Guardian Industries Corp. v. Commissioner

REPORTS

OF THE

UNITED STATES TAX COURT

GUARDIAN INDUSTRIES CORP., PETITIONER v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT

Docket No. 20755–12. Filed July 17, 2014.

I.R.C. section 162(f) denies a deduction for ‘‘any fine or

similar penalty paid to a government for the violation of any

law.’’ Section 1.162–21(a), Income Tax Regs., provides that the

term ‘‘government’’ includes a ‘‘corporation or other entity

serving as an agency or instrumentality’’ of a domestic or for-

eign government. In 2008 P, a U.S. corporation, paid a fine to

the Commission of the European Community (Commission)

for participating in a price-fixing cartel that violated the com-

petition provisions of European Community (EC) law. P sub-

sequently claimed a deduction for this payment on its 2008

Federal income tax return. R disallowed the claimed deduc-

tion under I.R.C. section 162(f), contending that the Commis-

sion is an instrumentality of the government of a foreign

country within the meaning of section 1.162–21(a), Income

Tax Regs.

1. Held: The phrase ‘‘government of a foreign country,’’ as

used in section 1.162–21(a), Income Tax Regs., may refer both

to the government of a single foreign country and to the

governments of two or more foreign countries.

2. Held, further, the Commission is an entity serving as an

instrumentality of the EC member states within the meaning

of section 1.162–21(a)(2) and (3), Income Tax Regs.

3. Held, further, P’s claimed deduction for the fine paid to

the Commission was properly disallowed under I.R.C. section

162(f).

Allen Duane Webber, Jaclyn J. Pampel, Summer M. Aus-

tin, and Katie M. Marcusse, for petitioner.

Dennis M. Kelly, Heather L. Lampert, and Robert M. Morri-

son, for respondent.

OPINION

LAUBER, Judge: Following an examination of petitioner’s

Federal income tax returns for 2005–08, the Internal Rev-

enue Service (IRS or respondent) determined tax deficiencies

1

2 143 UNITED STATES TAX COURT REPORTS (1)

and accuracy-related penalties under section 6662(a). 1 After

concessions, the remaining substantive issue concerns the

deductibility of a Ö20 million payment that petitioner made

in 2008 to the Commission of the European Community

(Commission). 2 The IRS disallowed a deduction for this pay-

ment under section 162(f), which provides that ‘‘[n]o deduc-

tion shall be allowed * * * for any fine or similar penalty

paid to a government for the violation of any law.’’ The par-

ties have filed cross-motions for partial summary judgment

on this point.

Petitioner does not dispute that the Ö20 million payment

was a ‘‘fine or similar penalty’’ or that this payment was

made ‘‘for the violation of * * * [a] law.’’ The question the

parties have submitted for resolution by summary judgment

is whether the payment was made ‘‘to a government.’’ The

answer depends on whether the European Community (EC),

and specifically the Commission, is an ‘‘agency or instrumen-

tality’’ of ‘‘[t]he government of a foreign country’’ within the

meaning of section 1.162–21(a), Income Tax Regs.

We hold that the term ‘‘government of a foreign country’’

as used in this regulation can refer to a single government

or to multiple governments and thus embraces the govern-

ments of the EC member states. We further hold that the

EC, and specifically the Commission, is an ‘‘instrumentality’’

of the EC member states considered individually and collec-

tively. We believe these holdings to be consistent with a

recent opinion of the U.S. Court of Appeals for the Second

Circuit, which holds that the EC is an ‘‘agency or instrumen-

tality of a foreign state’’ for purposes of the Foreign Sov-

ereign Immunities Act (FSIA), 28 U.S.C. sec. 1603(b) (2006).

See European Cmty. v. RJR Nabisco, Inc., 764 F.3d 129 (2d

Cir. 2014), vacating 814 F. Supp. 2d 189 (E.D.N.Y. 2011).

Concluding as we do that the Ö20 million fine was non-

1 Unless

otherwise indicated, all statutory references are to the Internal

Revenue Code in effect for the tax years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure. We round all mone-

tary amounts to the nearest dollar.

2 The parties filed a stipulation of settled issues resolving the other sub-

stantive issue, concerning petitioner’s subpart F foreign base company

services income. Upon disposition of the pending motions, the only out-

standing matters will be the accuracy-related penalties and computational

adjustments.

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 3

deductible under section 162(f) because it was paid to an

‘‘instrumentality’’ of the ‘‘government of a foreign country,’’

we will grant respondent’s motion for partial summary judg-

ment and deny petitioner’s motion.

Background

The following facts are not in dispute and are derived prin-

cipally from the pleadings, the stipulation of facts, and the

related exhibits. At the time petitioner filed its petition, its

principal place of business was in Michigan. 3

The EC was established in 1958 pursuant to the Treaty

Establishing the European Economic Community (EC

Treaty). 4 The EC was created to accomplish common objec-

tives that could not be efficiently achieved by individual

action of the member states. The European Union (EU) came

into existence in 1993 with the Treaty on European Union.

During 2008 the EC had 27 member states and was one of

several entities collectively constituting the EU, with a sepa-

rate legal personhood distinct from the EU. 5

3 The parties submitted an extensive stipulation of facts with attached

exhibits that deals comprehensively with relevant aspects of EC law.

Where necessary, we have consulted resources outside the stipulation to

provide a fuller picture. See Rule 146 (‘‘The Court’s determination [of for-

eign law] shall be treated as a ruling on a question of law.’’); Greene v.

Commissioner, 85 T.C. 1024, 1026 n.3 (1985) (determining that the Court

is not bound by the stipulations of the parties as to matters of law); Curtis

v. Beatrice Foods Co., 481 F. Supp. 1275, 1285 (S.D.N.Y. 1980) (‘‘[F]ederal

judges may reject even the uncontradicted conclusions of an expert witness

and reach their own decisions on the basis of independent examination of

foreign legal authorities.’’), aff ’d without published opinion, 633 F.2d 203

(2d Cir. 1980).

4 We cite the consolidated version of the Treaty on European Union and

of the Treaty Establishing the European Community, C 321 E/1.

5 In 2009 the Lisbon Treaty incorporated the EC, along with other Euro-

pean bodies, into the EU. See Treaty of Lisbon Amending the Treaty on

European Union and the Treaty Establishing the European Community,

Dec. 13, 2007, 2007 O.J. (C 306). The EC continued to operate as it had

previously, but after 2009 it was no longer an independent entity. See

Brian F. Havel & Gabriel S. Sanchez, ‘‘Restoring Global Aviation’s ‘Cos-

mopolitan Mentalite´,’ ’’ 29 B.U. Int’l L.J. 1, 3 n.2 (2011) (‘‘While some schol-

ars have labored in the past to keep the European Union conceptually sep-

arate from the European Community, with the former referring to a geo-

graphic and political territory and the latter designating a source of law

Continued

4 143 UNITED STATES TAX COURT REPORTS (1)

Under the EC Treaty, shared objectives were to be imple-

mented by the EC acting alone, by the EC and the member

states sharing competences, or by the EC’s undertaking to

support, coordinate, or supplement actions of the individual

member states. The EC Treaty defines the EC’s areas of

authority and limits its powers to act outside those areas.

See EC Treaty art. 5. As relevant to this Opinion, the institu-

tional framework created to implement the goals of the EC

consists of the Parliament, the Council, and the Commission,

along with the Court of Justice and the Court of Auditors. Id.

art. 7.

The Parliament, a semi-legislative body, consists of rep-

resentatives directly elected by the citizens of the member

states. The Council is a legislative body composed of govern-

ment ministers from each member state who are authorized

to commit their respective governments. Id. art. 203. The

Council exercises, jointly with the Parliament, legislative and

budgetary functions. See id. arts. 161, 202. However, the

Council and the Parliament generally exercise their decision-

making power only upon the basis of a proposal from the

Commission.

The Commission functions in effect as the EC’s executive

branch. It consists of a President from one member state,

who is nominated by the Council and approved by the Par-

liament, and a commissioner from each other member state.

The latter must be approved by the Parliament and by the

Council, which appoints each Commission member to a five-

year term. Id. art. 214. Commission members are required to

be completely independent in the performance of their duties,

which means that they must act solely on behalf of the EC

and not on behalf of any individual member state or the

government thereof. Individual Commission members can be

removed only for cause, by the Court of Justice upon proper

application by the Council or the Commission. See id. art.

216.

To further economic unity and the goal of a well-regulated

common market, the EC Treaty tasks the Commission with

enforcing rules governing competition and free trade. These

include rules that bar price-fixing, abusive market positions,

and mergers that violate competition mandates. See id. arts.

and policy, * * * [the Lisbon Treaty] abolished this distinction.’’).

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 5

81, 82, 85. As in effect during 2008, 6 EC Treaty article 81

restricted (among other things) actions that directly or

indirectly fixed the purchase or selling prices of goods. On

application of a member state or on its own initiative, the

Commission was authorized to investigate cases of suspected

infringement of article 81; propose measures to bring the

infringement to an end; and, if the infringement continued,

record the infringement in a decision. Id. art. 85. A Commis-

sion decision addressing competition or free trade violations

is binding upon all those to whom it is addressed. EC Treaty

art. 249.

During 2008 the relationship between the Commission and

the competition authorities of the member states was gov-

erned by a regulation enacted by the Council in 2002. See

Regulation No. 1/2003, 2003 O.J. (L 1) 1. Under this regula-

tion, responsibility for enforcing EC competition rules, pre-

viously exercised by the Commission alone, was shared

between the Commission and national authorities. National

authorities and national courts were thenceforth required to

apply EC Treaty articles 81 and 82 in individual cases. Regu-

lation 1/2003 arts. 3, 5, 6. They were also empowered to

impose liability on infringing parties and decree remedies

based on EC as well as national law, provided the application

of national law did not prejudice the uniform application of

EC rules governing competition.

Regulation 1/2003 requires the Commission and national

authorities to apply EC competition law in ‘‘close coopera-

tion.’’ Id. art. 11(1). To achieve this goal, the regulation

established the European Competition Network (ECN), con-

sisting of the Commission and national competition agencies.

Participants in the ECN were encouraged to pool experience,

share information, conduct joint investigations, and allocate

resources in an efficient manner. 7

6 After 2008 articles 81 and 82 were replaced by articles 101 and 102.

Treaty on the Functioning of the European Union, 2008 O.J. (C 115) 47.

7 An EC Notice issued in 2004 explained the objectives of the ECN. See

Commission Notice on Cooperation within the Network of Competition Au-

thorities, 2004 O.J. (C 101) 43:

Together the * * * [national authorities] and the Commission form a

network of public authorities: they act in the public interest and cooper-

ate closely in order to protect competition. The network is a forum for

Continued

6 143 UNITED STATES TAX COURT REPORTS (1)

The Commission is authorized to conduct necessary inspec-

tions, with the aid of national authorities, by entering places

of business, examining books and records, and sealing busi-

ness premises. Id. art. 20. Businesses are required to submit

to these inspections. If a business opposes an inspection, the

relevant member state is required to provide the Commission

with any needed assistance, including the assistance of the

state’s police power.

Although Regulation 1/2003 permits national authorities to

bring infringement actions, the Commission has a right of

first refusal to commence its own proceeding. A national

authority must inform the Commission in writing before

taking any formal steps toward conducting its own investiga-

tion. If the Commission does not act at that time, the rel-

evant national authority, before issuing any decision con-

cerning infringement, must inform the Commission of the

impending decision. The Commission again has the option

(rarely exercised at this juncture) to commence a proceeding

of its own. The Commission’s initiation of proceedings

relieves national authorities of their competence to apply EC

competition rules to the matter. Once the Commission issues

a decision, national authorities and courts are barred from

taking any action inconsistent with its decision. Id. arts. 3,

11, 16.

After beginning a proceeding, the Commission continues to

share information with relevant national authorities and

may consult in a collaborative manner with the Council or

the Parliament. 8 Before recording a decision finding infringe-

ment, the Commission confers with the Advisory Committee

on Restrictive Practices and Dominant Positions, composed of

representatives of national authorities of the member states.

discussion and cooperation in the application and enforcement of EC

competition policy. It provides a framework for the cooperation of Euro-

pean competition authorities in cases where Articles 81 and 82 of the

Treaty are applied and is the basis for the creation and maintenance of

a common competition culture in Europe.

8 ‘‘[T]he Commission would be foolish to ignore the inter-institutional

context within which all European policy is made. It should come as no

surprise to find, therefore, that the Commission has often encouraged par-

liamentary and Council involvement where formally none was necessary.’’

Michelle Cini & Lee McGowan, Competition Policy in the European Union

44 (2009).

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 7

Member states, through this committee, may have their opin-

ions heard, but they cannot override the Commission’s deci-

sion or dictate the final outcome.

Commission decisions are ultimately enforced by national

authorities. EC Treaty art. 256. National authorities are

required to enforce Commission decisions with no formality

other than verification of the decision’s authenticity, without

modifying the decision or limiting its scope. Ibid. Following

this verification, the Commission can proceed to seek enforce-

ment of its decision, in accordance with the law of the

member state, by bringing the matter before the relevant

national tribunal.

This case arises from an investigation that the Commission

conducted of Guardian Industries Corp. (Guardian) and its

wholly owned Luxembourg subsidiary, Guardian Europe

S.a`.r.l. (Guardian Europe). Guardian and Guardian Europe

manufactured and sold float glass, fabricated-glass products,

fiberglass insulation, and other building materials to cus-

tomers in Europe and elsewhere. In 2004 a group of glass

producers and suppliers approached petitioner with a view to

discussing and agreeing on prices and price increases for

glass products. The Commission suspected that these compa-

nies were fixing prices of their products and initiated an

investigation into this suspected anticompetitive behavior.

In November 2007 the Commission concluded its investiga-

tion and issued a decision determining that Guardian and

Guardian Europe had participated in a cartel that infringed

the competition provisions of EC Treaty article 81 by fixing

prices. In December 2007 the Commission notified Guardian

and Guardian Europe of its decision and advised that they

were jointly and severally liable for a fine of Ö148 million. In

March 2008 petitioner paid the Commission Ö20 million;

Guardian Europe paid the Commission Ö91 million; and the

two companies provided the Commission a guaranty covering

the remaining Ö37 million. Neither the payment by Guardian

Europe nor the guaranty is at issue here.

Guardian timely filed its Federal income tax return for

2008. On its return Guardian deducted the payment it made

to the Commission, which was $30,260,000 when converted

to dollars at the relevant exchange rate. Following an exam-

ination, the IRS sent petitioner a notice of deficiency dis-

allowing this deduction under section 162(f).

8 143 UNITED STATES TAX COURT REPORTS (1)

Discussion

I. Summary Judgment Standard

The purpose of summary judgment is to expedite litigation

and avoid unnecessary and expensive trials. See FPL Grp.,

Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We

may grant summary judgment when there is no genuine dis-

pute of material fact and a decision may be rendered as a

matter of law. Rule 121(b); Elec. Arts, Inc. v. Commissioner,

118 T.C. 226, 238 (2002). The parties agree on all questions

of basic fact and have expressed that consensus by filing

cross-motions for partial summary judgment. We conclude

that the question presented is appropriate for summary adju-

dication.

II. Governing Statutory Framework

Section 162(a) permits taxpayers to deduct ‘‘all the ordi-

nary and necessary expenses paid or incurred during the tax-

able year in carrying on any trade or business.’’ Section

162(f) excepts from this general rule ‘‘any fine or similar pen-

alty paid to a government for the violation of any law.’’ The

parties have stipulated that Guardian’s payment to the

Commission constitutes a ‘‘fine or similar penalty paid * * *

for the violation of [a] law.’’ 9 The parties disagree as to

whether the payment was made ‘‘to a government.’’

The Treasury regulations provide that no deduction shall

be allowed for a fine or penalty paid to:

(1) The government of the United States, a State, a territory or posses-

sion of the United States, the District of Columbia, or the Common-

wealth of Puerto Rico;

(2) The government of a foreign country; or

(3) A political subdivision of, or corporation or other entity serving as

an agency or instrumentality of, any of the above.

[Sec. 1.162–21(a), Income Tax Regs.]

9 Petitioner

stipulated that ‘‘[i]f the Commission was an ‘agency or in-

strumentality’ of the government of a foreign country within the meaning

of Treasury Regulation section 1.162–21(a), Guardian was not entitled to

deduct the Payment under section 162(a).’’ Petitioner informed the Court

that it ‘‘does not agree, in substance, that the Payment constituted the

payment of a ‘fine or penalty.’ ’’ But it agreed that it would not contest the

Commissioner’s determination that the payment should be so character-

ized.

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 9

Petitioner does not challenge the validity of this regulation.

Respondent agrees that the Commission is neither ‘‘[t]he

government of a foreign country’’ nor ‘‘[a] political subdivi-

sion’’ thereof. Accordingly, the question for decision is

whether the Commission is an ‘‘entity serving as an agency

or instrumentality’’ of ‘‘[t]he government of a foreign country’’

within the meaning of this regulation. The parties have not

brought to our attention, and we have not discovered, any

prior authority that addresses this question directly. 10

A. ‘‘Government of a Foreign Country’’

The Commission is required to act on behalf of the EC and

its member states collectively, and it is forbidden to act in

the exclusive interest of any single government. Before we

examine whether the Commission is an ‘‘agency or

instrumentality,’’ therefore, we must answer the threshold

question whether the term ‘‘government of a foreign country,’’

as used in section 1.162–21(a), Income Tax Regs., embraces

the plural as well as the singular.

As a general matter of statutory interpretation, ‘‘unless the

context indicates otherwise—words importing the singular

include and apply to several persons, parties, or things.’’ 1

U.S.C. sec. 1 (2006). This canon of construction is fully

applicable in Federal tax cases. See sec. 7701(p)(1) (referring

to 1 U.S.C. sec. 1 for ‘‘[s]ingular as including plural’’). This

Court and other courts have invoked this principle in

numerous contexts analogous to that here.

In Estate of Shamberg v. Commissioner, 3 T.C. 131 (1944),

aff ’d, 144 F.2d 998 (2d Cir. 1944), the question was whether

interest paid on bonds issued by the Port of New York

Authority, a joint agency of the States of New York and New

10 In his final summary judgment brief, respondent contends for the first

time that his interpretation of the regulation is entitled to deference under

Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945). We need

not decide whether respondent timely advanced his deference argument or

whether we would defer to litigating positions that do not derive their sup-

port from regulations, rulings, or longstanding administrative practice. See

Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988); Garnett v.

Commissioner, 132 T.C. 368, 381 (2009) (citing Gen. Dynamics Corp. &

Subs. v. Commissioner, 108 T.C. 107, 120–121 (1997)). As explained more

fully below, we are able to decide this case in respondent’s favor without

according any deference to his interpretation of section 1.162–21(a), In-

come Tax Regs.

10 143 UNITED STATES TAX COURT REPORTS (1)

Jersey, was exempt from tax under a statute that excluded

from gross income interest on ‘‘the obligations of a State,

Territory, or any political subdivision thereof.’’ Id. at 134

(citing section 22(b)(4) of Revenue Acts of 1936 and 1938).

After concluding that the Port Authority exercised sovereign

powers, the Court addressed ‘‘the final objection that * * *

[it] is not a political subdivision of ‘a’ state but of two states,

and hence falls outside the exemption.’’ Id. at 145. We

rejected this argument: ‘‘[T]he answer, as we see it, is that

the Port Authority is the political subdivision of a state—the

State of New York—and also the political subdivision of

another State—the State of New Jersey.’’ Ibid. The Court of

Appeals for the Second Circuit, in an opinion by Judge

Augustus Hand, affirmed this conclusion. See Estate of

Shamberg, 144 F.2d at 1006 (‘‘The argument that the exemp-

tion does not apply to the Authority because two states,

rather than one, created the agency is far from persuasive.’’).

In RJR Nabisco, 764 F.3d at 143–144 (citing 28 U.S.C. sec.

1603(b)), the Court of Appeals held that the EC constitutes

‘‘an organ of a foreign state’’ and is thus an ‘‘agency or

instrumentality of a foreign state’’ for FSIA purposes. As

Judge Leval put it: ‘‘There is no logic to the proposition that

an entity that serves as an organ of one foreign state cannot

also serve as the organ of another.’’ Id. at 147. Citing 1

U.S.C. sec. 1, the court found no indication in the FSIA ‘‘that

the phrase ‘a foreign state’ must be interpreted to exclude an

organ that serves as an agency of several states.’’ Ibid.;

accord, e.g., In re Aircrash Disaster Near Roselawn, Ind., 96

F.3d 932, 938–939 (7th Cir. 1996) (holding that an entity cre-

ated by multiple governments is an ‘‘agency or instrumen-

tality’’ under FSIA); Mangattu v. M/V Ibn Hayyan, 35 F.3d

205, 208 (5th Cir. 1994) (same); In re EAL Corp., No. 93–

cv578 (SLR), 1994 WL 828320 (D. Del. Aug. 3, 1994) (entity

created by 15 European nations and responsible for Euro-

pean air traffic control was an instrumentality of ‘‘a foreign

state’’ under FSIA); LeDonne v. Gulf Air, Inc., 700 F. Supp.

1400, 1406 (E.D. Va. 1988) (corporation created by treaty

among four nations was an instrumentality of ‘‘a foreign

state’’ under FSIA).

We are instructed to apply the singular-includes-the-plural

canon of construction ‘‘unless the context indicates other-

wise.’’ 1 U.S.C. sec. 1; see Metallics Recycling Co. v. Commis-

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 11

sioner, 79 T.C. 730, 738 (1982) (‘‘[W]hether the rule of

1 U.S.C. sec. 1 is to be applied * * * depends upon congres-

sional intent in enacting the * * * [statute.]’’), aff ’d, 732

F.2d 523 (6th Cir. 1984). We discern nothing in section 162(f)

or the congressional intent underlying its enactment that

would render this canon of construction inapplicable here.

Congress enacted section 162(f) to preclude tax deductions

for civil penalties imposed for violation of U.S. or foreign law.

See Hawronsky v. Commissioner, 105 T.C. 94, 97 (1995), aff ’d

without published opinion, 98 F.3d 1338 (5th Cir. 1996). Peti-

tioner has stipulated that the Ö20 million fine was imposed

for violation of EC law. Under EC law, both the Commission

and EC national authorities could investigate and sanction

violations of EC Treaty articles 81 and 82. Had the Commis-

sion not proceeded against Guardian, an EC member state

could have initiated a substantially identical infringement

proceeding and could have imposed the same liability upon

petitioner, for the same conduct, based on the same EC law.

It would be an odd result, and a result plainly contrary to

the statute’s purpose, if a penalty imposed by one member

state would be nondeductible under section 162(f), whereas

the same penalty imposed by multiple member states, or an

entity acting on their behalf, would qualify for deduction. 11

Like the District Court in LeDonne, 700 F. Supp. at 1406,

we decline to construe section 162(f) and the regulations

interpreting it by employing an ‘‘unnecessary literalism that

runs counter to * * * [their] purpose and ignores the well-

established international practice of states acting jointly

through treaty-created entities for public or sovereign pur-

poses.’’ We conclude that the phrase ‘‘government of a foreign

country,’’ as used in section 1.162–21(a), Income Tax Regs.,

may refer both to the government of a single foreign country

11 Indeed, it is not clear to what extent petitioner disputes the applica-

tion of the singular-includes-the-plural canon of construction. In its final

reply brief, petitioner agrees that ‘‘[t]he Commission is not automatically

disqualified as an ‘agency or instrumentality’ of ‘the government of a for-

eign country’ solely because the European Community was formed by more

than one Member State.’’ Petitioner hypothesizes, for example, that ‘‘an

agency or instrumentality of the Latvian Government could also serve as

an agency or instrumentality of the Estonian Government,’’ provided that

the entity qualified as an ‘‘agency or instrumentality’’ under petitioner’s

proposed test.

12 143 UNITED STATES TAX COURT REPORTS (1)

and to the governments of two or more foreign countries. As

applied here, the term embraces the governments of the EC

member states acting individually or collectively. Cf. RJR

Nabisco, 764 F.3d at 144 (‘‘The European Community was

formed by its member nations to serve on their collective

behalf * * *. We see no reason why it is not properly

described as an organ of each nation.’’). The remaining ques-

tion, and the chief focus of the parties’ dispute, is whether

the Commission is an ‘‘entity serving as an agency or

instrumentality’’ of the EC member states. We turn now to

that question.

B. ‘‘Agency or Instrumentality’’

Because the terms ‘‘agency’’ and ‘‘instrumentality’’ as used

in section 1.162–21(a)(3), Income Tax Regs., are not defined

in the statute, the regulations, or the legislative history, we

employ the standard tools of construction to discern their

meaning. Regulations are interpreted in the same manner as

statutes. See Austin v. Commissioner, 141 T.C. 551, 563

(2013) (citing Black & Decker Corp. v. Commissioner, 986

F.2d 60, 65 (4th Cir. 1993), aff ’g T.C. Memo. 1991–557). In

determining ‘‘the plain meaning of the statute, the court

must look to the particular statutory language at issue, as

well as the language and design of the statute as a whole.’’

K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988); Nor-

folk Energy, Inc. v. Hodel, 898 F.2d 1435, 1442 (9th Cir.

1990). When a statute is ambiguous, a court must find the

interpretation that ‘‘can most fairly be said to be embedded

in the statute, in the sense of being most harmonious with

its scheme and with the general purposes that Congress

manifested.’’ NLRB v. Lion Oil Co., 352 U.S. 282, 297 (1957).

1. ‘‘Plain Meaning’’ Proposed by Guardian

Our initial inquiry is whether the language of the regula-

tion is so plain as to permit only one reasonable interpreta-

tion of the phrase ‘‘agency or instrumentality.’’ See, e.g.,

Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997). Peti-

tioner’s central argument hinges on its submission that this

phrase does have a plain meaning. According to Guardian,

‘‘[t]he common sense reading of the term ‘agency or

instrumentality’ in the context of the applicable regulatory

language, and as informed by applicable dictionary defini-

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 13

tions, demonstrates that such term encompasses only entities

that act as divisions or subsidiary branches of a govern-

ment.’’ Under Guardian’s proposed test, an entity qualifies as

an ‘‘agency or instrumentality’’ of a foreign government only

if it: (1) is controlled by that government; (2) acts exclusively

on behalf of that government; and (3) is subordinate to that

government. The Commission would not pass this test.

We do not agree that the phrase ‘‘agency or instrumen-

tality’’ has an unambiguous plain meaning. A term is ambig-

uous if it is ‘‘capable of being understood in two or more pos-

sible senses or ways.’’ Chickasaw Nation v. United States,

534 U.S. 84, 90 (2001). ‘‘Agency’’ and ‘‘instrumentality’’ are

terms of considerable breadth, and they are susceptible of

different meanings in different contexts. Although Guardian

offered dictionary definitions showing that ‘‘agency or

instrumentality’’ can refer to an administrative division of a

government, both words are commonly used in other, less

specific, senses. For example, ‘‘agency’’ is defined as ‘‘[t]he

means or mode of acting; instrumentality’’; and ‘‘instrumen-

tality’’ is defined as ‘‘[a] means; an agency.’’ American Herit-

age Dictionary 32, 910 (5th ed. 2011). Black’s Law Dictionary

870 (9th ed. 2009) defines an ‘‘instrumentality’’ as ‘‘[a] thing

used to achieve an end or purpose’’ and as ‘‘[a] means or

agency through which a function of another entity is accom-

plished.’’ See RJR Nabisco, 764 F.3d at 144 (although some

definitions ‘‘characterize an organ as subordinate to a larger

entity,’’ the fact that a word ‘‘is sometimes used to refer to

a smaller part of a larger whole does not mean that the word

can serve only in that fashion’’).

Judicial precedent is hostile to the notion that the terms

‘‘agency’’ and ‘‘instrumentality’’ have an unambiguous plain

meaning that dictionaries can illuminate. We have discov-

ered at least five distinct tests that courts have employed to

determine, in various contexts, whether an entity is an

‘‘agency’’ or ‘‘instrumentality’’ of government. See Fed.

Reserve Bank of St. Louis v. Metrocentre Improvement Dist.

#1, 657 F.2d 183, 185 (8th Cir. 1981) (whether entity is an

‘‘agency or instrumentality’’ for purposes of intergovern-

mental tax immunity), aff ’d, 455 U.S. 995 (1982); Michigan

v. United States, 40 F.3d 817, 829 (6th Cir. 1994) (same);

Filler v. Hanvit Bank, 378 F.3d 213, 217 (2d Cir. 2004)

(whether entity is an ‘‘agency or instrumentality’’ for FSIA

14 143 UNITED STATES TAX COURT REPORTS (1)

purposes); Soucie v. David, 448 F.2d 1067, 1075 (D.C. Cir.

1971) (whether entity is an ‘‘agency’’ for APA purposes);

Groves v. United States, 533 F.2d 1376, 1383 (5th Cir. 1976)

(whether entity is an ‘‘agency’’ for purposes of section

911(a)(1) exclusion for foreign earned income). Indeed, an

entity can be an ‘‘agency’’ or ‘‘instrumentality’’ of government

for one purpose but not another. Compare Gradall v. United

States, 329 F.2d 960, 964 (Ct. Cl. 1963) (American Red Cross

is an ‘‘instrumentality’’ of the United States), with Rev. Rul.

60–36, 1960–1 C.B. 279 (American Red Cross is not an

‘‘agency’’ of the United States for purposes of excluding for-

eign income from taxation under former section 911). None

of these courts found the term ‘‘agency’’ or ‘‘instrumentality’’

to have a plain meaning, and none of them relied on dic-

tionary definitions as a reliable guide to discerning the

proper interpretation of these words in context. Petitioner

has cited no case in which a court has done so. 12

Moreover, we find little merit in the definition that peti-

tioner proposes to capture the plain meaning of these terms.

If we adopted Guardian’s definition of ‘‘agency or instrumen-

tality,’’ these words in the regulation would become super-

fluous. According to Guardian, an entity qualifies as an

‘‘agency or instrumentality’’ only if it acts as a division or

subsidiary branch of a government to which it is subordinate

and by which it is controlled. Under this definition, an

‘‘agency or instrumentality’’ equates to a ‘‘political subdivi-

sion.’’ See, e.g., Garb v. Republic of Poland, 440 F.3d 579, 596

n.21 (2d Cir. 2006) (‘‘political subdivision’’ includes all

governmental units beneath the central government,

including local governments).

It is a well-accepted canon of construction that a statute

ought to be construed so that no clause, sentence, or word is

12 Petitioner cites two cases in which courts determined the meaning of

instrumentality by applying the canon of construction noscitur a sociis. See

Edison v. Douberly, 604 F.3d 1307, 1309 (11th Cir. 2010); Green v. City of

New York, 465 F.3d 65, 79 (2d Cir. 2006). These cases are inapposite; the

noscitur a sociis canon cannot properly be applied to interpret the regula-

tion at issue. See infra pp. 15–16. In any event, these cases show the error

of petitioner’s submission that the phrase ‘‘agency or instrumentality’’ has

an unambiguous plain meaning: ‘‘Only if an attempt to discern the plain

meaning fails because the statute is ambiguous, do we resort to canons of

construction.’’ Green, 465 F.3d at 78.

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 15

rendered superfluous, void, or insignificant. See Duncan v.

Walker, 533 U.S. 167, 174 (2001). The regulation at issue

explicitly refers in the disjunctive to ‘‘a political subdivision,’’

on the one hand, and to ‘‘an agency or instrumentality’’ on

the other. See sec. 1.162–21(a)(3), Income Tax Regs. (dis-

allowing deduction for fine paid to ‘‘a political subdivision of,

or a corporation or other entity serving as an agency or

instrumentality of, any of the above’’). By equating ‘‘agency

or instrumentality’’ with ‘‘political subdivision,’’ petitioner

would deprive ‘‘agency or instrumentality’’ of any inde-

pendent meaning. We decline to adopt an interpretation of

the regulation that renders a substantial portion of it mean-

ingless. See Filler, 378 F.3d at 219–220 (rejecting plaintiffs’

proposed construction of FSIA under antisurplusage canon

because it would equate ‘‘foreign state’’ with ‘‘political sub-

division,’’ whereas statute repeatedly employs those terms in

the disjunctive).

Petitioner tries to support its proposed definition of

‘‘agency or instrumentality’’ by relying on the canon of

construction noscitur a sociis—a Latin phrase meaning ‘‘it is

known by its associates.’’ This canon of construction ‘‘hold[s]

that the meaning of an unclear word or phrase should be

determined by the words immediately surrounding it.’’

Black’s Law Dictionary 1160–1161. While noscitur a sociis is

most commonly applied to lists of three or more terms, it

may apply ‘‘when two or more words are grouped together.’’

2A Norman J. Singer & J.D. Shambie Singer, Sutherland

Statutory Construction, sec. 47:16, at 359 (7th ed. 2014).

Because ‘‘political subdivision’’ appears in the same clause as

‘‘agency or instrumentality,’’ petitioner argues that the latter

phrase should be given a limiting construction that essen-

tially equates it to the former.

This argument is unconvincing for two reasons. First,

noscitur a sociis is properly applied to limit the scope of a

potentially broad statutory term, not to render that term

altogether superfluous. For example, in Jarecki v. G.D.

Searle & Co., 367 U.S. 303, 307 (1961), the Supreme Court

employed noscitur a sociis to interpret the term ‘‘discovery’’

as used in section 456(a)(2)(B) of the 1939 Code, which

imposed tax on ‘‘[i]ncome resulting from exploration, dis-

covery, or prospecting.’’ Whereas ‘‘discovery’’ is a broad term

that in other contexts can include geographical and scientific

16 143 UNITED STATES TAX COURT REPORTS (1)

discoveries, the Court held that its association with ‘‘explo-

ration’’ and ‘‘prospecting’’ suggested that the term, as used in

this statute, had the narrower meaning of ‘‘discovery of min-

eral resources.’’ G.D. Searle & Co., 367 U.S. at 307. This

application of noscitur a sociis did not deprive ‘‘discovery’’ of

independent meaning; it simply limited the scope of the term

to one type of discovery. By contrast, petitioner’s application

of this canon would equate ‘‘agency or instrumentality’’ with

‘‘political subdivision’’ and thus render the former phrase

superfluous.

Second, noscitur a sociis is typically applied to a series of

coequal terms that are in a syntactically equivalent position.

See, e.g., G.D. Searle & Co., 367 U.S. at 307 (applying this

canon to ‘‘income resulting from exploration, discovery, or

prospecting’’); Green v. City of New York, 465 F.3d 65, 78–79

(2d Cir. 2006) (applying this canon to ‘‘any department,

agency, special purpose district, or other instrumentality of

a State’’). Here, we do not have a series or list of three

coequal terms. Rather, the regulation defines ‘‘government’’

to include ‘‘[a] political subdivision of, or corporation or other

entity serving as an agency or instrumentality of, any of the

above.’’ Sec. 1.162–21(a)(3), Income Tax Regs. This is not a

series to which noscitur a sociis is properly applied, because

the syntax tells us to expect two distinct sets, not three

coequal members of the same set. 13

In sum, we conclude that paragraph (a)(3) of the regulation

does not have a plain meaning, and we reject the specific

‘‘plain meaning’’ definition that Guardian proposes. Because

we determine the phrase ‘‘agency or instrumentality’’ as used

in this regulation to be ambiguous, we must look beyond the

plain meaning and find the interpretation that makes the

most sense given the context in which this phrase appears.

See Lion Oil Co., 352 U.S. at 297.

13 For example, assume a regulation that defined a ‘‘disqualified person’’

to include ‘‘a family member of, or a business partner or associate of,’’ an

individual. The noscitur a sociis canon might properly be applied to give

similar scope to the terms ‘‘business partner’’ and ‘‘associate.’’ However,

this canon could not properly be applied to equate ‘‘business partner or as-

sociate’’ with ‘‘family member.’’ Similarly here, noscitur a sociis may rea-

sonably be applied to give similar scope to the terms ‘‘agency’’ and ‘‘instru-

mentality.’’ But this canon cannot properly be applied to equate ‘‘agency

or instrumentality’’ with ‘‘political subdivision.’’

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 17

2. A Functional Approach

Courts tasked with ascertaining whether a particular

entity is an ‘‘agency’’ or ‘‘instrumentality’’ of government

have found it difficult to rely on dictionary definitions.

Because ‘‘it [is] clear that any general definition can be of

only limited utility to a court confronted with one of the

myriad organizational arrangements for getting the business

of the government done,’’ courts have generally adopted a

‘‘more functional’’ approach to this question. Wash. Research

Project, Inc. v. HEW, 504 F.2d 238, 245–246 (D.C. Cir. 1974)

(determining whether ‘‘initial review group’’ performing peer

review on proposals for government grants was an ‘‘agency’’

for Freedom of Information Act purposes). ‘‘The unavoidable

fact,’’ as Judge McGowan explained, ‘‘is that each new

arrangement must be examined anew and in its own con-

text.’’ Id. at 246. Our task is to determine the appropriate

test to use in deciding whether the Commission should be

regarded as an ‘‘agency or instrumentality’’ of the EC

member states, given the context in which it operates and

the legislative purpose underlying section 162(f).

We addressed a similar question in Estate of Shamberg,

where we held that the Port of New York Authority, a joint

agency of New York and New Jersey, was a ‘‘political sub-

division’’ for purposes of the tax exemption for interest paid

on State and local bonds. See supra pp. 9–10. The Port

Authority was a ‘‘[m]utual endeavor * * * approved by the

legislatures of the two states and Congress,’’ designed to

assure cooperation in the development of the Port of New

York. Estate of Shamberg, 3 T.C. at 132. It was constituted

by the proper authorities of each State ‘‘for the purpose of

carrying out some of its public functions,’’ id. at 141, and it

was ‘‘engaged in the performance of a sovereign function of

each of the states of New York and New Jersey,’’ id. at 143–

144 (quoting Case v. Commissioner, 34 B.T.A. 1229, 1247

(1936), aff ’d, 92 F.2d 999 (2d Cir. 1937)). We deemed it

immaterial that the Port Authority lacked certain sovereign

powers, such as the power to tax. See ibid. And we concluded

that it need not necessarily exercise ‘‘an ‘essential’ govern-

mental function.’’ Id. at 137. Rather, we held that the Port

Authority was a ‘‘political subdivision’’ of New York and New

Jersey and that the interest paid on its bonds was exempt

18 143 UNITED STATES TAX COURT REPORTS (1)

from Federal income tax, because it had been ‘‘delegated the

right to exercise part of the sovereign power of the State.’’ 14

The courts have applied a similar analysis in holding that

Federal Reserve banks constitute ‘‘instrumentalities’’ of the

United States for purposes of immunity from State and local

taxation. For example, in Metrocentre Improvement Dist. #1,

the Court of Appeals for the Eighth Circuit cited Supreme

Court precedent for the proposition that ‘‘a governmental

instrumentality is one that performs an important govern-

mental function.’’ 657 F.2d at 185 (citing Fed. Land Bank v.

Bismark Lumber Co., 314 U.S. 95, 102 (1941), and Fed. Land

Bank v. Priddy, 295 U.S. 229, 231 (1935)). Applying this test,

the court held that the bank was an instrumentality of the

Federal Government because it conducted ‘‘important govern-

mental functions regarding the issuance of currency * * *

[and] general fiscal duties of the United States.’’ Ibid. The

court reached this conclusion notwithstanding the ‘‘great

independence’’ from political authority that Federal Reserve

banks enjoy in performing their duties. Id. at 185 n.2. This

test, like the test we adopted in Estate of Shamberg, focuses

not on whether the government has plenary control over the

entity, but on whether the entity exercises sovereign powers

and discharges an important governmental function. See, e.g.,

United States v. Michigan, 851 F.2d 803, 806 (6th Cir. 1988).

In a variety of contexts, courts have stated that ‘‘[t]he

authority to act with the sanction of government behind it

determines whether or not a governmental agency exists.’’

Lassiter v. Guy F. Atkinson Co., 176 F.2d 984, 991 (9th Cir.

1949). 15 Whether an entity has ‘‘the authority to act with the

14 We noted in Estate of Shamberg that the Port Authority would also

constitute a ‘‘political subdivision’’ under the test adopted in Little v. Wil-

liams, 231 U.S. 335, 341 (1913), which held that a levee district endowed

with taxing powers was a ‘‘political subdivision’’ where it was ‘‘a subordi-

nate agency of the state exercising a power of the state.’’ See Estate of

Shamberg, 3 T.C. at 142. However, the principal basis for this Court’s

holding was that the Port Authority had been ‘‘delegated the right to exer-

cise part of the sovereign power of the State.’’ Id. at 141–142.

15 See, e.g., United States v. Herman, 589 F.2d 1191, 1210 (3d Cir. 1978)

(whether entity was an ‘‘agency’’ for APA purposes); Bell v. Commissioner,

278 F.2d 100, 103 (4th Cir. 1960) (whether entity was an ‘‘agency’’ for pur-

poses of foreign earned income exclusion), aff ’g 30 T.C. 559 (1958); Kam

Koon Wan v. Black, 188 F.2d 558, 561 (9th Cir. 1951) (whether military

governor of Hawaii was an ‘‘agency of the United States’’ for purposes of

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 19

sanction of government behind it’’ seems especially relevant

in the context of section 162(f). The power to impose fines

and penalties is an essential attribute of sovereignty. Thus,

in determining whether an entity is ‘‘an agency or

instrumentality’’ for purposes of section 162(f), it is impor-

tant to ascertain not only whether the entity has been dele-

gated power to impose fines, but also whether it has the

authority of government behind it when it seeks to collect the

fine or otherwise enforce its decision. The real sting from

imposition of a fine or penalty follows from the ability to col-

lect it.

We conclude that an entity should be regarded as an

‘‘agency or instrumentality’’ for purposes of section 162(f) if

it has been delegated the right to exercise part of the sov-

ereign power of a government or governments; if it performs

an important governmental function; and if it has the

authority to act with the sanction of government behind it.

This functional test is ‘‘most harmonious with * * * [the

statutory] scheme and with the general purposes that Con-

gress manifested’’ when acting to disallow tax deductions for

payments determined to violate public policy. See Lion Oil

Co., 352 U.S. at 297.

3. Application to the Commission

The member states created the EC to establish ‘‘a common

market and an economic and monetary union’’ and ‘‘to pro-

mote throughout the Community a harmonious, balanced

and sustainable development of economic activities.’’ EC

Treaty art. 2. ‘‘The management of a common currency and

the maintenance of economic stability are quintessential

national purposes.’’ RJR Nabisco, 764 F.3d at 145. The EC

and the Commission perform an array of important govern-

ment functions, including the regulation of commerce, the

issuance of currency, and overseeing the fiscal affairs of the

EC member states. See Metrocentre Improvement Dist. #1,

657 F.2d at 185.

The Commission acts as the executive branch of the EC.

Because a proposal from the Commission is a prerequisite for

Portal-to-Portal Act of 1947); McKinney v. Caldera, 141 F. Supp. 2d 25, 32

(D.D.C. 2001) (same); Ellsworth Bottling Co. v. United States, 408 F. Supp.

280, 282 (W.D. Okla. 1975) (same).

20 143 UNITED STATES TAX COURT REPORTS (1)

most actions by the Council and the Parliament, the

Commission performs important government functions in

every field in which the EC operates. In particular, the

member states conferred upon the EC and the Commission

the authority to enforce laws regarding free trade and com-

petition. The enforcement of competition laws and the

implementation of competition policy—whether by the

Commission in Europe or the Federal Trade Commission in

the United States—constitute important government func-

tions. 16

The member states and the Commission share authority

for enforcing EC competition law, and national authorities

are required to apply EC competition law in their own courts.

But once the Commission initiates proceedings, the member

states are barred from bringing their own actions. This

makes it clear that the Commission has been ‘‘delegated the

right to exercise part of the sovereign power’’ of the EC

member states. See Estate of Shamberg, 3 T.C. at 142.

The power to impose civil and criminal penalties for viola-

tion of law is an essential attribute of sovereignty. The

Commission and national authorities are authorized to

impose the same types of penalties, under the same EC law,

for the same types of anticompetitive behavior. Petitioner has

stipulated that the Ö20 million penalty at issue was imposed

‘‘for violation of law.’’ Because the Commission has been dele-

gated final authority to impose penalties for violation of law,

it clearly exercises sovereign power.

The Commission likewise has ‘‘[t]he authority to act with

the sanction of government behind it.’’ Lassiter, 176 F.2d at

991. When conducting investigations, the Commission is

authorized to enter places of business, examine books and

records, and seal business premises. Regulation 1/2003 art.

20. If a business opposes an inspection, the member state

must provide the Commission with any needed assistance,

including the assistance of the state’s police power. When the

16 The United States recognizes the EC’s sovereign authority over anti-

trust matters. In enacting the International Antitrust Enforcement Assist-

ance Act of 1994, Pub. L. No. 103–438, 108 Stat. 4597 (current version at

15 U.S.C. secs. 6201–6212 (2006)), Congress provided that a ‘‘regional eco-

nomic integration organization’’ such as the EC may act as the antitrust

authority for its member states. See 15 U.S.C. sec. 6211(9); H.R. Rept. No.

103–772, at 14 (1994), 1994 U.S.C.C.A.N. 3647, 3654.

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 21

Commission enters a decision, that decision must be enforced

by national authorities; no formality is required other than

verification of its authenticity. The Commission has the

authority ‘‘to act with the sanction of government behind it’’

because it can impose penalties for violation of EC law, and

these decisions must be enforced by the governments of all

EC member states.

We conclude that the Commission is an ‘‘entity serving as

an agency or instrumentality’’ of the EC member states

within the meaning of section 1.162–21(a)(3), Income Tax

Regs., and specifically that it serves as an ‘‘instrumentality’’

of the EC member states, because it exercises part of the sov-

ereign power of the EC member states, performs important

government functions, and has authority to act with the

sanction of those governments behind it. We believe this

conclusion to be consistent not only with judicial precedent

in analogous areas of law, but also with the legislative pur-

pose underlying section 162(f). Congress enacted this provi-

sion to prevent taxpayers from deducting fines or penalties

paid for violation of U.S. or foreign law. The Ö20 million pen-

alty at issue here was imposed and paid for violation of EC

law. Given the context and statutory purpose, it makes no

difference that the penalty was paid to the Commission on

behalf of EC member states collectively rather than to the

government of an EC member state individually. 17

4. Petitioner’s Arguments

Guardian concedes that the Ö20 million penalty would be

nondeductible under section 162(f) if it had been paid (for

example) to the Government of France, a political subdivision

of the Government of France, or a competition agency

subordinate to the Government of France. In urging the

17 The District Court in In re EAL Corp., No. 93–cv578 (SLR), 1994 WL

828320 at *4, reached a similar conclusion in a related context:

Eurocontrol is charged with the regulation and governance of aviation

and air traffic in its [fifteen European] Member States. * * * [But for

the creation of Eurocontrol], each of Eurocontrol’s Member States likely

would maintain its own FAA-equivalent to perform the duties presently

performed by Eurocontrol within the borders of that nation. It is beyond

dispute that each such entity would be an ‘agency or instrumentality of

a foreign state’ within the meaning of the FSIA. Formation of

Eurocontrol by these sovereigns should not change this result. * * *

22 143 UNITED STATES TAX COURT REPORTS (1)

opposite result here, petitioner relies chiefly on the fact that

the Commission is not controlled by, or subordinate to, the

government of any individual EC member state. We have

already rejected petitioner’s proposed definition of ‘‘agency or

instrumentality’’ as a matter of textual interpretation. See

supra pp. 12–16. We likewise find it to be unsupported by

judicial precedent or common sense.

Petitioner’s central argument is that an agency or

instrumentality must be below a government. This argument

might have appeal if we were considering whether an entity

is an ‘‘agency or instrumentality’’ of a single known govern-

ment. Guardian cites cases, for example, addressing whether

a territory or possession of the United States constitutes ‘‘an

agency thereof’’ for purposes of the foreign earned income

exclusion under section 911(a) and (b)(1)(B)(ii). 18 Because an

entity serving as an ‘‘agency or instrumentality’’ of a single

government will almost invariably be subordinate to that

government, these courts logically employed a ‘‘control’’ test.

Petitioner’s approach has less appeal when one is consid-

ering the status of an entity as an ‘‘agency or instrumen-

tality’’ of multiple governments. When sovereign states enter

into a treaty to accomplish shared goals, it is rare that any

signatory nation exercises unilateral control over the entities

thus created. Typically, signatories voluntarily restrict their

authority to act unilaterally, as the EC member states have

done, in favor of a collective regulatory scheme that they

believe will serve their long-term interests. The fact that the

Commission is not subordinate to, or subject to the control of,

any individual member state thus has little relevance in

deciding whether it is an ‘‘agency or instrumentality’’ of the

member states collectively.

The precedents dealing with entities created by multiple

sovereigns supports this commonsense conclusion. In Estate

of Shamberg, for example, neither New York nor New Jersey

could exercise unilateral control over the Port Authority,

since its power was exercised by 12 commissioners, half of

18 See Payne v. United States, 980 F.2d 148 (2d Cir. 1992) (Panama

Canal Commission was an ‘‘agency of the United States’’). Compare Groves

v. United States, 533 F.2d 1376 (5th Cir. 1976) (Trust Territory of the Pa-

cific Islands is an ‘‘agency of the United States’’), with McComish v. Com-

missioner, 580 F.2d 1323 (9th Cir. 1978) (Trust Territory of the Pacific Is-

lands is not an ‘‘agency of the United States’’), rev’g 64 T.C. 909 (1975).

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 23

whom were appointed by the Governor of each State. This

Court nevertheless held the Port Authority to be a ‘‘political

subdivision’’ of New York and of New Jersey. 3 T.C. at 146.

In LeDonne, 700 F. Supp. at 1406, the defendant was a cor-

poration created by a treaty among four Persian Gulf

nations. No government could exercise unilateral control over

the corporation because it was ‘‘owned equally by [the] four

foreign states, not one which has a majority of its shares.’’

Ibid. The court nevertheless held that the airline was an

‘‘agency or instrumentality of a foreign state’’ for FSIA pur-

poses. Ibid. And in In re EAL Corp., 1994 WL 828320, at *4,

the court held that an entity created by 15 nations to operate

the European air traffic control system was an ‘‘agency or

instrumentality of a foreign state’’ under the FSIA, even

though it was not subordinate to, or subject to the unilateral

control of, any single nation. 19

Petitioner notes correctly that the Commission, far from

being subject to control by individual member states, can act

in a manner contrary to a member state’s wishes and

interest. The Commission, for example, may investigate and

fine a company resident in a member state—as it did here

with respect to Guardian Europe, a Luxembourg company—

over objection from that state. Petitioner also notes correctly

that while member states under the EC Treaty have ultimate

control over the EC and the Commission, they cannot control

the day-to-day operations of either entity or dictate its

conclusions concerning any particular matter.

Neither of these observations undermines the status of the

Commission as an ‘‘instrumentality’’ of the member states.

No nation joined the EC expecting that every issue would be

decided in its favor. European nations joined the union

because they believed that the long-term strategic benefits of

membership would outweigh short-term tactical losses. In

order for the Commission to constitute an ‘‘instrumentality’’

of the 27 member states, it is not necessary that each nation

19 As noted earlier, petitioner agrees in theory that an entity can be an

‘‘agency or instrumentality’’ of government even though it has been formed

by more than one sovereign. See supra note 11. However, petitioner asserts

that this could be true only if that entity is controlled by, is subordinate

to, and acts on behalf of each government considered separately. Petitioner

cites no example of such an entity, and it is hard to understand how such

an entity could function efficaciously in the real world.

24 143 UNITED STATES TAX COURT REPORTS (1)

benefit equally from, or be entirely happy with, every deci-

sion the Commission makes.

Nor is the status of the Commission as an ‘‘instrumen-

tality’’ of the EC member states undermined by the relative

independence they have given it. The particular form that an

entity assumes is not determinative as to whether it is an

‘‘agency’’ or ‘‘instrumentality’’ of government. See Inland

Waterways Corp. v. Young, 309 U.S. 517, 523 (1940) (‘‘[T]he

form which Government takes * * * is wholly immaterial.’’);

Lassiter, 176 F.2d at 991. The U.S. Congress has endowed

various regulatory agencies with considerable independence

by providing (for example) that their members can be

removed only for cause and by staggering their terms so as

not to coincide with election cycles. See, e.g., Humphrey’s Ex’r

v. United States, 295 U.S. 602 (1935). The possession of such

independence does not deprive the Federal Trade Commis-

sion, the Federal Reserve Board, or the National Labor Rela-

tions Board of its status as an ‘‘instrumentalit[y] of the

United States.’’ We see no reason why a different analysis

should apply to the Commission. The level of independence

that member states have chosen to give to the Commission

should have no relevance in deciding whether the penalties

it imposes can escape the bar on tax deductibility that Con-

gress enacted in section 162(f). Cf. RJR Nabisco, 764 F.3d at

145 (EC constitutes an ‘‘organ’’ of the EC member states for

FSIA purposes even though member states do not ‘‘micro-

manage every aspect of * * * [its] activities’’); Michigan v.

United States, 40 F.3d 817, 828 (6th Cir. 1994) (education

trust constituted a public agency for purposes of intergovern-

mental tax immunity even though the trust was ‘‘functionally

independent’’ of the State and ‘‘fiscally independent’’).

Finally, petitioner contends that the test we have adopted

proves too much. According to Guardian, if the Commission

is recognized as an ‘‘agency or instrumentality’’ of govern-

ment for purposes of section 162(f), the same conclusion

would follow for ‘‘thousands of additional treaty-based enti-

ties and international organizations.’’ Guardian notes that

Congress has considered, but decided against, amending sec-

tion 162(f) to provide that amounts paid to certain non-

governmental entities would be treated as paid ‘‘to a govern-

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 25

ment.’’ 20 Unless we adopt its narrow definition of ‘‘agency or

instrumentality,’’ Guardian contends, we would unjustifiably

expand the scope of section 162(f) to include payments to this

larger group.

Petitioner has provided no reason to believe that the non-

governmental entities it hypothesizes resemble the Commis-

sion in respects that are salient for purposes of our analysis.

Petitioner has provided no evidence, for example, that such

entities have been delegated sovereign powers to impose pen-

alties, backed by the sanction of government, for violation of

law. Absent such evidence, these entities could not qualify

under this Opinion as instrumentalities of a foreign govern-

ment for purposes of section 162(f). And we see little rel-

evance in the fact that Congress has not amended section

162(f) to cover amounts paid to nongovernmental entities.

Our holding is that Guardian’s Ö20 million fine was paid to

a governmental entity, and is thus covered by section 162(f)

as it exists, because the Commission is an ‘‘entity serving as

an agency or instrumentality’’ of a foreign government within

the meaning of section 1.162–21(a), Income Tax Regs.

C. The Filler Test

The courts have crafted various tests for determining

whether an entity constitutes an agency or instrumentality of

government for purposes of different statutory regimes. In

Filler, the Court of Appeals for the Second Circuit enunciated

a five-part test for making this determination for FSIA pur-

poses. In RJR Nabisco, 764 F.3d at 144–147, the court

applied the Filler factors to the EC and ruled that it is an

‘‘organ’’ of a foreign government and thus ‘‘an agency or

instrumentality of a foreign government’’ within the meaning

of 28 U.S.C. sec. 1603(b).

Although both parties discuss the Filler test, neither urges

that we adopt it for purposes of resolving the tax question

presented here. In the interest of completeness, we will

nevertheless consider how this case might be decided under

that approach. Applying the Filler test in the section 162(f)

context, we would reach the same result that the Court of

20 See S. 506, 111th Cong., sec. 309 (2009); H.R. 2136, 110th Cong., sec.

309 (2007); S. 681, 110th Cong., sec. 309 (2007); S. 1890, 109th Cong.,

sec. 2 (2005); S. 936, 108th Cong., sec. 2 (2003).

26 143 UNITED STATES TAX COURT REPORTS (1)

Appeals reached in the FSIA context. See RJR Nabisco, 764

F.3d at 144–147. This result is consistent with our analysis

above.

Under the FSIA, an entity qualifies for immunity from suit

in U.S. courts if it is ‘‘an agency or instrumentality of a for-

eign state.’’ One way in which an entity can qualify as an

‘‘agency or instrumentality’’ is if it constitutes ‘‘an organ of

a foreign state or political subdivision thereof.’’ 28 U.S.C. sec.

1603(a), (b)(2). In Filler, 378 F.3d at 217, the court noted

that ‘‘there is no specific test for ‘organ’ status under the

FSIA,’’ but it mentioned five factors as relevant:

(1) whether the foreign state created the entity for a national purpose;

(2) whether the foreign state actively supervises the entity;

(3) whether the foreign state requires the hiring of public employees

and pays their salaries;

(4) whether the entity holds exclusive rights to some right in the [for-

eign] country; and

(5) how the entity is treated under foreign state law.

A court balances these factors without particular emphasis

on any given factor and without requiring that every factor

weigh in favor of a particular outcome. See RJR Nabisco, 764

F.3d at 144 (‘‘[T]hese factors invite a balancing process [such]

that an entity can be an organ even if not all of the factors

are satisfied.’’); Kelly v. Syria Shell Petroleum Dev. B.V., 213

F.3d 841, 847 (5th Cir. 2000) (while the five factors ‘‘provide

a helpful framework, we will not apply them mechanically or

require that all five support an organ-determination’’).

The first factor is whether a foreign state or foreign states

‘‘created the entity for a national purpose.’’ This inquiry

closely resembles the inquiry we have made as to whether

the Commission ‘‘performs an important government func-

tion.’’ The Court of Appeals in RJR Nabisco, 764 F.3d at 145,

deemed it ‘‘beyond doubt’’ that the member states founded

the EC ‘‘for a ‘national purpose.’ ’’ The first Filler factor,

which we believe to be the most important for purposes of

section 162(f), thus furnishes strong support for the conclu-

sion that the Commission is an ‘‘agency or instrumentality’’

of the EC member states.

The second factor is whether a foreign state ‘‘actively

supervises the entity,’’ e.g., whether it regulates the entity or

directs its appointments or official acts. See Peninsula Asset

Mgmt. (Cayman) Ltd. v. Hankook Tire Co., 476 F.3d 140, 143

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 27

(2d Cir. 2007). The Court of Appeals in RJR Nabisco, 764

F.3d at 145, resolved this factor in favor of the EC, con-

cluding that the member states’ supervision of the Council

‘‘enables * * * [them] to supervise the [EC’s] most significant

policy decisions.’’ Although the member states do not control

the details of the Commission’s regulatory activity or dictate

its appointments, we reach a similar conclusion here.

Respondent admits, and we agree, that the Commission,

like the EC, operated with a significant degree of autonomy;

that the Commission and its members were required to act

independently of their member states; and that the Par-

liament was not directly answerable to the governments of

the member states. The Council, the body most closely con-

trolled by the member states, lacked direct authority to

appoint or remove members of the Commission. On the other

hand, the member states did nominate the Commission’s

members and exercised ultimate control over it, defining its

areas of authority and limiting its power to act outside those

areas. EC Treaty art. 5. The Commission’s only source of

authority was the EC Treaty, which the member states

retained power to amend. The fact that the relevant treaties

were amended five times between 1987 and 2007 evidences

the reality of that control. 21

The member states did exercise some influence over

Commission decisions in the competition area. The member

states coordinated and cooperated with the Commission

through the European Competition Network regarding inves-

tigations and decisions. This cooperation included pooling

experience, conducting joint investigations, sharing informa-

tion, and allocating cases and resources. During the course of

investigations, the Commission often consulted in a collabo-

rative manner with the Council and the Parliament. Before

recording infringement in a decision, the Commission was

21 Significantamendments to the treaties include the following: (a) the

Single European Act, June 29, 1987, 1987 O.J. (L 169) 1; (b) the TEU, also

known as the Treaty of Maastricht, in 1993; (c) the EC Treaty, also known

as the Treaty of Amsterdam, in 1997; (d) the Treaty of Nice amending the

Treaty on European Union, the Treaties establishing the European Com-

munities and certain related acts, Feb. 26, 2001, 2001 O.J. (C 80) 1; and

(e) the Treaty of Lisbon amending the Treaty on European Union and the

Treaty establishing the European Community, Dec. 13, 2007, 2007 O.J. (C

306) 1.

28 143 UNITED STATES TAX COURT REPORTS (1)

required to confer with the Advisory Committee on Restric-

tive Practices and Dominant Positions, which was composed

of representatives of national authorities of the member

states. Thus, although the Commission could record an

infringement contrary to the request of a member state, the

member states had influence over its decisionmaking process.

For reasons adequate to themselves, the member states

have chosen to exercise their supervisory authority over the

EC and the Commission through a consultative and collabo-

rative, rather than an autocratic, process. In the competition

arena, this supervision is ‘‘active’’ in the sense that the

Commission consults regularly with numerous organs of the

EC and numerous representatives of the member states, all

of whom have the ability to influence its decisions. Cognizant

that the second Filler factor ‘‘does not require the foreign

state to micro manage every aspect of the organ’s activities,’’

RJR Nabisco, 2014 WL 1613878, at *13, we conclude that

the ‘‘active supervision’’ factor slightly favors the Commission

or is neutral here.

The third factor is whether ‘‘the foreign state requires the

hiring of public employees and pays their salaries.’’ The

Court of Appeals in RJR Nabisco concluded that EC officials

are ‘‘public employees’’ in that they exercise ‘‘ ‘powers con-

ferred by public law and duties designed to safeguard the

general interests of the state.’ ’’ RJR Nabisco, 764 F.3d at 145

(quoting RJR Nabisco, 814 F. Supp. 2d at 205). Similarly, the

member states ‘‘indirectly pay the salaries’’ of EC officials,

since they pay into the EC’s general fund, from which those

salaries are paid. Ibid. RJR Nabisco nevertheless argued that

this factor disfavored ‘‘organ’’ status because the EC literally

employs these individuals; it, not the member states, sets

their salaries and cuts their paychecks.

The Court of Appeals concluded that the formal arrange-

ments used to pay diplomatic salaries are ‘‘of small impor-

tance at best,’’ id. at 146, and we agree with that conclusion.

If we were considering whether the Commission were an

‘‘agency or instrumentality’’ of a single foreign government,

whether that government formally employed its officers

might be a salient factor. Cf. Glencore, Ltd. v. Chase Manhat-

tan Bank, N.A., No. 92–civ6214, 1998 WL 74294, at *3

(S.D.N.Y. Feb. 20, 1998) (concluding that bank officials

employed by the government of India were ‘‘public

(1) GUARDIAN INDUS. CORP. v. COMMISSIONER 29

employees’’ under the FSIA). But these formal employment

details seem insignificant in the present context, where we

are considering whether a penalty imposed by an entity cre-

ated by multiple sovereigns qualifies for a tax deduction. The

salient fact is that Commission officials are public employees

who exercise powers conferred by public law, including the

power to impose penalties backed by the sanction of govern-

ment. Like the Court of Appeals in RJR Nabisco, we regard

the third Filler factor as basically neutral here and in any

event as a factor that should be given little weight.

The fourth factor is whether the entity ‘‘holds exclusive

rights to some right in the foreign country.’’ The Court of

Appeals in RJR Nabisco, 764 F.3d at 146, concluded that the

EC holds ‘‘the exclusive right to exercise a number of signifi-

cant governmental powers’’ in the EC member states,

including the right to ‘‘authorize the issue of banknotes

within the Community’’ and ‘‘to conclude the Multilateral

Agreements on Trade in Goods.’’ With respect to competition

law specifically, the Commission has the right to conduct

investigations of anticompetitive behavior within member

states and to record an infringement for competition viola-

tions. This factor favors finding that the EC is an

‘‘instrumentality’’ of the member states.

The fifth factor considers ‘‘how the entity is treated under

foreign state law.’’ In RJR Nabisco, 764 F.3d at 146, the

member states advised the District Court that they consider

the European Community to be a governmental entity, and

the U.S. Department of State ‘‘advised that it accepts this

representation.’’ On this basis, the Court of Appeals con-

cluded that the EC ‘‘appears to satisfy this factor.’’ The fact

that ‘‘the member states have ceded portions of their govern-

mental authority to the * * * [EC] to be exercised by it in

their stead and on their collective behalf seems to confirm its

status as an organ and agency of the member states.’’ Ibid.

Petitioner argues that the member states do not regard the

Commission as an ‘‘agency or instrumentality’’ below them

but as a supranational body that is in some sense above

them. The Court of Appeals answered this argument suc-

cinctly:

This argument * * * depends on the proposition that a governmental

entity created by a collectivity of governments * * * cannot be at once

a supranational entity and an organ or agency of the actors that created

30 143 UNITED STATES TAX COURT REPORTS (1)

it. It appears to us that both descriptions are accurate, and the fact that

the * * * [EC] functions as a supranational governmental entity does

not negate its also being an organ and agency of its member states,

which continue to exist as sovereign nations, notwithstanding having

delegated some of their governmental powers to the supranational

agency they created. [Id. at 146–147.]

We agree with this analysis and conclude that the fifth Filler

factor supports the conclusion that the Commission, as the

executive branch of the EC, is an ‘‘agency or instrumentality’’

of its member states.

On balance, we believe that three of the Filler factors

strongly support the Commission’s status as an ‘‘agency or

instrumentality’’ of the EC member states and that the other

two factors slightly favor the Commission, are neutral, or

deserve little weight in the section 162(f) setting. Cognizant

that these factors should not be applied ‘‘mechanically,’’

Kelly, 213 F.3d at 847, but rather in a manner sensitive to

the context, we conclude that the Commission constitutes an

‘‘agency or instrumentality’’ of the EC member states both

under the Filler test and under the framework we have

adopted. Because Guardian’s Ö20 million fine was paid to an

‘‘agency or instrumentality’’ of a ‘‘foreign government’’ within

the meaning of section 1.162–21(a), Income Tax Regs., that

payment was nondeductible for Federal income tax purposes

by virtue of section 162(f). We will therefore grant respond-

ent’s motion for partial summary judgment and deny peti-

tioner’s motion.

An appropriate order will be issued.

f