# UNITED STATES TAX COURT

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A846c851e604a537d

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

139 T.C. No. 8

UNITED STATES TAX COURT

HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDIARIES,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 21976-07, 10075-08.

Filed September 24, 2012.

The parties cross-moved for partial summary judgment on
whether P was required, as asserted by R, to include nonsales income,

including dividends, interest, rent, and other income, in its "average
annual gross receipts" for purposes of calculating its I.R.C. sec. 41
research credits for taxable years 1999 through 2001.

Held: P was required to include such amounts in its "average
annual gross receipts" in determining available research credits for
the taxable years at issue. Accordingly, we will grant R's motion on
this matter.

Albert H. Turkus and Paul Oosterhuis, for petitioner.
David P. Fuller and Roger L. Kave, for respondent.

SERVED SEP 2 4 2012

-2OPINION
GOEKE, Judge: In two statutory notices of deficiency respondent
disallowed in part credits for increasing research activities pursuant to section 41,1
claimed by petitioner, Hewlett-Packard Co. & Consolidated Subsidiaries (HP), for
taxable years 1999 through 2003. Following concessions and stipulations, the
parties cross-moved for partial summary judgment on two issues:
(1) whether HP was required to include intercompany gross receipts
received from controlled foreign corporations (CFCs), within the meaning of

section 41(f)(5), in its "average annual gross receipt" (AAGR) when calculating its
section 41 credits for all of the taxable years in issue; and
(2) whether HP was required to include nonsales income, including
dividends, interest, rent, and other income in its AAGR when calculating its
section 41 credits for taxable years 1999 through 2001.
Concerning the first issue, respondent, in his response to HP's cross-motion,
indicated that he had no objection to granting HP's motion to exclude such

'Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) as amended and in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.

-3amounts in determining its AAGR. Accordingly, we will grant petitioner's
motion, in part.
As to the second issue, we find that HP was required to include such
nonsales income when determining its AAGR. Therefore, we will also grant
respondent's motion, in part.
Backaround

HP is a corporation organized under the laws of the State of Delaware. At
all relevant times HP maintained its principal corporate offices in California.
During the taxable years at issue HP was a global technology and service
company. HP, directly or through its foreign affiliates,2 manufactured and
distributed a broad range of technology-based business products including
printers, scanners, ink and laser supplies, desktop personal computers, notebooks,
workstations, high-end servers, total disk storage systems, and software

technology, including system management software. For all relevant years HP

accrued income from the sale of goods and services, dividends, interest, and gross
royalties and other income from its CFCs and from unrelated parties.

2Among HP's foreign affiliates were several CFCs within the meaning of
sec. 951. These CFCs, pursuant to sec. 41(f)(5), were also members of HP's
"controlled group of corporations".

-4For each of the taxable years in issue, HP claimed section 41(a)(1) credits
for increasing research activities, electing to calculate such credits according to the
alternative incremental credit (AIRC) computation method prescribed in section
41(c)(4). In determining its available credits under that section, HP was required,
in part, to compute its AAGR for the four taxable years preceding the respective
determination year. HP used the amounts reported on line 1(c) of its Forms 1120,
U.S. Corporation Income Tax Return, as the base for its AAGR calculation for
each year. Form 1120, for taxable years 1995 to 2000, described the amounts
reported on line 1(a) as "gross receipt or sales" and the amounts reported on line

1(b) as "returns and allowances". Line 1(c) represented the difference between
line 1(a) and line 1(b). HP included intercompany revenues from sales to its CFCs
in line 1(a) for each of the relevant years.3
Form 1120, for taxable years 1995 to 2000, described amounts reported on
lines 4, 5, 6, 7, and 10 as "Dividends", "Interest", "Gross rents", "Gross royalties",
and "Other income", respectively. HP excluded amounts reported on those lines

3On June 12, 2003, HP filed amended returns for its 1999 and 2000 tax
years to reduce the AAGR (included in line 1(c)) by gross receipts accrued from
CFCs. The same day, HP filed a claim for refund with respect to its 2001 tax year
to similarly reduce the AAGR (included on line 1(c)) by gross receipts accrued

from CFCs.

-5in computing its AAGRs for purposes of determining its section 41(a)(1) credits
for taxable years 1999 to 2001.
For each taxable year 1999 to 2002, pursuant to section 280C(c)(3), HP
elected to reduce its section 41 credit by the amount equal to the maximum rate of
tax under section 11(b)(1) multiplied by the section 41 credit, rather than reduce
its section 174 expense deduction. For its 2003 tax year, HP did not make such an
election.

Following respondent's issuance of two statutory notices of deficiency, HP
timely petitioned this Court to contest respondent's determinations. After
subsequent stipulations and concessions, the amounts attributable to HP's lines
1(c), 4, 5, 6, 7, and 10 for each of the relevant tax years are as follows:
Line 1(c):

Taxable
y_eear

gross
receipts or
sales less
returns and
allowances

Line 4:
dividends

Line 5:
interest

Line 6:
gross rents

Line 7:
gross
royalties

Line 10:
other
income

1995

'$15,689,432

-0-

$172,816

$449,260

$144,057

$80,468

1996

17,905,779

-0-

276,553

527,781

243,233

49,625

1997

20,473,806

$335

494,017

633,342

273,959

63,355

1998

16,586,875

281

679,076

702,422

242,411

84,527

1999

16,401,655

1,005

676,384

666,093

22,278

30,286

2000

19,080,696

2,391

289,519

598,480

144,266

36,144

iEach figure represents amounts in thousand-dollar increments.

-6Discussion
I. Summary Judgment

Summary judgment is intended to expedite litigation and avoid unnecessary
and expensive trials of phantom factual issues. Boyd Gaming Corp. v.

Commissioner, 106 T.C. 343, 346-347 (1996); Kroh v. Commissioner, 98 T.C.
383, 390 (1992). Either party may move for summary judgment upon all or any
part of the legal issues in controversy. Rule 121(a); FPL Group, Inc., & Subs. v.
Commissioner, 116 T.C. 73, 74 (2001). We will render a decision on a motion for
partial summary judgment "if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials, * * * show that there
is no genuine dispute as to any material fact and that a decision may be rendered

as a matter of law." Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518,

520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
The parties filed cross-motions for partial summary judgment, in part, on

whether HP, for tax years ended October 31, 1999 through 2001, must include
dividends, interest, rent, and other income accrued from unrelated parties in its
calculation of AAGR for purposes of the AIRC computation method prescribed in

section 41(c)(4). The parties agree, and we conclude, that there is no

-7genuine issue of material fact and that a decision may be rendered as a matter of
law.
II. The Credit for Increasing Research Activities
Congress introduced the credit for increasing research activities in the
Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, sec. 221(a), 95 Stat. at
241. The credit was intended to "stimulate a higher rate of capital formation and

to increase productivity", S. Rept. No. 97-144, at 76-77 (1981), 1981-2 C.B. 412,
438-439; H. R. Rept. No. 97-201, at 111 (1981), 1981-2 C.B. 352, 358, and "to
encourage business firms to perform the research necessary to increase the

innovative qualities and efficiency of the U.S. economy", S. Rept. No. 99-313, at

694 (1986), 1986-3 C.B. (Vol. 3) 1, 694; H. R. Rept. No. 99-426, at 177 (1985),
1986-3 C.B. (Vol. 2) 1, 177.4
Before 1989 the research credit was calculated entirely on the basis of
research expenditures. Both former section 44F(a) and its later iteration under

section 30(a) prescribed an annual credit in an amount equal to 25% of the excess
of "qualified research expenditures" (QRE) for the taxable year over "base period

4The credit was originally included in sec. 44F. In 1984 Congress
redesignated sec. 44F as sec. 30. Deficit Reduction Act of 1984, Pub. L. No. 98369, sec. 471(c), 98 Stat. at 826. The credit was subsequently reenacted and
redesignated, again, by Congress in 1986 as sec. 41. Tax Reform Act of 1986,
Pub. L. No. 99-514, sec. 231(d)(2), 100 Stat. 2085 at 2173-2180.

-8research expenses". The former provisions, in sections 44F(c) and 30(c),
respectively, defined "base period research expenses" as the average of QREs for
the three years preceding the taxable year at issue. When Congress reenacted and
redesignated the credit in 1986 as section 41, then section 41(a)(1) retained the
basic credit calculation supra; however, the credit amount was altered from 25% to
20% of the excess of QRE over "base period research expenses".5

In the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239,
sec. 7110(b), 103 Stat. at 2323-2324, Congress substantially altered the scheme for
calculating the research credit, effectively tying the credit computation to not only
research expenditures, but also "gross receipts". As amended and in effect for the
years in issue, section 41(a)(1) prescribes a credit for an amount equal to 20% of
the excess of any QRE for the taxable year over the "base amount". A taxpayer's
"base amount" is the product of its (1)"fixed-base percentage" and (2) its AAGR
for the four taxable years preceding the taxable year at issue. Sec. 41(c)(1).
Section 41(c)(3)(A) generally defines the "fixed-base percentage" as the
percentage of aggregate QRE of the taxpayer for the taxable years beginning after

5In that year Congress also allowed for the first time in then sec. 41(a)(2) a
credit for 20% of the basic research payments determined under sec. 41(e)(1)(A).

-9December 31, 1983, and before January 1, 1989, to AAGR of the taxpayer for the
same taxable years.6
Congress also promulgated then section 41(c)(5), providing that "gross
receipts", for purposes of the section 41 research credit, "shall be reduced by
returns and allowances made during the taxable year. In the case of a foreign
corporation, there shall be taken into account only gross receipts which are
effectively connected with the conduct of a trade or business within the United
States".7
In describing its reasoning for these changes, Congress noted:
[T]he committee wished to respond to the criticism that the incentive
effect of the present-law research credit was diminished as a result of
the method of computing the taxpayer's base amount. Critics have
noted that although an increase in research expenditures resulted in a
taxpayer receiving a larger credit for that year, it also resulted in
higher base period amounts (and therefore smaller credits) in the
following three years. As a consequence, the present-law credit's
marginal incentive effect provided in the first year was largely offset
in the following three years. The committee, therefore, modified the

6The 1989 amendments retained the sec. 41(a)(2) 20% basic research
payment credit, as well.
7In the Ticket to Work and Work Incentives Improvement Act of 1999, Pub.
L. No. 106-170, sec. 502(c)(1), 113 Stat. at 1919, Congress expanded the
definition of gross receipts of foreign corporations, then set forth in sec. 41(c)(6),
for purposes of the sec. 41 credit, to include those effectively connected with the
conduct of a trade or business in "the Commonwealth of Puerto Rico, or any
possession of the United States."

- 10 method of calculating a taxpayer's base amount in order to enhance
the credit's incentive effect. The committee did wish, however, to
retain an incremental credit structure in order to maximize the credit's
efficiency by not allowing (to the extent possible) credits for research
that would have been undertaken in any event.

*

*

*

*

*

*

Because businesses often determine their research budgets as a
fixed percentage of gross receipts, it is appropriate to index each
taxpayer's base amount to average growth in its gross receipts. By so
adjusting each taxpayer's base amount, the committee believes the
credit will be better able to achieve its intended purpose of rewarding
taxpayers for research expenses in excess of amounts which would
have been expended in any case. Using gross receipts as an index,
firms in fast-growing sectors will not be unduly rewarded if their
research intensity, as measured by their ratio of qualified research to
gross receipts, does not correspondingly increase. Likewise, firms in
sectors with slower growth will still be able to earn credits as long as
they maintain research expenditures commensurate with their own
sales growth.
[H. R. Rept. No. 101-247, at 1199-1200 (1989), 1989 U.S.C.C.A.N.
1906, 2669.]
In 1996 Congress enacted new section 41(c)(4), effective for taxable years

beginning after June 30, 1996. Small Business Job Protection Act of 1996, Pub.

L. No. 104-188, sec. 1204(c), (f)(2), 110 Stat. at 1774, 1775.8 That section allows
a taxpayer to elect a separate AIRC method of computing the research credit under

8Congress also redesignated then sec. 41(c)(5), entitled "Gross receipts", as
sec. 41(c)(6), later redesignated as sec. 41(c)(7).

- 11 section 41(a)(1) and establishes a three-tiered formula for making such a
computation. As noted supra, HP made the AIRC election under section 41(c)(4)
for all of the taxable years in issue.
As in effect for and applied to HP's 1999 taxable year, section 41(c)(4)
prescribed a credit in an amount equal to the sum of: (I) 1.65% of so much of the
QRE from the taxable year as exceeded 1% of HP's AAGR, but did not exceed

1.5% of those AAGR; (ii) 2.2% of so much of the QRE from the taxable year as
exceeded 1.5% of HP's AAGR, but did not exceed 2% of those AAGR; and (iii)
2.75% of so much of the QRE for the taxable year as exceeded 2% of HP's

AAGR.
For the remaining taxable years in issue, section 41(c)(4) prescribed a credit
in an amount equal to the sum of: (I) 2.65% of so much of the QRE from the

taxable year as exceeded 1% of HP's AAGR, but did not exceed 1.5% of those
AAGR; (ii) 3.2% of so much of the QRE from the taxable year as exceeded 1.5%

of HP's AAGR, but did not exceed 2% of those AAGR; and (iii) 3.75% of so
much of the QRE from the taxable year as exceeded 2% of HP's AAGR.
In 1998 the Department of the Treasury published in the Federal Register a
notice of proposed rulemaking under section 41, endeavoring, in part, to provide
guidance on the items of income included in the definition of "gross receipts".

- 12 Notice of Proposed Rulemaking, 63 Fed. Reg. 66503 (Dec. 2, 1998). Section

1.41-3(c)(1), Proposed Income Tax Regs., 63 Fed. Reg. 66507 (Dec. 2, 1998),9
provided that "gross receipts", for purposes of section 41 credit calculations,
included the "total amount, as determined under the taxpayer's method of
accounting, derived by the taxpayer from all its activities and from all sources
(e.g., revenues derived from the sale of inventory before reduction for cost of
goods sold)."1°
In 2001 the Department of the Treasury promulgated final regulations,
adopting, in substantial part, the provisions of the proposed regulations. T.D.
9Generally, proposed regulations are afforded no more weight than a
position advanced by the Commissioner on brief. KTA-Tator, Inc. v.
Commissioner, 108 T.C. 100, 102-103 (1997); F.W. Woolworth Co. v.

Commissioner, 54 T.C. 1233, 1265-1266 (1970).
1°Sec. 1.41-3(c)(2), Proposed Income Tax Regs., 63 Fed. Reg. 66508 (Dec.
2, 1998), also excluded certain items from the definition, including:
(I) returns or allowances; (ii) receipts from the sale or exchange of
capital assets, as defined in section 1221; (iii) repayments of loans or
similar instruments (e.g., a repayment of the principal amount of a
loan held by a commercial lender); (iv) receipts from a sale or
exchange not in the ordinary course of business, such as the sale of an
entire trade or business or the sale of property used in a trade or
business as defined under section 1221(2); and (v) amounts received
with respect to sales tax or other similar state and local taxes, if under
the applicable state or local law, the tax is legally imposed on the

purchaser of the good or service, and the taxpayer merely collects and
remits the tax to the taxing authority.

- 13 8930, 2001-1 C.B. 433." However, the final regulations, by their own terms,
explicitly apply only to taxable years beginning after January 3, 2001. Sec. 1.413(e), Income Tax Regs. Furthermore, in promulgating the final regulations, the
Department of the Treasury expressly limited their exegetic scope to credit

computations for the taxable years following the regulations' effective date

(January 3, 2001). T.D. 8930, 2001-1 C.B. at 440 ("No inference should be drawn
from the applicability date concerning the application of section 41 to * * * the

computation of the base amount before the applicability date."). Consequently,
the final regulations provide no guidance in our present inquiry.
HP does suggest, however, that respondent's position in these cases
represents an impermissible retroactive application of the regulation. As discussed
infra, we reject this characterization. Nonetheless, we believe that the Department

"The final regulations, under sec. 1.41-3(c)(2)(vi), Income Tax Regs.,
further excluded from the definition of "gross receipts":

Amounts received by a taxpayer in a taxable year that precedes the
first taxable year in which the taxpayer derives more than $25,000 in
gross receipts other than investment income. For purposes of this
paragraph (c)(2)(vi), investment income is interest or distributions
with respect to stock (other than the stock of a 20-percent owned
corporation as defined in section 243(c)(2).

- 14 of the Treasury's logic in embracing a broad definition of "gross receipts" for
section 41 computation purposes, articulated in its preamble to the final
regulations, equally applies to pre-effective-date taxable years:
When Congress revised the computation of the research credit
to incorporate a taxpayer's gross receipts, neither the statute nor the
legislative history defined the term gross receipts, other than to
provide that gross receipts for any taxable year are reduced by returns
and allowances made during the tax year, and, in the case of a foreign
corporation, that only gross receipts effectively connected with the
conduct of a trade or business within the United States are taken into
account. See section 41(c)(6).
The proposed regulations generally defined gross receipts as
the total amount derived by a taxpayer from all activities and sources.
However, in recognition of the fact that certain extraordinary gross
receipts might not be taken into account when a business determines
its research budget, the proposed regulations provided that certain
extraordinary items (such as receipts from the sale or exchange of
capital assets) would be excluded from the computation of gross
receipts.

Several commentators objected to the definition of gross
receipts in the proposed regulations. Referring to the inclusion in a
House Budget Report of the term sales growth as an apparent shorthand reference to an increase in gross receipts, some commentators
argued that gross receipts should be limited to income from sales.
See H.R. Rep. No. 101-247, at 1200 (1989). In determining its
research budget, however, a business may take into account any
expected income stream, regardless of whether or not the income is
derived from sales or from other active business activities. Moreover,
many businesses do not generate any income in the form of sales.
Accordingly, the final regulations do not adopt this suggestion.

- 15 The final regulations also do not adopt suggestions that the
definition of gross receipts be narrowed to exclude those items not
directly related to the conduct of the taxpayer's trade or business. As
noted above, any expected income stream may be taken into account
in determining a business' research budget, regardless of the source
of the income. Moreover, IRS and Treasury believe that a subjective
narrowing of the term aross receipts, as suggested by these
commentators, could leave the definition of the term, and thus
the computation of the base amount, vulnerable to
manipulation.
For example, a narrower definition allowing taxpayers to
exclude items not derived in the ordinary course of business might
prompt a taxpayer to assert that certain royalties received in the 1980s
were derived in the ordinary course of business and are includable as
gross receipts (thus decreasing the taxpayer's fixed-base percentage),
but that certain interest income received in the years preceding the
credit year was not derived in the ordinary course of business and was
not includable in gross receipts (thus decreasing the base amount).
Nor would a rule of consistency be effective in preventing such
manipulation. While the taxpayer described above would be
characterizing the nature of its income items as derived or not derived
in the ordinary course of a trade or business so as to maximize the
amount of the credit, the taxpayer would not be taking inconsistent
positions with respect to the same items of income. * * *
[T.D. 8930, 2001-1 C.B. at 434-435; emphasis added.]
III. Statutory Interpretation

A. Statutory Language
The Supreme Court has stated that "'in any case of statutory construction,
* * * [its] analysis begins with the language of the statute, * * * . And where the

statutory language provides a clear answer, it ends there as well'." Harris Trust &

- 16 Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 254 (2000) (quoting
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999)); United States v. Mo.
Pac. R.R. Co., 278 U.S. 269, 278 (1929) ("where the language of an enactment is
clear, and construction according to its terms does not lead to absurd or
impracticable consequences, the words employed are to be taken as the final
expression of the meaning intended.")." When a word is undefined in a statute, it
is a fundamental canon of statutory construction that it will be interpreted as

taking its ordinary, contemporary, common meaning. See Commissioner v.

Soliman, 506 U.S. 168, 174 (1993).
For the taxable years at issue, then section 41(c)(6) provided in part that
"gross receipts", for purposes of the section 41 research credit, "shall be reduced
by returns and allowances made during the taxable year." The function of the

provision was to specify exclusions from "gross receipts"; it offered little
clarification concerning the category or categories of receipts included within the
definition of the term. No other provision in section 41 filled this ostensible
statutory gap.

°Cf. Halpern v. Commissioner, 96 T.C. 895, 899 (1991) ("where a statute
is clear on its face, we require unequivocal evidence of legislative purpose before
construing the statute so as to override the plain meaning of the words used
therein") (citing Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984)).

- 17 HP submits that by specifically excluding "returns and allowances", a
phrase connoting a merchant business association, Congress evinced a clear
intention to limit gross receipts to solely sales receipts. Similarly, citing a Black's
Law Dictionary entry, HP asserts that the generally accepted definition of "gross
receipts" focuses on sales or services income. See Black's Law Dictionary 772
(9th ed. 2009) (defining "gross receipts" as "The total amount of money or other
consideration received by a business taxpayer for goods sold or services
performed in a taxable year, before deductions. * * * [Sec.] 448; * * * [sec.]

1.448-1T(f)(2)(iv)[Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16,

1987)].").
We are unpersuaded by HP's contentions. Nowhere in the Code has the

isolated term "gross receipts" been construed as narrowly as HP suggests." On
the contrary, an examination of the Federal income tax laws reveals that Congress

1311 is a well-established canon of statutory interpretation that "'identical

words used in different parts of the same act are intended to have the same
meaning.'" United States Nat'l Bank of Or. v. Indep. Ins. Agents of Am., Inc.,
508 U.S. 439, 460 (1993) (quoting Commissioner v. Keystone Consol. Indus.,
Inc., 508 U.S. 152, 159 (1993)). Similarly, the meaning, or ambiguity, of certain
words or phrases may become evident only when they are placed in context. FDA
v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132-133 (2000) (citing
Brown v. Gardner, 513 U.S. 115, 118 (1994)). "[W]ords of a statute must be read
in their context and with a view to their place in the overall statutory scheme.'"
Id. at 133 (quoting Davis v. Mich. Dept. of Treasury, 489 U.S. 803, 809 (1989)).

- 18 widely embraces the notion of a broad, inclusive definition for the term. See, e.g.,
secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C). Indeed, when adopting that term in a
provision, Congress often qualifies the term's comprehensive definition through
specific exclusions or limitations to accommodate the relevant statutory scheme.

See, e.g., secs. 448(c)(3)(C), 509(a)(2)(A)(ii), 1362(d)(3)(B) and (C)." If, as
proffered by HP, Congress intended to further limit the definition of "gross
receipts" in section 41, it undoubtedly recognized the constructional convention
of statutory construction by which it had traditionally done so in numerous

provisions.
Further, HP's attempt to equate the common meaning of "gross receipts"

with the narrow definition Black's Law Dictionary is unavailing. Specifically, the
definition provided in Black's Law Dictionary is undermined by the cited
authorities, section 448 and section 1.448-1T(f)(2)(iv), Temporary Income Tax
Regs., supra, from which the definition was purportedly derived. Coincidentally,
section 448(c)(3)(C) serves as the most analogous statutory provision to section
41(c)(6), offering nearly identical language. It prescribes that "gross receipts for
any taxable year", for purposes of limitations on the use of the cash method of
"At the time sec. 41 was amended to include "gross receipts" in increasing
research credit calculations, current sec. 1362(d)(3)(B) and (C) was enacted, in
similar form, as sec. 1362(d)(3)(C) and (D), respectively.

- 19 accounting, "shall be reduced by returns and allowances made during such year."
Section 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, promulgated
before the statutory amendment incorporating "gross receipts" into the section 41
credit calculation and effective for all of the taxable years in issue," provides that
for purposes of section 448(c)(3)(C), "gross receipts" include:
total sales (net of returns and allowances) and all amounts received
for services. In addition, gross receipts include any income from
investments, and from incidental or outside sources. For example,
gross receipts include interest * * *, dividends, rents, royalties, and
annuities, regardless of whether such amounts are derived in the
ordinary course of the taxpayer's trade or business. Gross receipts are
not reduced by cost of goods sold or by the cost of property sold if

such property is described in section 1221 (1), (3), (4) or (5). With
respect to sales of capital assets as defined in section 1221, or sales of
property described in 1221(2) (relating to property used in a trade or
business), gross receipts shall be reduced by the taxpayer's adjusted
basis in such property. Gross receipts do not include the repayment
of a loan or similar instrument (e.g., a repayment of the principal
amount of a loan held by a commercial lender). Finally, gross

receipts do not include amounts received by the taxpayer with respect
to sales tax or other similar state and local taxes if, under the
applicable state or local law, the tax is legally imposed on the
purchaser of the good or service, and the taxpayer merely collects and
remits the tax to the taxing authority. If, in contrast, the tax is

"Sec. 1.448-1T(f)(2), Temporary Income Tax Regs., 52 Fed. Reg. 22764
(June 16, 1987), was promulgated in 1987. Sec. 7805(e)(2) currently prescribes
that temporary regulations expire within three years from the date of issuance;
however, this provision applies only to temporary regulations issued after

November 20, 1988. Technical and Miscellaneous Revenue Act of 1988, Pub. L.
No. 100-647, sec. 6232(b), 102 Stat. at 3735. Accordingly, the temporary
regulation remained valid for all the taxable years in issue.

- 20 imposed on the taxpayer under the applicable law, then gross receipts
shall include the amounts received that are allocable to the payment
of such tax. [Emphasis added.]
Clearly then, Black's Law Dictionary's definition of "gross receipts" contradicts
its referenced sources. Rather than endorse a circumscribed interpretation of the
term, the cited temporary regulation explicitly sets forth several categories of

receipts making up a taxpayer's annual "gross receipts". Indeed, dissecting the
definition proffered by HP concomitantly with its corresponding sources only

serves to strengthen respondent's position.
HP also refers the Court to line 1(a), "Gross receipts or sales", on thenapplicable versions of Form 1120 to demonstrate that the Commissioner used
those terms interchangeably to describe the same items of income. We are
skeptical that a form the Commissioner developed for the effective administration
of the Federal income tax laws provides this Court with any implication or
guidance in the matter at hand.is Moreover, neither the relevant statute nor its

16"[T]he authoritative sources of Federal tax law are in statutes, regulations,
and judicial decisions and not in such informal [IRS] publications." Zimmerman
v. Commissioner, 71 T.C. 367, 371 (1978), aff'd without published opinion, 614
F.2d 1294 (2d Cir. 1979); see also Van Dusen v. Commissioner, 136 T.C. 515, 531
n.29 (2011); Mohamed v. Commissioner, T.C. Memo. 2012-152, 2012 Tax Ct.
Memo LEXIS 152, at *29 ("A taxpayer relies on his private interpretation of a tax
form at his own risk.").

- 21 attendant legislative history discussed further infra refers to Form 1120.
Accordingly, we find this assertion irrelevant.
B. Legislative History
HP further asserts that Congress' somewhat inconsistent and, at points,
interchangeable use of the terms "sales" and "gross receipts" in describing the
1989 restructuring of the section 41 credit calculation indicates that Congress
viewed the two words as coterminous. See, e.g., H.R. Rept. No. 101-247, supra at

1199-1200 ("Likewise, firms in sectors with slower growth will still be able to
earn credits as long as they maintain research expenditures commensurate with
their own sales growth."). In essence, HP requests that the Court construe any

purported legislative ambiguity in its favor. While the pertinent legislative history
certainly lacks distinctive clarity, it is not completely devoid of language
evidencing Congress' true intent.
As noted supra, Congress determined that "indexing" research expenditures
to average annual growth in gross receipts would "better serve" the credits'
"intended purpose of rewarding taxpayers for research expenses in excess of

amounts which would have been expended in any case." Id. However, if we were
to accept HP's assertion that "gross receipts" included only "sales receipts", then
we would concomitantly accredit the correlative proposition that Congress

- 22 intended to extend preferential treatment to companies that did not engage in sales
activity. Under HP's interpretation of the credit calculation, it is unlikely that
businesses which accrue mainly licensing or investment income would generate
substantial AAGR. As a result, such businesses would likely never register a
"base amount" exceeding the minimum base amount prescribed by section
41(c)(2)." Similarly, if such businesses elected to calculate their research credits
under the AIRC computation method prescribed in section 41(c)(4), they would

avoid the lower, more credit-limiting tiers of the AIRC credit calculation structure.
In both circumstances, taxpayers would enhance their annual research credits and
effectively subvert the legislative purpose of the section 41 credit statutory scheme
by indexing their allowable credit amount to certain research expenditures that
they would have made in any event. Indeed, this interpretation would provide
disparate treatment to businesses in the same industry operating under different
business models. For instance, a company which merely licensed intellectual

property would benefit over a similar entity which, instead, incorporated such
property into marketable products for subsequent sale. We find no hint of any
congressional intent effectively endorsing such divergent results. See H.R. Rept.

"Sec. 41(c)(2) provides that "In no event shall the base amount be less than
50 percent of the qualified research expenses for the credit year."

- 23 No. 101-247, supra at 1199-1200 ("Because businesses often determine their
research budgets as a fixed percentage of gross receipts, it is appropriate to index
each taxpayer's base amount to average growth in its gross receipts." (Emphasis

added.)).
C. Respondent's Position
Respondent maintains that HP should include receipts reflected on Form
1120 lines 4 (dividends), 5 (interest), 6 (gross rents), 7 (gross royalty), and 10
(other income) in "gross receipts" for its section 41 calculations for each of the
taxable years at issue; however, respondent does not seek to include receipts
reflected on Form 1120 line 8 (capital gain net income) or 9 (net gain from the sale
of a business) for the same purpose. As noted supra, HP counters that this
assertion effectively represents an invalid retroactive application of section 1.4481T(f)(2), Temporary Income Tax Regs., supra, to the tax years in issue. We do not
construe respondent's position as such. While respondent's nuanced definition of
"gross receipts" is not entirely congruent with our discernment of a more

comprehensive interpretation of the term,18 we find that respondent's position

18See Deere & Co. v. Commissioner, 133 T.C. 246, 253 (2009) (the
taxpayer, in determining its "gross receipts" for purposes of its sec. 41 credit, used
the domestic income it reported on its Form 1120 line 11, representing the total
amount of income listed on lines 3 through 10).

- 24 simply represents a concession in these cases. Accordingly, we need not further
address HP's contention.
D. "Expressio Unius Est Exclusio Alterius"

We are cognizant of the venerable rule of statutory construction, commonly
referred to as the maxim "expressio unius est exclusio alterius", which dictates:
"'Where Congress explicitly enumerates certain exceptions * * * additional
exceptions are not to be implied, in the absence of evidence of a contrary

legislative intent.'" United States v. Smith, 499 U.S. 160, 167(1991)(quoting

Andrus v. Glover Constr. Co., 446 U.S. 608, 616-617 (1980)); see also Catterall v.
Commissioner, 68 T.C. 413, 421 (1977), aff'd sub nom. Vorbleski v.
Commissioner, 589 F.2d 123 (3d Cir. 1978). Given our understanding of the
comprehensive definition of "gross receipts", the sole statutory exclusion from
that definition ("returns and allowances"), and a lack of congressional intent
indicating otherwise, we do not read any further limitations into the definition of

"gross receipts" for purposes of section 41.
E. Conclusion
HP repeatedly requests that the Court heed the oft-cited admonition that
"taxing acts 'are not to be extended by implication beyond the clear impact of the
language used'" and that "doubts are to be resolved against the government and in

- 25 -

favor of the taxpayer." Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 93
(1934). Nonetheless, it is clear that

The intention of the lawmaker controls in the construction of taxing
acts as it does in the construction of other statutes, and that intention
is to be ascertained, not by taking the word or clause in question from
its setting and viewing it apart, but by considering it in connection
with the context, the general purposes of the statute in which it is
found, the occasion and circumstances of its use, and other
appropriate tests for the ascertainment of the legislative will. * * *

{Ii at 93-94.]
We believe it evident, when considering the statutory language at issue,
comparable language in the Code, and the purpose of the research credit statutory
scheme, that Congress intended a broad, inclusive definition of the term
"gross receipts" for purposes of section 41 credit calculations, not one limited
solely to "sales receipts".
IV. Conclusion
On the basis of respondent's concession, we shall grant in part HP's motion
for partial summary judgment thus allowing HP to exclude intercompany gross
receipts received from CFCs, within the meaning of section 41(f)(5), from its

AAGR when calculating its section 41 credits for all of the taxable years at issue.
We shall also grant in part respondent's motion for partial summary
judgment affirming that HP was required to include nonsales income, including

- 26 dividends, interest, rent, and other income, in its AAGRs when calculating its
section 41 credits for taxable years 1999 through 2001.
In reaching our holdings herein, we have considered all arguments made,
and, to the extent not mentioned above, we conclude they are moot, irrelevant, or
without merit.

To reflect the foregoing,
An appropriate order will
be issued granting the parties'

cross-motions for partial summary
judgment in part.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A846c851e604a537d. Public record. Not legal advice.