438
Syllabus
Company Sponsored costs as directly related to a single program and unrelated to any other program. Because nearly half of the Company Sponsored R&D at issue was allocated to programs that had no sales in the year in which the research was conducted, that amount was deducted by Boeing currently in calculating its taxable income for the years at issue, but never affected the calculation of the CTI derived by Boeing and its DISC from export sales. The Internal Revenue Service reallocated Boeing's Company Sponsored R&D costs for 1979 to 1987, thereby decreasing the untaxed profits of its export subsidiaries and increasing its taxable profits on export sales. After paying the additional taxes, Boeing filed this refund suit. In granting Boeing summary judgment, the District Court found § 1.861-8(e)(3) invalid, reasoning that its categorical treatment of R&D conflicted with congressional intent that there be a direct relationship between items of gross income and expenses related thereto, and with a specific DISC regulation giving the taxpayer the right to group and allocate income and costs by product or product line. The Ninth Circuit reversed.
Held: Section 1.861-8(e)(3) is a proper exercise of the Secretary of the
Treasury's rulemaking authority. Pp. 446-457.
(a) The relevant statutory text does not support Boeing's argument that the statute and certain regulations give it an unqualified right to allocate its Company Sponsored R&D expenses to the specific products to which they are factually related and to exclude such R&D from treatment as a cost of any other product. The method that Boeing chose to determine an export sale's transfer price allowed the DISC "to derive taxable income attributable to [an export sale] in an amount which does not exceed . . . 50 percent of the combined taxable income of [the DISC and the parent] which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts . . . ." 26 U. S. C. § 994(a)(2) (emphasis added). The statute does not define "combined taxable income" or specifically mention R&D expenditures. The Secretary's regulation must be treated with deference, see Cottage Savings Assn. v. Commissioner, 499 U. S. 554, 560- 561, but the statute places some limits on the Secretary's interpretive authority. First, "does not exceed" places an upper limit on the share of the export profits that can be assigned to a DISC and gives three methods of setting the transfer price. Second, "combined taxable income" makes it clear that the domestic parent's taxable income is a part of the CTI equation. Third, "attributable" limits the portion of the domestic parent's taxable income that can be treated as a part of the CTI. The Secretary's classification of all R&D as an indirect cost of all export
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