Cite as: 537 U. S. 437 (2003)
Opinion of the Court
26 U. S. C. § 174. The regulation at issue here, 26 CFR § 1.861-8(e)(3) (1979), deals with R&D expenditures for which the taxpayer has taken a current deduction. It tells the taxpaying parent and its DISC "what" must be treated as a cost when calculating CTI, and "how" those costs should be (a) allocated among different products and (b) apportioned between the DISC and its parent.7
With respect to the "what" question, the Treasury might have adopted a broad approach defining the relevant R&D as including all of the parent's products, or a narrow approach defining the relevant R&D as all R&D directly related to a particular product being exported. Instead, the regulation includes a list of two-digit Standard Industrial Classification (SIC) categories (examples are "chemicals and allied products" and "transportation equipment"), and it requires that R&D for any product within the same category as the exported product be taken into account.8 See ibid. The regulation explains that R&D on any product "is an inherently speculative activity" that sometimes contributes unexpected benefits on other products, and "that the gross income derived from successful research and development must bear the cost of unsuccessful research and development." Ibid.
With respect to the two "how" questions, the regulations use gross receipts from sales as the basis both for allocating the costs among the products within the broad R&D categories and also for apportioning those costs between the parent and the DISC. Thus, if the exported product constitutes 20 percent of the parties' total sales of all products within an
7 Treasury Regulation § 1.861-8 (1979) also specifies how other specific items of expense should be treated. See, e. g., 26 CFR § 1.861-8(e)(2) (1979) (interest fees); § 1.861-8(e)(5) (legal and accounting fees); § 1.861- 8(e)(6) (income taxes).
8 The original regulation used two-digit SIC categories. See § 1.861- 8(e)(3). The current regulation uses narrower three-digit SIC categories, see 26 CFR § 1.861-17(a)(2)(ii) (2002), but the change is not relevant to this suit.
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