Cite as: 537 U. S. 437 (2003)
Thomas, J., dissenting
while general R&D expenses were "definitely related" to gross income resulting from sales of all three types of engines, R&D expenses in connection with a specific type of engine were to be allocated only to gross income arising from sales of that type of engine. Id., at 15846 ("X's deductions for its research and development expenses in connection with the 4 cylinder engine are definitely related to the gross income to which the 4 cylinder engine gives rise, i. e., gross income from the sales of 4 cylinder engines . . .").
Indeed, the IRS' 1974 position on the proper allocation of R&D expenses incurred in connection with separate lines of products is the only one that makes sense under the relevant DISC regulations. See, e. g., 26 CFR §§ 1.994-1(c)(6), (7) (1979). As the Court explains, ante, at 440, 26 U. S. C. § 994 was designed to provide special tax treatment for American companies engaged in export activities. To that end, § 994 permits a DISC and its related supplier to compute their relevant transfer price (and, relatedly, their income tax liability) based on one of three methods. See § 994 (providing that the transfer price for sales between a DISC and a related supplier can be computed based on (1) the gross income method, (2) the combined taxable income method, and (3) the usual transfer-pricing rules set forth in § 482).
The Treasury Department has promulgated regulations explaining how the statutory framework must be applied. Section 1.994-1(c)(7) of those regulations explains that, as a general rule, a determination of the transfer price under § 994 is to be made on a transaction-by-transaction basis. Section 1.994-1(c)(7), however, provides that, instead of following the transaction-by-transaction rule, taxpayers may make § 994 transfer price determinations based on groups consisting of products or product lines. § 1.994-1(c)(7)(i). Specifically, the regulation states:
"A determination by a taxpayer as to a product or a product line will be accepted by a district director if
459
Page: Index Previous 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NextLast modified: October 4, 2007