determining whether the corporation (or alien) is entitled to
deduct its expenses. We disagree. The Court in Espinosa on the
referenced page made the following observation as to Anglo-Am.
Direct Tea Trading Co.: “while a terminal date does exist [after
which a foreign corporation or nonresident alien can no longer
claim the benefit of deductions by filing a Federal income tax
return], the timely filing requirements of section 6072(c) are
not determinative as to whether a taxpayer [the corporation or
alien] is entitled to the benefit of deductions.” The Court in
Espinosa did not limit Anglo-Am. Direct Tea Trading Co. to that
observation or to any other point. In fact, as the Board
explained its holding in Anglo-Am. Direct Tea Trading Co. shortly
after rendering it:
In the Anglo-American Co. case, it was held that
the phrase in section 233 of the Revenue Acts of 1928
and 1932, “in the manner prescribed in this title”, did
not mean within the time prescribed in the titles of
the respective acts and the allowance of the credits
and deductions otherwise allowable by such acts was not
dependent under section 233 on the filing of returns
within the time prescribed by said acts. [Taylor Sec.,
Inc. v. Commissioner, 40 B.T.A. at 702.]
-45-
Accord Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum
Opinion of the Board of Tax Appeals dated April 13, 1939; Mills,
Spence & Co. v. Commissioner, a Memorandum Opinion of the Board
of Tax Appeals dated Oct. 5, 1938. In addition, the Court of
Appeals for the Fourth Circuit in Ardbern Co. v. Commissioner,
120 F.2d at 425-426, quoted and applied favorably the following
holding from Anglo-Am. Direct Tea Trading Co. in deciding for the
taxpayer:
Inasmuch as separate sections deal with “manner” and
“time,” we think it highly improbable that Congress
ever intended to include the element of time in the
section dealing primarily with the manner of filing.
We hold, therefore, that the mere fact the return was
not filed within the time prescribed by Section 235
does not, under the circumstances here presented,
preclude the allowance of deductions claimed.
I. Inverworld, Inc.
In Inverworld, Inc. v. Commissioner, T.C. Memo. 1996-301,
the taxpayer was a foreign corporation that had not as of the
time of trial filed a Federal income tax return for any of the
relevant years. All of those years predated the effective date
of the disputed regulations. See discussion infra p. 48.
The taxpayer noted that the applicable regulations had been
issued in 1957 and that those regulations did not contain a
timely filing requirement. The taxpayer argued that such a
requirement was therefore not applicable to the relevant years.
The Court did not decide that argument. Instead, the Court
applied the opinions of the Court of Appeals for the Fourth
-46-
Circuit in Blenheim v. Commissioner, 125 F.2d 906 (4th Cir.
1942), and Ardbern Co. v. Commissioner, supra, and held that
section 882(c)(2) applied to deny the taxpayer the benefit of any
deductions for those years because the taxpayer had never filed a
return.
VII. Regulations Interpreting Section 882(c)(2) and Its
Predecessors
A. Background
The Secretary never issued regulations interpreting former
section 233. Since the enactment of section 882 of the 1954
Code, the Secretary has issued four sets of regulations
interpreting the relevant text of that section. The first set of
regulations was issued in 1957 (1957 regulations) and was amended
in 1990 through the second set of regulations (1990 regulations),
which contain the disputed regulations. The third set of
regulations was issued in 2002 (2002 temporary regulations) as
temporary regulations amending a portion of the 1990 regulations.
The fourth set of regulations was issued in 2003 (2003
regulations) and finalized the 2002 temporary regulations.14
14
In addition to the three sets of regulations that were
issued after the 1957 regulations, the Secretary in 1980 issued
one other set of regulations (1980 regulations) that pertained to
the 1957 regulations. See T.D. 7749, 1981-1 C.B. 390. The 1980
regulations amended the 1957 regulations by adding a new
paragraph (c), the substance of which is now reflected in sec.
1.882-4(b), Income Tax Regs. Because the 1980 regulations relate
to a subject that is not relevant to our analysis, we make no
further reference to them.
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B. 1957 Regulations
On October 23, 1957, the Secretary filed in the Federal
Register the 1957 regulations interpreting section 882 of the
1954 Code. See sec. 1.882-4, Income Tax Regs., 22 Fed. Reg. 8362(Oct. 23, 1957). According to those regulations, section 882 of
the 1954 Code pertained to “resident corporations”; i.e.,
corporations with a trade or business in the United States, and
such a corporation could deduct its expenses only if it filed a
true and accurate Federal income tax return in accordance with
section 6012 and the regulations thereunder. The 1957
regulations stated that a foreign corporation would be taxed on
its gross income, without the benefit of any deductions, if it
did not so file such a return. The 1957 regulations did not
require that the required return be filed by a set time. Nor did
the 1957 regulations state that the relevant text included a
timely filing requirement. The 1957 regulations stated in
relevant part:
§ 1.882-4 Allowance of Deductions to Foreign
Corporations.--* * *
(b) Resident foreign corporations.--(1) Return
necessary. A resident foreign corporation shall
receive the benefit of the deductions allowed to it
with respect to the income tax, only if it files or
causes to be filed with the district director, in
accordance with section 6012 and the regulations
thereunder, a true and accurate return of its total
income received from all sources within the United
States.
-48-
(2) Tax on gross income. If a return is not so
filed, the tax shall be collected on the basis of gross
income, determined in accordance with § 1.882-1 but
without regard to any deductions otherwise allowable.
C. 1990 Regulations
On December 10, 1990, the Secretary issued the 1990
regulations to amend section 1.882-4, Income Tax Regs., as
adopted in 1957. See sec. 1.882-4, Income Tax Regs., 55 Fed.
Reg. 50830 (Dec. 11, 1990), T.D. 8322, 1990-2 C.B. 172. The
amendments were first published as proposed regulations. See
sec. 1.882-4, Proposed Income Tax Regs., 54 Fed. Reg. 31547(July 31, 1989). In the preamble to the proposed regulations,
the Secretary explained: “Since the filing of a timely return is
one of the requirements set forth in subtitle F, these
regulations provide that otherwise allowable deductions and
credits will be allowed only if a return is filed by the time
limits as set forth in these regulations.” Id. As finalized,
the 1990 regulations became effective July 31, 1990, for taxable
years ended after that date. See sec. 1.882-4, Income Tax Regs.,
supra, T.D. 8322, 1990-2 C.B. at 172.
The 1990 regulations added to the 1957 regulations a general
requirement that a foreign corporation file its Federal income
tax return timely; i.e., generally before the 18-month deadline,
in order to deduct its expenses for the year covered by the
return. As respondent asserts in brief, a timely filing
requirement was added because:
-49-
When Anglo-American and its progeny were decided,
the scale and nature of international business activity
was markedly different from today’s modern business
environment. At that time, international travel was a
time-consuming and cumbersome endeavor. Transatlantic
air travel was in its infancy, zeppelins and cruise
ships were the predominant means of travel. Books and
records were in paper, not electronic form. Data and
information was transmitted via mail.
In the years since Anglo-American, there have been
dramatic changes and increases in the nature and level
of international business activity. International air
travel is commonplace, taking hours instead of days.
Books and records are now maintained in electronic form
on computers. Data, information, and money are
transmitted around the world in electronic form.
Businesses have instantaneous access to information via
the internet. Documents are delivered via overnight
delivery or by facsimile.
Section 1.882-4(a)(2), Income Tax Regs., as amended in 1990,
states:
(2) Return necessary. A foreign corporation shall
receive the benefit of the deductions and credits
otherwise allowed to it with respect to the income tax,
only if it timely files or causes to be filed with the
Philadelphia Service Center, in the manner prescribed
in subtitle F, a true and accurate return of its
taxable income which is effectively connected, or
treated as effectively connected, for the taxable year
with the conduct of a trade or business in the United
States by that corporation. * * *
Section 1.882-4(a)(3)(i), Income Tax Regs., as amended in 1990,
goes on to set forth filing deadlines by which to measure whether
the timely filing requirement has been met. See supra note 4.
Section 1.882-4(a)(3)(ii), Income Tax Regs., as amended in 1990,
also states, without further explanation, that “The filing
deadlines set forth in paragraph (a)(3)(i) of this section may be
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waived by the District Director or Assistant Commissioner
(International), in rare and unusual circumstances if good cause
for such waiver, based on the facts and circumstances, is
established by the foreign corporation.”
As to the inclusion of the timely filing requirement, the
preamble to the 1990 regulations states in relevant part:
Commentators questioned the validity of the filing
deadlines as set forth in the proposed regulations.
The filing deadlines were not eliminated in the final
regulations, however, since the statute clearly
provides for the denial of deductions and credits if
returns are not filed in a timely manner. This
requirement is justified because of different
administrative and compliance concerns with regard to
nonresident alien individuals and foreign corporations.
[T.D. 8322, supra, 1990-2 C.B. at 172, 55 Fed. Reg.
50827 (Dec. 11, 1990).]
Among the referenced commentators was the American Bar
Association Section of Taxation (ABAST). See Letter from Holden,
Chair, Section of Taxation, American Bar Association Section of
Taxation (May 25, 1990), reprinted in 90 TNT 120-28 (June 7,
1990). The ABAST commented that the timely filing requirement
was inconsistent with section 882(c)(2) and supported that
comment by citing Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), Blenheim Co. v. Commissioner,
125 F.2d 906 (4th Cir. 1942), Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941), and Georday Enters. v.
Commissioner, 126 F.2d 384 (4th Cir. 1942), all of which, the
ABAST stated, rejected such a requirement. See Letter from
-51-
Holden, supra. The ABAST also observed that there had been
“almost countless tax bills over the past 50 years, including
recodifications in 1939, 1954 and 1986" and concluded that
Congress must have acquiesced in the interpretation set forth in
those cases. Id.
D. 2002 Temporary Regulations
On January 28, 2002, the Secretary filed with the Federal
Register the 2002 temporary regulations consisting of section
1.882-4T(a)(3)(ii), (iii), and (iv), Temporary Income Tax Regs.,
67 Fed. Reg. 4217 (Jan. 29, 2002). These temporary regulations
amended the waiver standard prescribed in section 1.882-4, Income
Tax Regs., as amended in 1990, and listed examples of the amended
standard. The 2002 temporary regulations were effective for open
years for which a request for a waiver was filed on or after
January 29, 2002.
E. 2003 Regulations
On March 7, 2003, the Secretary replaced the 2002 temporary
regulations with the 2003 regulations. See 68 Fed. Reg. 11313(March 7, 2003). The 2003 regulations allow the Commissioner to
waive the 18-month deadline prescribed in the 1990 regulations if
the foreign corporation “establishes to the satisfaction of the
Commissioner or his or her delegate that the corporation, based
on the facts and circumstances, acted reasonably and in good
faith in failing to file a U.S. income tax return”. Sec.
-52-
1.882-4(a)(3)(ii), Income Tax Regs. Section 1.882-4(a)(3)(ii)
and (iii), Income Tax Regs., as finalized in the 2003
regulations, is effective for open years for which a request for
a waiver is filed on or after January 29, 2002. See sec.
1.882-4(a)(3)(iv), Income Tax Regs.
In the case of the subject returns, the 18-month deadlines
are May 15, 1996, 1997, and 1998, respectively (i.e., 18 months
after the 15th day of the sixth month after the close of the
taxable year).
VIII. Secretary’s Authority To Issue Regulations
The Secretary may issue two types of regulations. See
Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7 (2000); Estate
of Pullin v. Commissioner, 84 T.C. 789, 795 (1985); see also E.I.
duPont de Nemours & Co. v. Commissioner, 41 F.3d 130, 135 (3d
Cir.), affg. 102 T.C. 1 (1994). The first type, legislative
regulations, are issued pursuant to a specific delegation from
Congress to the Secretary. The second type, interpretative
regulations, are issued under the general authority vested in the
Secretary under section 7805(a).
Respondent acknowledges that the disputed regulations are
interpretative regulations. Section 7805(a) reflects a broad
delegation of general authority from Congress to the Secretary to
prescribe all needful rules and regulations for the enforcement
of the Internal Revenue Code. See United States v. Correll,
-53-
389 U.S. 299, 306-307 (1967). The authority delegated to the
Secretary, however, is not limitless and, if exercised
improperly, may usurp the role of Congress as the legislator in
our system of Government. The Secretary’s authority to issue
regulations is not the power to make law; it is the power to
carry into effect the will of Congress as expressed in the
statute under which the regulations are prescribed. See
Manhattan Gen. Equip. Co. v. Commissioner, 297 U.S. 129, 134-135
(1936). When a statute’s provisions are unambiguous, and its
directive is specific, the Secretary has no power to amend that
statute by regulation. See Koshland v. Helvering, 298 U.S. 441,
447 (1936).
IX. This Court’s Review of an Interpretative Regulation
This Court is empowered to invalidate a regulation that
exceeds the authority of the Secretary to issue it. See, e.g.,
Profl. Equities, Inc. v. Commissioner, 89 T.C. 165 (1987); Estate
of Pullin v. Commissioner, supra; Stephenson Trust v.
Commissioner, 81 T.C. 283, 288 (1983); Estate of Boeshore v.
Commissioner, 78 T.C. 523, 527 (1982); Washington v.
Commissioner, 77 T.C. 656 (1981), affd. 692 F.2d 128 (D.C. Cir.
1982). When this Court reviews an interpretative Federal tax
regulation, we generally apply the analysis set forth by the
Supreme Court in Natl. Muffler Dealers Association v. United
-54-
States, 440 U.S. 472 (1979).15 See, e.g., Robinson v.
Commissioner, 119 T.C. 44, 70 (2002); Walton v. Commissioner,
115 T.C. 589, 597-598 (2000); UnionBancal Corp. v. Commissioner,
113 T.C. 309, 317 (1999). Under Natl. Muffler, which like the
present case involved an interpretative regulation issued under
section 7805(a), an interpretative regulation is valid if it
implements a congressional mandate in a reasonable manner.16 See
Natl. Muffler Dealers Association v. United States, supra at 476-
477 (citing United States v. Cartwright, 411 U.S. 546, 550
(1973); United States v. Correll, supra at 307); see also United
States v. Cleveland Indians Baseball Co., 532 U.S. 200, 218-219
(2001); Newark Morning Ledger Co. v. United States, 507 U.S. 546,
575-576 (1993); Rowan Cos. v. United States, 452 U.S. 247,
252-253 (1981). We must defer to a Federal tax regulation that
is reasonable under this standard. Cf. United States v. Mead
Corp., 533 U.S. 218 (2001); Smiley v. Citibank (S.D.), N.A.,
517 U.S. 735, 739 (1996).
15
A task force of the American Bar Association has recently
concluded likewise that the Supreme Court primarily reviews
interpretative Federal tax regulations under the analysis set
forth in Natl. Muffler Dealers Association v. United States,
440 U.S. 472 (1979). See Salem et al., ABA Section of Taxn.
Report of the Task Force on Judicial Deference, 104 Tax Notes
1231 (2004).
16
Legislative regulations, by contrast, are upheld “unless
arbitrary, capricious, or manifestly contrary to the statute”.
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837, 844 (1984).
-55-
An interpretative Federal tax regulation is reasonable under
Natl. Muffler Dealers Association v. United States, supra, only
if it “harmonizes with the plain language of the statute, its
origin, and its purpose.” Id. at 477; see also United States v.
Vogel Fertilizer Co., 455 U.S. 16, 26 (1982). For this purpose,
A regulation may have particular force if it is a
substantially contemporaneous construction of the
statute by those presumed to have been aware of
congressional intent. If the regulation dates from a
later period, the manner in which it evolved merits
inquiry. Other relevant considerations are the length
of time the regulation has been in effect, the reliance
placed on it, the consistency of the Commissioner’s
interpretation, and the degree of scrutiny Congress has
devoted to the regulation during subsequent
re-enactments of the statute. [Natl. Muffler Dealers
Association v. United States, supra at 477.]
Following its decision in Natl. Muffler Dealers Association
v. United States, supra, the Supreme Court decided Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837(1984). There, the Supreme Court stated:
When a court reviews an agency’s construction of
the statute which it administers, it is confronted with
two questions. First, always, is the question whether
Congress has directly spoken to the precise question at
issue. If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed
intent of Congress.9 If, however, the court determines
Congress has not directly addressed the precise
question at issue, the court does not simply impose its
own construction on the statute, as would be necessary
in the absence of an administrative interpretation.
Rather, if the statute is silent or ambiguous with
respect to the specific issue, the question for the
court is whether the agency’s answer is based on a
permissible construction of the statute.
-56-
9
The judiciary is the final authority on issues
of statutory construction and must reject
administrative constructions which are contrary to
clear congressional intent. * * * If a court,
employing traditional tools of statutory construction,
ascertains that Congress had an intention on the
precise question at issue, that intention is the law
and must be given effect.
[Id. at 842-843 (some fn. refs. omitted; citations
omitted).]
The question arises from the timing of these two decisions
whether the Supreme Court intended for Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., supra, to replace Natl. Muffler
Dealers Association v. United States, supra, in the review of a
Federal tax regulation. We have previously stated with respect
to that question: “we are inclined to the view that the impact of
the traditional, i.e., National Muffler standard, has not been
changed by Chevron, but has merely been restated in a practical
two-part test with possibly subtle distinctions as to the role of
legislative history and the degree of deference to be accorded to
a regulation.” Central Pa. Sav. Association & Subs. v.
Commissioner, 104 T.C. 384, 392 (1995); see also id. at 390-392
(discussing the review of Federal tax regulations under Natl.
Muffler in relation to Chevron); cf. E.I. duPont de Nemours & Co.
v. Commissioner, 41 F.3d 130 (3d Cir. 1994) (questioning whether
Chevron applies to interpretative Federal tax regulations).
Here, we conclude likewise that we need not parse the semantics
of the two tests to discern any substantive difference between
-57-
them. While we apply a Natl. Muffler analysis, our result under
a Chevron analysis would be the same.
X. Review of the Disputed Regulations
A. Overview
We conclude that the timely filing requirement in the
disputed regulations does not harmonize with the plain language,
origin, or purpose of the relevant text of section 882(c)(2). A
plain reading of the relevant text in the context of the Internal
Revenue Code shows that the text includes no timely filing
requirement. Where, as here, the Secretary has prescribed a
regulation that is inconsistent with the plain meaning of a
statute, the regulation is invalid, and any deference to the
Secretary’s interpretation of that statute under Natl. Muffler
Dealers Association v. United States, 440 U.S. 472 (1979), is
unwarranted. Such is especially so where, as here, the disputed
regulations also are unreasonable under an analysis of Natl.
Muffler Dealers Association v. United States, supra at 477.
B. Plain Meaning of the Relevant Text
We begin our analysis of the relevant text with the words
used therein. We apply the plain meaning of the words used in a
statute unless we find that a word’s plain meaning is ambiguous.
See Garcia v. United States, 469 U.S. 70, 76 n.3 (1984); see also
Ex parte Collett, 337 U.S. 55 (1949). When interpreting a
statute, “[t]he judiciary is the final authority on issues of
-58-
statutory construction”. Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., supra at 843 n.9; see also Volkswagenwerk v.
FMC, 390 U.S. 261, 272 (1968); FTC v. Colgate-Palmolive Co.,
380 U.S. 374, 385 (1965).
We agree with the holdings in Anglo-Am. Direct Tea Trading
Co. v. Commissioner, 38 B.T.A. 711 (1938), and its progeny, that
the plain meaning of the word “manner”, as used in the relevant
text, does not include an element of time. For purposes of our
Federal tax system, Congress has consistently used the word
“time” together with the word “manner” when it intended to
include the meanings of both words in a single taxing section.
In the Revenue Act of 1928, for example, from which section 233
emanated, Congress used both words in sections 115(g) and 291.
The former section addressed the situation where “a corporation
cancels or redeems its stock * * * at such time and in such
manner as to make the distribution and cancellation or redemption
in whole or in part essentially equivalent to the distribution of
a taxable dividend”. Revenue Act of 1928, ch. 852, sec. 115(g),
45 Stat. 822. The latter section provided that additions to tax
for failure to file a tax return “shall be collected at the same
time and in the same manner and as part of the tax”. Revenue Act
of 1928, ch. 852, sec. 291, 45 Stat. 857.
In the 1939 Code, when the relevant text was first codified,
Congress again used the words “time” and “manner” together when
-59-
it intended to include the meanings of both words in a single
statutory provision. See, e.g., 1939 Code secs. 55(b)(1) and
(2), (d)(1)(B), 115(g), 291, 821(b), 864(b), 1203, 1420(c), 1421,
1502, 1522, 1530(b), 1604, 1716, 1902(b), 2190, 2471, 2701,
2802(d)(2), 2803(d), 2854, 2903(c), 2905, 3150(b)(1), 3271,
3310(c), 3448(a), 3461, 3467(b), 3612(e), 3640, 3701, 3704(b),
3975, 3976(a). Many of those instances applied specifically to
the time and manner of the filing of a return. See, e.g., 1939
Code secs. 821(b) and 864(b) (“The return required of the
executor under subsection (a) shall be filed at such times and in
such manner as may be required by regulations made pursuant to
law”), 2471 (“Such returns shall contain such information and be
made at such times and in such manner as the Commissioner, with
the approval of the Secretary, may by regulations prescribe”),
2701 (same language), 3448(a) (same language), 3461 (same
language), 3467(b) (same language); see also 1939 Code secs. 1203
(stating the specific time by which a return must be filed and
that the “return shall contain such information and be made in
such manner as the Commissioner with the approval of the
Secretary may by regulations prescribe”), 1604 (similar
language), 1716 (similar language).
In the 1954 Code, when Congress recodified the relevant text
with a reference to “subtitle F”, Congress continued to use the
words “time” and “manner” together to express its intent to
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include both meanings in a single provision. See, e.g., 1954
Code secs. 6033(b), 6036, 6081(b), 6103(b)(1) and (d)(1)(B),
6201(a), 6205(a)(1) and (b), 6302(c), 6335(b), 6338(b), 6413(b),
7204 for instances where Congress upon enactment of the 1954 Code
used both words in a single provision in subtitle F (then secs.
6001 through 7852). Congress did likewise in the Foreign
Investors Tax Act of 1966, when it legislated as to section 882,
and in the 1986 Code, when it recodified the relevant text a
second time. As to the former legislation, see, e.g., secs. (as
amended by the Foreign Investors Tax Act of 1966) 871(d)(3),
981(d). As to the latter legislation, see, e.g., 1986 Code secs.
6033(b), 6036, 6038(a)(2), 6038A(a), 6038B(a), 6039C(c)(4),
6039D(a) and (c), 6039F(a)(1), 6045(d), 6047(b), 6050A(a),
6050K(a), 6053(c)(1), 6059(c), 6081(b), 6096(c), 6103(f)(4)(A)
and (B) and (p)(1), 6104(a)(1)(A), 6157(a)(2), 6164(b),
6166(b)(7), 6167(a), 6201(a), 6205(a)(1) and (b), 6230(i),
6302(c), 6324A(a) for instances where Congress upon enactment of
the 1986 Code used both words in a single provision in subtitle F
(then secs. 6001 through 7872); see also 1986 Code sec. 6039(a)
(stating the specific time by which a “written statement” must be
furnished “in such manner and setting forth such information as
the Secretary may by regulations prescribe”).
We believe that Congress acted intentionally and purposely
when it included both “time” and “manner” in single sections of
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the referenced statutes but omitted the word “time” in favor of
only the word “manner” in other single sections of those
statutes; e.g., as in section 882(c)(2) and its predecessors.
See BFP v. Resolution Trust Corp., 511 U.S. 531, 537-538 (1994);
Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338 (1994); Keene
Corp. v. United States, 508 U.S. 200, 208 (1993); Russello v.
United States, 464 U.S. 16, 23 (1983). In construing a statute,
we must give a definite meaning to every word and expression
found therein, Dubuque & P.R. Co. v. Litchfield, 64 U.S. 66, 77
(1859); Early v. Doe, 57 U.S. 610, 617 (1853), and we must shy
away from interpreting a statute in a way that would render any
part of it redundant or surplusage, see Platt v. Union Pac. R.R.
Co., 99 U.S. 48, 58-59 (1878). See Jones v. United States, 529
U.S. 848, 857 (2000); United States v. Menasche, 348 U.S. 528,
538-539 (1955); see also United States v. Olympic Radio &
Television, Inc., 349 U.S. 232, 235-236 (1955) (in applying the
traditional rules of statutory construction, a court should
assume that Congress uses language in a consistent manner, unless
otherwise indicated). Such is especially so where, as here, we
understand Congress’s use of the word “manner” in the referenced
Code sections as giving context to that word. We understand that
use to refer to items of information and not to refer to the time
for the filing of a return or the furnishing of any other
document. We conclude that Congress, by using only the word
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“manner” in section 882(c)(2), did not intend to include in that
provision any element of time.17 Nor do we believe that Congress
intended for the word “manner” in that situation to have a
flexible definition to be prescribed by the Secretary in order to
carry out the text’s general purpose, as was the case in Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 844.
Instead, we believe that the word “manner”, when used in the
relevant text, was intended by Congress to have only the single
definition that we decide herein.
Respondent requests that we defer to the Secretary’s
interpretation of the word “manner” to include a timely filing
requirement. We decline to do so. Because we find the meaning
of the word “manner” as used in section 882(c)(2) to be plain and
unambiguous, any deference that we would otherwise accord to the
Secretary’s interpretation of the word “manner” is unwarranted.18
17
In fact, as to the 18-month period set forth in the
regulations, it is not only arbitrary but without any statutory
basis at all. As we understand the Secretary’s formation of that
period, it corresponds to 1 year after the 6-month extended due
date of the return. See T.D. 8322, 1990-2 C.B. 172, 172-173,
55 Fed. Reg. 50827 (Dec. 11, 1990); see also sec. 6081(a)
(generally allowing the Secretary to grant extensions of up to
6 months). Where that 1-year rule came from, we do not know.
18
A term is ambiguous if it is “‘capable of being
understood in two or more possible senses or ways’”. Chickasaw
Nation v. United States, 534 U.S. 84, 94 (2001) (quoting
Webster’s Ninth New Collegiate Dictionary 77 (1985)). Although
the disputed regulations are contrary to our construction of the
text, as is the construction of the relevant text by respondent,
we do not believe that these contrary interpretations mean that
(continued...)
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See United States v. Mo. Pac. R. Co., 278 U.S. 269, 280 (1929);
United States v. Tanner, 147 U.S. 661, 663 (1893); Swift Co. v.
United States, 105 U.S. 691, 695 (1881); see also Atl. Mut. Ins.
Co. v. Commissioner, 523 U.S. 382, 387 (1998). Deference is
especially unwarranted where, as here, the Secretary’s
construction of the relevant text does not fill in a gap left
open by the statute as to a timeliness requirement but simply
adopts respondent’s unsuccessful litigating position, with total
disregard to firmly established judicial precedent,19 and adds an
18
(...continued)
the relevant text as of the issuance of the disputed regulations
was reasonably capable of being understood in two or more senses
or ways. The Treasury Department was not the first authoritative
body to have interpreted the relevant text. That text had
previously been construed on a number of occasions by both the
Court of Appeals for the Fourth Circuit and the Board. In
addition, contemporaneous to the seminal interpretation of the
relevant text in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), Congress codified the text in
the 1939 Code without any significant change from the text
construed by the Board in Anglo-Am. Direct Tea Trading Co..
Then, after both the Court of Appeals for the Fourth Circuit and
the Board had repeatedly and consistently construed the relevant
text as not including a timely filing requirement, Congress
recodified the relevant text in the 1954 and 1986 Codes, again
without any significant change. Given the multiple legislative
reenactments of the relevant text and the consistent and
unanimous prior interpretations of that text by the Court of
Appeals for the Fourth Circuit and the Board, we do not believe
that the relevant text as of the time of the disputed regulations
was reasonably capable of being understood in the sense advocated
by respondent and adopted by the Secretary in the form of the
disputed regulations.
19
We include the Board in our references to the judiciary.
Although the Board was established as “an independent agency in
the executive branch of the Government”, Revenue Act of 1924, ch.
(continued...)
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impermissible restriction to the statute.20 The functional
reasons for deference to agencies; i.e., the agencies’ expertise
and experience, do not carry the same force when interpreting the
word “manner” for purposes of the relevant text. The judiciary
has enough expertise and experience to ascertain congressional
intent with respect to that word, and any deference that is owed
to the Secretary does not mean that the judiciary as a matter of
course should simply ratify an unauthorized assumption by the
Secretary of major policy decisions properly made by Congress;
e.g., here, a foreign corporation’s forfeiture of deductions
absent its filing of a timely tax return.21 Cf. Estate of
19
(...continued)
234, sec. 900(a), (k), 43 Stat. 336, 338, the Court of Appeals
for the Third Circuit has noted that the Board “for all practical
purposes [was] a judicial tribunal operating in the federal
judicial system”. Stern v. Commissioner, 215 F.2d 701, 707-708
(3d Cir. 1954), revg. on other grounds 21 T.C. 155 (1953).
20
The improper addition to the statute is easily seen by
comparing sec. 882(c)(2) with sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990. The two sections are essentially the
same, except that the regulation includes the word “timely”.
Respondent has not explained why sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990, stated that a return must be filed
both “timely” and “in the manner prescribed in section F” if, as
he argues, the concept of “time” is subsumed within the statutory
phrase “in the manner prescribed in subtitle F”.
21
Absent a clear expression of legislative intent, we
believe it unreasonable to conclude, as did the Secretary in the
disputed regulations, that Congress intended for a foreign
corporation to forfeit any deduction of its otherwise deductible
ordinary and necessary business expenses simply because it filed
its tax return untimely. Cf. S. Rept. 1707, 89th Cong., 2d Sess.
26-27 (1966), 1966-2 C.B. 1059, 1076-1077 (noting as to
(continued...)
-65-
Applebaum v. Commissioner, 724 F.2d 375, 381-382 (3d Cir. 1983)
(Adams, J., concurring), affg. T.C. Memo. 1982-278. Courts “are
not obliged to stand aside and rubber-stamp their affirmance of
administrative decisions that they deem inconsistent with a
statutory mandate or that frustrate the congressional policy
underlying a statute”. NLRB v. Brown, 380 U.S. 278, 291 (1965);
accord FEC v. Democratic Senatorial Campaign Comm., 454 U.S. 27,
32 (1981).
C. Application of Natl. Muffler
We also conclude that the Secretary’s interpretation of a
timely filing requirement is unreasonable under an analysis of
the considerations discussed in Natl. Muffler Dealers Association
v. United States, 440 U.S. at 477. That case requires that we
take into account the following considerations: (1) Whether the
regulation is a substantially contemporaneous construction of the
statute by those presumed to have been aware of congressional
intent; (2) the manner in which a regulation dating from a later
period evolved; (3) the length of time that the regulation has
been in effect; (4) the reliance placed upon the regulation;
(5) the consistency of the Secretary’s interpretation; and
21
(...continued)
nonresident aliens owning property in the United States that
their “allocable deductions * * * may be relatively large” and
that not allowing such deductions “may result in quite heavy tax
burdens”).
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(6) the degree of scrutiny Congress has devoted to the regulation
during subsequent reenactments of the statute. Id.Our analysis of these considerations reinforces our
conclusion that the disputed regulations are invalid. The
regulations were issued in 1990, 62 years after the relevant text
was enacted and 72 years after the enactment of the parallel
provision of section 217 of the Revenue Act of 1918. Thus, the
disputed regulations are not a “substantially contemporaneous
construction of the statute by those presumed to have been aware
of congressional intent”. Id. at 477. We therefore inquire into
the manner in which the disputed regulations evolved. See id.The disputed regulations were issued after both the Court of
Appeals for the Fourth Circuit and the Board had repeatedly and
consistently held that the relevant text did not include a timely
filing requirement.22 The regulations also were issued after
multiple reenactments of the relevant text, none of which altered
the judiciary’s construction of the text, and merely adopted
respondent’s unsuccessful litigating position. The Secretary’s
statement accompanying the issuance of the disputed regulations,
22
The relevant meaning that we distill from the referenced
cases of the Court of Appeals for the Fourth Circuit and the
Board is twofold. First, a foreign corporation must file a tax
return in order to deduct its expenses. Second, the
Commissioner’s preparation of a substitute return for the
corporation is generally considered to be the corporation’s
return for Federal income tax purposes and divests the taxpayer
of its entitlement to file a return for itself.
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“the statute clearly provides for the denial of deductions and
credits if returns are not filed in a timely manner”, see
Preamble of T.D. 8322, 1990-2 C.B. at 172, flies in the face of
the judiciary’s prior holdings that the relevant text does not
include a timely filing requirement and the like interpretation
by the ABAST and the other commentators referenced in the
preamble to the regulations.23 The Secretary’s statement is even
a departure from his previous interpretation set forth in the
1957 regulations.24 The 1957 regulations make no mention of a
timely filing requirement but allow a resident foreign
corporation to deduct its expenses if it files a true and
accurate Federal income tax return in accordance with section
6012 and the regulations thereunder. We also note as to our
analysis under Natl. Muffler Dealers Association v. United
States, supra, that the disputed regulations had only been in
effect for approximately 3 years as of the first year in issue.
23
In fact, if anything is “clear”, it is that the statute
does not contain any time requirement and that the Secretary’s
inclusion of one in the disputed regulations is ultra vires.
24
Of course, the mere fact that the Secretary has changed
his interpretation of a statutory term does not necessarily mean
that the latter interpretation is invalid. See Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 863-864;
Dickman v. Commissioner, 465 U.S. 330, 343 (1984). Courts should
accord considerably less deference, however, to an agency’s
statutory interpretation that conflicts with the agency’s
previous interpretation of the same statute. See Pauley v.
BethEnergy Mines, Inc. 501 U.S. 680, 698 (1991); INS v.
Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987).
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As to the remaining two considerations, i.e., the degree of
scrutiny that Congress has devoted to the regulation in question
during subsequent reenactments of the statute and the reliance
placed on that regulation, these considerations also do not
support the Secretary’s issuance of the disputed regulations. As
to the former, section 882(c)(2) has not been amended since the
issuance of the disputed regulations. As to the latter,
petitioner obviously did not rely upon the disputed regulations
when it filed the subject returns untimely. In fact, the record
before us persuades us that petitioner filed those returns
relying on the belief that it would be taxed on the same taxable
base as that of a domestic corporation (i.e., gross income less
deductions). Given the relevant text, its legislative history,
the 1957 regulations, and the longstanding judicial precedents,
we have no doubt that taxpayers and their advisers would have
reasonably concluded immediately before the issuance of the
disputed regulations that the relevant text did not include a
timely filing requirement and would have reasonably concluded
upon the issuance of those regulations that such issuance was an
unreasonable attempt by the Secretary to circumvent the firmly
established legal terrain.25 In fact, as to petitioner, it did
almost everything that Congress envisioned as to foreign
25
We have found no authority, nor has respondent cited any,
to support respondent’s position that the relevant text contains
a timely filing requirement.
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taxpayers and their investment in real property in the United
States; petitioner invested in the U.S. real estate and
voluntarily filed Federal income tax returns reporting that
income net of the expenses related thereto.
For sake of completeness, we also note the legislative
reenactment doctrine. Under that doctrine, Congress is presumed
to have known of the administrative and judicial interpretations
of a statutory term reenacted without significant change and to
have ratified and included that interpretation in the reenacted
term. See Newark Morning Ledger Co. v. United States, 507 U.S.
at 574-576; Pierce v. Underwood, 487 U.S. 552, 567 (1988);
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S.
353, 381-382 (1982); Lorillard v. Pons, 434 U.S. 575, 580-581
(1978); see also Dresser Indus. v. United States, 238 F.3d 603,
614 (5th Cir. 2001); Kovacs v. Commissioner, 100 T.C. 124,
129-130 (1993), affd. without published opinion 25 F.3d 1048(6th Cir. 1994); cf. Cannon v. Univ. of Chicago, 441 U.S. 677,
696-697 (1979) (“It is always appropriate to assume that our
elected representatives, like other citizens, know the law”.).
See generally 2A Sands, Sutherland on Statutory Construction
§ 49.09 (4th ed. 1973), and cases cited therein. The legislative
reenactment doctrine applies with vigor where Congress reenacts
statutory text mainly in its entirety, see Dutton v. Wolpoff
& Abramson, 5 F.3d 649, 655 (3d Cir. 1993), or where a prior
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judicial interpretation of that text has been relied upon and
never questioned by the judiciary as of the time of reenactment,
see Cannon v. Univ. of Chicago, supra at 696-697 (prior
interpretation of a statute “was repeatedly cited with approval
and never questioned during the ensuing five years”); see
also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, supra
at 378-379. In the light of the legislative reenactment
doctrine, we presume that Congress upon reenacting the relevant
text without significant change as part of the 1939, 1954, and
1986 Codes, as well as part of the Foreign Investors Tax Act of
1966, was mindful of the relevant judicial interpretations and
included within the reenacted text the judiciary’s interpretation
that the text contains no timely filing requirement.26 See
Dutton v. Wolpoff & Abramson, supra at 655; cf. Kovacs v.
Commissioner, supra at 129-130 (concluding by application of the
legislative reenactment doctrine that Congress had adopted a
prior Board decision when it amended section 104(a)(2) in 1982
and 1989, and when it enacted the Internal Revenue Codes of 1939,
1954, and 1986).
This presumption is further supported by considering the
setting of each of the reenactments of the relevant text
26
In fact, respondent concedes that Congress knows of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711(1938), and that it is significant that Congress has never
amended the relevant text after that case.
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following its interpretation by the judiciary. First, when the
relevant text was codified in the 1939 Code, that text had
recently been construed in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), a unanimous reviewed opinion
of the Board, as including no timely filing requirement.27
Second, as of each of the times when the text was reenacted in
the 1954 Code, the Foreign Investors Tax Act of 1966, and the
1986 Code, Anglo-Am. Direct Tea Trading Co. had been cited
repeatedly, favorably, and without reservation by both the Court
of Appeals for the Fourth Circuit and the Board. As of each of
those times, the Court of Appeals for the Fourth Circuit also had
decided Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir.
1942), which confirmed the holding of Anglo-Am. Direct Tea
Trading Co. that the relevant text contained no reference to a
time element and stated that Congress, in initially enacting the
text as part of the Revenue Act of 1928, had adopted a
longstanding administrative construction of a parallel provision
to the effect that a foreign corporation may deduct its expenses
if it files a return before respondent prepares a substitute
return for it. We also note the legislative history underlying
the 1954 Code to the effect that Congress did not then believe
that a timely filing requirement was included within section 882.
27
The 1939 Code was enacted approximately 4 months after
the release of Anglo-Am. Direct Tea Trading Co. v. Commissioner,
supra.
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While no committee report makes any mention of such a
requirement, the House and Senate committee reports both note
specifically the “necessity for filing of returns by foreign
corporations in order to secure allowance of deductions”. See
S. Rept. 1622, 83d Cong., 2d Sess., supra at 417; H. Rept. 1337,
83d Cong., 2d Sess., supra at A246. The fact that Congress was
keenly aware of the foreign tax provisions when it enacted the
1954 Code also is seen from its inclusion in that act of section
6091(b)(2). That section allowed the Secretary to move all
appeals of the issue at hand from the Court of Appeals for the
Fourth Circuit, which had decided the issue unfavorably to
respondent, to another circuit of his liking.
Third, as part of the Foreign Investors Tax Act of 1966, we
note the substantial amendments which Congress made to section
882. In relevant part, Congress added a new section 882(d) that,
among other things, allowed a foreign corporation to elect to
treat real property income as if it were effectively connected
income. A stated purpose of this legislation was to promote
foreign investment in real property located in the United States.
As an inducement to such foreign investment, Congress intended to
allow foreigners to deduct their expenses related to those
investments. The disputed regulations work against this intent
in that the regulations deny a foreign corporation the taking of
its expenses upon the filing of an untimely return, with the
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result that the foreign corporation is required to pay taxes on
its gross (rather than net) income. We know of no statutory
authority under which any type of taxpayer forfeits an
entitlement to deduct substantiated ordinary and necessary
business expenses simply because the taxpayer files a tax return
untimely. While respondent proffers section 882(c)(2) as such
authority in the case of a foreign corporation, that section does
not explicitly support that proffer.
We also bear in mind the Foreign Investors Tax Act of 1966’s
legislative history, which adds to our understanding that
Congress was then mindful of the interpretations set forth in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, and its
progeny. The House committee report, for example, refers
specifically to “existing law”, states that a foreign corporation
is entitled to benefit from its deductions “by filing a true and
accurate return of its total income”, and makes no mention of a
timely filing requirement. See H. Rept. 1450, 89th Cong., 2d
Sess., supra at 90. The Senate committee report likewise makes
no mention of a timely filing requirement. The Senate committee
report, on the other hand, does state in a manner consistent with
our view that the committee intended for section 882(d) to allow
a foreign corporation to treat its real property income as
effectively connected income in order to deduct its expenses
related to that income. See S. Rept. 1707, 89th Cong., 2d Sess.,
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supra at 19, 1966-2 C.B. at 1071. The Senate report also
expresses Congress’s reluctance through the Foreign Investors Tax
Act of 1966 to disallow a nonresident alien’s deductions related
to his or her investment in U.S. real estate because such a
disallowance “would tend to discourage foreign investment in U.S.
realty”. S. Rept. 1707, 89th Cong., 2d Sess., supra at 26-27,
1966-2 C.B. at 1076-1077.
Respondent acknowledges that the disputed regulations are
invalid if the relevant text is unambiguous in including no
timely filing requirement. In contrast to the Secretary’s
statement in the preamble to the 1990 regulations, respondent
argues that the caselaw suggests that the relevant text is
ambiguous. Respondent observes that some of this caselaw states
that a foreign corporation must file a “timely” return in order
to benefit from its deductions. Respondent notes especially the
court’s use of the word “timely” in Blenheim Co. v. Commissioner,
supra at 908-910, 912.
We disagree with respondent that the caselaw interprets the
relevant text as including the Secretary’s timely filing
requirement. In Blenheim Co. v. Commissioner, 125 F.2d 906 (4th
Cir. 1942), the Court of Appeals for the Fourth Circuit did state
that a foreign corporation must file a “timely” return in order
to deduct its expenses; however, the court used the word “timely”
to mean that the foreign corporation had to file its return
-75-
before respondent prepared a substitute return for it. The
“timely” reference in that and in the other cases is to such a
“terminal date” found not in the statute but (1) “first adopted
in Taylor Sec. v. Commissioner”, 40 B.T.A. 696 (1939), and
(2) subsequently followed in Blenheim Co. v. Commissioner, supra
at 910, and Georday Enters. v. Commissioner, 126 F.2d at 388.28
See also Blenheim v. Commissioner, 42 B.T.A at 1251 (preparation
of a substitute return by the Commissioner makes any later return
prepared by the taxpayer a “nullity”, which, in turn, means that
the taxpayer’s later return is not a “return” within the meaning
of former sec. 233); Taylor Sec., Inc. v. Commissioner, supra at
703 (Board declined to conclude that Congress intended that
delinquent returns filed by a foreign corporation after the
28
Respondent acknowledges that the terminal date in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939), Blenheim Co. v.
Commissioner, 125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248(1940), and Georday Enters. v. Commissioner, 126 F.2d 384 (4th
Cir. 1942), was the point where the Commissioner prepared a
substitute return for the taxpayer. The Court of Appeals for the
Fourth Circuit stated as to this point that it is consistent
with, among other things, “the generally accepted rule concerning
the number of returns which may be filed.” Blenheim Co. v.
Commissioner, supra at 910. While the court also stated that
this point is not an “absolute and rigid rule”, we understand
that statement to mean that a foreign corporation may in certain
cases be entitled to benefit from its deductions where the
Commissioner has prepared a substitute return for the
corporation. In fact, had the Court of Appeals for the Fourth
Circuit adopted such an “absolute and rigid rule” in Blenheim,
its actions would have been inconsistent with its earlier holding
in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir. 1941),
modifying and remanding 41 B.T.A. 910 (1940), that the foreign
corporation was entitled to its deductions even though the
Commissioner had filed substitute returns for it.
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Commissioner’s determination are “returns” within the meaning of
former sec. 233). Contrary to respondent’s assertion that the
Court of Appeals for the Fourth Circuit and the Board construed
the statute to impose a timely filing requirement, those
tribunals, in referencing the word “timely”, were adopting a
judicial limitation based on (1) the statute’s requirement that a
foreign corporation file a tax return in order to deduct its
expenses and (2) their conclusion that a foreign corporation
could not file such a return if a return had already been
prepared for it by the Commissioner.
D. Natl. Cable
In the recent case of Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., 545 U.S. , 125 S. Ct. 2688 (2005),
the Supreme Court decided the validity of a regulation that
construed a statute inconsistently with a prior judicial
interpretation. The Court held that “A court’s prior judicial
construction of a statute trumps an agency construction otherwise
entitled to Chevron deference only if the prior court decision
holds that its construction follows from the unambiguous terms of
the statute and thus leaves no room for agency discretion.” Id.
at 2700. The Court stated: “Only a judicial precedent holding
that the statute unambiguously forecloses the agency’s
interpretation, and therefore contains no gap for the agency to
fill, displaces a conflicting agency construction.” Id. at 2700.
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The Court noted that its decisions in Neal v. United States,
516 U.S. 284 (1996), Lechmere, Inc. v. NLRB, 502 U.S. 527,
536-537 (1992), and Maislin Indus., U.S., Inc. v. Primary Steel,
Inc., 497 U.S. 116, 131 (1990), “allow a court’s prior
interpretation of a statute to override an agency’s
interpretation only if the relevant court decision held the
statute unambiguous.” Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., supra at , 125 S. Ct. at 2700.
Given that the Supreme Court has historically reviewed
Federal tax regulations primarily under the reasonableness test
of Natl. Muffler Dealers Association v. United States, 440 U.S.
472 (1979), the question arises whether Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra, which neither
cited Natl. Muffler nor involved a Federal tax regulation,
applies to Federal tax regulations. We do not decide that
question because we conclude that Natl. Cable is distinguishable
from this case and, thus, its holding is not controlling here.
While we take seriously the Supreme Court’s holding in Natl.
Cable, we likewise take seriously that Court’s discussion of its
rationale for, and the context of, that holding. After
considering that discussion, and the significant contrasts
between that case and the case before us, we are persuaded for
numerous reasons that the holding of Natl. Cable does not govern
here.
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First, the issue in Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., supra, was whether broadband was subject
to regulation as a telecommunications service. Before ruling,
the Federal Communications Commission (FCC) had carefully
considered technological developments and its own related
interpretations. The Supreme Court’s extensive discussion of the
FCC’s work on its ruling suggests that it was exactly the kind of
agency decision that is most entitled to deference. Here, we
find no corresponding record of the Secretary’s consideration of
whether the relevant text in 1990 included a timely filing
requirement; the Secretary’s rationale for adopting the disputed
regulations is at best perfunctory.
Second, the Supreme Court in Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra, noted that the FCC
had not previously ruled on the question at hand, but that its
ruling regarding broadband was consistent with prior FCC rulings.
Here, the Secretary in 1990 directly altered regulations adopted
in (and unchanged since) 1957. Thus, unlike Natl. Cable, the
instant case raises questions as to the reasonableness and how
much deference applies when the Secretary issues an
interpretative regulation that reverses long-settled law.
Third, in Natl. Cable & Telecomm. Association v. Brand X
Internet Servs., supra, the FCC was not a party to AT&T Corp. v.
Portland, 216 F.3d. 871 (9th Cir. 2000), the prior case that the
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Court of Appeals for the Ninth Circuit had treated as
controlling. Here, the Commissioner was the unsuccessful party
in all of the cases holding that timely filing is not required
for a foreign corporation to claim its deductions and credits.
In addition, unlike the FCC, the Secretary through the disputed
regulations is attempting to overturn the outcome of those cases
through his general regulatory authority.
Fourth, AT&T Corp. v. Portland, supra, which the Supreme
Court declined to permit to “trump” the FCC ruling, had been
decided only approximately 5 years before Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra. Here, Anglo-Am.
Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938), and
its progeny were decided approximately 50 years before the
disputed regulations were issued. Thus, in Natl. Cable the
Supreme Court was not faced with the question of whether a
longstanding judicial interpretation is entitled to more
deference than a recent judicial interpretation. Nor was that
Court faced with the question of the effect of the reenactment of
the underlying statute on a prior judicial interpretation. The
case of Natl. Cable also did not involve an agency that was
seeking to reverse course from a preexisting, decades old
regulatory position that was consistent with judicial precedents
of even greater antiquity.
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Moreover, apart from the previously mentioned differences,
the Court in Natl. Cable & Telecomm. Association v. Brand X
Internet Servs., supra, stated that regulatory interpretations
do not prevail over a contrary previous judicial interpretation
when the judicial tribunal referred to the interpreted statute
as unambiguous. Although the judicial tribunals in Ardbern Co.
v. Commissioner, 120 F.2d 424 (4th Cir. 1941), Blenheim Co. v.
Commissioner, 125 F.2d 906 (4th Cir. 1942), and Anglo-Am. Direct
Tea Trading Co. v. Commissioner, supra, did not state explicitly
that they were applying the unambiguous meaning of the word
“manner”, we believe that they did so, given their analysis and
the fact that their interpretation of that word was purely one
of statutory construction that resulted from the employment of
traditional tools of statutory construction. “It is
emphatically, the province and duty of the judicial department
to say what the law is”, Marbury v. Madison, 5 U.S. 137, 177
(1803), and “If a court, employing traditional tools of
statutory construction, ascertains that Congress had an
intention on the precise question at issue, that intention is
the law and must be given effect”, Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. at 843 n.9; see also
INS v. Cardoza-Fonseca, 480 U.S. 421, 432 (1987). Moreover,
where “the only or principal dispute relates to the meaning of
the statutory term, the controversy must ultimately be resolved,
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not on the basis of matters within the special competence of the
* * * [agency], but by judicial application of canons of
statutory construction.” Barlow v. Collins, 397 U.S. 159, 166
(1970). Compare Chevron U.S.A., Inc. v. Natural Res. Def.
Council, Inc., supra at 845 (Supreme Court exercised a very
limited review of an agency’s regulations after the Court
concluded that Congress had left a gap in the statute for the
agency to fill), with INS v. Cardoza-Fonseca, supra at 446(Supreme Court rejected an agency’s interpretation of a statute
after the Court concluded that the question before it was a
“pure question of statutory construction for the courts to
decide”).
In Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra,
the Board was the first judicial body to construe the relevant
text. It construed the meaning of the word “manner” plainly
using traditional tools of statutory construction. The Court of
Appeals for the Fourth Circuit performed a similar textual
construction in Blenheim Co. v. Commissioner, supra at 908, by
simply reading and applying the words of section 233 of the
Revenue Act of 1934.29 The referenced decisions of the Court of
29
In Ardbern Co. v. Commissioner, 120 F.2d at 426 (4th Cir.
1941), the Court of Appeals for the Fourth Circuit noted that
respondent had conceded that the taxpayer would have been
entitled to its claimed deductions if the return which the
taxpayer had attempted to file with the revenue agent had instead
been filed with the Collector at Baltimore. The court,
(continued...)
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Appeals for the Fourth Circuit and the Board turned not on the
need to fill in a gap that Congress left in the statute but on a
matter of pure statutory construction. Those judicial tribunals
gave effect to the relevant text by reading the text literally
and without reference to any contrary argument that the text was
ambiguous as to the inclusion of a timely filing requirement.
The judicial tribunals’ reading of the word “manner” was
consistent with that word’s accepted meaning in legislative
practice, as seen from the Board’s discussion in Anglo-Am.
Direct Tea Trading Co. of the “structure” of the revenue acts.
Respondent with a citation to his nonacquiscence in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, see
1939-1 C.B. (pt. 1) 39, argues on brief that the holdings in
Anglo-Am. Direct Tea Trading Co. and Ardbern Co. v.
Commissioner, supra, as to the construction of former section
233 are incorrect and invites the Court to disavow those
holdings. We decline that invitation. We also disagree with
respondent’s argument that the applicability of the rationale of
the court in Ardbern is limited to those cases where a
29
(...continued)
therefore, primarily limited its analysis of whether the statute
included a timely filing requirement to the statement of the
Board quoted supra p. 36. The court did point out, however, that
no provision in the Revenue Act of 1934, ch. 277, 48 Stat. 680,
precluded a late filing taxpayer who filed a return from
receiving the benefit of the deductions to which the taxpayer was
otherwise entitled. See id. at 426.
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compelling equitable consideration is present so as to serve
elementary justice. The Court of Appeals for the Fourth Circuit
held specifically in Ardbern Co. v. Commissioner, supra at 426,
that former section 233 does not forbid a taxpayer from
deducting expenses when the taxpayer files, or attempts in good
faith to file, a return claiming those deductions before the
Commissioner determines a deficiency against the taxpayer or
files a substitute return on the taxpayer’s behalf. Accord
Blenheim v. Commissioner, supra at 908 (“It is true that this
section [section 233 of the 1928 and 1932 Revenue Acts] contains
no reference to a time element.”).
XI. Conclusion
On the basis of the foregoing, we conclude that the
disputed regulations are invalid to the extent described herein.
Given the plain meaning of the relevant text and the historical
setting laid out in detail in this Opinion, including caselaw,
legislation, legislative history, and regulations, the
Secretary’s adoption of a timely filing requirement and his
attempted sub silentio overruling of contrary judicial and
administrative precedents is unreasonable under Natl. Muffler
Dealers Association v. United States, 440 U.S. 472 (1979).30
30
We note that this case is strikingly similar to Anglo-Am.
Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938),
where the taxpayer was allowed to receive the benefit of its
deductions upon the untimely filing of returns more than
(continued...)
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Congress is the legislator in our system of Government and when
an interpretation must be made of a tax bill enacted into law,
both the judicial and executive branches of Governments, the
latter acting through the Treasury Department, may render that
interpretation in their own constitutionally permitted ways.
As one of those ways, however, it is not reasonable for the
Secretary (or anyone else for that matter) to construe a
statute’s unambiguous meaning in a manner contrary to that
intended by Congress in passing the legislation. Such is
especially so where, as here, the Secretary attempts to
circumvent longstanding judicial decisions that have arrived at
the plain meaning of a statute enacted decades before. After
the passage of over a half of a century, during which the law on
this subject has remained settled and has been relied upon by
both taxpayers and the Government alike, it is simply wrong for
the Secretary to attempt to resurrect a failed litigating
position through the issuance of interpretative regulations.31
30
(...continued)
18 months after their due date. Indeed, the facts in support of
an allowance of deductions are even stronger here. While the
taxpayer in Anglo-Am. Direct Tea Trading Co. filed its returns
only after respondent discovered that the returns were overdue,
petitioner filed its returns before any contact from respondent.
31
Congress is the only body that may amend the relevant
text. Respondent makes no assertion that the Secretary ever
asked Congress to amend the text to change the holding of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, and its
progeny that the text does not include a timely filing
(continued...)
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We hold, contrary to respondent’s determination, that
section 882(c)(2) does not preclude petitioner from deducting
the expenses claimed on the subject returns. We have considered
all arguments made by the parties as to the manner in which we
resolve this case and have found those arguments not discussed
herein to be without merit.
Decision will be entered
for petitioner.
Reviewed by the Court.
GERBER, COHEN, WELLS, COLVIN, VASQUEZ, GALE, THORNTON,
MARVEL, HAINES, GOEKE, WHERRY, and KROUPA, JJ., agree with this
majority opinion.
CHIECHI and FOLEY, JJ., concur in result only.
31
(...continued)
requirement. Nor have we found that such was the case. Instead,
respondent invites this Court to take a fresh look at the
relevant text in the light of the disputed regulations, to reject
the judiciary’s almost 70-year-old interpretation of that text,
and to “incorporate [into the text] the timely filing concept as
embodied in the regulation”. Respondent asserts that not reading
a timely filing requirement into the statute “is administratively
unworkable * * * [in that it] would permit foreign taxpayers to
live off the U.S. fisc indefinitely, file their returns only when
20-20 hindsight suggests it is in their own best interests to do
so, and put the Service at an extreme disadvantage in performing
its statutory duties.” To say the least, such equitable
arguments are made more appropriately to Congress than to the
judiciary.
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SWIFT, J., dissenting: For the reasons explained below, I
respectfully disagree with the majority opinion.
(1) The majority opinion fails properly to distinguish the
pre-1990 “no-regulation environment” of the cited court opinions
from the environment or authority that came into existence upon
promulgation in 1990 of section 1.882-4(a)(2) and (3)(i) and
(ii), Income Tax Regs.
With regard to such a change in the regulatory environment
applicable to a particular Federal law question, the Supreme
Court recently stated in Natl. Cable & Telecomm. Association v.
Brand X Internet Serv., 545 U.S. , 125 S. Ct. 2688, 2700
(2005):
allowing a judicial precedent to foreclose an agency from
interpreting an ambiguous statute * * * would allow a
court’s interpretation to override an agency’s. Chevron’s
premise is that it is for agencies, not courts, to fill
statutory gaps. * * * The better rule is to hold judicial
interpretations contained in precedents to the same
demanding Chevron step one standard that applies if the
court is reviewing the agency’s construction on a blank
slate: Only a judicial precedent holding that the statute
unambiguously forecloses the agency’s interpretation, and
therefore contains no gap for the agency to fill, displaces
a conflicting agency construction. [Citing Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-
844 n.11 (1984).]
Based on this recent Supreme Court explanation in Natl.
Cable & Telecomm. Association of Chevron deference to be given
Federal agency regulatory authority, I do not believe that 1930s
and 1940s court opinions construing the predecessor of section
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882(c)(2) preempted respondent’s regulatory authority to
promulgate in 1990 a specific administrative rule with regard to
section 882(c)(2). See Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 843-844 (1984).
In light of Natl. Cable, we should be focusing herein on an
analysis of the reasonableness of the filing deadline reflected
in section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs.,
as promulgated in 1990, vis-a-vis the filing deadline reflected
in the court opinions that had been extant for approximately 50
years. The majority opinion’s analysis, see majority op. pp.
65-69, however, of the reasonableness of the 1990 regulation is
quite inadequate.
For the reasons set forth in the discussion below, section
1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs., constitutes
a reasonable administrative rule promulgated by the Commissioner
and the Treasury Department and reasonably fills in a gap in the
statutory language of section 882(c)(2).
(2) The 1930s and 1940s court opinions adopted and applied
a tax return filing deadline to the ability of foreign
corporations to qualify for deductions and credits under the
predecessor of section 882(c)(2). The court opinions in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939); Ardbern Co. v.
Commissioner, 120 F.2d 424 (4th Cir. 1941), modifying and
remanding 41 B.T.A. 910 (1940); Blenheim Co. v. Commissioner,
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125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940);
Georday Enters. v. Commissioner, 126 F.2d 384 (4th Cir. 1942),
affg. a Memorandum Opinion of the Board of Tax Appeals, clearly
clarified and modified Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), and adopted and applied a
tax return filing “deadline”, “timely filing date”, “cutoff”, or
“terminal date” (whatever one chooses to call it) to the
entitlement of foreign corporations to deductions and credits
under the predecessor of section 882(c)(2).
As the Board of Tax Appeals explained in Taylor Sec., Inc.
v. Commissioner, supra at 703-704:
In view of such a specific prerequisite [that foreign
corporate taxpayers file tax returns] it is inconceivable
that Congress contemplated by that section that taxpayers
could wait indefinitely to file returns and eventually when
the respondent determined deficiencies against them they
could then by filing returns obtain all the benefits to
which they would have been entitled if their returns had
been timely filed. Such a construction would put a premium
on evasion, since a taxpayer would have nothing to lose by
not filing a return as required by statute.
In light of the above 1939 clarification by the Board of
Tax Appeals to its earlier 1938 opinion arguably to the contrary
in Anglo-Am. Direct Tea Trading Co., supra, it is Taylor Sec.,
Inc., not Anglo-Am., that is to be regarded as the lead pre-
regulation court case. See Blenheim Co. v. Commissioner, supra
at 910, in which the Court of Appeals for the Fourth Circuit
acknowledges that it is Taylor Sec., Inc. that (in spite of the
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prior Anglo-Am. opinion) first adopted a foreign corporation tax
return “terminal date” or filing deadline (for purposes of
allowing deductions and credits to foreign corporations).
Thus, for more than 50 years, prior to 1990 when the
regulation in issue herein was promulgated and since the 1939
issuance of the opinion of the Board of Tax Appeals in Taylor
Sec., Inc., section 882(c)(2) and its predecessor were
interpreted and were held by Federal courts to be unclear and
incomplete as to the above corporate filing deadline, and the
courts recognized the need for and applied such a deadline. As
the Court of Appeals for the Fourth Circuit stated explicitly in
Blenheim Co. v. Commissioner, supra at 908:
It is true that this section contains no reference to a
time element. Nevertheless, we feel that the so-called
normal tax return filed by petitioner on Form 1120 was not
a sufficient or timely compliance with Section 233 [the
predecessor of section 882(c)(2)] to entitle the petitioner
to the deductions claimed therein. * * *
The above “judicially recognized need” for a foreign
corporate filing deadline (for purposes of allowing deductions
and credits under section 882(c)(2) and its predecessor)
provides perhaps the strongest support for the conclusion that
the regulation in issue is reasonable (i.e., the regulation
simply reflects the attempt by respondent and by the Treasury
Department to address via a formally promulgated regulation the
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same need the courts addressed in Taylor Sec., Inc. v.
Commissioner, supra, and its progeny).
(3) The majority opinion’s description of section 1.882-
4(a)(2) and (3)(i), Income Tax Regs., as simply a reflection of
respondent’s “unsuccessful litigating position”, majority op.
p. 63, is inaccurate, which inaccuracy perhaps is explained by
the failure of the majority opinion to consider the specifics of
the filing deadline set forth in the regulation.
Although it early on, see majority op. note 4, sets forth
the language of section 1.882-4(a)(3)(i), Income Tax Regs., the
majority opinion provides only two single-sentence, general
explanations of the filing deadline set forth therein, see
majority op. pp. 5, 48, and nowhere does the majority opinion
attempt to compare the filing deadline that was adopted and
applied by Taylor Sec., Inc. and its progeny with the specifics
of the filing deadline set forth in the regulation.
In that regard, the following explanation of the specifics
of the filing deadline set forth in section 1.882-4(a)(2) and
(3)(i), Income Tax Regs., may be helpful.
Section 1.882-4(a)(2) and the first sentence of (3)(i),
Income Tax Regs., explains that the “timely filing” deadline set
forth therein applies only in determining a foreign
corporation’s entitlement to deductions and credits under
section 882(c)(2). It does not constitute a generic timely
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filing deadline that applies to foreign corporations under other
provisions of the Code. For example, the timely filing deadline
of the above regulation does not apply for purposes of section
6072(c).
Section 1.882-4(a)(3)(i), Income Tax Regs., then proceeds,
for purposes of allowing deductions and credits under section
882(c)(2) for a current taxable year, to divide foreign
corporations required to file Federal tax returns into two
categories: First, those that for the prior taxable year filed
an income tax return (and those for which the current taxable
year is the taxpayers’ first taxable year for which a Federal
tax return is required) (category 1 corporation) and, second,
those that for the prior taxable year were required to but did
not file a Federal tax return (category 2 corporation).
For purposes of allowing deductions and credits under
section 882(c)(2) for the current year, section 1.882-
4(a)(3)(i), Income Tax Regs., provides that for a category 1
corporation (prior year tax return filed or first year tax
return required) the filing deadline for the current taxable
year is a fixed 18 months after the due date for the current
year tax return. Where, prior to the filing by a category 1
corporation of its current year tax return within this 18-month
period, respondent notifies the corporation (that no tax return
has been filed for the current year and that no deductions or
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credits under section 882(c)(2) will be allowed), the 18-month
filing deadline set forth in the regulation represents a
lengthening of the return filing deadline that would have
applied under Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696(1939), and its progeny (under which respondent’s prior
notification would have established the deadline).
Where a category 1 corporation files its tax return for the
current year after the 18-month period, but before respondent
notifies the taxpayer, the fixed 18-month filing deadline of the
regulation would apply, and the regulation represents a
shortening of the filing deadline that would have applied under
Taylor Sec., Inc. and its progeny.
For purposes of allowing the deductions and credits under
section 882(c)(2) for the current year for a category 2
corporation (tax return for the prior year not filed), section
1.882-4(a)(3)(i), Income Tax Regs., provides that a foreign
corporation must file its tax return for the current year before
the earlier of either respondent’s notification to the
corporation (that no tax return has been filed for the current
year and that no deductions or credits under section 882(c)(2)
will be allowed) or 18 months after the due date for the current
year tax return. Where respondent so notifies a category 2
corporation within the specified 18-month period, this filing
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deadline constitutes the same filing deadline as would have
applied under Taylor Sec., Inc. and its progeny.
For a category 2 corporation that files its tax return
after the 18-month period but before respondent notifies the
taxpayer, the 18-month filing deadline of the regulation would
apply, and the regulation represents a shortening of the filing
deadline that would have applied under Taylor Sec., Inc. and its
progeny.
In effect, the filing deadline set forth in section 1.882-
4(a)(3)(i), Income Tax Regs., significantly incorporates and
reflects aspects of the filing deadline of Taylor Sec., Inc. and
its progeny, but it shortens that deadline to no later than 18
months after the due date of the current year tax return, and it
lengthens that deadline to 18 months after the tax return due
date for a foreign corporation that filed a tax return for the
prior year and that received notification from respondent prior
to filing its tax return.1
As is evident, contrary to the majority opinion’s
contention that section 1.882-4(a)(2) and (3)(i), Income Tax
1
I regard the notification to foreign corporations
described in sec. 1.882-4(a)(3)(i), Income Tax Regs. (that no tax
return has been filed for the current year and that no deductions
or credits under sec. 882(c)(2) will be allowed), as not
materially different from the notification mentioned in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939), and its progeny
(that respondent has prepared a substitute tax return or issued a
notice of deficiency in which a corporation’s deductions and
credits under sec. 882(c)(2) were not allowed).
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Regs., “simply adopts respondent’s unsuccessful litigating
position”, majority op. p. 63, or seeks to “resurrect * * *
[respondent’s] failed litigating position”, majority op. p. 84,
the regulation in issue incorporates significant aspects of the
judicially crafted filing deadline that was in effect for many
years prior to 1990.
It would seem obvious that the increased number of foreign
corporation Federal income tax returns filed with respondent in
today’s world (as distinguished from the 1930s when the cases
relied on by the majority opinion were decided) and the
increasingly complex tax laws and tax administration applicable
thereto would support, per se, respondent’s effort, by properly
promulgated regulation, to modify and clarify, in the above
modest manner, the return filing deadline that has been
applicable to foreign corporations.
Further, it is appropriate to emphasize that the regulation
at issue herein provides in subdivision (ii) of section 1.882-
4(a)(3), Income Tax Regs., a good cause, facts and circumstances
exception to the return filing deadline otherwise applicable
under section 1.882-4(a)(3)(i), Income Tax Regs. This aspect of
the 1990 regulation is consistent with the facts and
circumstances filing deadline that was applied by the Court of
Appeals for the Fourth Circuit in Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941).
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Lastly on this point, in 1938 respondent’s litigating
position in Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38
B.T.A. 711 (1938), was that the return filing deadline for
purposes of the predecessor of section 882(c)(2) was the same as
the statutory due date for filing foreign corporation tax
returns. By 1941, if not earlier, respondent’s litigating
position had changed, and respondent was conceding that foreign
corporation tax returns filed late but before respondent’s
notification to foreign corporations would be considered timely
under the predecessor of section 882(c)(2). See Ardbern Co. v.
Commissioner, supra at 426.
In summary on this point, the filing deadline reflected in
section 1.882-4(a)(3)(i) and (ii), Income Tax Regs.,
incorporates significant aspects of the judicially crafted
foreign corporation tax return filing deadline and is quite
different from respondent’s original litigating position in 1938
in Anglo-Am. Direct Tea Trading Co.
(4) The majority opinion, see majority op. p. 77, suggests
that section 1.882-4(a)(2) and (3)(i), Income Tax Regs., is
inconsistent with the Treasury regulation promulgated in 1957;
namely, sec. 1.882-4, Income Tax Regs. To the contrary, the
1957 regulation was silent as to any tax return filing deadline
under section 882(c)(2); just as section 882(c)(2) is silent
still today as to any such deadline. Section 1.882-4(a)(2) and
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(3)(i) and (ii), Income Tax Regs., thus fills a gap not only in
the language of section 882(c)(2), but also in the language of
the 1957 regulation; just as Taylor Sec., Inc. and its progeny
filled a gap in the language of the predecessor of section
882(c)(2).
(5) In its discussion of the legislative reenactment
doctrine, see majority op. pp. 69-74, the majority opinion
ignores a significant limitation on the legislative reenactment
doctrine as follows:
[The legislative reenactment doctrine] does not apply where
nothing indicates that the legislature had its attention
directed to the administrative interpretation upon
reenactment. [2B Singer, Sutherland Statutory Construction
§ 49:09 (6th ed. 2000).]
In this case, in reenacting section 882(c)(2) and its
predecessor, no evidence indicates that Congress had “its
attention directed” to any of the 1930s and 1940s court opinions
involving a deadline for foreign corporations to file their tax
returns in order to preserve deductions and credits under the
predecessor of section 882(c)(2). Absent such evidence, any
application herein of the legislative reenactment doctrine would
be inappropriate.2
2
A vague statement in one of respondent’s briefs that
Congress “was aware of” the early Board of Tax Appeals and other
court opinions is puzzling and ambiguous.
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As the Court of Appeals for the Seventh Circuit explained
in Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d
224, 230 (7th Cir. 1994), revg. T.C. Memo. 1991-368:
However, neither * * * [the taxpayer] nor the tax court has
pointed to any occasion when Congress even mentioned the
old--or new--regulation. This fact is important to the
workings of the re-enactment doctrine for a relevant factor
in a court’s review is “the degree of scrutiny Congress has
devoted to the regulation during subsequent re-enactments
of the statute.” * * * [Citing National Muffler Dealers
Assoc., Inc. v. United States, 440 U.S. 472, 477 (1979).]
The regulations and statutes involved in this area are too
complex for us to venture to assume Congress’s intent
through its silence. Therefore, we choose to not second-
guess the Treasury on this matter. The Sixth Circuit was
correct when it stated:
The re-enactment doctrine is merely an interpretive
tool fashioned by the courts for their own use in
construing ambiguous legislation. It is most useful
in situations where there is some indication that
Congress noted or considered the regulations in effect
at the time of its action. Otherwise, the doctrine
may be as doubtful as the silence of the statutes and
legislative history to which it is applied. * * *
[Quoting Peoples Fed. Sav. & Loan Association v.
Commissioner, 948 F.2d 289, 302-303 (6th Cir. 1991),
revg. T.C. Memo. 1990-129.]
We also have applied this particular limitation to the
legislative reenactment doctrine. In Ashland Oil, Inc. v.
Commissioner, 95 T.C. 348, 363 (1990),3 we refused to apply the
3
We also have stated that, “we do not believe that the
legislative reenactment doctrine can be applied to bar reasonable
amendments to regulations where * * * the change is made only
prospectively from the date of the announcement of the proposed
change.” Wendland v. Commissioner, 79 T.C. 355, 384 (1982),
affd. sub nom. Redhouse v. Commissioner, 728 F.2d 1249 (9th Cir.
(continued...)
-98-
legislative reenactment doctrine to a revenue ruling because
“Without affirmative indications of congressional awareness and
consideration, we decline to cloak this revenue ruling with the
aura of legislative approval.”
(6) Finally, rather than expressing sympathy for
petitioner, see majority op. pp. 68, 72-74, whose Federal income
tax returns were due on November 15 of each year, the fact that
petitioner filed each of its 1993, 1994, 1995, and 1996 Federal
corporate income tax returns on July 23, 1999, some 2-5 years
after the return due dates and 9 years after section 1.882-
4(a)(2) and (3)(i), Income Tax Regs., was promulgated is hardly
indicative of a foreign corporation seeking to comply with U.S.
tax laws.
In conclusion, it is not respondent herein who is
attempting to resurrect anything, see majority op. p. 84.
Rather, it is the majority opinion that would resurrect Anglo-
Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711(1938), and that would ignore later Board of Tax Appeals and
Court of Appeals opinions and litigation that concluded that the
statutory language of the predecessor of section 882(c)(2) was
incomplete and ambiguous and necessitated the adoption and
3
(...continued)
1984). Note the prospective only effective date of the
regulation at issue herein, for taxable years ending after July
31, 1990. Sec. 1.882-4(a)(3)(i), Income Tax Regs.
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application by the courts of a foreign corporation filing
deadline for purposes of the predecessor of section 882(c)(2).
Section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax
Regs., reflects the Commissioner’s and the Secretary’s
consistent and similar conclusion. The specific foreign
corporation tax return filing deadline that is reflected in the
regulation incorporates aspects of the judicially crafted
deadline, is flexible to take into account unusual situations,
but also is modestly tightened up to reflect updated tax
administration concerns relating to foreign corporate tax
compliance.
For the reasons stated, I respectfully dissent from this
Opinion which invalidates section 1.882-4(a)(2) and (3)(i),
Income Tax Regs.
HOLMES, J., agrees with this dissenting opinion.
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HALPERN, J., dissenting:
I. Introduction
This case involves the deference (if any) that we must show
the Secretary of the Treasury’s (Secretary’s) construction of
the Internal Revenue Code. The majority holds that we need show
no deference to the Secretary’s construction found in section
1.882-4(a)(2) and (3)(i), Income Tax Regs., imposing a timely
filing requirement on foreign corporations. It holds the
regulation to be invalid. I disagree.
In Chevron, U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, 842-843 (1984), the Supreme Court set forth
a sequential approach for determining whether an agency’s
construction of a statute it administers should be given
deference:
First, always, is the question whether Congress has
directly spoken to the precise question at issue. If
the intent of Congress is clear, that is the end of
the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of
Congress. * * * [I]f the statute is silent or
ambiguous with respect to the specific issue, the
question for the court is whether the agency’s answer
is based on a permissible construction of the statute.
Id. (fn. ref. omitted). That approach was reaffirmed by the
Supreme Court in Atl. Mut. Ins. Co. v. Commissioner, 523 U.S.
382, 389 (1998) (a case involving the validity of an income tax
regulation), in which, with respect to the second question, the
Court added the admonition: “[T]he task that confronts us is to
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decide, not whether the Treasury Regulation represents the best
interpretation of the statute, but whether it represents a
reasonable one. See Cottage Savings Assn. v. Commissioner, 499
U.S. 554, 560-561 (1991).”
Accordingly, the questions in the instant case are: (1)
Whether, in denying a foreign corporation an allowance for
deductions and credits (without distinction, deductions) unless
the foreign corporation files a true and accurate income tax
return within the time limits set forth in section 1.882-4(a)(2)
and (3)(i), Income Tax Regs., the Secretary has contradicted the
unambiguously expressed intent of Congress; and, if that cannot
be said, (2) whether the time limits imposed by the Secretary
constitute a permissible construction of section 882(c)(2).
Before proceeding, it may be helpful to establish some
terminology regarding the time for filing returns. I find the
majority’s use of the term “timely” confusing. For example, on
page 4 of its report, the majority uses the term “timely” to
mean both a return filed on or before the due date established
by section 6072 (see note 3) and a return filed after the due
date but before the “arbitrary 18-month deadline * * * devised
by the Secretary.” I use the term “on-time” to describe a
return filed on or before the date established by the relevant
provision of a statute and the term “timely” to describe a
return filed after that date but before some date after which
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the filing would be considered untimely (e.g., the “terminal
date” described by the Court of Appeals for the Fourth Circuit
in Blenheim Co. v. Commissioner, 125 F.2d 906, 910 (4th Cir.
1942), affg. 42 B.T.A. 1248 (1940)).
II. First Question: Has Congress Directly Spoken to the
Precise Question at Issue?
If a foreign corporation files its income tax return on or
before the due date prescribed in section 6072(c), the return is
on-time. Moreover, no provision of subtitle F deprives a
foreign corporation of the benefit of deductions claimed on a
return simply because the return was not on-time. Indeed, in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711(1938), our predecessor, the Board of Tax Appeals (the Board),
held that section 233 of the Revenue Act of 1928, ch. 852, 45
Stat. 849 (a precursor to section 882(c)(2)), could not be read
to make an on-time return a prerequisite to a foreign
corporation’s having the benefit of deductions to which it was
otherwise entitled: “[I]f Congress had intended to deprive a
foreign corporation of its right to * * * [a deduction] if it
did not file its return within the time prescribed, we think it
would have said so.” Id. at 715 (emphasis added). Thereafter,
however, both the Board and the Court of Appeals for the Fourth
Circuit acknowledged that the allowance of deductions to a
foreign corporation was a privilege, which should be terminated
at some point to assure the proper administration of the income
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tax. Georday Enters. v. Commissioner, 126 F.2d 384, 388 (4th
Cir. 1942), affg. a B.T.A. Memorandum Opinion; Blenheim Co. v.
Commissioner, supra at 909-910; Ardbern Co. v. Commissioner, 120
F.2d 424 (4th Cir. 1941), modifying and remanding 41 B.T.A. 910(1940); Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696, 703
(1939).
In Blenheim Co. v. Commissioner, supra at 908, the Court of
Appeals did state that section 233 of the Revenue Act of 1934,
ch. 277, 48 Stat. 737, “contains no reference to a time
element.” It found, however, that the return filed by the
taxpayer was “[n]evertheless * * * not a sufficient or timely
compliance with Section 233 to entitle the petitioner to the
deductions claimed therein.” Id. (emphasis added). It held
that, in subjecting foreign corporations to section 233 of the
1934 Act, “Congress conditioned its grant of deductions upon the
timely filing of true, proper and complete returns.” Id. at 909(emphasis added).
In Taylor Sec., Inc. v. Commissioner, supra, the Board
concluded that, once the Commissioner determined a deficiency in
tax, a taxpayer could not avoid the effect of section 233 by
thereafter filing a return. The Board stated:
[W]e are unable to conclude that in enacting section
233 * * * it was the intention of Congress that
delinquent returns filed by a foreign corporation
after the respondent's determination should constitute
the returns required as a prerequisite to the
allowance of the credits and deductions ordinarily
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allowable to the corporations. * * * In view of such
a specific prerequisite it is inconceivable that
Congress contemplated by that section that taxpayers
could wait indefinitely to file returns and eventually
when the respondent determined deficiencies against
them they could then by filing returns obtain all the
benefits to which they would have been entitled if
their returns had been timely filed. Such a
construction would put a premium on evasion, since a
taxpayer would have nothing to lose by not filing a
return as required by statute.
Id. at 703-704.
More recently, in Espinosa v. Commissioner, 107 T.C. 146(1996), the issue was whether untimely returns filed by a
nonresident alien individual were sufficient to avoid the
disallowance of deductions under section 874(a) (which contains
language virtually identical to the language in question in
section 882(c)(2)). We upheld the disallowance of deductions
under section 874(a), concluding:
[W]hile sections 874(a) and 882(c)(2) contain no
explicit time limit, the policy behind these
provisions, as applied by the case law, dictates that
there is a cut-off point or terminal date after which
it is too late to submit a tax return and claim the
benefit of deductions. If no cut-off point existed,
taxpayers would have an indefinite time to file a
return, and these provisions would be rendered
meaningless. * * *
Id. at 157 (emphasis added).
As the above discussion suggests, no case has said that
section 822(c)(2) does not (or its precursors did not) make
timely filing a prerequisite to receiving the benefit of
deductions. Nor does the body of cases discussing section
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822(c)(2) and its precursors provide guidance of general
applicability concerning timeliness; it merely resolves issues
created by unique fact patterns on a case-by-case basis.
Although those cases do not unambiguously establish the limits
of timeliness, they clearly establish that timely filing is
required. Those cases treat section 882(c)(2) as if it were
incomplete: Timeliness is required, but timeliness is not
defined. Timeliness is anchored by section 6072 to the date
required for filing the return, but neither section 882(c)(2)
nor any other provision of the Code tells us when the line runs
out. This case does not involve the question of whether a line
can be drawn to enforce section 882(c)(2); that has already been
decided in the affirmative. This case involves the question of
who gets to draw the line: the courts or the Secretary? The
clearly expressed intent of Congress to the contrary not being
apparent, the Secretary is not deprived of his authority under
section 7805(a) to draw that line (i.e., to establish needful
rules and regulations for the enforcement of section 882(c)(2)).
III. Second Question: Is the Secretary’s Regulation Based on a
Permissible Construction of the Statute?
Having reached the second step in our sequential analysis,
the question that we must answer is whether the timely filing
rule found in section 1.882-4(a)(2) and (3)(i), Income Tax
Regs., is based on a permissible construction of the statute.
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In Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. at 843-844, the Supreme Court said:
If Congress has explicitly left a gap for the agency
to fill, there is an express delegation of authority
to the agency to elucidate a specific provision of the
statute by regulation. Such legislative regulations
are given controlling weight unless they are
arbitrary, capricious, or manifestly contrary to the
statute. Sometimes the legislative delegation to an
agency on a particular question is implicit rather
than explicit. In such a case, a court may not
substitute its own construction of a statutory
provision for a reasonable interpretation made by the
administrator of an agency. [Fn. refs. omitted.]
Section 882(c)(2) does not specifically make the allowance
of deductions to a foreign corporation contingent on a timely
filed return, nor does it grant the Secretary express authority
to prescribe regulations defining timeliness for purposes of
section 882(c). In promulgating section 1.882-4(a)(2) and
(3)(i), Income Tax Regs., the Secretary exercised his rulemaking
authority under section 7805(a), which gives the Secretary
general authority to "prescribe all needful rules and
regulations for the enforcement" of the Internal Revenue Code.
See T.D. 8322, 1990-2 C.B. 172.1 The appropriate standard for
1
In Boeing Co. v. United States, 537 U.S. 437, 448 (2003),
the Supreme Court said of another Treasury regulation issued
under the authority of sec. 7805(a): “Even if we regard the
challenged regulation [sec. 1.861–8(e)(3) (1979), Income Tax
Regs.] as interpretive because it was promulgated under §
7805(a)'s general rulemaking grant rather than pursuant to a
specific grant of authority, we must still treat the regulation
with deference. See Cottage Savings Assn. v. Commissioner, 499
U.S. 554, 560-561 (1991).”
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determining whether section 1.882-4(a)(2) and (3)(i), Income Tax
Regs., is based on a permissible construction of section
882(c)(2) is whether it represents a “reasonable” interpretation
of that section. See Atl. Mut. Ins. Co. v. Commissioner, 523
U.S. at 389.2
To be more specific, we must determine whether the 18-month
limitation found in section 1.882-4(a)(3), Income Tax Regs., is
reasonable, since the otherwise applicable filing limitation
found in section 1.882-4(a)(2) and (3)(i), Income Tax Regs.,
construes the statute in a similar (indeed, in a more generous)
manner than the courts have construed it. See Judge Swift’s
dissent p. 90. I have already quoted our report in Espinosa v.
Commissioner, supra, to the effect that the policy behind
section 882(c)(2) implies a cutoff point or terminal date after
which it is too late to submit a tax return and claim the
benefit of deductions. The question is thus one of line
drawing, and the majority has failed to convince me that the
line drawn by the Secretary is unreasonable. Judges Holmes and
Swift have adequately dealt with the majority’s conclusion to
the contrary, and I have nothing to add. I also fully join
2
I am not ready to join Judge Holmes in concluding that,
in United States v. Mead Corp., 533 U.S. 218 (2001), the Supreme
Court “clarified the law, by conflating the standard of
‘reasonableness’ with the standard of ‘arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.’”
Judge Holmes’s dissent p. 141.
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Judge Holmes’s criticism of the majority’s distinction of Natl.
Cable & Telecomm. Association. v. Brand X Internet Servs., 545
U.S. __, 125 S. Ct. 2688 (2005). Since we are faced here with a
question of line drawing, the Secretary’s reasonably drawn line
necessarily supersedes the line drawn by any court. See Natl.
Cable & Telecomm. Association, supra at 2700.
IV. Conclusion
For the reasons stated, I would uphold section 1.882-
4(a)(2) and (3)(i), Income Tax Regs., as a reasonable exercise
of the Secretary’s authority under section 7805(a) to draw
lines.
SWIFT, J., agrees with this dissenting opinion.
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HOLMES, J., dissenting: The issue in this case is easy to
understand. Section 882(c)(2) denies foreign corporations that
have U.S. income the benefit of the deductions and tax credits
they would otherwise get if they fail to file returns “in the
manner prescribed by subtitle F.” Section 6072--which is part
of the Code’s subtitle F--imposes a time limit for filing
foreign corporate returns. Before 1990, courts had construed
the phrase in section 882(c)(2)--“in the manner prescribed by
subtitle F”--as meaning neither “foreign corporations must file
their returns by the deadline set in section 6072" nor “foreign
corporations have till the end of time to file,” but rather that
“foreign corporations have only until the Secretary, after a
reasonable time, prepares a substitute return.” The regulation
that we invalidate today replaced the old “reasonable time
standard” with an 18-month grace period1 beyond section 6072's
deadline, and replaced the preparation of a substitute return
with a written notice. The 18-month grace period might be
shorter or longer than the old judicially-constructed one. It
is undeniably more definite.
1
As Judge Swift carefully explains, see dissent supra pp.
90-93, the disputed regulation is fairly complex and establishes
a number of exceptions to the general 18-month rule; for
simplicity’s sake, I refer to the regulation as creating an 18-
month grace period.
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Upholding this regulation should be almost trivially easy.
“So long as the Commissioner issues regulations that ‘implement
the congressional mandate in some reasonable manner,’ * * * we
must defer to the Commissioner’s interpretation. Only if the
code has a meaning that is clear, unambiguous, and in conflict
with a regulation does a court have the authority to reject the
Commissioner’s reasoned interpretation and invalidate the
regulation.” Redlark v. Commissioner, 141 F.3d 936, 939 (9th
Cir. 1998), revg. 106 T.C. 31 (1996). For the Secretary to
issue a regulation giving a clear 18-month grace period doesn’t
contradict anything in the Code, at least anything clearly and
unambiguously in the Code.2
2
Our Court has met with limited success in finding
regulations unreasonable after the extensive review of the sort
we do today. See Pac. First Fed. Sav. Bank v. Commissioner, 94
T.C. 101 (1990) (invalidating sec. 1.593-6(b)(1)(iv), Income Tax
Regs. after plenary review of statute and legislative history),
revd. 961 F.2d 800, 805 (9th Cir. 1992) (“we cannot usurp the
Treasury’s authority and invalidate the regulation unless it is
an unreasonable construction”), disagreed with by Peoples Fed.
S&L v. Commissioner, 948 F.2d 289, 300 (6th Cir. 1991) (“a court
may not substitute its own construction for the reasonable
interpretation of an agency”), disagreed with again by Bell Fed.
Sav. & Loan Association v. Commissioner, 40 F.3d 224,227 (7th
Cir. 1994), revg. T.C. Memo. 1991-368 (“choice among reasonable
interpretations is for the Commissioner, not the courts”), and
finally abrogated, Cent. Pa. Sav. Association & Subs. v.
Commissioner, 104 T.C. 384 (1995); see also Redlark v.
Commissioner, 106 T.C. 31 (1996) (invalidating sec. 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409(Dec. 22, 1987) after plenary review of statute and legislative
history), revd. 141 F.3d 936 (9th Cir. 1998) (using language
quoted in text above), disagreed with by Allen v. United States,
(continued...)
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I respectfully dissent, because today’s opinion lays down
new and misleading trails through three different parts of the
jungle of administrative law:
! It misapplies the plain meaning rule;
! It greatly extends the doctrine of legislative
reenactment to overturn a regulation; and
! It rejects the recent teaching of the Supreme
Court in Brand-X3 on the necessity of deferring
to an administrative agency’s decision to issue a
regulation overturning caselaw.
I also write separately to highlight what I think is a
serious confusion in the appropriate way we should review
regulations that have gone through notice-and-comment
rulemaking, especially those that change existing law. Much of
the majority’s exhaustive recitation of the history of section
882 and its regulation arises from the different factors that we
2
(...continued)
173 F.3d 533 (4th Cir. 1999) (regulation need not be “best
possible means of implementing the statute” if it’s reasonable),
and disagreed again with Kikalos v. Commissioner, 190 F.3d 791,
796-797 (7th Cir. 1999), revg. T.C. Memo. 1998-92 (“[i]t is not
our role to determine the most appropriate interpretation of the
statute, but simply to assess whether the regulation reflects a
reasonable construction”), and finally abrogated, Robinson v.
Commissioner, 119 T.C. 44 (2002).
3
Natl. Cable & Telecomm. Assn. v. Brand X Internet Servs.,
546 U.S. ___, 125 S. Ct. 2688 (2005).
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use in applying National Muffler4 compared to Chevron.5 This
case may therefore be a good vehicle for appellate guidance on
whether National Muffler continues to be in good working order
after Chevron, Mead,6 and Brand X.
I.
The majority begins its analysis, as I agree we should,
with the question of whether section 882's phrase “in the manner
prescribed by subtitle F” has an unambiguous meaning. Whether
National Muffler or Chevron applies, there is no doubt that if
Congress has spoken on the issue, no regulation in conflict can
survive. “If the intent of Congress is clear, that is the end
of the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress.”
Chevron, 467 U.S. at 842-843; see also National Muffler, 440
U.S. at 476.
But what materials should a court look at to decide whether
a statutory phrase is unambiguous? The answer is in Natl. R.R.
Passenger Corp. v. Boston & Maine Corp., 503 U.S. 407, 417
(1992) (citations omitted): “a court must look to the structure
4
National Muffler Dealers Assn., Inc., v. United States,
440 U.S. 472 (1979).
5
Chevron U.S.A., Inc., v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984).
6
United States v. Mead Corp., 533 U.S. 218 (2001).
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and language of the statute as a whole. If the text is
ambiguous and so open to interpretation in some respects, a
degree of deference is granted to the agency.”7
The majority crane their necks away from the actual words
of section 882 and its place in the Code to look at whether the
regulation “adopts respondent’s unsuccessful litigating
position, with total disregard for judicial precedent,” majority
op. p. 63, and at the legislative reenactment doctrine, majority
op. p. 62 note 18. As I discuss later on, these factors are
only relevant, if at all, in reviewing a regulation based on a
text that we’ve already found to be ambiguous. The majority’s
strongest point, though, is their cataloging of the various
times in the Code where a phrase like “at the time and in the
manner prescribed” appears. The absence of the first part of
the phrase, they reason, means that the second part--“in the
manner prescribed” has no “time element” because Congress must
7
Whether a court should look to the text alone in deciding
if a statute is ambiguous, as in Natl. R.R. Passenger, or to the
text plus legislative history, as Chevron implies, see Chevron,
467 U.S. at 842, is a matter of some controversy. See Coke v.
Long Island Care at Home, Ltd., 376 F.3d 118, 127 n.2 (2d Cir.
2004) (collecting cases); see also Tax Analysts v. Commissioner,
350 F.3d 100, 103-104 (D.C. Cir. 2003); Hosp. Corp. of America &
Subs. v. Commissioner, 348 F.3d 136, 144 (6th Cir. 2003) affg.
107 T.C. 73 (1996). It doesn’t matter in this case because the
legislative history of section 882 shows no congressional intent
one way or the other about when a foreign corporation must file
its return to avoid loss of deductions. See infra p. 122.
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have known what it was doing when it included “manner” and left
out “time”. Majority op. pp. 58-60. They conclude:
We understand that use [i.e., of the word
“manner”] to refer to items of information
and not to refer to the time for the filing
of a return or the furnishing of any other
document. We conclude that Congress, by
using only the word “manner” in section
882(c)(2), did not intend to include in that
provision any element of time.* * *
Majority op. pp. 61-62.8
This was also more or less the reasoning of our
predecessor, the Board of Tax Appeals, in Anglo-Am. Direct Tea
Trading Co. v. Commissioner, 38 B.T.A. 711 (1938). But there
are at least two problems with this reasoning. The first is
that, as is usually the case with a statute as old and overgrown
as the Code, there are counterexamples of the use of the word
“manner.” Consider, for example, section 179(c). This section
gives small businesses the option of expensing capital
purchases. Such an election “shall be made in such manner as
the Secretary may by regulations prescribe.” He prescribed such
8
The Code governs the “place” of filing returns as well as
their “time” and “manner.” Part VII of subtitle F has detailed
rules, which the IRS has supplemented with extensive regulations.
Treas. Regs. 1.6091-1, 20.6091-1, 25.6091-1, 31.6091-1, 40.6091-
1, 41.6091-1, 44.6091-1, 53.6091-1, 55.6091-1, 156.6091-1,
157.6091-1T, 301.6091-1, 1.6091-2, 1.6091-3, 1.6091-4. Given
today’s narrow reading of “manner prescribed under subtitle F,”
we may someday have to decide whether a return that a foreign
corporation intentionally sends astray could trigger a loss of
deductions.
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a regulation, sec. 1.179-5(a), Income Tax Regs., and it
restricts the time in which a taxpayer can make this election,
given the practical needs of a tax system based on periodic
returns. The same is true of elections by a reciprocal insurer
under section 835(c)(2), which requires a consent “in such
manner as the Secretary shall prescribe.” The Secretary
prescribed the manner in a regulation, which again requires
filing of such consents by a particular time. See sec. 1.826-
1(c), Income Tax Regs.
This is hardly surprising. While I agree that we should
always construe the words of a statute to have their original
public meaning, it is also true that we can--indeed, we should--
recognize that even tax statutes are written against a
background of common law legal usage. And it is generally the
case that when a legal instrument omits explicit time limits to
do something permitted or required, it does not ordinarily mean
that there are no time limits at all. See 1 Restatement,
Contracts 2d, sec. 41 (1981); 1 Corbin, Corbin on Contracts,
sec. 2.16 at 203 (1993) (“[i]f the offeror has not communicated
a specific time limit with sufficient definiteness, the power of
acceptance by the offeree continues for a reasonable time * * *
[w]hat is a reasonable time, in any case, is a question of fact
to be determined by a consideration of all the circumstances
existing when the offer [is made]”); e.g., Staples v. Pan-Am.
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Wall Paper & Paint Co., 63 F.2d 701, 702 (3d Cir. 1933) (as
offer “contained no time limitation for acceptance, it was
incumbent upon the plaintiff to accept within a reasonable
time”); Minneapolis & St. Louis R.R. Co. v. Columbus Rolling-
Mill Co., 119 U.S. 149, 151 (1886) (“[i]f the offer does not
limit the time for its acceptance, it must be accepted within a
reasonable time”).
I’m not saying that we need to canvass contract law to
construe the Code, only suggesting that the observation that
Congress used the word “manner” without specifying “time” is not
the end of the argument. The context in which the word occurs
suggests that imputation of a reasonable time limit is not a
departure from the ordinary legal meaning of the word--any more
than imputation of a reasonable delivery time in a contract for
delivery of specified goods, 1 Restatement, Contracts 2d sec. 33
(1981), or imputation of a reasonable time for closing a
conveyance of property, 1 Restatement, Property (Mortgages) 3d
sec. 7.2 (1997) would be. And before today, I knew of no place
in the Code where a Court has held that “manner” without “time”
means “anytime at all.”
The reason for imputing some time limits on filing returns
or making elections is one of practical necessity. And this is
where the majority’s invocation of Anglo-American is so
unintentionally radical, because the second problem with its
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discussion of the plain meaning of “manner” is that it
misunderstands the import of the many opinions from the 1930s
and 1940s that in effect did set a filing deadline for foreign
corporations if they wanted to qualify for deductions and other
credits. The BTA’s opinion in Taylor Securities Inc. v.
Commissioner, 40 B.T.A. 696 (1939), and the opinions of the
Fourth Circuit in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th
Cir. 1941), modifying and remanding 41 B.T.A. 910 (1940);
Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir. 1942),
affg. 42 B.T.A. 1248 (1940); and Georday Enterprises v.
Commissioner, 126 F.2d 384 (4th Cir. 1942), all disagreed with a
reading of Anglo-American as disallowing any limits on late
filing.
As the Board of Tax Appeals explained in Taylor Securities:
In view of such a specific prerequisite [that
foreign corporate taxpayers file tax returns]
it is inconceivable that Congress contemplated
by that section that taxpayers could wait
indefinitely to file returns and eventually
when the respondent determined deficiencies
against them they could then by filing returns
obtain all the benefits to which they would
have been entitled if their returns had been
timely filed. Such a construction would put a
premium on evasion, since a taxpayer would have
nothing to lose by not filing a return as
required by statute.
40 B.T.A. at 703-04.
The Fourth Circuit recognized long ago that Taylor
Securities was an innovation. Blenheim, 125 F.2d at 910. It is
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therefore Taylor Securities, not Anglo-American that was--until
today, at least--the controlling pre-regulation case. And Taylor
Securities accommodated the Commissioner’s need for some point at
which he could assess delinquent taxes owed by a foreign
corporation that had failed to file its own return. Taylor
Securities and its progeny were precisely the sort of case-by-
case development of reasonableness that one would expect in
response to the absence of a specific mention of time in section
882.
Where our Opinion leaves the Commissioner after today’s
ruling is very unclear.9 Current IRS practice, even when the
Commissioner prepares a substitute return under section 6020(b),
is to encourage nonfilers to prepare and file a return, if for no
other reason than to stop the addition to tax for failure to
timely file. See sec. 6651(g)(1), (a)(1); In re Rank, 161 B.R.
406 (N.D. Ohio 1993) (noting number of exceptions to recognition
of substitute return, giving taxpayer continuing incentive to
file); Saltzman, IRS Practice & Procedure, par. 4.02 (citing
examples in Code where taxpayer may file a return after
substitute return prepared to challenge Commissioner’s
9
The majority seems to soften its analysis by suggesting at
a couple points that the Commissioner can still enforce section
882 by again preparing substitute returns. See majority op. pp.
65 note 22, 75. But the Opinion also states that this cannot be
an “absolute and rigid rule.” Majority op. p. 74 note 28.
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determinations). If the majority’s hesitance to explicitly
overrule Taylor Securities is an endorsement of what was, over 60
years ago, “the generally accepted rule concerning the number of
returns which may be filed,” majority op. p. 75 note 28, quoting
Blenheim, 125 F.2d at 910, it will just cause more confusion
given the intervening evolution in the effect of substitute
returns.
II.
Having concluded that the plain language of section 882
invalidates the regulation, the majority could have stopped.
Instead, as an alternative holding, it goes on to analyze the
reasonableness of the regulation under National Muffler--asking
whether the regulation “(harmonizes with the plain language of
the statute, its origin, and its purpose.)” Majority op. p. 55
(quoting National Muffler, 440 U.S. at 477).
Applying National Muffler, the majority concludes that the
regulation is out of tune with the statute not just because it
fails to harmonize with section 882's plain language but because
the regulation:
! is “not a ‘substantially contemporaneous
construction of the statute,’”
! “merely adopted respondent’s unsuccessful
litigating position,”
! “conflicts with the agency’s previous
interpretation of the same statute,”
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! had been in effect for only a short time before
being challenged,
! was not issued after a revision to section 882,
and
! was not relied on by petitioner to his detriment.
See majority op. pp. 65-67.
Each of these statements is at least arguably true--though
it seems a stretch to say that a bright-line 18-month grace
period is so substantially different from the old reasonable-
time-before-letting-the-IRS-bring-the-curtain-down-by-filing-a-
substitute-return test as to be in “conflict”. And each of the
factors the majority cites is concededly relevant in a National
Muffler analysis. These counts, though, don’t add up to a
successful indictment of the regulation’s reasonableness. For
what really seems to trouble the majority is that this regulation
was promulgated years after section 882 or its predecessor was
enacted, and that it disregarded the caselaw that had built up in
the meantime. These related issues are the “legislative
reenactment” and “Brand-X” problems.
A.
According to the majority, the legislative reenactment
doctrine means that “Congress is presumed to have known of the
administrative and judicial interpretations of a statutory term
reenacted without significant change and to have ratified and
included that interpretation in the reenacted term.” Majority
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op. p. 69. The majority then marches through the history of the
reenactments of section 882--both the great codifications of
1939, 1954, and 1986, and a minor amendment (having nothing to do
with the filing requirement) in 1966--before reaching its
conclusion that Congress “was mindful of the relevant judicial
interpretations and included within the reenacted text the
judiciary’s interpretation.” Majority op. p. 70.
I don’t agree that this is right formulation of the
legislative reenactment doctrine, at least when it is used to
invalidate, rather than uphold, a regulation. In a lengthy
discussion of the doctrine, the D.C. Circuit held:
The district court mistakenly relied on the
familiar notion that Congress is presumed to
be aware of administrative interpretations of
a statute or regulation when it adopts such
language in a statute. Though courts have
stated this general proposition, usually as a
defense to a later attack against the same
interpretation, no case has rested on this
presumption alone as a basis for holding that
the statute required that interpretation.* * *
AFL-CIO v. Brock, 835 F.2d 912, 916 n.6 (D.C. Cir. 1987).
Even if we wanted to be pioneers, I am quite leery of the
majority’s formulation. Elsewhere in Brock, the D.C. Circuit
summarized its understanding of the doctrine to require “express
congressional approval of an administrative interpretation if it
is to be viewed as statutorily mandated.” Id. at 915. Other
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appellate courts have likewise been careful in limiting the
doctrine:
! “Mere reenactment is insufficient. It must also
appear that Congress expressed approval of the
agency interpretation. That is to say, the
doctrine applies when Congress indicates not only
an awareness of the administrative view, but also
takes an affirmative step to ratify it.” Isaacs
v. Bowen, 865 F.2d 468, 473 (2d Cir. 1989);
! “When the congressional discussion preceding
reenactment makes no reference to the * * *
regulation, and there is no other evidence to
suggest that Congress was even aware of the * * *
interpretive position[,] ‘we consider the * * *
reenactment to be without significance.’”* * *
Am. Bankers Ins. Grp. v. United States, 408
F.3d 1328, 1335-36 (11th Cir. 2005) (quoting
Am. Online v. United States, 64 Fed. Cl. 571, 580-
581 (2005)).
See also Peoples Fed. Sav. & Loan Association. of Sidney v.
Commissioner, 948 F.2d 289, 302 (9th Cir. 1991) (doctrine is
“most useful in situations where there is some indication that
Congress noted or considered the regulations in effect at the
time of its action”).
The majority’s reliance on legislative reenactment should
have ended when it could find no affirmative evidence that
Congress knew of any of the Fourth Circuit or BTA cases that it
describes. The legislative history that the majority quotes and
summarizes features only vague references to “existing law.”
Majority op. p. 73.
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Of course, the majority also describes at great length the
absence of even a mention of a timely filing requirement in any
of the various legislative histories that it pores through. They
reason that the absence of any disagreement with the existing BTA
and Fourth Circuit precedents shows that Congress intended to
ratify those precedents. See majority op. pp. 70-71. This is an
innovation. If taken seriously, it would freeze existing
judicial constructions and IRS regulations in place whenever
Congress reenacted a portion of the Code, forcing us to treat
them as if they were part of the statutory language and blocking
the Secretary from changing regulations without persuading
Congress to change the Code.
This cannot be right.
B.
The majority is, I think, also wrong about the amount of
deference the Secretary owes to caselaw when he writes a
regulation.
This is the Brand-X problem. In that case, the FCC had
issued a declaratory rule interpreting the term “telecommunica-
tions service” under its general authority to enforce the
Telecommunications Act of 1934. Brand X, 125 S. Ct. 2688, 2695
(2005). According to this new regulation, broadband cable modems
were not a “telecommunication service.” This was a change in the
law, at least in the Ninth Circuit, because in AT&T Corp. v.
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Portland, 216 F.3d 871, 880 (9th Cir. 2000), that court had
specifically ruled that broadband cable modems were a
“telecommunications service.”
The Supreme Court began its analysis by citing the FCC’s
broad grant of regulation-writing power--very similar to the
Secretary’s in section 7805(a)--of prescribing “such rules and
regulations as may be necessary in the public interest.” Brand
X, 125 S. Ct. at 2699. The Court recognized that the regulation
did change existing caselaw but reasoned:
A court’s prior judicial construction of a
statute trumps an agency construction
otherwise entitled to Chevron deference only
if the prior court decision holds that its
construction follows from the unambiguous
terms of the statute and thus leaves no room
for agency discretion.* * *
Id. at 2700.
The majority distinguishes Brand X in several ways:
! the FCC gave a more careful consideration of
developments in the field than the Secretary did
here;
! Brand X did not involve a change in the agency’s
own interpretation;
! the FCC was not a party in the court case whose
holding it was reversing; and
! the FCC’s new regulation was promulgated only five
years after the contrary caselaw.
Majority op. pp. 78-81.
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These distinctions should not make a difference--the Supreme
Court did not balance carefulness of consideration, prior
litigation history, or the amount of time that had passed between
the caselaw and the new regulation. It simply looked to see if
the agency had been delegated broad regulatory authority and
whether its construction of an ambiguous statutory phrase was
reasonable. Brand X, 125 S. Ct. at 2700-2702. Conflicting
precedent would have mattered only if that precedent had held the
phrase “telecommunications service” to have an unambiguous
meaning contrary to the regulation. Id. at 2700. And in this
case, the majority can point to no precedent that holds the
absence of a time restriction in section 882 unambiguously means
that there is no time restriction.
III.
Finding the regulation unreasonable under National Muffler,
even if section 882 is ambiguous, raises some very difficult
issues at the intersection of administrative and tax law. I
think the majority has erred, both in relying so heavily on the
disputed regulation’s change to existing law and in being so
skeptical about whether Brand X even applies to tax regulations,
majority op. p. 77. I also think those errors are examples of
how difficult some of these issues have proven to be for trial
courts conscientiously trying to follow their reviewing courts’
precedents. In the spirit of Eberhart v. United States, 546 U.S.
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___, 126 S. Ct. 403, 407 (2005), revg. 388 F.3d 1043 (7th Cir.
2004), I think it important not to hide these troublesome issues
and hope that their effects in this case will help those likely
to review our decision.
A.
The first issue is whether it is still correct to say, as we
did ten years ago, that
we are inclined to the view that the
impact of the traditional, i.e., National
Muffler standard, has not been changed by
Chevron, but has merely been restated in
a practical two-part test * * *
Central Pa. Sav. Association & Subs. v. Commissioner, 104 T.C.
384, 392 (1995) (quoted at majority op. p. 56). Both National
Muffler and Chevron do tell courts to review regulations for
their reasonableness. But the factors that each test tells us to
consider can be quite different.
National Muffler--at least as our Court has applied it--
requires a top-to-bottom review of the regulation to see if it is
in harmony with the “plain language of the statute, its origin,
and its purpose.” National Muffler, 440 U.S. at 477. It
requires us to consider whether a regulation:
is a substantially contemporaneous
construction of the statute by those
presumed to have been aware of
congressional intent. If the regulation
dates from a later period, the manner in
which it evolved merits inquiry. Other
relevant considerations are the length of
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time the regulation has been in effect,
the reliance placed on it, the consistency
of the Commissioner’s interpretation, and
the degree of scrutiny Congress has
devoted to the regulation during
subsequent re-enactments of the statute.
* * *
Id.National Muffler gives great weight to the consistency of an
agency’s position over time, consistency with judicial prece-
dent,10 and any reliance interest the public might have
developed. This makes a regulation that changes existing law
more likely to be invalidated. And this is logical--if a court
has to consider factors focusing on the Secretary’s justification
for changing his position, there will be some cases where they
will be decisive. See, e.g., Pac. First Fed. Sav. Bank v.
Commissioner, 94 T.C. 101 (1990) (discussed supra note 2).
Chevron review places substantially less emphasis on
justification for regulatory change. It expressly recognizes
that there can be a range of permissible alternatives, and
directs a court to decide only if the agency’s regulation is “a
permissible construction of the statute.” Chevron, 467 U.S. at
10
This seems to be a special concern for our Court. See,
e.g., Ga. Fed. Bank v. Commissioner, 98 T.C. 105, 114 (1992)
(later vacated and remanded) (regulations contrary to judicial
precedents “created a greater inconsistency than they resolved”);
Redlark, 106 T.C. at 57 (“The nuts and bolts of this case is that
the Commissioner continues to disagree with the pre-TRA judicial
view”); see also majority op. p. 63 (deference unwarranted where
Secretary has “total disregard to firmly established judicial
precedent”).
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843. After Chevron, “there is a range of permissible
interpretations * * * [and] the agency is free to move from one
to another, so long as the most recent interpretation is
reasonable its antiquity should make no difference.” Barnhart v.
Walton, 535 U.S. 212, 226 (2002) (Scalia, J., concurring in part
and concurring in judgment).
It’s important to recognize that, in most cases, applying
either National Muffler or Chevron will end up producing the same
result--when a statute is ambiguous, agencies do have
considerable leeway in devising regulations that clarify the law.
But the most important class of cases in which results under the
two tests diverge is the one into which this case falls--when an
agency writes a regulation that changes existing law, either in
the form of a previous regulation or judicial construction. The
Supreme Court has consistently held that Chevron allows such
reversals.11 Chevron is such an important case because it was so
explicit in recognizing that resolution of ambiguities in a
11
See, e.g., Brand X, 545 U.S. , 125 S. Ct. at 2699(2005) (agency reversal permissible as it is charged with
interpreting ambiguous statutes); Smiley v. Citibank (South
Dakota), N.A., 517 U.S. 735, 742 (1996) (prior contradictory
agency position is not fatal); Rust v. Sullivan, 500 U.S. 173,
186-187 (1991) (changing circumstances require that an agency’s
position not be “carved in stone”). Of course, such changes are
permissible under National Muffler too. (Indeed, National
Muffler involved a regulation that changed existing law. 440
U.S. at 481-483.) But they would seem to be less probable
because of the National Muffler factors that concentrate on
consistency in the law over time.
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statute is more “a question of policy than of law. * * * When
Congress, through express delegation or the introduction of an
interpretive gap in the statutory structure, has delegated
policy-making authority to an administrative agency, the extent
of judicial review of the agency’s policy determinations is
limited.” Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 696
(1991).
We have, in some cases at least, viewed the decision to
analyze a regulation under National Muffler as a mandate to
undertake a review of the Secretary’s legal analysis, construing
“reasonableness” under National Muffler almost as meaning “the
most reasonable construction.” Compare the majority’s analysis
in today’s Opinion to the minimal deference given regulations
under Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944): “The
weight * * * in a particular case will depend upon the
thoroughness evident in its consideration, the validity of its
reasoning, its consistency with earlier and later pronouncements,
and all those factors which give it the power to persuade, if
lacking power to control.”
This “hard look” deference simply doesn’t reflect the
contemporary understanding of administrative law that regulations
are a way to make policy choices, not just a way to interpret
ambiguous statutory phrases. I agree with the majority that the
judicial interpretations of section 882(c)(2) in the years before
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the regulation was issued are more in keeping with the actual
words of the Code than are the words of the regulation. But this
is due to the different competencies of judges and regulation
writers. Regulation writers are doing their jobs when they make
up safe harbors and lay down deadlines; for judges to do so--
instead of setting up fact-bound tests of “reasonableness”--looks
like an exercise of legislative or administrative, rather than
judicial, power.
My disagreement with the majority is not just a disagreement
about how to apply National Muffler. Instead, I think the
problem lies in a very subtle distinction between National
Muffler and Chevron--“reasonableness” using the National Muffler
factors is taken to mean “is the Secretary construing the statute
reasonably?,” while under Chevron it means “is the Secretary
behaving unreasonably by violating the statute in the course of
exercising his delegated authority to set policy?” Both cases
look to reasonableness,12 but in different ways. The majority’s
condemnation of the Secretary’s 18-month grace period, majority
12
The Supreme Court’s continuing citations to National
Muffler after Chevron all stand for this general proposition.
See Boeing Co. v. United States, 537 U.S. 437, 451 (2003); United
States v. Cleveland Indians Baseball Co., 532 U.S. 200, 219
(2001); Atl. Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 389
(1998); Commissioner v. Estate of Hubert, 520 U.S. 93, 127
(1997); Newark Morning Ledger Co. v. United States, 507 U.S. 546,
576 (1993); Cottage Sav. Assn. v. Commissioner, 499 U.S. 554,
560-561 (1991).
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op. p. 62 note 17, illustrates this. It rhetorically asks:
“Where that * * * rule came from, we do not know.” Majority op.
p. 62 note 17. The fact is that the Secretary routinely makes
tax law more certain by using his regulatory authority under
section 7805(a) to dredge safe harbors and stake well-defined
boundaries. See, e.g., sec, 1.401(a)(4)-2(b) Income Tax Regs.
There are undoubtedly hundreds more such instances scattered
throughout the five thick volumes of title 26 of the Code of
Federal Regulations. They (or at least most of them) survive
Chevron review because they are “permissible constructions” in
the sense that they don’t violate the Code, not in the sense that
they interpret the Code in the same way a judge using normal
canons of statutory interpretation would. If each of these
detailed regulations had to survive scrutiny by matching it up
against general statutory language and asking “where did this
come from?,” instead of “does the Code prohibit it?” today’s
Opinion would ignite a thoroughgoing revolution in tax law.
B.
This observation brings me to the next two issues today’s
decision raises--should regulations issued under section 7805(a)
receive Chevron deference? And what would such deference look
like?
The key text here is the famous passage from Chevron where
the Supreme Court said:
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If Congress has explicitly left a gap for the
agency to fill, there is an express delegation
of authority to the agency to elucidate a
specific provision of the statute by
regulation. Such legislative regulations are
given controlling weight unless they are
arbitrary, capricious, or manifestly contrary
to the statute. Sometimes the legislative
delegation to an agency on a particular
question is implicit rather than explicit. In
such a case, a court may not substitute its own
construction of a statutory provision for a
reasonable interpretation made by the
administrator of an agency.
467 U.S. at 843-44 (fn. refs. omitted).
What is an “express delegation of authority to the agency to
elucidate a specific provision of the statute by regulation?”
And what is the difference between reviewing a regulation to
decide whether it is “arbitrary, capricious, or manifestly
contrary to the statute” in contrast to a “reasonable
interpretation?”
I’ll discuss each in turn.
1.
The majority accurately states our Court’s general rule - if
the Secretary issues a regulation under section 7805(a), we call
it “interpretive” and analyze its validity under National
Muffler, but if the Secretary issues a regulation under a more
specific grant of authority, we call it “legislative,” and
analyze its validity under Chevron. Walton v. Commissioner, 115
T.C. 589, 597 (2002).
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Understanding the problem this causes requires a brief
introduction into the ambiguity of the terms “interpretive” and
“legislative” when used to describe regulations. In tax law,
“legislative” regulations are those issued by the Secretary under
a specific grant of authority in a particular Code section.
“Interpretive” regulations, on the other hand, are all those
regulations issued under the Secretary’s general authority to
prescribe all “needful rules and regulations.” See sec. 7805(a).
“Interpretive” regulations issued under sec. 7805(a) are,
however, almost always sent through notice-and-comment
rulemaking.13
In administrative law, these same terms mean something
different. Under the Administrative Procedure Act, “legislative
regulations” are those that create new legal duties binding on
the parties and the courts. Merrill & Watts, Agency Rules With
the Force of Law: The Original Convention, 116 Harv. L. Rev. 467,
477 (2002). They must generally be subjected to notice-and-
comment rulemaking. 5 U.S.C. sec. 553(b) (2000).
“Interpretative” regulations, in contrast, only clarify existing
13
Saltzman, IRS Practice & Procedure, 2d ed., par. 3.02[2];
sec. 601.601, Statement of Procedural Rules.
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duties; and they do not bind the public, and do not go through
notice-and-comment rulemaking.14
There can be little doubt that, in this classification, both
general and specific authority tax regulations are intended to
bind the public and have the force of law. The IRS and Treasury
use the same regulation-writing process for both general and
specific authority regulations, subjecting both to the same
painstaking review under the IRS’s “Regulation Drafting
Handbook,” I.R.M. 32.1.5. Both types are issued as Treasury
decisions, and both are signed by an Assistant Treasury Secretary
and the IRS Commissioner. And when the Code penalizes taxpayers
for “disregard of rules and regulations,” sec. 6662, it penalizes
them for disregard of either type of regulation. See sec.
1.6662-3(b)(2), Income Tax Regs.
Chevron’s distinction between explicit and implicit
congressional delegations of authority certainly doesn’t reflect
any difference between general and specific authority
regulations. The Court there cited to four cases as examples of
14
The confusing nomenclature prompted one academic to
propose calling Treasury regulations issued under section 7805
“general authority” regulations, and Treasury regulations issued
under other sections “specific authority” regulations.
Coverdale, “Court Review of Tax Regulations and Revenue Rulings
in the Chevron Era,” 64 Geo. Wash. L. Rev. 35, 55 (1995). I
adopt this convention for the remainder of this Opinion.
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“express delegations.” Chevron, 467 U.S. at 844 n.12. But look
at the statutes involved
! 42 U.S.C. § 607(a): whether a child “has been
deprived of parental support or care by reason of
the unemployment (as determined in accordance with
standards prescribed by the Secretary),” Batterton
v. Francis, 432 U.S. 416, 419 (1977);
! 42 U.S.C. § 1396a(a)(17)(B): “taking into account
only such income and resources as are, as
determined in accordance with standards prescribed
by the Secretary, available to the applicant,”
Schweiker v. Gray Panthers, 453 U.S. 34, 43-44
(1981);
! Communications Act of 1934, § 200: “The
Commission may, in its discretion, prescribe the
forms of any and all accounts, records, and
memoranda,” AT&T v. United States, 299 U.S. 232,
235 (1936); and
! 25 U.S.C. § 9: “The President may prescribe such
regulations as he may think fit for carrying into
effect the various provisions of any act relating
to Indian affairs, and for the settlement of the
accounts of Indian affairs,” Morton v. Ruiz, 415
U.S. 199, 231 n.25 (1974).
The first two delegations are the kind that tax lawyers
would say lead to “legislative” regulations--they are delegations
of authority to fill in a gap in one particular section of a
statute. But the second two delegations are entirely as broad as
section 7805(a)’s power to make “all needful rules and
regulations under this title.”
To make the contrast sharper, consider the two cases cited
by the Court in Chevron as examples of a “legislative delegation
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to an agency on a particular question [that] is implicit rather
than explicit”
! INS v. Jong Ha Wang, 450 U.S. 139, 140 (1981),
analyzing reviewability of the Attorney General’s
decision to suspend deportation of an illegal
alien under 8 U.S.C. § 1254(a)(1) if it would
“result in extreme hardship * * *,” and
! Train v. NRDC, 421 U.S. 60, 67 (1975) analyzing
reviewability of the EPA Administrator’s approval
of a state’s Clean Air Act plan under 42 U.S.C.
§ 1857c(5)(a)(2) requiring him to approve a plan
“if he determines that it was adopted after
reasonable notice and hearing.”
Neither of these two cases involved direct review of
regulations at all, but instead were reviews of individual
decisions by agencies in the course of which they had to construe
disputed statutory terms.
In short, I think that the contrast that Chevron made was
between review of regulations put through notice-and-comment
rulemaking, and construction of statutory terms in the course of
administrative adjudication.15 Reading Chevron this way makes
sense when one considers the Administrative Procedure Act itself,
which tells courts to use one standard in reviewing formal
regulations--are they “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law?,” 5 U.S.C.
§ 706(2)(A), see Motor Vehicle Manufacturers Association of
15
This is the consensus view in nontax fields. See
Cunningham & Repetti, “Textualism and Tax Shelters,” 24 Va. Tax
Rev. 1, 43-45 (2004).
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United States, Inc. v. State Farm, 463 U.S. 29, 41-45 (1983); and
another standard in reviewing administrative adjudications--are
they “unsupported by substantial evidence?,” 5 U.S.C. § 706(2)(E)
(which has been interpreted as going to “the reasonableness of
what the agency did,” United States v. Carlo Bianchi & Co., 373
U.S. 709, 715 (1963) (emphasis added)).
Mead makes this clearer--it says that the Court has
“recognized a very good indicator of delegation meriting Chevron
treatment in express congressional authorizations to engage in
the process of rulemaking or adjudication that produces
regulations.” 533 U.S. at 229 (2001). It then lists, among
other cases to prove that point, Atlantic Mut. Ins. Co v.
Commissioner, 523 U.S. 382 (1998), a case in which we were
reversed after invalidating a regulation issued under section
7805(a).16
16
Mead, 533 U.S. at 230 n.12. Many, perhaps most, of the
cases cited in that footnote involve general authority
regulations. E.g. Shalala v. Ill. Council on Long Term Care,
Inc., 529 U.S. 1 (2000)[issued under 42 U.S.C. sec. 1395cc(b)(2)
(“Secretary may [act] * * * as may be specified in
regulations”)]; United States v. Haggar Apparel Co., 526 U.S. 380(1999)[issued under 19 U.S.C. sec. 1502(a) (Secretary may
“establish and promulgate such rules and regulations not
inconsistent with the law”)]; AT&T Corp. v. Ia. Util. Bd., 525
U.S. 366 (1999)[issued under 47 U.S.C. sec. 201(b) (“Commissioner
may prescribe such rules and regulations as may be necessary”)];
United States v. O’Hagan, 521 U.S. 642 (1997)[issued under 15
U.S.C. sec. 78j(b) (authorizing “rules and regulations as the
[SEC] Commissioner may prescribe as necessary or appropriate”)];
Am. Hospital Assn. v. NLRB, 499 U.S. 606 (1991)[issued under 29
(continued...)
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After Mead, I don’t think it possible to draw distinctions
between the deference owed tax regulations issued under section
7805(a) and those issued under more specific authority.17 See
Boeing Co. v. United States, 537 U.S. 437, 448 (2003) (dismissing
dispute over distinctions between general and specific authority
regulations because both must be treated with deference).
If applying Chevron instead of National Muffler would lead
to a different result, this discussion might still not matter--
National Muffler (and the pre-Chevron cases that relied on it,
United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982); Rowan
Cos. v. United States, 452 U.S. 247 (1981) were all tax cases,
16
(...continued)
U.S.C. sec. 156 (“authority from time to time to make, amend, and
rescind * * * such rules and regulations as may be necessary”)];
Sullivan v. Everhart, 494 U.S. 83 (1990)[issued under 42
U.S.C.(a) 401 et seq. (Secretary authorized to “make rules and
regulations and to establish procedures not inconsistent with
this subchapter, which are necessary”)]; Massachusetts v. Morash,
490 U.S. 107 (1989)[issued under 29 U.S.C. sec. 1135 (“the
Secretary may prescribe such regulations as he finds necessary or
appropriate”)]; K Mart Corp. v. Cartier, Inc., 486 U.S. 281(1988)[issued under 19 U.S.C. sec. 1526(d)(4) (“Secretary may
prescribe such rules and regulations as may be necessary”)].
17
See also Vermuele, “Mead in the Trenches,” 71 Geo. Wash.
L. Rev. 347, 350 (2003) (notice-and-comment rulemaking a safe-
harbor category); but see Coke v. Long Island Care at Home, Ltd.,
376 F.3d 118, 132 n.5 (2d Cir. 2004); Merrill, “The Mead
Doctrine: Rules and Standards, Meta-Rules, and Meta-Standards,”
54 Admin. L. Rev. 807, 814-15 (2002) (notice-and-comment
rulemaking begets Chevron deference only if regulation intended
to have force of law). (That distinction wouldn’t matter here,
because general authority tax regulations are intended to have
the force of law.)
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and the rule is that we are bound to follow the cases that more
directly control until and unless they are expressly overruled.
Agostini v. Felton, 521 U.S. 203 (1997), quoted by Eberhart, 388
F.3d at 1049.
But our Court has a special problem in trying to find the
precedents it should follow--appeals from our decisions go to
twelve different courts of appeal, and the question of what
review a general authority regulation issued under section 7805
should get has already led to divergent results. Some of our
reviewing courts have concluded that general authority
regulations don’t qualify for Chevron deference, and some have
concluded that they qualify only as an implicit delegation on a
particular question and read Chevron as silently incorporating
National Muffler and its factors as a test of “reasonableness.”
And some read Chevron as requiring review of general authority
regulations under an arbitrary-and-capricious standard.
The resulting circuit split was noted as long ago as 1998.
See Bankers Life and Casualty Co. v. United States, 142 F.3d 973,
982 (7th Cir. 1998). And it seems only to have become more
pronounced:
! Second Circuit--Gen. Elec. Co. v. Commissioner,
245 F.3d 149, 154 n.8 (2001) (noting conflict but
not taking sides)
! Third Circuit--E.I. du Pont de Nemours & Co. v.
Commissioner, 41 F.3d 130, 135-36 and n.23 (1994)
(less deference to general authority regulations,
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but leaving open possibility of considering the
question); see also the nontax cases Cleary v.
Waldman, 167 F.3d 801, 807 (1999) (Chevron
deference applies to notice-and-comment rules);
Elizabeth Blackwell Health Center for Women v.
Knoll, 61 F.3d 170, 190 (1995) (interpretive rules
get only Skidmore deference);
! Fourth Circuit--Snowa v. Commissioner, 123 F.3d
190, 197 (1997) (general authority regulations get
National Muffler review under Chevron);
! Fifth Circuit--Nalle v. Commissioner, 997 F.2d
1134, 1138 (1993) (National Muffler review rather
than Chevron);
! Sixth Circuit--Peoples Fed. Sav. & Loan
Association. of Sidney v. Commissioner, 948 F.2d
289, 300 (1991) (Chevron review for
“reasonableness”); Hospital Corp. of Am. & Subs.
v. Commissioner, 348 F.3d 136, 141 (2004);
! Seventh Circuit--Bankers Life & Cas. Co. v. United
States, 142 F.3d 973, 983 (1998) (Chevron review
for “reasonableness”);
! Eighth Circuit--United States v. Tucker, 217 F.3d
960, 965 (2000) (National Muffler review)
! Ninth Circuit--Redlark v. Commissioner, 141 F.3d
936, 940 (1998) (Chevron arbitrary-and-capricious
review);
! Tenth Circuit--In re Craddock, 149 F.3d 1249, 1258
(1998) (National Muffler review)
! Eleventh Circuit--Beard v. United States, 992 F.2d
1516, 1520-21 (1993) (Chevron arbitrary-and-
capricious review);
! D.C. Circuit--Tax Analysts v. Commissioner, 350
F.3d 100, 102-03 (2003) (Chevron review); and
! Fed. Circuit--Schuler Indus. Inc. v. United
States, 109 F.3d 753, 755 (1997) (National Muffler
deference)
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2.
How would review of this regulation look under Chevron?
Here again, I think that Mead has clarified the law, by
conflating the standard of “reasonableness” with the standard of
“arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” See Mead, 533 U.S. at 229.18
On what “reasonableness” means in the post-Mead world, I
generally agree with Judges Swift and Halpern.19 The question is
one of line-drawing, and substituting an 18-month rule for an
indeterminate and case-by-case consideration of the facts
certainly seems reasonable. It does nothing more than substitute
more definite deadlines for less definite ones and allows the
Commissioner to trigger them by sending a notice rather than
filing a substitute return.
18
See also Sunstein, Law and Administration after Chevron,
90 Colum. L. Rev. 2071, 2093 (1990) (“Chevron might be taken to
suggest that whenever an agency is entrusted with implementing
power--whether to be exercised through rulemaking or
adjudication--agency interpretations in the course of exercising
that power are entitled to respect so long as they are
reasonable”). See also CHW West Bay v. Thompson, 246 F.3d 1218,
1223 (9th Cir. 2001) (summarizing caselaw on Chevron step two as
requiring reasonableness in substantive interpretation and in the
process of making the decision).
19
There is an extensive commentary on Chevron step-two
standards. See Polsky, “Can Treasury Overrule the Supreme
Court?,” 84 B.U.L. Rev. 185, 192 (2004); Cunningham & Repetti,
supra n.15, 24 Va. Tax Rev. at 49.
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I will only add a cite to Motor Vehicle Mfrs. Assn. of the
United States, Inc. v. State Farm, 463 U.S. 29 (1983). In that
case, the Supreme Court wrote that a regulation was arbitrary and
capricious if:
the agency has relied on factors which Congress
has not intended it to consider, entirely
failed to consider an important aspect of the
problem, offered an explanation for its
decision that runs counter to the evidence
before the agency, or is so implausible that it
could not be ascribed to a difference in view
or the product of agency expertise.* * *
Id. at 43; see also Sunstein, 90 Colum. L. Rev. at 2104-2105.
That is of course far from what happened here. The
Secretary faced an ambiguous phrase in a Code section,
unambiguously aimed at giving foreign corporations a major
incentive to file their returns. He also learned by experience
that some taxpayers would wait to file until a notice of
deficiency was issued, Anglo-American, 38 B.T.A. 711, or would
file only after starting a case in this Court, Blenheim, 125 F.2d
906, or would refuse to file even after a revenue agent came
calling, Ardbern, 120 F.2d 424. To issue a regulation with a
fixed grace period and provision for exceptions reflected
experience, failed to consider no aspect of the problem, and ran
counter to no reasonable evidence before him. The regulation did
change existing law, but under Chevron and Brand-X, the Secretary
should be allowed to “change the law”--even if the law is our
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caselaw--by regulation, vetted by notice-and-comment, and tested
against only a very liberal notion of reasonableness.
I respectfully dissent.
Swift, J., agrees with this dissenting opinion.