# Swallows Holding, Ltd. v. Commissioner

> United States Tax Court · January 26, 2006 · 126 T.C. No. 6

URL: https://www.frixlaw.com/law-library/cases/4335783

## Case

- **Court:** United States Tax Court
- **Decided:** January 26, 2006
- **Citations:** 126 T.C. No. 6
- **Opinion:** Opinion
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

126 T.C. No. 6

UNITED 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.
-2-

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.
-3-

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.
-4-

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.
-5-

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.]
-6-

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.
-7-

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.
-8-

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.
-9-

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
-10-

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.
-11-

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).
-12-

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.
-13-

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.
-14-

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
-15-

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.
-16-

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
-17-

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.
-18-

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
-19-

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.
-20-

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.
-21-

(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.
-22-

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
-41-

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).
-44-

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.
-47-

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
-50-

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
-62-

“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...)
-63-

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).
-68-

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.
-69-

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
-70-

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.
-71-

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.
-72-

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
-73-

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.,
-74-

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 concl

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4335783. Public record. Not legal advice.