# Guardian Industries Corp. v. Commissioner

> United States Tax Court · July 17, 2014 · 143 T.C. 1

URL: https://www.frixlaw.com/law-library/cases/4339786

## Case

- **Full name:** Guardian Industries Corp., Petitioner v. Commissioner of Internal Revenue, Respondent
- **Court:** United States Tax Court
- **Decided:** July 17, 2014
- **Citations:** 143 T.C. 1; 143 T.C. No. 1; 2014 U.S. Tax Ct. LEXIS 30
- **Precedential status:** Published
- **Opinion:** Opinion by Lauber
- **Judges:** Lauber
- **Cited by:** 14 later opinions in the Frix Law Library

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## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4339786. Public record. Not legal advice.