Cite as: 537 U. S. 437 (2003)
Opinion of the Court
method of accounting for $3.6 billion of "Company Sponsored" R&D gave rise to this litigation.
Boeing's accountants treated all of the Company Sponsored research costs as directly related to a single program, and as totally unrelated to any other program. Thus, for DISC purposes, the cost of Company Sponsored R&D directly related to the 767 model, for example, had no effect on the calculation of the "combined taxable income" produced by export sales of any other models. Moreover, because immense Company Sponsored research costs were routinely incurred while a particular model was being completed and before any sales of that model occurred, those costs effectively "disappeared" in the calculation of the CTI even for the model to which the R&D was most directly related.10
Almost half of the $3.6 billion of Company Sponsored R&D at issue in this suit was allocated to programs that had no sales in the year in which the research was conducted. That amount (approximately $1.75 billion) was deducted by Boeing currently in the calculation of 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.
Pursuant to an audit, the Internal Revenue Service reallocated Boeing's Company Sponsored R&D costs for the years 1979 to 1987, thereby decreasing the untaxed profits of its export subsidiaries and increasing the parent's taxable profits from export sales. Boeing paid the additional tax obligation of $419 million and filed this suit seeking a refund. Relying on the decision of the Eighth Circuit in St. Jude Medical, Inc. v. Commissioner, 34 F. 3d 1394 (1994), the District Court entered summary judgment in favor of Boeing. It held that 26 CFR § 1.861-8(e)(3) (1979) is invalid as applied to DISC and FSC transactions because the regulation's cate-10 When Boeing charged R&D costs to programs that had no sales in the year the research was conducted, the R&D costs effectively "disappeared" in the sense that they were not accounted for by Boeing in computing its CTI.
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