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126 T.C. No. 6
UNITED STATES TAX COURT
SWALLOWS HOLDING, LTD., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8045-02.
Filed January 26, 2006.
P is a foreign corporation whose only substantial
asset is unimproved land in the United States. On its
1994, 1995, and 1996 Federal income tax returns, P
recognized rent and option income and claimed
deductions for taxes and licenses, the result of which
was a reported loss for each year. P filed each return
after its due date, but before any contact from R. R
determined that sec. 882(c)(2), I.R.C., precluded P
from deducting its expenses because it filed its
returns untimely. In Anglo-Am. Direct Tea Trading Co.
v. Commissioner, 38 B.T.A. 711 (1938), a setting
similar to that here, the Board held that sec. 233 of
the Revenue Act of 1928, ch. 852, 45 Stat. 849, and the
Revenue Act of 1932, ch. 209, 47 Stat. 230, an almost
verbatim predecessor to sec. 882(c)(2), I.R.C., did not
include a timely filing requirement and rejected R’s
contrary interpretation. Subsequently, the Court of
Appeals for the Fourth Circuit construed like
predecessor text similarly, also in rejection of R’s
contrary interpretation. See Blenheim Co. v.
-2Commissioner, 125 F.2d 906 (4th Cir. 1942), affg.
42 B.T.A. 1248 (1940); Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941), modifying and remanding
on other grounds 41 B.T.A. 910 (1940). R continues to
adhere to his rejected interpretation and now attempts
to support that interpretation by citing Treasury
regulations issued in 1990. Those regulations
interpret sec. 882(c)(2), I.R.C., to provide that a
foreign corporation generally is entitled to deduct its
expenses only if it files a timely return.
Held: A timely filing requirement is not found in
a plain reading of sec. 882(c)(2), I.R.C.
Held, further, the timely filing requirement in
the regulations is invalid in that it is unreasonable
under a plain reading of sec. 882(c)(2), I.R.C., and an
application of the considerations set forth in Natl.
Muffler Dealers Association v. United States, 440 U.S.
472 (1979).
Phillip L. Jelsma, for petitioner.
Thomas A. Dombrowski and Nina E. Chowdhry, for respondent.
LARO, Judge:
Petitioner petitioned the Court to redetermine
respondent’s determination of deficiencies in its Federal income
taxes for its taxable years ended May 31, 1994, 1995, and 1996
(1994, 1995, and 1996 taxable years, respectively; collectively,
subject years), and additions thereto under section 6651(a)(1).1
The deficiencies and additions to tax are as follows:
1
Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code of 1986. Rule
references are to the Tax Court Rules of Practice and Procedure.
-3Taxable Year
Deficiency
Addition to tax
Sec. 6651(a)(1)
1994
1995
1996
$7,200
5,850
1,800
$1,800.00
1,462.50
450.00
We decide whether petitioner may deduct the ordinary and
necessary expenses it incurred during the subject years.
The
expenses relate to income treated as effectively connected to the
conduct of a trade or business in the United States (effectively
connected income), and petitioner claimed the expenses on its
Federal income tax returns, which it filed before any contact
from respondent.
Respondent determined in the notice of
deficiency that section 882(c)(2) precludes petitioner from
deducting its expenses because it did not file its returns
timely.
Respondent concedes that the expenses are deductible if
section 882(c)(2) does not include a timely filing requirement.
In Anglo-Am. Direct Tea Trading Co. v. Commissioner,
38 B.T.A. 711 (1938), the Board of Tax Appeals (Board) held that
section 233 of the the Revenue Act of 1928, ch. 852, 45 Stat.
849, and the Revenue Act of 1932, ch. 209, 47 Stat. 230, an
almost verbatim predecessor to section 882(c)(2), did not include
a timely filing requirement.2
2
In so holding, the Board construed
As will be discussed, the relevant text of sec. 882(c)(2),
“in the manner prescribed in subtitle F”, is substantially the
same as the related text of the predecessors to sec. 882(c)(2).
We refer interchangeably to the relevant text of sec. 882(c)(2)
and the related text of its predecessors as the relevant text.
-4the earlier section's requirement that a foreign corporation file
a true and accurate return “in the manner prescribed in this
title” and rejected respondent’s argument that the word “manner”,
as it appeared in the quoted text, meant that the foreign
corporation could deduct its expenses only if it filed its
returns timely; i.e., before the time set forth in a predecessor
to section 6072.3
Subsequently, the Court of Appeals for the
Fourth Circuit in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th
Cir. 1941), modifying and remanding on other grounds 41 B.T.A.
910 (1940), quoted and applied the Anglo-Am. Direct Tea Trading
Co. holding favorably and without reservation.
The Court of
Appeals for the Fourth Circuit in Blenheim Co. v. Commissioner,
125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940), also
acknowledged the Anglo-Am. Direct Tea Trading Co. holding,
construed the relevant text not to contain any reference to time,
and stated that Congress had enacted the relevant text in 1928
intending to allow a foreign corporation to deduct its expenses
upon its filing of a tax return.
In 1990, the Secretary issued section 1.882-4(a)(2) and
(3)(i), Income Tax Regs. (disputed regulations).
The disputed
regulations interpret section 882(c)(2) to provide that a foreign
corporation generally is entitled to deduct its expenses only if
3
Sec. 6072, entitled “Time For Filing Income Tax Returns”,
provides dates by which an income tax return must be filed in
order to be timely.
-5it files a timely return.
Under the relevant part of the
disputed regulations, a return is timely if it is filed before an
arbitrary 18-month deadline (18-month deadline) devised by the
Secretary.4
The Secretary issued the disputed regulations
stating that section 882(c)(2) contains a “clear” requirement
that a foreign corporation file its return timely in order to
deduct its expenses.
The Secretary made no mention of the
consistent interpretation of the relevant text by the Court of
4
The regulations explain the 18-month deadline as follows:
For taxable years of a foreign corporation ending after
July 31, 1990, whether a return for the current taxable
year has been filed on a timely basis is dependent upon
whether the foreign corporation filed a return for the
taxable year immediately preceding the current taxable
year. If a return was filed for that immediately
preceding taxable year, or if the current taxable year
is the first taxable year of the foreign corporation
for which a return is required to be filed, the
required return for the current taxable year must be
filed within 18 months of the due date as set forth in
section 6072 and the regulations under that section,
for filing the return for the current taxable year. If
no return for the taxable year immediately preceding
the current taxable year has been filed, the required
return for the current taxable year (other than the
first taxable year of the foreign corporation for which
a return is required to be filed) must have been filed
no later than the earlier of the date which is 18
months after the due date, as set forth in section
6072, for filing the return for the current taxable
year or the date the Internal Revenue Service mails a
notice to the foreign corporation advising the
corporation that the current year tax return has not
been filed and that no deductions (other than that
allowed under section 170) or credits (other than those
allowed under sections 33, 34 and 852(b)(3)(D)(ii)) may
be claimed by the taxpayer. [Sec. 1.882-4(a)(3)(i),
Income Tax Regs.]
-6Appeals for the Fourth Circuit and the Board not to include any
timely filing requirement.
Petitioner argues that section 882(c)(2) does not contain a
timely filing requirement and that the disputed regulations are
invalid as inconsistent with that section.5
Respondent argues
that section 882(c)(2) provides clearly that a foreign
corporation must file its return timely in order to deduct its
expenses and that the disputed regulations are a proper
interpretation of that provision.
Respondent asks the Court now
to accept his interpretation, which he acknowledges is the same
as that rejected in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, supra, and its progeny, and to disavow all contrary
interpretations expressed by the Court of Appeals for the Fourth
Circuit and the Board.
We agree with petitioner that section 882(c)(2) does not
contain a timely filing requirement and that the disputed
regulations are invalid to the extent discussed herein.
that petitioner may deduct its expenses.
We hold
On the basis of our
holding and a concession by respondent that section 6651(a) is
inapplicable if petitioner is entitled to deduct its expenses, we
also hold without further discussion that petitioner is not
5
Petitioner also makes numerous other arguments which are
pertinent only if the disputed regulations are valid. Given our
holding herein that the disputed regulations are invalid, we need
not and do not decide any of petitioner’s other arguments.
-7liable for any addition to tax determined by respondent under
section 6651(a).
FINDINGS OF FACT
Many facts were stipulated and are found accordingly.
We
incorporate herein by this reference the stipulated facts and the
exhibits submitted therewith.
I.
Background
Petitioner is a Barbados corporation whose mailing address
was in Bridgetown, Barbados, when its petition was filed with the
Court.
It is an accrual method taxpayer that for Federal income
tax purposes files a Form 1120-F, U.S. Income Tax Return of a
Foreign Corporation (Form 1120-F), on the basis of a fiscal year
ending on May 31.
Its sole activity during the subject years was
owning 160 acres of unimproved real estate (U.S. real estate) in
San Diego County, California, and receiving option and rental
income from the U.S. real estate.
Petitioner has never engaged
in a trade or business in the United States, and it does not have
a separate business activity in Barbados.
II.
Petitioner’s Formation and Issuance of Additional Shares
Raimundo Arnaiz-Rosas (Rosas) is a citizen and resident of
Mexico.
He acquired the U.S. real estate on December 30, 1986.
In June 1991, he formed petitioner as his wholly owned
corporation.
He transferred the U.S. real estate to petitioner
on November 21, 1991.
-8Aurora Elsa Arnaiz (Arnaiz) is the sister of Rosas.
a citizen and resident of Mexico.
She is
On June 1, 1992, petitioner
issued additional shares of its stock to Arnaiz.
Afterwards,
Arnaiz owned 52 percent of petitioner’s stock, and Rosas owned
the remaining 48 percent.
III.
Petitioner’s Initial Tax Return
On September 14, 1992, petitioner filed a Form 1120-F with
respondent’s service center in Philadelphia, Pennsylvania
(Philadelphia Service Center), for its short taxable year from
June 27, 1991, through May 31, 1992 (1992 taxable year).
The
return (petitioner’s initial return) was petitioner’s first
Federal income tax return.
That return was prepared by Francisco
A.F. Cervantes (Cervantes), petitioner’s tax adviser and
certified public accountant in California.
As to petitioner’s
1992 taxable year, petitioner’s initial return reported that
petitioner had no income or expense, that it had not engaged in a
trade or business in the United States, and that it had no
effectively connected income.
Petitioner’s initial return also
reported that petitioner’s business activity was real estate and
that its product or service was investment.
Petitioner’s initial
return also reported that petitioner was incorporated in Barbados
and that petitioner was subject to income tax under the laws of
Barbados.
-9IV.
U.S. Real Estate
The U.S. real estate has been vacant land throughout the
subject years.
During the subject years, an apparently unrelated
entity leased from petitioner approximately 10 acres of the U.S.
real estate for use as a skydiving landing zone.
Pursuant to the
lease agreements, the lessee was responsible for maintenance
costs, utilities, license fees, personal property taxes, and
other costs associated with its use of the leased property.
Between March 16, 1993, and April 1, 1996, another apparently
unrelated entity held an option to purchase a portion of the U.S.
real estate.
During the respective subject years, petitioner realized
rental income of $12,000, $18,000, and $12,000 as to the lease
and $36,000, $21,000, and zero dollars as to the option.
During
the same respective years, petitioner incurred expenses totaling
$77,059, $62,418, and $40,041 for real property taxes payable to
the County of San Diego, franchise taxes payable to the State of
California, and other fees.
V.
Petitioner’s Tax Returns Other Than the Initial Return
On July 23, 1999, petitioner filed with the Philadelphia
Service Center a Form 1120-F for its taxable year ended May 31,
1993 (1993 taxable year).
Also on that date, petitioner
voluntarily (before any contact from respondent) filed with the
Philadelphia Service Center a Form 1120-F for each of the subject
-10years (collectively, subject returns).
Cervantes first advised
petitioner in 1999 that it had to file the four returns, and
Cervantes prepared those returns shortly after giving this
advice.6
Petitioner had no communications with Cervantes as of
the time of this advice going back to the earlier time at which
petitioner’s initial return was filed.
When the four returns
were filed, respondent had no knowledge that the returns were
overdue.
The four returns filed in 1999 each listed petitioner’s U.S.
employer identification number and reported that petitioner was
incorporated in Barbados, that petitioner was subject to income
tax under the laws of Barbados, and that petitioner was not
liable for a United States branch profits tax.
Each return also
reported that petitioner’s business activity was real estate and
that its product or service was investment.
Each return also
reported that petitioner had not engaged in a trade or business
in the United States, but that petitioner had realized a taxable
loss effectively connected with the conduct of a trade or
business in the United States.
None of the returns included a
statement under section 1.871-10(d)(1)(ii), Income Tax Regs.,
reporting that petitioner was making an election under section
882(d)(1).
6
Because respondent with petitioner’s acquiescence has
Cervantes also prepared petitioner’s Federal income tax
returns for several years following the subject years.
-11treated the subject returns as such an election, petitioner’s
income from the U.S. real estate for the subject years is treated
as effectively connected income.
On its Form 1120-F for its 1993 taxable year, petitioner
recognized option income of $16,290 and deducted an expense for
taxes of $52,081, resulting in a reported taxable loss of
$35,791.
On the respective subject returns, petitioner
recognized rental income of $12,000, $18,000, and $12,000 and
option income of $36,000, $21,000, and zero dollars.
Petitioner
also on the respective subject returns deducted expenses for
taxes and licenses in the total amounts of $77,059, $62,418, and
$40,041, resulting in reported losses (without consideration of
any net operating loss (NOL) carryforward) of $29,059, $23,418,
and $28,041.
Petitioner reported on its Form 1120-F for its 1994
taxable year that it had available as an NOL carryover its prior
year’s loss of $35,791.
Petitioner reported on its Form 1120-F
for its 1995 taxable year that it had available as an NOL
carryover its prior years’ losses totaling $64,850 ($29,059 +
$35,791).
Petitioner reported on its Form 1120-F for its 1996
taxable year that it had available as an NOL carryover its prior
years’ losses totaling $88,268 ($23,418 + $29,059 + $35,791).
-12VI.
Respondent’s Determination
On January 31, 2002, respondent issued the notice of
deficiency to petitioner for the subject years.7
Respondent
determined the deficiencies shown therein by disallowing all of
the deductions claimed on the subject returns and applying the
corporate income tax rates of section 11 to petitioner’s gross
income, as reported.
Respondent disallowed the deductions
because none of the returns was filed timely.
OPINION
I.
Burden of Proof
The Commissioner’s determinations in a notice of deficiency
are generally presumed correct, and taxpayers generally bear the
burden of proving those determinations wrong.
See Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
In
certain cases, section 7491(a) places the burden of proof upon
the Commissioner.
Given the manner in which we decide this case,
we need not and do not decide which party bears the burden of
proof in this case.
II.
Parties’ Arguments
The parties disagree on the section 882(c)(2) requirements
which serve as a prerequisite to a foreign corporation’s
deducting its expenses.
7
Petitioner argues that it meets those
Neither party has explained why the notice of deficiency
does not address petitioner’s 1993 taxable year.
-13requirements in that it filed true and accurate Federal income
tax returns.
According to petitioner, section 882(c)(2) does not
require that the subject returns be filed timely, and the
disputed regulations are invalid to the extent they impose such a
requirement.
Respondent argues that section 882(c)(2) includes a
clear timely filing requirement and that the disputed regulations
are a valid construction of that requirement.
According to
respondent, petitioner may not deduct its expenses because it did
not file the subject returns timely.
We agree with petitioner.
To best understand our decision,
we first discuss the relevant provisions and developments in the
law which preceded the issuance of the disputed regulations.
We
then address our interpretation of the relevant text and the
standard by which we judge the disputed regulations to be
invalid.
III.
Relevant Filing Requirements
Every corporation subject to Federal income tax must file a
Federal income tax return with respect to that tax.
6012(a)(2).
See sec.
The regulations interpret section 6012(a)(2) to
require that such a corporation file a Federal income tax return
even if it does not have any gross or taxable income for the
year.
See sec. 1.6012-2(a)(1), Income Tax Regs.
The regulations
interpret section 6012(a)(2) to apply to foreign corporations to
the extent set forth in section 1.6012-2(g)(1), Income Tax Regs.
-14See id.
Section 1.6012-2(g)(1), Income Tax Regs., generally
requires that a foreign corporation file a Federal income tax
return on Form 1120-F if it “is engaged in trade or business in
the United States at any time during the taxable year or * * *
has income which is subject to taxation under subtitle A of the
Code (relating to income taxes)”.
Section 6072 sets the time for the filing of Federal income
tax returns required by section 6012.
A corporation generally
must file its return by the 15th day of the third month following
the close of its taxable year.
See sec. 6072(b); see also sec.
1.6072-2(a), Income Tax Regs.
An exception to this rule is found
in the case of a foreign corporation without an office or place
of business in the United States.
In such a case, the foreign
corporation may file its tax return up until the 15th day of the
sixth month following the close of its taxable year.
See sec.
6072(c); see also sec. 1.6072-2(b), Income Tax Regs.
Petitioner did not conduct a trade or business in the United
States at any time from its inception through the close of the
last subject year.
Thus, but for an election under section
882(d)(1), petitioner was required by section 6012(a), as
interpreted by section 1.6012-2(a)(1) and (g)(1), Income Tax
Regs., to file a Federal income tax return for a taxable year
included within that period only if it had income subject to
-15Federal income tax.8
Petitioner had no such income for its first
taxable year but did have such income for each of its taxable
years thereafter through the close of the last subject year.
For
each of the subject years, therefore, petitioner was required to
file a Form 1120-F with the Commissioner.
Because petitioner was
within the rule of section 6072(c) for each of those years, the
due dates of the subject returns were November 15, 1994, 1995,
and 1996, respectively.
IV.
Place for Filing Returns
Section 6091(b)(2) sets forth the rules concerning the place
where a corporation must file its Federal income tax returns.
That section was enacted as part of the Internal Revenue Code of
1954 (1954 Code), ch. 736, 68A Stat. 752, to replace section
53(b)(2) of the Internal Revenue Code of 1939 (1939 Code), ch. 2,
53 Stat. 28.
Former section 53(b)(2), which also appeared in the
Revenue Act of 1928, 45 Stat. 808, and the Revenue Act of 1932,
47 Stat. 189, provided:
(2) CORPORATIONS.--Returns of corporations shall
be made to the collector of the district in which is
located the principal place of business or principal
office or agency of the corporation, or, if it has no
principal place of business or principal office or
agency in the United States, then to the collector at
Baltimore, Maryland.
8
Petitioner would have been required by sec. 6012(a), as
interpreted by sec. 1.6012-2(a)(1) and (g)(1), Income Tax Regs.,
to file a return for any taxable year in which it had a sec.
882(d)(1) election in effect. Such an election was in effect as
to petitioner only during the subject years.
-16Thus, before the enactment of the 1954 Code, a foreign
corporation such as petitioner was required to file its Federal
income tax returns at Baltimore, Maryland.
Since the enactment of the 1954 Code, a corporation
generally must file its Federal income tax returns with the
District Director for the internal revenue district in which is
located the corporation’s principal place of business, principal
office, or agency.
See sec. 6091(b)(2)(A); see also sec.
1.6091-2(b), Income Tax Regs.
The rule is different where a
foreign corporation has no principal place of business, principal
office, or agency in any internal revenue district.
6091(b)(2)(B)(i), (iii).
See sec.
In that case, section 6091(b)(2)(B)(i)
and (iii) allows the Secretary to designate by regulation the
place where the foreign corporation’s return will be filed.
As relevant here, section 1.6091-3(f), Income Tax Regs.
(before amendment on September 15, 2004, by T.D. 9156, 2004-2
C.B. 669, 671), generally required that a foreign corporation
file its Federal income tax returns with the “Director of
International Operations, Internal Revenue Service, Washington,
D.C. 20225, or the district director, or the director of the
service center, depending on the appropriate officer designated
on the return form or in the instructions issued with respect to
such form”.
That section was issued by the Secretary in 1959.
See T.D. 6364, 1959-1 C.B. 546, 604.
In the 1972 instructions
-17for Form 1120-F, the Commissioner directed that “All foreign
corporations (whether or not engaged in a trade or business
within the U.S.) must file their return with the Internal Revenue
Service Center * * * [in] Philadelphia, Pennsylvania 19155”.
Previously, the instructions for Form 1120-F had stated that “All
foreign corporations (whether or not engaged in a trade or
business within the United States) must file their return with
the “Director of International Operations, Internal Revenue
Service Center, Washington, D.C. 20225”.
See, e.g., the 1971
instructions for Form 1120-F.
The instructions for the subject returns state that
taxpayers must file their Forms 1120-F “with the Internal Revenue
Service Center, Philadelphia, PA 19255”.
In accordance with
these instructions, petitioner filed the subject returns with the
Philadelphia Service Center.9
9
Sec. 7482(b)(1)(B) provides rules as to venue for appeal
by a corporation without a principal place of business, principal
office, or agency in a judicial circuit. In such a case, venue
is the United States Court of Appeals for the circuit in which is
located “the office to which was made the return of the tax in
respect of which the liability arises”. Id. Because petitioner
filed the subject returns in Philadelphia, Pa., an appeal of this
case would appear to be to the Court of Appeals for the Third
Circuit. As noted supra pp. 15-16, a foreign corporation such as
petitioner was required before the enactment of the 1954 Code to
file its Federal income tax returns at Baltimore, Md. Venue for
appeal in that case was the Court of Appeals for the Fourth
Circuit.
-18V.
Section 882
A.
Overview
A foreign corporation engaged in a trade or business within
the United States is taxable under section 11, 55, 59A, or
1201(a) on its taxable income that is effectively connected
income, see sec. 882(a)(1); such taxation is consistent with that
of a domestic corporation.
A foreign corporation not engaged in
a trade or business within the United States is taxable at a flat
rate of 30 percent of the amount received from “interest (other
than original issue discount as defined in section 1273),
dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, and other fixed or
determinable annual or periodical gains, profits, and income”,
but only to the extent that the income is received from sources
within the United States (U.S. source income).
Sec. 881(a)(1).
A foreign corporation is not taxable in the United States on its
income that is neither effectively connected income nor U.S.
source income.
See id.
A foreign corporation that realizes U.S. source income that
is not effectively connected income may elect to treat the U.S.
source income as effectively connected income if the U.S. source
income is derived from real property located in the United
States.
See sec. 882(d)(1).
The Commissioner has ruled that a
foreign corporation may not make such an election for a taxable
-19year in which it does not derive income from real property in the
United States.
See Rev. Rul. 91-7, 1991-1 C.B. 110; see also
sec. 1.871-10(a), Income Tax Regs.
For purposes of section 882(a)(1), a foreign corporation
generally determines its taxable income by including in its gross
income only its effectively connected income.
882(a)(2).
See sec.
Whether the foreign corporation may claim deductions
against its gross income to arrive at taxable income depends on
section 882(c)(2).
Under that section, a
foreign corporation shall receive the benefit of the
deductions and credits allowed to it in this subtitle
only by filing or causing to be filed with the
Secretary a true and accurate return, in the manner
prescribed in subtitle F, including therein all the
information which the Secretary may deem necessary for
the calculation of such deductions and credits. * * *
B.
History of Relevant Provisions
1.
Predecessors to Section 882(c)(2)
We trace section 882(c)(2) to its origin in section 233 of
the Revenue Act of 1928.
SEC. 233.
There, Congress provided:
ALLOWANCE OF DEDUCTIONS AND CREDITS.
A foreign corporation shall receive the benefit of
the deductions and credits allowed to it in this title
only by filing or causing to be filed with the
collector a true and accurate return of its total
income received from all sources in the United States,
in the manner prescribed in this title; including
therein all the information which the Commissioner may
deem necessary for the calculation of such deductions
and credits.
-20Congress enacted section 233 of the Revenue Act of 1928 in the
same form as the related bill had been introduced in the House of
Representatives.
(1927).
See H.R. 1, sec. 233, 70th Cong., 1st Sess.
The committee reports underlying this enactment do not
explain the section’s intent or breadth.
Section 233 of the Revenue Act of 1928 was reenacted
verbatim in the Revenue Act of 1932, 47 Stat. 230, the Revenue
Act of 1934, ch. 277, 48 Stat. 737, the Revenue Act of 1936, ch.
690, 49 Stat. 1717, and the Revenue Act of 1938, ch. 289,
52 Stat. 531.
The same provision also was codified verbatim in
the 1939 Code, 53 Stat. 79, except that Congress placed the word
“chapter” in the two places where the word “title” had appeared
in the previous statute.10
Compare section 233 of the 1939 Code
with section 233 of the Revenue Act of 1938.
In the 1954 Code, Congress recodified section 233 of the
1939 Code in former section 882(c)(1), 68A Stat. 282, with slight
modifications.
10
Section 882(c)(1) of the 1954 Code provided:
The 1939 Code was approved and published on Feb. 10,
1939. See 53 Stat. iii. The 1939 Code “is an enactment without
change of the 1939 edition of the Codification of Internal
Revenue Laws prepared by * * * the staff of the Joint Committee
on Internal Revenue Taxation, with the assistance of the
Department of the Treasury and the Department of Justice.”
53 Stat. iii. The underlying bill was introduced in the House
Committee on Ways and Means on Jan. 18, 1939. See 53 Stat. iii.
-21(c) Allowance of Deductions and Credits.-(1) Deductions allowed only if return
filed.--A foreign corporation shall receive
the benefit of the deductions allowed to it
in this subtitle only by filing or causing to
be filed with the Secretary or his delegate a
true and accurate return of its total income
received from all sources in the United
States, in the manner prescribed in subtitle
F, including therein all the information
which the Secretary or his delegate may deem
necessary for the calculation of such
deductions.
The House committee report underlying the 1954 Code stated as to
this action:
“Subsection (c), relating to necessity for filing
of returns by foreign corporations in order to secure allowance
of deductions and credits, is, in substance, identical with
sections 232, 233, and 234, 1939 Code.”
H. Rept. 1337, 83d
Cong., 2d Sess. A246 (1954); see also S. Rept. 1622, 83d Cong.,
2d Sess. 417 (1954) (same statement except omits the words “and
credits”).
Section 882 of the 1954 Code was next amended in the Foreign
Investors Tax Act of 1966, Pub. L. 89-809, sec. 104(b)(1), 80
Stat. 1555.
A stated purpose of that act was “To provide
equitable tax treatment for foreign investment in the United
States”.
Foreign Investors Tax Act of 1966, 80 Stat. 1539.
To
that end, Congress renumbered section 882(c)(1) of the 1954 Code
with slight modification as section 882(c)(2) and added a new
section 882(d).
Foreign Investors Tax Act of 1966, sec.
-22104(b)(1), 80 Stat. 1556.
As to the first action, the House
committee report stated:
Deductions and credits allowed only if return filed.
Paragraph (2) of section 882(c) continues the
substance of the rule contained in section 882(c)(1) of
existing law that a foreign corporation is to receive
the benefit of the allowable deductions only by filing
a true and accurate return of its total income
(including income subject to tax under section 881(a));
a technical amendment has been provided, however, to
make clear that the return must also include the income
derived from sources without the United States which is
effectively connected with the conduct of a trade or
business within the United States. This rule has also
been extended to apply to credits against tax, such as
the foreign tax credit, other than the credit provided
by section 32 for tax withheld at the source or the
credit provided by section 39 for certain users of
gasoline and lubricating oil. As so amended, section
882(c)(2) is consistent with section 874(a) of the
code, as amended by section 3(d) of the bill. [H.
Rept. 1450, 89th Cong. 2d Sess. 90 (1966).]
As to the addition of section 882(d), the Senate committee report
stated:
As a general rule, the bill provides that income of a
nonresident alien or foreign corporation will be
subject to the flat 30-percent (or lower treaty) rate
if it is not effectively connected with the conduct of
a trade or business within the United States. The
regular individual or corporate rates apply to income
which is effectively connected to the conduct of a U.S.
trade or business. However, the foreigner may elect to
treat real property income as if it were income
effectively connected with a U.S. business. This is to
permit the deductions attributable to this real
property income to be deducted from it. * * * [S.
Rept. 1707, 89th Cong., 2d Sess. 19 (1966), 1966-2 C.B.
1059, 1071.]
-23Cf. id. at 26, 1966-2 C.B. at 1076-1077, where the Senate
committee noted as to nonresident aliens owning property in the
United States that
Taxing income on real property at a flat 30-percent
rate without the allowance of allocable
deductions--which in the case of this type of income
may be relatively large--may result in quite heavy tax
burdens on this type of income. Your committee agrees
with the House that the law in this area should be
clarified and doubts whether the disallowance of
deductions in such cases is appropriate. Moreover, the
disallowance of deductions in such cases would tend to
discourage foreign investment in U.S. realty.
2.
Section 217 of the Revenue Act of 1918
a.
Overview
Ten years before the Revenue Act of 1928, 45 Stat. 791,
Congress enacted in section 217 of the Revenue Act of 1918, ch.
18, 40 Stat. 1069, a provision applicable to nonresident aliens.
This provision was substantially similar to section 233 of the
Revenue Act of 1928, except that section 217 used the words
“nonresident alien individual” rather than the words “foreign
corporation”.
Section 217 of the Revenue Act of 1918 provided:
NONRESIDENT ALIENS--ALLOWANCE OF DEDUCTIONS AND
CREDITS.
Sec. 217. That a nonresident alien individual
shall receive the benefit of the deductions and credits
allowed in this title only by filing or causing to be
filed with the collector a true and accurate return of
his total income received from all sources corporate or
otherwise in the United States, in the manner
prescribed by this title, including therein all the
information which the Commissioner may deem necessary
for the calculation of such deductions and credits:
* * *
-24Section 217 of the Revenue Act of 1918 was reenacted in
subsequent revenue acts, see, e.g., Revenue Act of 1924, ch. 234,
sec. 217(g), 43 Stat. 275; Revenue Act of 1926, ch. 27, sec.
217(g), 44 Stat. 32; Revenue Act of 1928, ch. 852, sec. 215(a),
45 Stat. 848; Revenue Act of 1932, ch. 208, sec. 215(a), 47 Stat.
229, and was codified in the 1939 Code as section 215(a), ch. 2,
53 Stat. 77.
It was recodified in the 1954 Code as section
874(a), 68A Stat. 281.
Section 874 of the 1954 Code was
identical in substance with sections 215 and 216 of the 1939
Code, H. Rept. 1337, 83d Cong., 2d Sess., supra at A245, and is
virtually identical to section 882(c)(2) except that the latter
section uses the words “foreign corporation” instead of the words
“nonresident alien individual”.
From the outset, the Secretary interpreted section 217 of
the Revenue Act of 1918 as providing that a nonresident alien was
allowed deductions upon the alien’s filing of a true and accurate
Federal income tax return and that the alien’s tax liability
would be assessed without the benefit of deductions if the
Commissioner had to prepare a substitute return for the alien.
That interpretation was set forth in Article 311 of Regulations
45 as follows:
Art. 311. Allowance of deductions and credits to
nonresident alien individual.--Unless a nonresident
alien individual shall render a return of income as
required in article 404 [i.e., “a full and accurate
return on form 1040 (revised) or form 1040 A (revised)
of his income received from sources within the United
-25States, regardless of amount”], the tax shall be
collected on the basis of his gross income (not his net
income) from sources within the United States. Where a
nonresident alien has various sources of income within
the United States, so that from any one source or from
all sources combined the amount of income shall call
for the assessment of a surtax, and a return of income
shall not be filed by him or on his behalf, the
Commissioner will cause a return of income to be made
and include therein the income of such nonresident
alien from all sources concerning which he has
information, and he will assess the tax and collect it
from one or more of the sources of income within the
United States of such nonresident alien, without
allowance for deductions or credits. * * *
b.
Relationship to Former Section 233
The Court of Appeals for the Fourth Circuit has observed
that Article 311 of Regulations 45 contains the Secretary’s
longstanding construction of section 217 of the Revenue Act of
1918.
See Blenheim Co. v. Commissioner, 125 F.2d at 910.
That
court has stated that Congress is presumed to have included that
construction in section 233 as enacted as part of the Revenue Act
of 1928 and as later reenacted.
See id. (citing Brewster v.
Gage, 280 U.S. 327 (1930); Morgan v. Commissioner, 309 U.S. 78
(1940)).
3.
Section 235 of the Revenue Act of 1928
Section 235 of the Revenue Act of 1928, 45 Stat. 849, was a
predecessor to section 6072 and provided the due date for filing
the Federal income tax returns of a foreign corporation without
an office or place of business in the United States.
of the Revenue Act of 1928 provided:
Section 235
-26SEC. 235. RETURNS.
In the case of a foreign corporation not having
any office or place of business in the United States
the return, in lieu of the time prescribed in section
53(a)(1), shall be made on or before the fifteenth day
of the sixth month following the close of the fiscal
year, or, if the return is made on the basis of the
calendar year then on or before the fifteenth day of
June. If any foreign corporation has no office or
place of business in the United States but has an agent
in the United States, the return shall be made by the
agent.
Section 235 of the Revenue Act of 1928 was reenacted verbatim in
the Revenue Act of 1932, 47 Stat. 230.
Compare section 235 of
the Revenue Act of 1932 with section 235 of the Revenue Act of
1928.
VI.
Relevant Caselaw
A.
Overview
This Court has observed that sections 874(a) and 882(c)(2),
because similar in text and legislative intent, are to be
interpreted in pari materia.
107 T.C. 146, 152 (1996).
See Espinosa v. Commissioner,
The Court has also observed that few
opinions discuss the text of these sections in the context of
Federal income tax returns submitted to the Commissioner
untimely.11
11
Id. at 152-153.
All of the cases discussing the
The paucity of cases is not surprising. Before the
enactment of the 1954 Code, all cases interpreting the
predecessors of sec. 882(c)(2) were appealable to the Court of
Appeals for the Fourth Circuit. See supra note 9. As will be
discussed, the view of that court was set forth by the end of
1942 in three opinions. In addition, as also will be discussed,
(continued...)
-27relevant text are in the setting of former section 233.
Only one
case discusses the text of section 874(a), and no case discusses
the predecessors of that section.
B.
Anglo-Am. Direct Tea Trading Co.
In the seminal case of Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), the taxpayer was a foreign
corporation with no offices or agents in the United States, and
it did not transact any business in the United States.
During
its taxable years ended November 30, 1932 and 1933, the taxpayer
received gross income in the form of dividends from a wholly
owned domestic corporation.
In March 1935, the Commissioner
learned of the dividends, determined that the taxpayer had not
filed Federal income tax returns for its taxable years of
receipt, and discussed this matter with one of the taxpayer’s
officers.
On or about April 15, 1935, without informing the
taxpayer that he was doing so, the Commissioner’s revenue agent
prepared substitute Federal income tax returns for those taxable
years of receipt.
Before the substitute returns were accepted by
the Commissioner, the taxpayer on April 18, 1935, filed
delinquent Federal income tax returns that included the dividends
in its gross income and claimed corresponding deductions for
11
(...continued)
the Secretary’s regulations construing the relevant text did not
state until 1990 that a timely filed return was required as a
condition to a foreign corporation’s deducting its expenses.
-28dividends received.
The Commissioner denied the deductions
reported on those returns.
Section 23 of the Revenue Act of 1928, 45 Stat. 799, and the
Revenue Act of 1932, 47 Stat. 179, allowed the taxpayer to deduct
from its gross income any dividend received from a domestic
corporation.
The Commissioner argued that notwithstanding this
law, the phrase in section 233 of the 1928 and 1932 Revenue Acts
that conditioned the allowance of deductions on the filing of
returns “in the manner prescribed in this title” meant that
deductions were allowable to a foreign corporation only if it
filed its return before the time specified in section 235 of the
1928 and 1932 Revenue Acts.
Under section 235 of the 1928 and
1932 Revenue Acts, the taxpayer’s returns had to be filed by May
30, 1933 and 1934, respectively, in order to be timely.
The
Commissioner argued more specifically that Congress intended that
the word “manner” be construed broadly as including a timeliness
requirement or, in other words, a reference to the timely filing
requirements found elsewhere in the applicable revenue acts.
The Board, in a reviewed opinion with no recorded dissent,
disagreed with the Coommissioner’s interpretation of the relevant
text and held that the taxpayer was entitled to its deductions
even though its returns had been filed untimely.
See Anglo-Am.
Direct Tea Trading Co. v. Commissioner, supra at 716.
The Board
reached this holding by carefully examining Congress’s use in the
-29revenue acts of the words “manner” and “time” and by literally
applying the word “manner” in accordance with the word’s “usual
and ordinary meaning of ‘mode, method, mien, style, or way’”.
Id. at 715.
The Board concluded that the word “manner” was not
intended by Congress to, and thus did not, include any element of
time, let alone impose a requirement that a foreign corporation
file its return by a certain date in order to deduct its
expenses.
Id. at 714-716.
The Board stated:
“A careful reading
of sections 233 and 235 discloses no indication of a legislative
intent to extend the meaning of ‘manner’ so as to include ‘time’.
Neither section provides that the deductions may not be allowed
unless the return is filed within the time prescribed.”
715.
Id. at
The Board added that if Congress had intended to deprive a
foreign corporation of its right to a deduction when it did not
file a timely Federal income tax return, it would have said so.
Id.
The Board also supported its conclusion by analyzing the
“structure” of the revenue acts.
The Board concluded from that
analysis:
They seem to have a more or less common pattern. Thus
section 52 governs the manner of filing corporation
returns, section 215(a) deals with the manner of filing
returns by or for nonresident aliens, section 251(f)
the manner of filing returns by citizens of the United
States who are in receipt of income from sources within
possessions of the United States, and section 233 the
manner of filing returns for a foreign corporation.
Sections 53, 217, and 235 deal with the time and place
of filing returns, while sections 56, 218, and 236 deal
with payment. Inasmuch as separate sections deal with
“manner” and “time”, we think it highly improbable that
-30Congress ever intended to include the element of time
in the section dealing primarily with the manner of
filing. * * * [Id. at 715-716.]
C.
Mills, Spence & Co.
In Mills, Spence & Co. v. Commissioner, a Memorandum Opinion
of the Board of Tax Appeals dated Oct. 5, 1938, the Board
followed its decision in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, supra.
In Mills, Spence & Co., the taxpayer was a
foreign corporation that had no offices in the United States but
derived income from sources within the United States, thus
requiring it to file Federal income tax returns.
On July 19,
1934, the Commissioner informed the taxpayer that it had to file
tax returns for 1930 through 1933 because it had received during
those years gross income subject to Federal income tax.
The
taxpayer filed those returns on February 21, 1936, reporting net
losses for each year.
Subsequently, the Commissioner issued a
notice of deficiency to the taxpayer that disallowed all of the
deductions claimed on the returns.
The Commissioner argued
before the Board that the taxpayer’s failure to file its tax
returns timely meant that it was precluded by section 233 of the
1928 and 1933 Revenue Acts from deducting its expenses.
The
Board disagreed, stating:
That the petitioner received the gross incomes,
incurred the expenses, and sustained the net losses as
set out in the tabulation is not in dispute. The
contention of respondent is that such expenses are not
deductible, for the sole reason that the petitioner,
being a foreign corporation, is prohibited from
-31receiving the benefit of such deductions by the
provisions of section 233 of the Revenue Acts of 1928
and 1932, because none of its returns for the periods
involved was timely filed. The gist of his contention
is that the words in those sections “in the manner
prescribed in this title” embrace timely filing of
returns within their meaning and that, consequently,
deductions are allowable to a foreign corporation only
when its returns are filed within the time specified in
section 235 of the Revenue Acts of 1928 and 1932,
supra. Under this section, 235, petitioner should have
filed its returns for the periods involved on or before
June 15 of each of the years 1931, 1932, 1933, and
1934, but did not file any returns until February 21,
1936, when it filed returns for all the periods. The
respondent argues that as a consequence of such
untimely filing of the returns the petitioner is not
entitled to the deductions of the expenses involved and
that the tax should be computed upon its gross income.
We do not agree with respondent’s contention. It
is unnecessary to assign any reason for such conclusion
other than to say that our decision on this point is
clearly controlled by the holding of the Board in
Anglo-American Direct Tea Trading Co., Ltd.,
promulgated October 4, 1938, 36 B.T.A. No. 94.
Accordingly we hold that petitioner is entitled to the
deduction of the expenses as set out in the above
tabulation and that respondent erred in computing
petitioner’s taxes on the basis of its gross income.
[Mills, Spence & Co. v. Commissioner, supra; fn. ref.
omitted.]
D.
Am. Inv. and Gen. Trust Co.
In Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum
Opinion of the Board of Tax Appeals dated April 13, 1939, the
Board again applied its holding in Anglo-Am. Direct Tea Trading
Co. v. Commissioner, 38 B.T.A. 711 (1938).
The Board found that
the taxpayer, a foreign corporation, had not filed its 1929 and
1930 Federal income tax returns timely.
The Commissioner again
-32argued that this finding meant that the taxpayer was not entitled
to its deductions.
The Board disagreed, stating:
this is not a “no return” case. It is obvious,
however, that the petitioner was delinquent in filing
its returns. The returns were due not later than
June 15, 1930 and June 15, 1931, whereas they were not
filed until after June 12, 1934. The Commissioner
argues that this foreign corporation can not receive
the benefit of the deductions and credits allowed under
Title I of the Revenue Act of 1928 because the filing
of the delinquent returns was not the filing of returns
“in the manner prescribed” in Title I. This same
argument has been considered and rejected by the Board
in the case of Anglo-American Direct Tea Trading Co.,
Ltd., 38 B.T.A. 711. It is rejected here on authority
of that case. [Am. Inv. and Gen. Trust Co., Ltd. v.
Commissioner, supra.]
E.
Taylor Sec., Inc.
Next, the Board decided Taylor Sec., Inc. v. Commissioner,
40 B.T.A. 696 (1939).
There, the Commissioner issued a notice of
deficiency to the foreign corporation taxpayer on March 23, 1937.
That notice reflected substitute returns that the Commissioner
had prepared for the taxpayer’s 1930 through 1935 taxable years,
using only the taxpayer’s income.
On June 16, 1937, the taxpayer
petitioned the Board as to the notice of deficiency, and the
Commissioner answered the petition shortly thereafter.
On
October 20, 1938, the taxpayer was notified by the Board that a
hearing was set for a stated session of the Board beginning
December 5, 1938.
Subsequently, after the Board continued the
date of that hearing until January 16, 1939, the taxpayer filed
its 1930 through 1935 tax returns on December 13, 1938.
-33The Board held that the taxpayer was not entitled to its
claimed deductions because it had not filed a return as required
by the statute.
In rejecting any argument that the taxpayer’s
returns were “returns” for this purpose, the Board distinguished
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, on the
grounds that there the taxpayer had filed its returns before the
notice of deficiency was issued, those returns had been audited
(not the returns prepared by the revenue agent), and the returns
prepared by the revenue agent had never been accepted by the
Commissioner.
702-703.
See Taylor Sec., Inc. v. Commissioner, supra at
The Board stated:
Here the question is whether the petitioner, by
filing returns after the respondent made his
determination of deficiencies under the circumstances
presented, relieved itself of the adverse condition in
which it was situated by reason of section 233 and is
entitled to the benefits to which it would otherwise
have been entitled by the timely filing of returns. In
our opinion it may not.
* * * we are unable to conclude that in enacting
section 233, supra, it was the intention of Congress
that delinquent returns filed by a foreign corporation
after the respondent’s determination should constitute
the returns required as a prerequisite to the allowance
of the credits and deductions ordinarily allowable to
the corporations. * * * By section 233 the allowance
to foreign corporations of the credits and deductions
ordinarily allowable is specifically predicated upon
such corporations filing returns. In view of such a
specific prerequisite it is inconceivable that Congress
contemplated by that section that taxpayers could wait
indefinitely to file returns and eventually when the
respondent determined deficiencies against them they
could then by filing returns obtain all the benefits to
which they would have been entitled if their returns
had been timely filed. Such a construction would put a
-34premium on evasion, since a taxpayer would have nothing
to lose by not filing a return as required by statute.
[Id. at 703-704.]
F.
Ardbern/Blenheim
One year later, the Board decided Ardbern Co. v.
Commissioner, 41 B.T.A. 910 (1940), and Blenheim Co. v.
Commissioner, 42 B.T.A. 1248 (1940).
In Ardbern, the taxpayer
was a foreign corporation that attempted to file Federal income
tax returns for 1929 through 1932 in June 1937.
The taxpayer
tendered those returns to the Commissioner’s revenue agent, but
the agent refused to accept them believing that the returns had
to be filed with the Collector of Internal Revenue at Baltimore,
Maryland.
The agent did not inform the taxpayer how to file
those returns properly.
On July 3, 1937, the Commissioner issued
a notice of deficiency to the taxpayer for the years in question
and, 6 days later, prepared substitute returns for the taxpayer.
On September 29, 1937, the taxpayer petitioned the Board with
respect to the matter, and the Commissioner answered that
petition on December 7, 1937.
On October 28, 1938, the taxpayer
filed its 1929 through 1932 Federal income tax returns with the
Collector of Internal Revenue at Baltimore, Maryland, claiming
deductions and reporting no tax due.
The Board applied Taylor Sec., Inc. v. Commissioner, supra,
and sustained the Commissioner’s disallowance of deductions.
Board stated:
The
-35Petitioner did not, by the lodgment of returns
with * * * [the revenue agent], discharge the duty
which the statute laid upon it. Also, the action of
petitioner in filing returns with the collector at
Baltimore on October 28, 1938, was ineffective to bring
it within the limitations of the statute so as to
entitle it to the benefit of deductions. These returns
were filed (a) after respondent had determined the
deficiencies and prepared returns for petitioner under
section 3176 of the Revised Statutes, as amended, and
(b) after the petition and answer had been filed and
the case was at issue before the Board, and only
approximately two and one-half months prior to the
hearing. Returns filed under such circumstances do not
meet the requirements of section 233. Taylor
Securities, Inc., 40 B.T.A. 696. On the point under
discussion, the facts of the instant proceeding are not
distinguishable in any material respect from those of
the Taylor case. On authority of that decision and for
the reasons therein stated, which need not be repeated
here, respondent’s action in computing the present
deficiencies without the allowance of deductions is
approved. [Ardbern Co. v. Commissioner, 41 B.T.A at
919-920.]
Upon appeal, the Court of Appeals for the Fourth Circuit
modified and remanded the Board’s decision on the authority of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711
(1938).
The court stated:
fair dealing between the Government and a taxpayer
would require the agent to whom the returns were
improperly tendered for filing to advise the taxpayer
as to the official and place where the returns should
be filed. Here the agent Muller rejected the returns
on the sole ground that they were improperly executed
and did not notify the taxpayer that the returns could
in no event be filed with him. Soon after the refusal
to accept the returns the deficiency was determined
against the taxpayer.
It is conceded that, if the return which taxpayer
attempted to file before Muller in June 1937 had been
properly filed before the Collector at Baltimore,
taxpayer would have been entitled to the deductions
-36claimed, which represented expense incurred in
connection with the earning of the income taxed. The
deductions are denied merely because they were not
claimed in a return properly filed until after the
deficiency assessment had been made against taxpayer
upon a return filed for him by the Commissioner in
which no deductions were allowed. We think, however,
that when return was filed by the Commissioner for the
taxpayer, he should have given him the benefit of
proper deductions for expense of doing business, of
which he had been notified by the return which taxpayer
had attempted to file with his agent, or, at least,
that taxpayer should be allowed such deductions when,
upon the assessment of a deficiency against him, he
shows that prior to its assessment he attempted in good
faith to file a return in which such deductions were
claimed. This is nothing but elementary justice, and
we find nothing in the statute which forbids it. The
return made by the Commissioner was clearly not based
upon the best available information.
While there is a specific penalty of 25 per centum
fixed for failure to file tax returns, Section 291,
Revenue Act of 1928, * * * there is no provision that
there shall be an added penalty in the form of not
allowing the delinquent taxpayer deductions to which it
otherwise would be entitled. The Board held in
Anglo-American Direct Tea Trading Co. v. Commissioner,
38 B.T.A. 711: “Inasmuch as separate sections deal
with “manner” and “time,” we think it highly improbable
that Congress ever intended to include the element of
time in the section dealing primarily with the manner
of filing. We hold, therefore, that the mere fact the
return was not filed within the time prescribed by
section 235 does not, under the circumstances here
presented, preclude the allowance of deductions
claimed.” [Ardbern Co. v. Commissioner, 120 F.2d at
426.]
The Board also followed Taylor Sec., Inc. v. Commissioner,
40 B.T.A. 696 (1939), in Blenheim Co. v. Commissioner, 42 B.T.A.
1248 (1940).
There, the taxpayer was a foreign corporation that
on June 15, 1935, filed a 1934 personal holding company return
(Form 1120H) reporting income consisting only of dividends
-37received from domestic corporations.
The Commissioner learned
that the taxpayer had not filed a corporate income tax return
(Form 1120) for that year and asked the taxpayer to do so.
taxpayer declined.
The
On April 28, 1938, the Commissioner prepared
a substitute return for the taxpayer and, on May 18, 1938, issued
to it a notice of deficiency.
On August 9, 1938, the taxpayer
filed a Form 1120 for 1934.
The Board held that the filing of Form 1120H did not satisfy
the requirements of section 233 of the 1928 and 1932 Revenue Acts
because the personal holding company surtax was separate and
distinct from the corporate income tax.
Id. at 1251-1252.
As to
the Form 1120 filed by the taxpayer for 1934, the Board stated:
Undoubtedly a taxpayer may litigate a
determination of respondent on the basis of a return
made by * * * [the Commissioner]. But, a “return”
filed by a taxpayer after such a return has been
prepared and filed for him by respondent, under the
circumstances existing here, is a nullity and does not
comply with section 233, supra. The taxpayer can not
thus take advantage from an alleged return submitted by
the taxpayer not only after respondent’s filing of its
return * * * but also after the issuance of a notice of
deficiency. Taylor Securities, Inc., 40 B.T.A. 696.
* * * [Id. at 1251.]
On appeal, the Court of Appeals for the Fourth Circuit
affirmed.
The court first quoted section 233 of the 1928 and
1932 Revenue Acts and then stated with respect thereto:
“It is
true that this section contains no reference to a time element.”
Blenheim Co. v. Commissioner, 125 F.2d at 908.
The court then
noted that section 233 of the 1928 and 1932 Revenue Acts applied
-38only to foreign corporations and explained that Congress intended
to impose special conditions on foreign corporations vis-a-vis
domestic corporations.
The court stated:
The difficulty here encountered by the
Commissioner in attempting to ascertain the
petitioner’s correct income tax is a striking example
of the many administrative problems inherent in the
application of the federal income tax to foreign
corporations. This has prompted Congress to impose
special conditions on such corporations. Indeed,
unless a foreign corporation is induced voluntarily to
advise the Commissioner of all of its income
attributable to sources within the United States and of
the exact nature of all deductions from such income,
the Commissioner may never learn even of the
corporation’s existence, and, in any event, he will
probably be unable to determine the correct amount of
its taxable income.
The situation is pregnant with possibilities of
tax evasion. In express recognition of this fertile
danger to the orderly administration of the income tax
as applied to foreign corporations, Congress
conditioned its grant of deductions upon the timely
filing of true, proper and complete returns. This is
in addition, of course, to the 25% penalty provided by
Section 291 of the 1934 Act for both foreign and
domestic corporations which either file no return or a
late return unless “reasonable cause” for the failure
to file a timely return is shown. * * * [Id. at 909.]
As to the “terminal date” that the Board had adopted in
Taylor Sec., Inc. v. Commissioner, supra, the Court of Appeals
for the Fourth Circuit explained that this date was justified
notwithstanding the absence in the statute of a time element.
The court stated:
The conclusion that the preparation of a return by
the Commissioner a reasonable time after the date it
was due terminates the period in which the taxpayer may
enjoy the privilege of receiving deductions by filing
-39its own return, is consistent not only with the
intention of Congress * * * but also with
considerations of sound administrative procedure and
the generally accepted rule concerning the number of
returns which may be filed.
This terminal date, which the Board of Tax Appeals
first adopted in Taylor Securities v. Commissioner,
40 B.T.A. 696 (1939), is directed against those foreign
corporations which instead of being induced voluntarily
to advise the Commissioner of their domestic
operations, might find their interests best served by
filing no return whatever, and then waiting until such
time, if any, as the Commissioner discovers their
existence and acquires sufficient information about
their income on which to base a return. Unless they
are precluded from then obtaining the deductions and
credits under such circumstances, such foreign
corporation can, if detected, come in for the first
time after the Commissioner has made a return and
suffer no economic loss other than the general 25% late
filing penalty which applies to domestic as well as
foreign corporations.
Without prescribing an absolute and rigid rule
that whenever the Commissioner files a return for a
foreign corporation the taxpayer is completely and
automatically denied the benefit of deductions or
credits, we yet hold that the facts of the instant case
justify a disallowance of deductions which petitioner
might otherwise have been entitled to claim, had it
filed a timely return in compliance with the statutory
requirement. [Blenheim Co. v. Commissioner, 125 F.2d
at 910.]
The Court of Appeals for the Fourth Circuit also found in the
legislative history of section 217 of the Revenue Act of 1918
further support for that conclusion and its reading of the
statute to the effect that a foreign corporation was entitled to
deduct its expenses upon the filing of an accurate and complete
return:
-40It will thus be noted that Section 233 relating to
foreign corporations, which made its first appearance
in the Revenue Act of 1928, 26 U.S.C.A. Int. Rev. Acts,
page 419, is almost verbally identical with this
section governing nonresident aliens which has been a
part of the revenue laws since 1918. The application
of Section 217 of the 1918 Act is clear. From the
outset the Treasury Regulations have expressly provided
that no deductions were allowable to nonresident aliens
unless an accurate and complete return was filed, and
the filing of the return by the Commissioner fixed the
tax liability. * * *
*
*
*
*
*
*
*
The foregoing regulation [Article 311 of Treasury
Regulations 45] states specifically that deductions are
allowable to a nonresident alien only if a return is
filed, and, if no return has been filed at the time the
Commissioner prepares a return for the taxpayer, the
tax shall be assessed with no allowance for deductions.
Congress may be presumed to have adopted this
longstanding administrative construction when it
enacted and reenacted Section 233. Brewster v. Gage,
1930, 280 U.S. 327, 50 S. Ct. 115, 74 L.Ed. 457, Morgan
v. Commissioner, 1940, 309 U.S. 78, 626, 60 S. Ct. 424,
84 L.Ed. 585, 1035. [Id. at 910.]
The Court of Appeals for the Fourth Circuit distinguished its
holding in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir.
1941), stating:
A substantially different factual situation is
presented in the case before us. Here the Commissioner
prepared a return only after he had unsuccessfully made
repeated requests to the taxpayer to do so, and only
after the taxpayer had flouted all of these requests.
Then, after the Commissioner had assessed a deficiency
on the basis of his return, but only then, the
petitioner filed its petition for review by the Board
and also a return.
Unless the deductions are here denied, Section 233
will become a meaningless provision, for if, after the
Commissioner has earnestly attempted to obtain a return
by the taxpayer and has waited a reasonable time before
-41filing his own return, the taxpayer may still enjoy the
privilege of all deductions and credits, there is then
no inducement to foreign corporations voluntarily to
file timely returns. In the absence of demonstrable
fraud, they will, by self-serving uncooperative
conduct, suffer no loss other than the general late
filing penalty which is applicable to domestic as well
as foreign corporations. Such a construction of the
statute would put a premium on tax evasion and would
reduce the administration of the tax laws to mere idle
activity. [Id. at 909-910.]
G.
Georday Enters.
In Georday Enters. v. Commissioner, 126 F.2d 384 (4th Cir.
1942), affg. a Memorandum Opinion of the Board of Tax Appeals, a
companion case to Blenheim Co. v. Commissioner, 125 F.2d 906 (4th
Cir. 1942), the Court of Appeals for the Fourth Circuit affirmed
the Board’s denial of deductions under section 233 of the 1928
and 1932 Revenue Acts.
The court noted that the case for the
disallowance was even stronger than in Blenheim because the
taxpayer did not attempt to file a return voluntarily until after
a petition had been filed with the Board.
The court stated:
On the issues of the timeliness of Georday’s federal
income tax return and the imposition of a 25% penalty,
our decision in the Blenheim case is determinative.
The case for disallowance of Georday’s deductions is
even stronger here because Georday failed to file a
return voluntarily not only after a return had been
filed for it by the Commissioner and after a deficiency
letter had been sent to it, but even after a petition
to the Board had been filed. In point of time, Georday
filed its return more than five years after the date on
which it was due.
Georday, therefore, clearly failed to file its
return within the reasonable terminal period prescribed
in the Blenheim case and is now precluded from
obtaining the benefits of any deductions it might have
-42otherwise been entitled to claim had it filed a timely
return. * * * [Georday Enters. v. Commissioner, supra
at 388.12]
H.
Espinosa
While each of the previously discussed cases dealt with the
applicability of former section 233 to a foreign corporation,
Espinosa v. Commissioner, 107 T.C. 146 (1996), involved the
applicability of section 874(a) to a nonresident alien taxpayer.
In Espinosa, the Commissioner had mailed a letter to the taxpayer
on November 13, 1992, asking him if he had filed returns and, if
he had not, instructing him to file returns or otherwise respond.
The letter stated that the Commissioner would file substitute
returns for the taxpayer if the taxpayer did not respond by
December 1, 1992.
On January 12, 1993, the taxpayer had not yet
responded, and the Commissioner wrote the taxpayer a second
request, adding that “your tax liability [will be determined]
based on the information we have” if the taxpayer did not respond
within 20 days.
On February 3, 1993, after the taxpayer had again failed to
respond, the Commissioner notified the taxpayer that the
Commissioner had filed substitute returns for the taxpayer for
1987 through 1991.
On March 23, 1993, the Commissioner notified
the taxpayer that the substitute returns had been computed
12
The “terminal period prescribed in the Blenheim case”
(emphasis added) is the point where the Commissioner prepared a
substitute return for the taxpayer.
-43without the benefit of any deductions.
On October 7, 1993, the
taxpayer submitted Federal income tax returns for 1987 through
1991; apparently, these returns were never filed by the
Commissioner.
The returns reported net losses from rental
properties located in the United States.
On January 13, 1994,
the Commissioner issued a notice of deficiency to the taxpayer
for 1987 through 1991.
The Commissioner determined in the notice
of deficiency that the taxpayer was liable for deficiencies and
additions to tax as ascertained from the substitute returns.
Pursuant to section 874(a), the Commissioner did not allow the
taxpayer to deduct any of his related expenses.13
This Court upheld the Commissioner’s determination, deciding
that a nonresident alien may not avoid the sanctions of section
874(a) by filing returns after the Commissioner has prepared
returns for the taxpayer, but before the Commissioner has issued
a notice of deficiency.
150, 158.
See Espinosa v. Commissioner, supra at
The Court noted that the Commissioner before preparing
the substitute returns had informed the taxpayer that he had not
filed a Federal income tax return and had given him a reasonable
time to do so.
13
Id. at 157.
Although the Commissioner in the notice of deficiency had
characterized the taxpayer’s rental income as effectively
connected income, the Court was careful to note that neither
party in that case had questioned whether the taxpayer had made a
valid election to support that characterization. See Espinosa v.
Commissioner, 107 T.C. 146, 150 (1996).
-44Respondent argues in this case that the Court in Espinosa v.
Commissioner, supra at 156, interpreted Anglo-Am. Direct Tea
Trading Co. v. Commissioner, 38 B.T.A. 711 (1938), to hold solely
that a foreign corporation’s (or nonresident alien’s) filing of a
Federal income tax return after the due date set forth in section
6072 (and its predecessors) is not the only factor to consider in
determining whether the corporation (or alien) is entitled to
deduct its expenses.
We disagree.
The Court in Espinosa on the
referenced page made the following observation as to Anglo-Am.
Direct Tea Trading Co.:
“while a terminal date does exist [after
which a foreign corporation or nonresident alien can no longer
claim the benefit of deductions by filing a Federal income tax
return], the timely filing requirements of section 6072(c) are
not determinative as to whether a taxpayer [the corporation or
alien] is entitled to the benefit of deductions.”
The Court in
Espinosa did not limit Anglo-Am. Direct Tea Trading Co. to that
observation or to any other point.
In fact, as the Board
explained its holding in Anglo-Am. Direct Tea Trading Co. shortly
after rendering it:
In the Anglo-American Co. case, it was held that
the phrase in section 233 of the Revenue Acts of 1928
and 1932, “in the manner prescribed in this title”, did
not mean within the time prescribed in the titles of
the respective acts and the allowance of the credits
and deductions otherwise allowable by such acts was not
dependent under section 233 on the filing of returns
within the time prescribed by said acts. [Taylor Sec.,
Inc. v. Commissioner, 40 B.T.A. at 702.]
-45Accord Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum
Opinion of the Board of Tax Appeals dated April 13, 1939; Mills,
Spence & Co. v. Commissioner, a Memorandum Opinion of the Board
of Tax Appeals dated Oct. 5, 1938.
In addition, the Court of
Appeals for the Fourth Circuit in Ardbern Co. v. Commissioner,
120 F.2d at 425-426, quoted and applied favorably the following
holding from Anglo-Am. Direct Tea Trading Co. in deciding for the
taxpayer:
Inasmuch as separate sections deal with “manner” and
“time,” we think it highly improbable that Congress
ever intended to include the element of time in the
section dealing primarily with the manner of filing.
We hold, therefore, that the mere fact the return was
not filed within the time prescribed by Section 235
does not, under the circumstances here presented,
preclude the allowance of deductions claimed.
I.
Inverworld, Inc.
In Inverworld, Inc. v. Commissioner, T.C. Memo. 1996-301,
the taxpayer was a foreign corporation that had not as of the
time of trial filed a Federal income tax return for any of the
relevant years.
All of those years predated the effective date
of the disputed regulations.
See discussion infra p. 48.
The taxpayer noted that the applicable regulations had been
issued in 1957 and that those regulations did not contain a
timely filing requirement.
The taxpayer argued that such a
requirement was therefore not applicable to the relevant years.
The Court did not decide that argument.
Instead, the Court
applied the opinions of the Court of Appeals for the Fourth
-46Circuit in Blenheim v. Commissioner, 125 F.2d 906 (4th Cir.
1942), and Ardbern Co. v. Commissioner, supra, and held that
section 882(c)(2) applied to deny the taxpayer the benefit of any
deductions for those years because the taxpayer had never filed a
return.
VII.
Regulations Interpreting Section 882(c)(2) and Its
Predecessors
A.
Background
The Secretary never issued regulations interpreting former
section 233.
Since the enactment of section 882 of the 1954
Code, the Secretary has issued four sets of regulations
interpreting the relevant text of that section.
The first set of
regulations was issued in 1957 (1957 regulations) and was amended
in 1990 through the second set of regulations (1990 regulations),
which contain the disputed regulations.
The third set of
regulations was issued in 2002 (2002 temporary regulations) as
temporary regulations amending a portion of the 1990 regulations.
The fourth set of regulations was issued in 2003 (2003
regulations) and finalized the 2002 temporary regulations.14
14
In addition to the three sets of regulations that were
issued after the 1957 regulations, the Secretary in 1980 issued
one other set of regulations (1980 regulations) that pertained to
the 1957 regulations. See T.D. 7749, 1981-1 C.B. 390. The 1980
regulations amended the 1957 regulations by adding a new
paragraph (c), the substance of which is now reflected in sec.
1.882-4(b), Income Tax Regs. Because the 1980 regulations relate
to a subject that is not relevant to our analysis, we make no
further reference to them.
-47B.
1957 Regulations
On October 23, 1957, the Secretary filed in the Federal
Register the 1957 regulations interpreting section 882 of the
1954 Code.
See sec. 1.882-4, Income Tax Regs., 22 Fed. Reg. 8362
(Oct. 23, 1957).
According to those regulations, section 882 of
the 1954 Code pertained to “resident corporations”; i.e.,
corporations with a trade or business in the United States, and
such a corporation could deduct its expenses only if it filed a
true and accurate Federal income tax return in accordance with
section 6012 and the regulations thereunder.
The 1957
regulations stated that a foreign corporation would be taxed on
its gross income, without the benefit of any deductions, if it
did not so file such a return.
The 1957 regulations did not
require that the required return be filed by a set time.
Nor did
the 1957 regulations state that the relevant text included a
timely filing requirement.
The 1957 regulations stated in
relevant part:
§ 1.882-4 Allowance of Deductions to Foreign
Corporations.--* * *
(b) Resident foreign corporations.--(1) Return
necessary. A resident foreign corporation shall
receive the benefit of the deductions allowed to it
with respect to the income tax, only if it files or
causes to be filed with the district director, in
accordance with section 6012 and the regulations
thereunder, a true and accurate return of its total
income received from all sources within the United
States.
-48(2) Tax on gross income. If a return is not so
filed, the tax shall be collected on the basis of gross
income, determined in accordance with § 1.882-1 but
without regard to any deductions otherwise allowable.
C.
1990 Regulations
On December 10, 1990, the Secretary issued the 1990
regulations to amend section 1.882-4, Income Tax Regs., as
adopted in 1957.
See sec. 1.882-4, Income Tax Regs., 55 Fed.
Reg. 50830 (Dec. 11, 1990), T.D. 8322, 1990-2 C.B. 172.
The
amendments were first published as proposed regulations.
See
sec. 1.882-4, Proposed Income Tax Regs., 54 Fed. Reg. 31547
(July 31, 1989).
In the preamble to the proposed regulations,
the Secretary explained:
“Since the filing of a timely return is
one of the requirements set forth in subtitle F, these
regulations provide that otherwise allowable deductions and
credits will be allowed only if a return is filed by the time
limits as set forth in these regulations.”
Id.
As finalized,
the 1990 regulations became effective July 31, 1990, for taxable
years ended after that date.
See sec. 1.882-4, Income Tax Regs.,
supra, T.D. 8322, 1990-2 C.B. at 172.
The 1990 regulations added to the 1957 regulations a general
requirement that a foreign corporation file its Federal income
tax return timely; i.e., generally before the 18-month deadline,
in order to deduct its expenses for the year covered by the
return.
As respondent asserts in brief, a timely filing
requirement was added because:
-49When Anglo-American and its progeny were decided,
the scale and nature of international business activity
was markedly different from today’s modern business
environment. At that time, international travel was a
time-consuming and cumbersome endeavor. Transatlantic
air travel was in its infancy, zeppelins and cruise
ships were the predominant means of travel. Books and
records were in paper, not electronic form. Data and
information was transmitted via mail.
In the years since Anglo-American, there have been
dramatic changes and increases in the nature and level
of international business activity. International air
travel is commonplace, taking hours instead of days.
Books and records are now maintained in electronic form
on computers. Data, information, and money are
transmitted around the world in electronic form.
Businesses have instantaneous access to information via
the internet. Documents are delivered via overnight
delivery or by facsimile.
Section 1.882-4(a)(2), Income Tax Regs., as amended in 1990,
states:
(2) Return necessary. A foreign corporation shall
receive the benefit of the deductions and credits
otherwise allowed to it with respect to the income tax,
only if it timely files or causes to be filed with the
Philadelphia Service Center, in the manner prescribed
in subtitle F, a true and accurate return of its
taxable income which is effectively connected, or
treated as effectively connected, for the taxable year
with the conduct of a trade or business in the United
States by that corporation. * * *
Section 1.882-4(a)(3)(i), Income Tax Regs., as amended in 1990,
goes on to set forth filing deadlines by which to measure whether
the timely filing requirement has been met.
See supra note 4.
Section 1.882-4(a)(3)(ii), Income Tax Regs., as amended in 1990,
also states, without further explanation, that “The filing
deadlines set forth in paragraph (a)(3)(i) of this section may be
-50waived by the District Director or Assistant Commissioner
(International), in rare and unusual circumstances if good cause
for such waiver, based on the facts and circumstances, is
established by the foreign corporation.”
As to the inclusion of the timely filing requirement, the
preamble to the 1990 regulations states in relevant part:
Commentators questioned the validity of the filing
deadlines as set forth in the proposed regulations.
The filing deadlines were not eliminated in the final
regulations, however, since the statute clearly
provides for the denial of deductions and credits if
returns are not filed in a timely manner. This
requirement is justified because of different
administrative and compliance concerns with regard to
nonresident alien individuals and foreign corporations.
[T.D. 8322, supra, 1990-2 C.B. at 172, 55 Fed. Reg.
50827 (Dec. 11, 1990).]
Among the referenced commentators was the American Bar
Association Section of Taxation (ABAST).
See Letter from Holden,
Chair, Section of Taxation, American Bar Association Section of
Taxation (May 25, 1990), reprinted in 90 TNT 120-28 (June 7,
1990).
The ABAST commented that the timely filing requirement
was inconsistent with section 882(c)(2) and supported that
comment by citing Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), Blenheim Co. v. Commissioner,
125 F.2d 906 (4th Cir. 1942), Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941), and Georday Enters. v.
Commissioner, 126 F.2d 384 (4th Cir. 1942), all of which, the
ABAST stated, rejected such a requirement.
See Letter from
-51Holden, supra.
The ABAST also observed that there had been
“almost countless tax bills over the past 50 years, including
recodifications in 1939, 1954 and 1986" and concluded that
Congress must have acquiesced in the interpretation set forth in
those cases.
D.
Id.
2002 Temporary Regulations
On January 28, 2002, the Secretary filed with the Federal
Register the 2002 temporary regulations consisting of section
1.882-4T(a)(3)(ii), (iii), and (iv), Temporary Income Tax Regs.,
67 Fed. Reg. 4217 (Jan. 29, 2002).
These temporary regulations
amended the waiver standard prescribed in section 1.882-4, Income
Tax Regs., as amended in 1990, and listed examples of the amended
standard.
The 2002 temporary regulations were effective for open
years for which a request for a waiver was filed on or after
January 29, 2002.
E.
2003 Regulations
On March 7, 2003, the Secretary replaced the 2002 temporary
regulations with the 2003 regulations.
(March 7, 2003).
See 68 Fed. Reg. 11313
The 2003 regulations allow the Commissioner to
waive the 18-month deadline prescribed in the 1990 regulations if
the foreign corporation “establishes to the satisfaction of the
Commissioner or his or her delegate that the corporation, based
on the facts and circumstances, acted reasonably and in good
faith in failing to file a U.S. income tax return”.
Sec.
-521.882-4(a)(3)(ii), Income Tax Regs.
Section 1.882-4(a)(3)(ii)
and (iii), Income Tax Regs., as finalized in the 2003
regulations, is effective for open years for which a request for
a waiver is filed on or after January 29, 2002.
See sec.
1.882-4(a)(3)(iv), Income Tax Regs.
In the case of the subject returns, the 18-month deadlines
are May 15, 1996, 1997, and 1998, respectively (i.e., 18 months
after the 15th day of the sixth month after the close of the
taxable year).
VIII.
Secretary’s Authority To Issue Regulations
The Secretary may issue two types of regulations.
See
Tutor-Saliba Corp. v. Commissioner, 115 T.C. 1, 7 (2000); Estate
of Pullin v. Commissioner, 84 T.C. 789, 795 (1985); see also E.I.
duPont de Nemours & Co. v. Commissioner, 41 F.3d 130, 135 (3d
Cir.), affg. 102 T.C. 1 (1994).
The first type, legislative
regulations, are issued pursuant to a specific delegation from
Congress to the Secretary.
The second type, interpretative
regulations, are issued under the general authority vested in the
Secretary under section 7805(a).
Respondent acknowledges that the disputed regulations are
interpretative regulations.
Section 7805(a) reflects a broad
delegation of general authority from Congress to the Secretary to
prescribe all needful rules and regulations for the enforcement
of the Internal Revenue Code.
See United States v. Correll,
-53389 U.S. 299, 306-307 (1967).
The authority delegated to the
Secretary, however, is not limitless and, if exercised
improperly, may usurp the role of Congress as the legislator in
our system of Government.
The Secretary’s authority to issue
regulations is not the power to make law; it is the power to
carry into effect the will of Congress as expressed in the
statute under which the regulations are prescribed.
See
Manhattan Gen. Equip. Co. v. Commissioner, 297 U.S. 129, 134-135
(1936).
When a statute’s provisions are unambiguous, and its
directive is specific, the Secretary has no power to amend that
statute by regulation.
See Koshland v. Helvering, 298 U.S. 441,
447 (1936).
IX.
This Court’s Review of an Interpretative Regulation
This Court is empowered to invalidate a regulation that
exceeds the authority of the Secretary to issue it.
See, e.g.,
Profl. Equities, Inc. v. Commissioner, 89 T.C. 165 (1987); Estate
of Pullin v. Commissioner, supra; Stephenson Trust v.
Commissioner, 81 T.C. 283, 288 (1983); Estate of Boeshore v.
Commissioner, 78 T.C. 523, 527 (1982); Washington v.
Commissioner, 77 T.C. 656 (1981), affd. 692 F.2d 128 (D.C. Cir.
1982).
When this Court reviews an interpretative Federal tax
regulation, we generally apply the analysis set forth by the
Supreme Court in Natl. Muffler Dealers Association v. United
-54States, 440 U.S. 472 (1979).15
See, e.g., Robinson v.
Commissioner, 119 T.C. 44, 70 (2002); Walton v. Commissioner,
115 T.C. 589, 597-598 (2000); UnionBancal Corp. v. Commissioner,
113 T.C. 309, 317 (1999).
Under Natl. Muffler, which like the
present case involved an interpretative regulation issued under
section 7805(a), an interpretative regulation is valid if it
implements a congressional mandate in a reasonable manner.16
See
Natl. Muffler Dealers Association v. United States, supra at 476477 (citing United States v. Cartwright, 411 U.S. 546, 550
(1973); United States v. Correll, supra at 307); see also United
States v. Cleveland Indians Baseball Co., 532 U.S. 200, 218-219
(2001); Newark Morning Ledger Co. v. United States, 507 U.S. 546,
575-576 (1993); Rowan Cos. v. United States, 452 U.S. 247,
252-253 (1981).
We must defer to a Federal tax regulation that
is reasonable under this standard.
Cf. United States v. Mead
Corp., 533 U.S. 218 (2001); Smiley v. Citibank (S.D.), N.A.,
517 U.S. 735, 739 (1996).
15
A task force of the American Bar Association has recently
concluded likewise that the Supreme Court primarily reviews
interpretative Federal tax regulations under the analysis set
forth in Natl. Muffler Dealers Association v. United States,
440 U.S. 472 (1979). See Salem et al., ABA Section of Taxn.
Report of the Task Force on Judicial Deference, 104 Tax Notes
1231 (2004).
16
Legislative regulations, by contrast, are upheld “unless
arbitrary, capricious, or manifestly contrary to the statute”.
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837, 844 (1984).
-55An interpretative Federal tax regulation is reasonable under
Natl. Muffler Dealers Association v. United States, supra, only
if it “harmonizes with the plain language of the statute, its
origin, and its purpose.”
Id. at 477; see also United States v.
Vogel Fertilizer Co., 455 U.S. 16, 26 (1982).
For this purpose,
A regulation may have particular force if it is a
substantially contemporaneous construction of the
statute by those presumed to have been aware of
congressional intent. If the regulation dates from a
later period, the manner in which it evolved merits
inquiry. Other relevant considerations are the length
of time the regulation has been in effect, the reliance
placed on it, the consistency of the Commissioner’s
interpretation, and the degree of scrutiny Congress has
devoted to the regulation during subsequent
re-enactments of the statute. [Natl. Muffler Dealers
Association v. United States, supra at 477.]
Following its decision in Natl. Muffler Dealers Association
v. United States, supra, the Supreme Court decided Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837
(1984).
There, the Supreme Court stated:
When a court reviews an agency’s construction of
the statute which it administers, it is confronted with
two questions. First, always, is the question whether
Congress has directly spoken to the precise question at
issue. If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed
intent of Congress.9 If, however, the court determines
Congress has not directly addressed the precise
question at issue, the court does not simply impose its
own construction on the statute, as would be necessary
in the absence of an administrative interpretation.
Rather, if the statute is silent or ambiguous with
respect to the specific issue, the question for the
court is whether the agency’s answer is based on a
permissible construction of the statute.
-569
The judiciary is the final authority on issues
of statutory construction and must reject
administrative constructions which are contrary to
clear congressional intent. * * * If a court,
employing traditional tools of statutory construction,
ascertains that Congress had an intention on the
precise question at issue, that intention is the law
and must be given effect.
[Id. at 842-843 (some fn. refs. omitted; citations
omitted).]
The question arises from the timing of these two decisions
whether the Supreme Court intended for Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., supra, to replace Natl. Muffler
Dealers Association v. United States, supra, in the review of a
Federal tax regulation.
We have previously stated with respect
to that question: “we are inclined to the view that the impact of
the traditional, i.e., National Muffler standard, has not been
changed by Chevron, but has merely been restated in a practical
two-part test with possibly subtle distinctions as to the role of
legislative history and the degree of deference to be accorded to
a regulation.”
Central Pa. Sav. Association & Subs. v.
Commissioner, 104 T.C. 384, 392 (1995); see also id. at 390-392
(discussing the review of Federal tax regulations under Natl.
Muffler in relation to Chevron); cf. E.I. duPont de Nemours & Co.
v. Commissioner, 41 F.3d 130 (3d Cir. 1994) (questioning whether
Chevron applies to interpretative Federal tax regulations).
Here, we conclude likewise that we need not parse the semantics
of the two tests to discern any substantive difference between
-57them.
While we apply a Natl. Muffler analysis, our result under
a Chevron analysis would be the same.
X.
Review of the Disputed Regulations
A.
Overview
We conclude that the timely filing requirement in the
disputed regulations does not harmonize with the plain language,
origin, or purpose of the relevant text of section 882(c)(2).
A
plain reading of the relevant text in the context of the Internal
Revenue Code shows that the text includes no timely filing
requirement.
Where, as here, the Secretary has prescribed a
regulation that is inconsistent with the plain meaning of a
statute, the regulation is invalid, and any deference to the
Secretary’s interpretation of that statute under Natl. Muffler
Dealers Association v. United States, 440 U.S. 472 (1979), is
unwarranted.
Such is especially so where, as here, the disputed
regulations also are unreasonable under an analysis of Natl.
Muffler Dealers Association v. United States, supra at 477.
B.
Plain Meaning of the Relevant Text
We begin our analysis of the relevant text with the words
used therein.
We apply the plain meaning of the words used in a
statute unless we find that a word’s plain meaning is ambiguous.
See Garcia v. United States, 469 U.S. 70, 76 n.3 (1984); see also
Ex parte Collett, 337 U.S. 55 (1949).
When interpreting a
statute, “[t]he judiciary is the final authority on issues of
-58statutory construction”.
Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., supra at 843 n.9; see also Volkswagenwerk v.
FMC, 390 U.S. 261, 272 (1968); FTC v. Colgate-Palmolive Co.,
380 U.S. 374, 385 (1965).
We agree with the holdings in Anglo-Am. Direct Tea Trading
Co. v. Commissioner, 38 B.T.A. 711 (1938), and its progeny, that
the plain meaning of the word “manner”, as used in the relevant
text, does not include an element of time.
For purposes of our
Federal tax system, Congress has consistently used the word
“time” together with the word “manner” when it intended to
include the meanings of both words in a single taxing section.
In the Revenue Act of 1928, for example, from which section 233
emanated, Congress used both words in sections 115(g) and 291.
The former section addressed the situation where “a corporation
cancels or redeems its stock * * * at such time and in such
manner as to make the distribution and cancellation or redemption
in whole or in part essentially equivalent to the distribution of
a taxable dividend”.
45 Stat. 822.
Revenue Act of 1928, ch. 852, sec. 115(g),
The latter section provided that additions to tax
for failure to file a tax return “shall be collected at the same
time and in the same manner and as part of the tax”.
Revenue Act
of 1928, ch. 852, sec. 291, 45 Stat. 857.
In the 1939 Code, when the relevant text was first codified,
Congress again used the words “time” and “manner” together when
-59it intended to include the meanings of both words in a single
statutory provision.
See, e.g., 1939 Code secs. 55(b)(1) and
(2), (d)(1)(B), 115(g), 291, 821(b), 864(b), 1203, 1420(c), 1421,
1502, 1522, 1530(b), 1604, 1716, 1902(b), 2190, 2471, 2701,
2802(d)(2), 2803(d), 2854, 2903(c), 2905, 3150(b)(1), 3271,
3310(c), 3448(a), 3461, 3467(b), 3612(e), 3640, 3701, 3704(b),
3975, 3976(a).
Many of those instances applied specifically to
the time and manner of the filing of a return.
See, e.g., 1939
Code secs. 821(b) and 864(b) (“The return required of the
executor under subsection (a) shall be filed at such times and in
such manner as may be required by regulations made pursuant to
law”), 2471 (“Such returns shall contain such information and be
made at such times and in such manner as the Commissioner, with
the approval of the Secretary, may by regulations prescribe”),
2701 (same language), 3448(a) (same language), 3461 (same
language), 3467(b) (same language); see also 1939 Code secs. 1203
(stating the specific time by which a return must be filed and
that the “return shall contain such information and be made in
such manner as the Commissioner with the approval of the
Secretary may by regulations prescribe”), 1604 (similar
language), 1716 (similar language).
In the 1954 Code, when Congress recodified the relevant text
with a reference to “subtitle F”, Congress continued to use the
words “time” and “manner” together to express its intent to
-60include both meanings in a single provision.
See, e.g., 1954
Code secs. 6033(b), 6036, 6081(b), 6103(b)(1) and (d)(1)(B),
6201(a), 6205(a)(1) and (b), 6302(c), 6335(b), 6338(b), 6413(b),
7204 for instances where Congress upon enactment of the 1954 Code
used both words in a single provision in subtitle F (then secs.
6001 through 7852).
Congress did likewise in the Foreign
Investors Tax Act of 1966, when it legislated as to section 882,
and in the 1986 Code, when it recodified the relevant text a
second time.
As to the former legislation, see, e.g., secs. (as
amended by the Foreign Investors Tax Act of 1966) 871(d)(3),
981(d).
As to the latter legislation, see, e.g., 1986 Code secs.
6033(b), 6036,
6038(a)(2), 6038A(a), 6038B(a), 6039C(c)(4),
6039D(a) and (c), 6039F(a)(1), 6045(d), 6047(b), 6050A(a),
6050K(a), 6053(c)(1), 6059(c), 6081(b), 6096(c), 6103(f)(4)(A)
and (B) and (p)(1), 6104(a)(1)(A), 6157(a)(2), 6164(b),
6166(b)(7), 6167(a), 6201(a), 6205(a)(1) and (b), 6230(i),
6302(c), 6324A(a) for instances where Congress upon enactment of
the 1986 Code used both words in a single provision in subtitle F
(then secs. 6001 through 7872); see also 1986 Code sec. 6039(a)
(stating the specific time by which a “written statement” must be
furnished “in such manner and setting forth such information as
the Secretary may by regulations prescribe”).
We believe that Congress acted intentionally and purposely
when it included both “time” and “manner” in single sections of
-61the referenced statutes but omitted the word “time” in favor of
only the word “manner” in other single sections of those
statutes; e.g., as in section 882(c)(2) and its predecessors.
See BFP v. Resolution Trust Corp., 511 U.S. 531, 537-538 (1994);
Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338 (1994); Keene
Corp. v. United States, 508 U.S. 200, 208 (1993); Russello v.
United States, 464 U.S. 16, 23 (1983).
In construing a statute,
we must give a definite meaning to every word and expression
found therein, Dubuque & P.R. Co. v. Litchfield, 64 U.S. 66, 77
(1859); Early v. Doe, 57 U.S. 610, 617 (1853), and we must shy
away from interpreting a statute in a way that would render any
part of it redundant or surplusage, see Platt v. Union Pac. R.R.
Co., 99 U.S. 48, 58-59 (1878).
See Jones v. United States, 529
U.S. 848, 857 (2000); United States v. Menasche, 348 U.S. 528,
538-539 (1955); see also United States v. Olympic Radio &
Television, Inc., 349 U.S. 232, 235-236 (1955) (in applying the
traditional rules of statutory construction, a court should
assume that Congress uses language in a consistent manner, unless
otherwise indicated).
Such is especially so where, as here, we
understand Congress’s use of the word “manner” in the referenced
Code sections as giving context to that word.
We understand that
use to refer to items of information and not to refer to the time
for the filing of a return or the furnishing of any other
document.
We conclude that Congress, by using only the word
-62“manner” in section 882(c)(2), did not intend to include in that
provision any element of time.17
Nor do we believe that Congress
intended for the word “manner” in that situation to have a
flexible definition to be prescribed by the Secretary in order to
carry out the text’s general purpose, as was the case in Chevron
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 844.
Instead, we believe that the word “manner”, when used in the
relevant text, was intended by Congress to have only the single
definition that we decide herein.
Respondent requests that we defer to the Secretary’s
interpretation of the word “manner” to include a timely filing
requirement.
We decline to do so.
Because we find the meaning
of the word “manner” as used in section 882(c)(2) to be plain and
unambiguous, any deference that we would otherwise accord to the
Secretary’s interpretation of the word “manner” is unwarranted.18
17
In fact, as to the 18-month period set forth in the
regulations, it is not only arbitrary but without any statutory
basis at all. As we understand the Secretary’s formation of that
period, it corresponds to 1 year after the 6-month extended due
date of the return. See T.D. 8322, 1990-2 C.B. 172, 172-173,
55 Fed. Reg. 50827 (Dec. 11, 1990); see also sec. 6081(a)
(generally allowing the Secretary to grant extensions of up to
6 months). Where that 1-year rule came from, we do not know.
18
A term is ambiguous if it is “‘capable of being
understood in two or more possible senses or ways’”. Chickasaw
Nation v. United States, 534 U.S. 84, 94 (2001) (quoting
Webster’s Ninth New Collegiate Dictionary 77 (1985)). Although
the disputed regulations are contrary to our construction of the
text, as is the construction of the relevant text by respondent,
we do not believe that these contrary interpretations mean that
(continued...)
-63See United States v. Mo. Pac. R. Co., 278 U.S. 269, 280 (1929);
United States v. Tanner, 147 U.S. 661, 663 (1893); Swift Co. v.
United States, 105 U.S. 691, 695 (1881); see also Atl. Mut. Ins.
Co. v. Commissioner, 523 U.S. 382, 387 (1998).
Deference is
especially unwarranted where, as here, the Secretary’s
construction of the relevant text does not fill in a gap left
open by the statute as to a timeliness requirement but simply
adopts respondent’s unsuccessful litigating position, with total
disregard to firmly established judicial precedent,19 and adds an
18
(...continued)
the relevant text as of the issuance of the disputed regulations
was reasonably capable of being understood in two or more senses
or ways. The Treasury Department was not the first authoritative
body to have interpreted the relevant text. That text had
previously been construed on a number of occasions by both the
Court of Appeals for the Fourth Circuit and the Board. In
addition, contemporaneous to the seminal interpretation of the
relevant text in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), Congress codified the text in
the 1939 Code without any significant change from the text
construed by the Board in Anglo-Am. Direct Tea Trading Co..
Then, after both the Court of Appeals for the Fourth Circuit and
the Board had repeatedly and consistently construed the relevant
text as not including a timely filing requirement, Congress
recodified the relevant text in the 1954 and 1986 Codes, again
without any significant change. Given the multiple legislative
reenactments of the relevant text and the consistent and
unanimous prior interpretations of that text by the Court of
Appeals for the Fourth Circuit and the Board, we do not believe
that the relevant text as of the time of the disputed regulations
was reasonably capable of being understood in the sense advocated
by respondent and adopted by the Secretary in the form of the
disputed regulations.
19
We include the Board in our references to the judiciary.
Although the Board was established as “an independent agency in
the executive branch of the Government”, Revenue Act of 1924, ch.
(continued...)
-64impermissible restriction to the statute.20
The functional
reasons for deference to agencies; i.e., the agencies’ expertise
and experience, do not carry the same force when interpreting the
word “manner” for purposes of the relevant text.
The judiciary
has enough expertise and experience to ascertain congressional
intent with respect to that word, and any deference that is owed
to the Secretary does not mean that the judiciary as a matter of
course should simply ratify an unauthorized assumption by the
Secretary of major policy decisions properly made by Congress;
e.g., here, a foreign corporation’s forfeiture of deductions
absent its filing of a timely tax return.21
Cf. Estate of
19
(...continued)
234, sec. 900(a), (k), 43 Stat. 336, 338, the Court of Appeals
for the Third Circuit has noted that the Board “for all practical
purposes [was] a judicial tribunal operating in the federal
judicial system”. Stern v. Commissioner, 215 F.2d 701, 707-708
(3d Cir. 1954), revg. on other grounds 21 T.C. 155 (1953).
20
The improper addition to the statute is easily seen by
comparing sec. 882(c)(2) with sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990. The two sections are essentially the
same, except that the regulation includes the word “timely”.
Respondent has not explained why sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990, stated that a return must be filed
both “timely” and “in the manner prescribed in section F” if, as
he argues, the concept of “time” is subsumed within the statutory
phrase “in the manner prescribed in subtitle F”.
21
Absent a clear expression of legislative intent, we
believe it unreasonable to conclude, as did the Secretary in the
disputed regulations, that Congress intended for a foreign
corporation to forfeit any deduction of its otherwise deductible
ordinary and necessary business expenses simply because it filed
its tax return untimely. Cf. S. Rept. 1707, 89th Cong., 2d Sess.
26-27 (1966), 1966-2 C.B. 1059, 1076-1077 (noting as to
(continued...)
-65Applebaum v. Commissioner, 724 F.2d 375, 381-382 (3d Cir. 1983)
(Adams, J., concurring), affg. T.C. Memo. 1982-278.
Courts “are
not obliged to stand aside and rubber-stamp their affirmance of
administrative decisions that they deem inconsistent with a
statutory mandate or that frustrate the congressional policy
underlying a statute”.
NLRB v. Brown, 380 U.S. 278, 291 (1965);
accord FEC v. Democratic Senatorial Campaign Comm., 454 U.S. 27,
32 (1981).
C.
Application of Natl. Muffler
We also conclude that the Secretary’s interpretation of a
timely filing requirement is unreasonable under an analysis of
the considerations discussed in Natl. Muffler Dealers Association
v. United States, 440 U.S. at 477.
That case requires that we
take into account the following considerations:
(1) Whether the
regulation is a substantially contemporaneous construction of the
statute by those presumed to have been aware of congressional
intent; (2) the manner in which a regulation dating from a later
period evolved; (3) the length of time that the regulation has
been in effect; (4) the reliance placed upon the regulation;
(5) the consistency of the Secretary’s interpretation; and
21
(...continued)
nonresident aliens owning property in the United States that
their “allocable deductions * * * may be relatively large” and
that not allowing such deductions “may result in quite heavy tax
burdens”).
-66(6) the degree of scrutiny Congress has devoted to the regulation
during subsequent reenactments of the statute.
Id.
Our analysis of these considerations reinforces our
conclusion that the disputed regulations are invalid.
The
regulations were issued in 1990, 62 years after the relevant text
was enacted and 72 years after the enactment of the parallel
provision of section 217 of the Revenue Act of 1918.
Thus, the
disputed regulations are not a “substantially contemporaneous
construction of the statute by those presumed to have been aware
of congressional intent”.
Id. at 477.
We therefore inquire into
the manner in which the disputed regulations evolved.
See id.
The disputed regulations were issued after both the Court of
Appeals for the Fourth Circuit and the Board had repeatedly and
consistently held that the relevant text did not include a timely
filing requirement.22
The regulations also were issued after
multiple reenactments of the relevant text, none of which altered
the judiciary’s construction of the text, and merely adopted
respondent’s unsuccessful litigating position.
The Secretary’s
statement accompanying the issuance of the disputed regulations,
22
The relevant meaning that we distill from the referenced
cases of the Court of Appeals for the Fourth Circuit and the
Board is twofold. First, a foreign corporation must file a tax
return in order to deduct its expenses. Second, the
Commissioner’s preparation of a substitute return for the
corporation is generally considered to be the corporation’s
return for Federal income tax purposes and divests the taxpayer
of its entitlement to file a return for itself.
-67“the statute clearly provides for the denial of deductions and
credits if returns are not filed in a timely manner”, see
Preamble of T.D. 8322, 1990-2 C.B. at 172, flies in the face of
the judiciary’s prior holdings that the relevant text does not
include a timely filing requirement and the like interpretation
by the ABAST and the other commentators referenced in the
preamble to the regulations.23
The Secretary’s statement is even
a departure from his previous interpretation set forth in the
1957 regulations.24
The 1957 regulations make no mention of a
timely filing requirement but allow a resident foreign
corporation to deduct its expenses if it files a true and
accurate Federal income tax return in accordance with section
6012 and the regulations thereunder.
We also note as to our
analysis under Natl. Muffler Dealers Association v. United
States, supra, that the disputed regulations had only been in
effect for approximately 3 years as of the first year in issue.
23
In fact, if anything is “clear”, it is that the statute
does not contain any time requirement and that the Secretary’s
inclusion of one in the disputed regulations is ultra vires.
24
Of course, the mere fact that the Secretary has changed
his interpretation of a statutory term does not necessarily mean
that the latter interpretation is invalid. See Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 863-864;
Dickman v. Commissioner, 465 U.S. 330, 343 (1984). Courts should
accord considerably less deference, however, to an agency’s
statutory interpretation that conflicts with the agency’s
previous interpretation of the same statute. See Pauley v.
BethEnergy Mines, Inc. 501 U.S. 680, 698 (1991); INS v.
Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987).
-68As to the remaining two considerations, i.e., the degree of
scrutiny that Congress has devoted to the regulation in question
during subsequent reenactments of the statute and the reliance
placed on that regulation, these considerations also do not
support the Secretary’s issuance of the disputed regulations.
As
to the former, section 882(c)(2) has not been amended since the
issuance of the disputed regulations.
As to the latter,
petitioner obviously did not rely upon the disputed regulations
when it filed the subject returns untimely.
In fact, the record
before us persuades us that petitioner filed those returns
relying on the belief that it would be taxed on the same taxable
base as that of a domestic corporation (i.e., gross income less
deductions).
Given the relevant text, its legislative history,
the 1957 regulations, and the longstanding judicial precedents,
we have no doubt that taxpayers and their advisers would have
reasonably concluded immediately before the issuance of the
disputed regulations that the relevant text did not include a
timely filing requirement and would have reasonably concluded
upon the issuance of those regulations that such issuance was an
unreasonable attempt by the Secretary to circumvent the firmly
established legal terrain.25
In fact, as to petitioner, it did
almost everything that Congress envisioned as to foreign
25
We have found no authority, nor has respondent cited any,
to support respondent’s position that the relevant text contains
a timely filing requirement.
-69taxpayers and their investment in real property in the United
States; petitioner invested in the U.S. real estate and
voluntarily filed Federal income tax returns reporting that
income net of the expenses related thereto.
For sake of completeness, we also note the legislative
reenactment doctrine.
Under that doctrine, Congress is presumed
to have known of the administrative and judicial interpretations
of a statutory term reenacted without significant change and to
have ratified and included that interpretation in the reenacted
term.
See Newark Morning Ledger Co. v. United States, 507 U.S.
at 574-576; Pierce v. Underwood, 487 U.S. 552, 567 (1988);
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S.
353, 381-382 (1982); Lorillard v. Pons, 434 U.S. 575, 580-581
(1978); see also Dresser Indus. v. United States, 238 F.3d 603,
614 (5th Cir. 2001); Kovacs v. Commissioner, 100 T.C. 124,
129-130 (1993), affd. without published opinion 25 F.3d 1048
(6th Cir. 1994); cf. Cannon v. Univ. of Chicago, 441 U.S. 677,
696-697 (1979) (“It is always appropriate to assume that our
elected representatives, like other citizens, know the law”.).
See generally 2A Sands, Sutherland on Statutory Construction
§ 49.09 (4th ed. 1973), and cases cited therein.
The legislative
reenactment doctrine applies with vigor where Congress reenacts
statutory text mainly in its entirety, see Dutton v. Wolpoff
& Abramson, 5 F.3d 649, 655 (3d Cir. 1993), or where a prior
-70judicial interpretation of that text has been relied upon and
never questioned by the judiciary as of the time of reenactment,
see Cannon v. Univ. of Chicago, supra at 696-697 (prior
interpretation of a statute “was repeatedly cited with approval
and never questioned during the ensuing five years”); see
also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, supra
at 378-379.
In the light of the legislative reenactment
doctrine, we presume that Congress upon reenacting the relevant
text without significant change as part of the 1939, 1954, and
1986 Codes, as well as part of the Foreign Investors Tax Act of
1966, was mindful of the relevant judicial interpretations and
included within the reenacted text the judiciary’s interpretation
that the text contains no timely filing requirement.26
See
Dutton v. Wolpoff & Abramson, supra at 655; cf. Kovacs v.
Commissioner, supra at 129-130 (concluding by application of the
legislative reenactment doctrine that Congress had adopted a
prior Board decision when it amended section 104(a)(2) in 1982
and 1989, and when it enacted the Internal Revenue Codes of 1939,
1954, and 1986).
This presumption is further supported by considering the
setting of each of the reenactments of the relevant text
26
In fact, respondent concedes that Congress knows of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711
(1938), and that it is significant that Congress has never
amended the relevant text after that case.
-71following its interpretation by the judiciary.
First, when the
relevant text was codified in the 1939 Code, that text had
recently been construed in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), a unanimous reviewed opinion
of the Board, as including no timely filing requirement.27
Second, as of each of the times when the text was reenacted in
the 1954 Code, the Foreign Investors Tax Act of 1966, and the
1986 Code, Anglo-Am. Direct Tea Trading Co. had been cited
repeatedly, favorably, and without reservation by both the Court
of Appeals for the Fourth Circuit and the Board.
As of each of
those times, the Court of Appeals for the Fourth Circuit also had
decided Blenheim Co. v. Commissioner, 125 F.2d 906 (4th Cir.
1942), which confirmed the holding of Anglo-Am. Direct Tea
Trading Co. that the relevant text contained no reference to a
time element and stated that Congress, in initially enacting the
text as part of the Revenue Act of 1928, had adopted a
longstanding administrative construction of a parallel provision
to the effect that a foreign corporation may deduct its expenses
if it files a return before respondent prepares a substitute
return for it.
We also note the legislative history underlying
the 1954 Code to the effect that Congress did not then believe
that a timely filing requirement was included within section 882.
27
The 1939 Code was enacted approximately 4 months after
the release of Anglo-Am. Direct Tea Trading Co. v. Commissioner,
supra.
-72While no committee report makes any mention of such a
requirement, the House and Senate committee reports both note
specifically the “necessity for filing of returns by foreign
corporations in order to secure allowance of deductions”.
See
S. Rept. 1622, 83d Cong., 2d Sess., supra at 417; H. Rept. 1337,
83d Cong., 2d Sess., supra at A246.
The fact that Congress was
keenly aware of the foreign tax provisions when it enacted the
1954 Code also is seen from its inclusion in that act of section
6091(b)(2).
That section allowed the Secretary to move all
appeals of the issue at hand from the Court of Appeals for the
Fourth Circuit, which had decided the issue unfavorably to
respondent, to another circuit of his liking.
Third, as part of the Foreign Investors Tax Act of 1966, we
note the substantial amendments which Congress made to section
882.
In relevant part, Congress added a new section 882(d) that,
among other things, allowed a foreign corporation to elect to
treat real property income as if it were effectively connected
income.
A stated purpose of this legislation was to promote
foreign investment in real property located in the United States.
As an inducement to such foreign investment, Congress intended to
allow foreigners to deduct their expenses related to those
investments.
The disputed regulations work against this intent
in that the regulations deny a foreign corporation the taking of
its expenses upon the filing of an untimely return, with the
-73result that the foreign corporation is required to pay taxes on
its gross (rather than net) income.
We know of no statutory
authority under which any type of taxpayer forfeits an
entitlement to deduct substantiated ordinary and necessary
business expenses simply because the taxpayer files a tax return
untimely.
While respondent proffers section 882(c)(2) as such
authority in the case of a foreign corporation, that section does
not explicitly support that proffer.
We also bear in mind the Foreign Investors Tax Act of 1966’s
legislative history, which adds to our understanding that
Congress was then mindful of the interpretations set forth in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, and its
progeny.
The House committee report, for example, refers
specifically to “existing law”, states that a foreign corporation
is entitled to benefit from its deductions “by filing a true and
accurate return of its total income”, and makes no mention of a
timely filing requirement.
Sess., supra at 90.
See H. Rept. 1450, 89th Cong., 2d
The Senate committee report likewise makes
no mention of a timely filing requirement.
The Senate committee
report, on the other hand, does state in a manner consistent with
our view that the committee intended for section 882(d) to allow
a foreign corporation to treat its real property income as
effectively connected income in order to deduct its expenses
related to that income.
See S. Rept. 1707, 89th Cong., 2d Sess.,
-74supra at 19, 1966-2 C.B. at 1071.
The Senate report also
expresses Congress’s reluctance through the Foreign Investors Tax
Act of 1966 to disallow a nonresident alien’s deductions related
to his or her investment in U.S. real estate because such a
disallowance “would tend to discourage foreign investment in U.S.
S. Rept. 1707, 89th Cong., 2d Sess., supra at 26-27,
realty”.
1966-2 C.B. at 1076-1077.
Respondent acknowledges that the disputed regulations are
invalid if the relevant text is unambiguous in including no
timely filing requirement.
In contrast to the Secretary’s
statement in the preamble to the 1990 regulations, respondent
argues that the caselaw suggests that the relevant text is
ambiguous.
Respondent observes that some of this caselaw states
that a foreign corporation must file a “timely” return in order
to benefit from its deductions.
Respondent notes especially the
court’s use of the word “timely” in Blenheim Co. v. Commissioner,
supra at 908-910, 912.
We disagree with respondent that the caselaw interprets the
relevant text as including the Secretary’s timely filing
requirement.
In Blenheim Co. v. Commissioner, 125 F.2d 906 (4th
Cir. 1942), the Court of Appeals for the Fourth Circuit did state
that a foreign corporation must file a “timely” return in order
to deduct its expenses; however, the court used the word “timely”
to mean that the foreign corporation had to file its return
-75before respondent prepared a substitute return for it.
The
“timely” reference in that and in the other cases is to such a
“terminal date” found not in the statute but (1) “first adopted
in Taylor Sec. v. Commissioner”, 40 B.T.A. 696 (1939), and
(2) subsequently followed in Blenheim Co. v. Commissioner, supra
at 910, and Georday Enters. v. Commissioner, 126 F.2d at 388.28
See also Blenheim v. Commissioner, 42 B.T.A at 1251 (preparation
of a substitute return by the Commissioner makes any later return
prepared by the taxpayer a “nullity”, which, in turn, means that
the taxpayer’s later return is not a “return” within the meaning
of former sec. 233); Taylor Sec., Inc. v. Commissioner, supra at
703 (Board declined to conclude that Congress intended that
delinquent returns filed by a foreign corporation after the
28
Respondent acknowledges that the terminal date in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939), Blenheim Co. v.
Commissioner, 125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248
(1940), and Georday Enters. v. Commissioner, 126 F.2d 384 (4th
Cir. 1942), was the point where the Commissioner prepared a
substitute return for the taxpayer. The Court of Appeals for the
Fourth Circuit stated as to this point that it is consistent
with, among other things, “the generally accepted rule concerning
the number of returns which may be filed.” Blenheim Co. v.
Commissioner, supra at 910. While the court also stated that
this point is not an “absolute and rigid rule”, we understand
that statement to mean that a foreign corporation may in certain
cases be entitled to benefit from its deductions where the
Commissioner has prepared a substitute return for the
corporation. In fact, had the Court of Appeals for the Fourth
Circuit adopted such an “absolute and rigid rule” in Blenheim,
its actions would have been inconsistent with its earlier holding
in Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir. 1941),
modifying and remanding 41 B.T.A. 910 (1940), that the foreign
corporation was entitled to its deductions even though the
Commissioner had filed substitute returns for it.
-76Commissioner’s determination are “returns” within the meaning of
former sec. 233).
Contrary to respondent’s assertion that the
Court of Appeals for the Fourth Circuit and the Board construed
the statute to impose a timely filing requirement, those
tribunals, in referencing the word “timely”, were adopting a
judicial limitation based on (1) the statute’s requirement that a
foreign corporation file a tax return in order to deduct its
expenses and (2) their conclusion that a foreign corporation
could not file such a return if a return had already been
prepared for it by the Commissioner.
D.
Natl. Cable
In the recent case of Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., 545 U.S.
, 125 S. Ct. 2688 (2005),
the Supreme Court decided the validity of a regulation that
construed a statute inconsistently with a prior judicial
interpretation.
The Court held that “A court’s prior judicial
construction of a statute trumps an agency construction otherwise
entitled to Chevron deference only if the prior court decision
holds that its construction follows from the unambiguous terms of
the statute and thus leaves no room for agency discretion.”
at 2700.
The Court stated:
Id.
“Only a judicial precedent holding
that the statute unambiguously forecloses the agency’s
interpretation, and therefore contains no gap for the agency to
fill, displaces a conflicting agency construction.”
Id. at 2700.
-77The Court noted that its decisions in Neal v. United States,
516 U.S. 284 (1996), Lechmere, Inc. v. NLRB, 502 U.S. 527,
536-537 (1992), and Maislin Indus., U.S., Inc. v. Primary Steel,
Inc., 497 U.S. 116, 131 (1990), “allow a court’s prior
interpretation of a statute to override an agency’s
interpretation only if the relevant court decision held the
statute unambiguous.”
Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., supra at
, 125 S. Ct. at 2700.
Given that the Supreme Court has historically reviewed
Federal tax regulations primarily under the reasonableness test
of Natl. Muffler Dealers Association v. United States, 440 U.S.
472 (1979), the question arises whether Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra, which neither
cited Natl. Muffler nor involved a Federal tax regulation,
applies to Federal tax regulations.
We do not decide that
question because we conclude that Natl. Cable is distinguishable
from this case and, thus, its holding is not controlling here.
While we take seriously the Supreme Court’s holding in Natl.
Cable, we likewise take seriously that Court’s discussion of its
rationale for, and the context of, that holding.
After
considering that discussion, and the significant contrasts
between that case and the case before us, we are persuaded for
numerous reasons that the holding of Natl. Cable does not govern
here.
-78First, the issue in Natl. Cable & Telecomm. Association v.
Brand X Internet Servs., supra, was whether broadband was subject
to regulation as a telecommunications service.
Before ruling,
the Federal Communications Commission (FCC) had carefully
considered technological developments and its own related
interpretations.
The Supreme Court’s extensive discussion of the
FCC’s work on its ruling suggests that it was exactly the kind of
agency decision that is most entitled to deference.
Here, we
find no corresponding record of the Secretary’s consideration of
whether the relevant text in 1990 included a timely filing
requirement; the Secretary’s rationale for adopting the disputed
regulations is at best perfunctory.
Second, the Supreme Court in Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra, noted that the FCC
had not previously ruled on the question at hand, but that its
ruling regarding broadband was consistent with prior FCC rulings.
Here, the Secretary in 1990 directly altered regulations adopted
in (and unchanged since) 1957.
Thus, unlike Natl. Cable, the
instant case raises questions as to the reasonableness and how
much deference applies when the Secretary issues an
interpretative regulation that reverses long-settled law.
Third, in Natl. Cable & Telecomm. Association v. Brand X
Internet Servs., supra, the FCC was not a party to AT&T Corp. v.
Portland, 216 F.3d. 871 (9th Cir. 2000), the prior case that the
-79Court of Appeals for the Ninth Circuit had treated as
controlling.
Here, the Commissioner was the unsuccessful party
in all of the cases holding that timely filing is not required
for a foreign corporation to claim its deductions and credits.
In addition, unlike the FCC, the Secretary through the disputed
regulations is attempting to overturn the outcome of those cases
through his general regulatory authority.
Fourth, AT&T Corp. v. Portland, supra, which the Supreme
Court declined to permit to “trump” the FCC ruling, had been
decided only approximately 5 years before Natl. Cable & Telecomm.
Association v. Brand X Internet Servs., supra.
Here, Anglo-Am.
Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938), and
its progeny were decided approximately 50 years before the
disputed regulations were issued.
Thus, in Natl. Cable the
Supreme Court was not faced with the question of whether a
longstanding judicial interpretation is entitled to more
deference than a recent judicial interpretation.
Nor was that
Court faced with the question of the effect of the reenactment of
the underlying statute on a prior judicial interpretation.
The
case of Natl. Cable also did not involve an agency that was
seeking to reverse course from a preexisting, decades old
regulatory position that was consistent with judicial precedents
of even greater antiquity.
-80Moreover, apart from the previously mentioned differences,
the Court in Natl. Cable & Telecomm. Association v. Brand X
Internet Servs., supra, stated that regulatory interpretations
do not prevail over a contrary previous judicial interpretation
when the judicial tribunal referred to the interpreted statute
as unambiguous.
Although the judicial tribunals in Ardbern Co.
v. Commissioner, 120 F.2d 424 (4th Cir. 1941), Blenheim Co. v.
Commissioner, 125 F.2d 906 (4th Cir. 1942), and Anglo-Am. Direct
Tea Trading Co. v. Commissioner, supra, did not state explicitly
that they were applying the unambiguous meaning of the word
“manner”, we believe that they did so, given their analysis and
the fact that their interpretation of that word was purely one
of statutory construction that resulted from the employment of
traditional tools of statutory construction.
“It is
emphatically, the province and duty of the judicial department
to say what the law is”, Marbury v. Madison, 5 U.S. 137, 177
(1803), and “If a court, employing traditional tools of
statutory construction, ascertains that Congress had an
intention on the precise question at issue, that intention is
the law and must be given effect”, Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. at 843 n.9; see also
INS v. Cardoza-Fonseca, 480 U.S. 421, 432 (1987).
Moreover,
where “the only or principal dispute relates to the meaning of
the statutory term, the controversy must ultimately be resolved,
-81not on the basis of matters within the special competence of the
* * * [agency], but by judicial application of canons of
statutory construction.”
(1970).
Barlow v. Collins, 397 U.S. 159, 166
Compare Chevron U.S.A., Inc. v. Natural Res. Def.
Council, Inc., supra at 845 (Supreme Court exercised a very
limited review of an agency’s regulations after the Court
concluded that Congress had left a gap in the statute for the
agency to fill), with INS v. Cardoza-Fonseca, supra at 446
(Supreme Court rejected an agency’s interpretation of a statute
after the Court concluded that the question before it was a
“pure question of statutory construction for the courts to
decide”).
In Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra,
the Board was the first judicial body to construe the relevant
text.
It construed the meaning of the word “manner” plainly
using traditional tools of statutory construction.
The Court of
Appeals for the Fourth Circuit performed a similar textual
construction in Blenheim Co. v. Commissioner, supra at 908, by
simply reading and applying the words of section 233 of the
Revenue Act of 1934.29
29
The referenced decisions of the Court of
In Ardbern Co. v. Commissioner, 120 F.2d at 426 (4th Cir.
1941), the Court of Appeals for the Fourth Circuit noted that
respondent had conceded that the taxpayer would have been
entitled to its claimed deductions if the return which the
taxpayer had attempted to file with the revenue agent had instead
been filed with the Collector at Baltimore. The court,
(continued...)
-82Appeals for the Fourth Circuit and the Board turned not on the
need to fill in a gap that Congress left in the statute but on a
matter of pure statutory construction.
Those judicial tribunals
gave effect to the relevant text by reading the text literally
and without reference to any contrary argument that the text was
ambiguous as to the inclusion of a timely filing requirement.
The judicial tribunals’ reading of the word “manner” was
consistent with that word’s accepted meaning in legislative
practice, as seen from the Board’s discussion in Anglo-Am.
Direct Tea Trading Co. of the “structure” of the revenue acts.
Respondent with a citation to his nonacquiscence in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, see
1939-1 C.B. (pt. 1) 39, argues on brief that the holdings in
Anglo-Am. Direct Tea Trading Co. and Ardbern Co. v.
Commissioner, supra, as to the construction of former section
233 are incorrect and invites the Court to disavow those
holdings.
We decline that invitation.
We also disagree with
respondent’s argument that the applicability of the rationale of
the court in Ardbern is limited to those cases where a
29
(...continued)
therefore, primarily limited its analysis of whether the statute
included a timely filing requirement to the statement of the
Board quoted supra p. 36. The court did point out, however, that
no provision in the Revenue Act of 1934, ch. 277, 48 Stat. 680,
precluded a late filing taxpayer who filed a return from
receiving the benefit of the deductions to which the taxpayer was
otherwise entitled. See id. at 426.
-83compelling equitable consideration is present so as to serve
elementary justice.
The Court of Appeals for the Fourth Circuit
held specifically in Ardbern Co. v. Commissioner, supra at 426,
that former section 233 does not forbid a taxpayer from
deducting expenses when the taxpayer files, or attempts in good
faith to file, a return claiming those deductions before the
Commissioner determines a deficiency against the taxpayer or
files a substitute return on the taxpayer’s behalf.
Accord
Blenheim v. Commissioner, supra at 908 (“It is true that this
section [section 233 of the 1928 and 1932 Revenue Acts] contains
no reference to a time element.”).
XI.
Conclusion
On the basis of the foregoing, we conclude that the
disputed regulations are invalid to the extent described herein.
Given the plain meaning of the relevant text and the historical
setting laid out in detail in this Opinion, including caselaw,
legislation, legislative history, and regulations, the
Secretary’s adoption of a timely filing requirement and his
attempted sub silentio overruling of contrary judicial and
administrative precedents is unreasonable under Natl. Muffler
Dealers Association v. United States, 440 U.S. 472 (1979).30
30
We note that this case is strikingly similar to Anglo-Am.
Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938),
where the taxpayer was allowed to receive the benefit of its
deductions upon the untimely filing of returns more than
(continued...)
-84Congress is the legislator in our system of Government and when
an interpretation must be made of a tax bill enacted into law,
both the judicial and executive branches of Governments, the
latter acting through the Treasury Department, may render that
interpretation in their own constitutionally permitted ways.
As one of those ways, however, it is not reasonable for the
Secretary (or anyone else for that matter) to construe a
statute’s unambiguous meaning in a manner contrary to that
intended by Congress in passing the legislation.
Such is
especially so where, as here, the Secretary attempts to
circumvent longstanding judicial decisions that have arrived at
the plain meaning of a statute enacted decades before.
After
the passage of over a half of a century, during which the law on
this subject has remained settled and has been relied upon by
both taxpayers and the Government alike, it is simply wrong for
the Secretary to attempt to resurrect a failed litigating
position through the issuance of interpretative regulations.31
30
(...continued)
18 months after their due date. Indeed, the facts in support of
an allowance of deductions are even stronger here. While the
taxpayer in Anglo-Am. Direct Tea Trading Co. filed its returns
only after respondent discovered that the returns were overdue,
petitioner filed its returns before any contact from respondent.
31
Congress is the only body that may amend the relevant
text. Respondent makes no assertion that the Secretary ever
asked Congress to amend the text to change the holding of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, supra, and its
progeny that the text does not include a timely filing
(continued...)
-85We hold, contrary to respondent’s determination, that
section 882(c)(2) does not preclude petitioner from deducting
the expenses claimed on the subject returns.
We have considered
all arguments made by the parties as to the manner in which we
resolve this case and have found those arguments not discussed
herein to be without merit.
Decision will be entered
for petitioner.
Reviewed by the Court.
GERBER, COHEN, WELLS, COLVIN, VASQUEZ, GALE, THORNTON,
MARVEL, HAINES, GOEKE, WHERRY, and KROUPA, JJ., agree with this
majority opinion.
CHIECHI and FOLEY, JJ., concur in result only.
31
(...continued)
requirement. Nor have we found that such was the case. Instead,
respondent invites this Court to take a fresh look at the
relevant text in the light of the disputed regulations, to reject
the judiciary’s almost 70-year-old interpretation of that text,
and to “incorporate [into the text] the timely filing concept as
embodied in the regulation”. Respondent asserts that not reading
a timely filing requirement into the statute “is administratively
unworkable * * * [in that it] would permit foreign taxpayers to
live off the U.S. fisc indefinitely, file their returns only when
20-20 hindsight suggests it is in their own best interests to do
so, and put the Service at an extreme disadvantage in performing
its statutory duties.” To say the least, such equitable
arguments are made more appropriately to Congress than to the
judiciary.
-86SWIFT, J., dissenting:
For the reasons explained below, I
respectfully disagree with the majority opinion.
(1) The majority opinion fails properly to distinguish the
pre-1990 “no-regulation environment” of the cited court opinions
from the environment or authority that came into existence upon
promulgation in 1990 of section 1.882-4(a)(2) and (3)(i) and
(ii), Income Tax Regs.
With regard to such a change in the regulatory environment
applicable to a particular Federal law question, the Supreme
Court recently stated in Natl. Cable & Telecomm. Association v.
Brand X Internet Serv., 545 U.S.
, 125 S. Ct. 2688, 2700
(2005):
allowing a judicial precedent to foreclose an agency from
interpreting an ambiguous statute * * * would allow a
court’s interpretation to override an agency’s. Chevron’s
premise is that it is for agencies, not courts, to fill
statutory gaps. * * * The better rule is to hold judicial
interpretations contained in precedents to the same
demanding Chevron step one standard that applies if the
court is reviewing the agency’s construction on a blank
slate: Only a judicial precedent holding that the statute
unambiguously forecloses the agency’s interpretation, and
therefore contains no gap for the agency to fill, displaces
a conflicting agency construction. [Citing Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843844 n.11 (1984).]
Based on this recent Supreme Court explanation in Natl.
Cable & Telecomm. Association of Chevron deference to be given
Federal agency regulatory authority, I do not believe that 1930s
and 1940s court opinions construing the predecessor of section
-87882(c)(2) preempted respondent’s regulatory authority to
promulgate in 1990 a specific administrative rule with regard to
section 882(c)(2).
See Chevron U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 843-844 (1984).
In light of Natl. Cable, we should be focusing herein on an
analysis of the reasonableness of the filing deadline reflected
in section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs.,
as promulgated in 1990, vis-a-vis the filing deadline reflected
in the court opinions that had been extant for approximately 50
years.
The majority opinion’s analysis, see majority op. pp.
65-69, however, of the reasonableness of the 1990 regulation is
quite inadequate.
For the reasons set forth in the discussion below, section
1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs., constitutes
a reasonable administrative rule promulgated by the Commissioner
and the Treasury Department and reasonably fills in a gap in the
statutory language of section 882(c)(2).
(2) The 1930s and 1940s court opinions adopted and applied
a tax return filing deadline to the ability of foreign
corporations to qualify for deductions and credits under the
predecessor of section 882(c)(2).
The court opinions in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939); Ardbern Co. v.
Commissioner, 120 F.2d 424 (4th Cir. 1941), modifying and
remanding 41 B.T.A. 910 (1940); Blenheim Co. v. Commissioner,
-88125 F.2d 906 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940);
Georday Enters. v. Commissioner, 126 F.2d 384 (4th Cir. 1942),
affg. a Memorandum Opinion of the Board of Tax Appeals, clearly
clarified and modified Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 38 B.T.A. 711 (1938), and adopted and applied a
tax return filing “deadline”, “timely filing date”, “cutoff”, or
“terminal date” (whatever one chooses to call it) to the
entitlement of foreign corporations to deductions and credits
under the predecessor of section 882(c)(2).
As the Board of Tax Appeals explained in Taylor Sec., Inc.
v. Commissioner, supra at 703-704:
In view of such a specific prerequisite [that foreign
corporate taxpayers file tax returns] it is inconceivable
that Congress contemplated by that section that taxpayers
could wait indefinitely to file returns and eventually when
the respondent determined deficiencies against them they
could then by filing returns obtain all the benefits to
which they would have been entitled if their returns had
been timely filed. Such a construction would put a premium
on evasion, since a taxpayer would have nothing to lose by
not filing a return as required by statute.
In light of the above 1939 clarification by the Board of
Tax Appeals to its earlier 1938 opinion arguably to the contrary
in Anglo-Am. Direct Tea Trading Co., supra, it is Taylor Sec.,
Inc., not Anglo-Am., that is to be regarded as the lead preregulation court case.
See Blenheim Co. v. Commissioner, supra
at 910, in which the Court of Appeals for the Fourth Circuit
acknowledges that it is Taylor Sec., Inc. that (in spite of the
-89prior Anglo-Am. opinion) first adopted a foreign corporation tax
return “terminal date” or filing deadline (for purposes of
allowing deductions and credits to foreign corporations).
Thus, for more than 50 years, prior to 1990 when the
regulation in issue herein was promulgated and since the 1939
issuance of the opinion of the Board of Tax Appeals in Taylor
Sec., Inc., section 882(c)(2) and its predecessor were
interpreted and were held by Federal courts to be unclear and
incomplete as to the above corporate filing deadline, and the
courts recognized the need for and applied such a deadline.
As
the Court of Appeals for the Fourth Circuit stated explicitly in
Blenheim Co. v. Commissioner, supra at 908:
It is true that this section contains no reference to a
time element. Nevertheless, we feel that the so-called
normal tax return filed by petitioner on Form 1120 was not
a sufficient or timely compliance with Section 233 [the
predecessor of section 882(c)(2)] to entitle the petitioner
to the deductions claimed therein. * * *
The above “judicially recognized need” for a foreign
corporate filing deadline (for purposes of allowing deductions
and credits under section 882(c)(2) and its predecessor)
provides perhaps the strongest support for the conclusion that
the regulation in issue is reasonable (i.e., the regulation
simply reflects the attempt by respondent and by the Treasury
Department to address via a formally promulgated regulation the
-90same need the courts addressed in Taylor Sec., Inc. v.
Commissioner, supra, and its progeny).
(3) The majority opinion’s description of section 1.8824(a)(2) and (3)(i), Income Tax Regs., as simply a reflection of
respondent’s “unsuccessful litigating position”, majority op.
p. 63, is inaccurate, which inaccuracy perhaps is explained by
the failure of the majority opinion to consider the specifics of
the filing deadline set forth in the regulation.
Although it early on, see majority op. note 4, sets forth
the language of section 1.882-4(a)(3)(i), Income Tax Regs., the
majority opinion provides only two single-sentence, general
explanations of the filing deadline set forth therein, see
majority op. pp. 5, 48, and nowhere does the majority opinion
attempt to compare the filing deadline that was adopted and
applied by Taylor Sec., Inc. and its progeny with the specifics
of the filing deadline set forth in the regulation.
In that regard, the following explanation of the specifics
of the filing deadline set forth in section 1.882-4(a)(2) and
(3)(i), Income Tax Regs., may be helpful.
Section 1.882-4(a)(2) and the first sentence of (3)(i),
Income Tax Regs., explains that the “timely filing” deadline set
forth therein applies only in determining a foreign
corporation’s entitlement to deductions and credits under
section 882(c)(2).
It does not constitute a generic timely
-91filing deadline that applies to foreign corporations under other
provisions of the Code.
For example, the timely filing deadline
of the above regulation does not apply for purposes of section
6072(c).
Section 1.882-4(a)(3)(i), Income Tax Regs., then proceeds,
for purposes of allowing deductions and credits under section
882(c)(2) for a current taxable year, to divide foreign
corporations required to file Federal tax returns into two
categories:
First, those that for the prior taxable year filed
an income tax return (and those for which the current taxable
year is the taxpayers’ first taxable year for which a Federal
tax return is required) (category 1 corporation) and, second,
those that for the prior taxable year were required to but did
not file a Federal tax return (category 2 corporation).
For purposes of allowing deductions and credits under
section 882(c)(2) for the current year, section 1.8824(a)(3)(i), Income Tax Regs., provides that for a category 1
corporation (prior year tax return filed or first year tax
return required) the filing deadline for the current taxable
year is a fixed 18 months after the due date for the current
year tax return.
Where, prior to the filing by a category 1
corporation of its current year tax return within this 18-month
period, respondent notifies the corporation (that no tax return
has been filed for the current year and that no deductions or
-92credits under section 882(c)(2) will be allowed), the 18-month
filing deadline set forth in the regulation represents a
lengthening of the return filing deadline that would have
applied under Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696
(1939), and its progeny (under which respondent’s prior
notification would have established the deadline).
Where a category 1 corporation files its tax return for the
current year after the 18-month period, but before respondent
notifies the taxpayer, the fixed 18-month filing deadline of the
regulation would apply, and the regulation represents a
shortening of the filing deadline that would have applied under
Taylor Sec., Inc. and its progeny.
For purposes of allowing the deductions and credits under
section 882(c)(2) for the current year for a category 2
corporation (tax return for the prior year not filed), section
1.882-4(a)(3)(i), Income Tax Regs., provides that a foreign
corporation must file its tax return for the current year before
the earlier of either respondent’s notification to the
corporation (that no tax return has been filed for the current
year and that no deductions or credits under section 882(c)(2)
will be allowed) or 18 months after the due date for the current
year tax return.
Where respondent so notifies a category 2
corporation within the specified 18-month period, this filing
-93deadline constitutes the same filing deadline as would have
applied under Taylor Sec., Inc. and its progeny.
For a category 2 corporation that files its tax return
after the 18-month period but before respondent notifies the
taxpayer, the 18-month filing deadline of the regulation would
apply, and the regulation represents a shortening of the filing
deadline that would have applied under Taylor Sec., Inc. and its
progeny.
In effect, the filing deadline set forth in section 1.8824(a)(3)(i), Income Tax Regs., significantly incorporates and
reflects aspects of the filing deadline of Taylor Sec., Inc. and
its progeny, but it shortens that deadline to no later than 18
months after the due date of the current year tax return, and it
lengthens that deadline to 18 months after the tax return due
date for a foreign corporation that filed a tax return for the
prior year and that received notification from respondent prior
to filing its tax return.1
As is evident, contrary to the majority opinion’s
contention that section 1.882-4(a)(2) and (3)(i), Income Tax
1
I regard the notification to foreign corporations
described in sec. 1.882-4(a)(3)(i), Income Tax Regs. (that no tax
return has been filed for the current year and that no deductions
or credits under sec. 882(c)(2) will be allowed), as not
materially different from the notification mentioned in Taylor
Sec., Inc. v. Commissioner, 40 B.T.A. 696 (1939), and its progeny
(that respondent has prepared a substitute tax return or issued a
notice of deficiency in which a corporation’s deductions and
credits under sec. 882(c)(2) were not allowed).
-94Regs., “simply adopts respondent’s unsuccessful litigating
position”, majority op. p. 63, or seeks to “resurrect * * *
[respondent’s] failed litigating position”, majority op. p. 84,
the regulation in issue incorporates significant aspects of the
judicially crafted filing deadline that was in effect for many
years prior to 1990.
It would seem obvious that the increased number of foreign
corporation Federal income tax returns filed with respondent in
today’s world (as distinguished from the 1930s when the cases
relied on by the majority opinion were decided) and the
increasingly complex tax laws and tax administration applicable
thereto would support, per se, respondent’s effort, by properly
promulgated regulation, to modify and clarify, in the above
modest manner, the return filing deadline that has been
applicable to foreign corporations.
Further, it is appropriate to emphasize that the regulation
at issue herein provides in subdivision (ii) of section 1.8824(a)(3), Income Tax Regs., a good cause, facts and circumstances
exception to the return filing deadline otherwise applicable
under section 1.882-4(a)(3)(i), Income Tax Regs.
This aspect of
the 1990 regulation is consistent with the facts and
circumstances filing deadline that was applied by the Court of
Appeals for the Fourth Circuit in Ardbern Co. v. Commissioner,
120 F.2d 424 (4th Cir. 1941).
-95Lastly on this point, in 1938 respondent’s litigating
position in Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38
B.T.A. 711 (1938), was that the return filing deadline for
purposes of the predecessor of section 882(c)(2) was the same as
the statutory due date for filing foreign corporation tax
returns.
By 1941, if not earlier, respondent’s litigating
position had changed, and respondent was conceding that foreign
corporation tax returns filed late but before respondent’s
notification to foreign corporations would be considered timely
under the predecessor of section 882(c)(2).
See Ardbern Co. v.
Commissioner, supra at 426.
In summary on this point, the filing deadline reflected in
section 1.882-4(a)(3)(i) and (ii), Income Tax Regs.,
incorporates significant aspects of the judicially crafted
foreign corporation tax return filing deadline and is quite
different from respondent’s original litigating position in 1938
in Anglo-Am. Direct Tea Trading Co.
(4) The majority opinion, see majority op. p. 77, suggests
that section 1.882-4(a)(2) and (3)(i), Income Tax Regs., is
inconsistent with the Treasury regulation promulgated in 1957;
namely, sec. 1.882-4, Income Tax Regs.
To the contrary, the
1957 regulation was silent as to any tax return filing deadline
under section 882(c)(2); just as section 882(c)(2) is silent
still today as to any such deadline.
Section 1.882-4(a)(2) and
-96(3)(i) and (ii), Income Tax Regs., thus fills a gap not only in
the language of section 882(c)(2), but also in the language of
the 1957 regulation; just as Taylor Sec., Inc. and its progeny
filled a gap in the language of the predecessor of section
882(c)(2).
(5) In its discussion of the legislative reenactment
doctrine, see majority op. pp. 69-74, the majority opinion
ignores a significant limitation on the legislative reenactment
doctrine as follows:
[The legislative reenactment doctrine] does not apply where
nothing indicates that the legislature had its attention
directed to the administrative interpretation upon
reenactment. [2B Singer, Sutherland Statutory Construction
§ 49:09 (6th ed. 2000).]
In this case, in reenacting section 882(c)(2) and its
predecessor, no evidence indicates that Congress had “its
attention directed” to any of the 1930s and 1940s court opinions
involving a deadline for foreign corporations to file their tax
returns in order to preserve deductions and credits under the
predecessor of section 882(c)(2).
Absent such evidence, any
application herein of the legislative reenactment doctrine would
be inappropriate.2
2
A vague statement in one of respondent’s briefs that
Congress “was aware of” the early Board of Tax Appeals and other
court opinions is puzzling and ambiguous.
-97As the Court of Appeals for the Seventh Circuit explained
in Bell Fed. Sav. & Loan Association v. Commissioner, 40 F.3d
224, 230 (7th Cir. 1994), revg. T.C. Memo. 1991-368:
However, neither * * * [the taxpayer] nor the tax court has
pointed to any occasion when Congress even mentioned the
old--or new--regulation. This fact is important to the
workings of the re-enactment doctrine for a relevant factor
in a court’s review is “the degree of scrutiny Congress has
devoted to the regulation during subsequent re-enactments
of the statute.” * * * [Citing National Muffler Dealers
Assoc., Inc. v. United States, 440 U.S. 472, 477 (1979).]
The regulations and statutes involved in this area are too
complex for us to venture to assume Congress’s intent
through its silence. Therefore, we choose to not secondguess the Treasury on this matter. The Sixth Circuit was
correct when it stated:
The re-enactment doctrine is merely an interpretive
tool fashioned by the courts for their own use in
construing ambiguous legislation. It is most useful
in situations where there is some indication that
Congress noted or considered the regulations in effect
at the time of its action. Otherwise, the doctrine
may be as doubtful as the silence of the statutes and
legislative history to which it is applied. * * *
[Quoting Peoples Fed. Sav. & Loan Association v.
Commissioner, 948 F.2d 289, 302-303 (6th Cir. 1991),
revg. T.C. Memo. 1990-129.]
We also have applied this particular limitation to the
legislative reenactment doctrine.
In Ashland Oil, Inc. v.
Commissioner, 95 T.C. 348, 363 (1990),3 we refused to apply the
3
We also have stated that, “we do not believe that the
legislative reenactment doctrine can be applied to bar reasonable
amendments to regulations where * * * the change is made only
prospectively from the date of the announcement of the proposed
change.” Wendland v. Commissioner, 79 T.C. 355, 384 (1982),
affd. sub nom. Redhouse v. Commissioner, 728 F.2d 1249 (9th Cir.
(continued...)
-98legislative reenactment doctrine to a revenue ruling because
“Without affirmative indications of congressional awareness and
consideration, we decline to cloak this revenue ruling with the
aura of legislative approval.”
(6) Finally, rather than expressing sympathy for
petitioner, see majority op. pp. 68, 72-74, whose Federal income
tax returns were due on November 15 of each year, the fact that
petitioner filed each of its 1993, 1994, 1995, and 1996 Federal
corporate income tax returns on July 23, 1999, some 2-5 years
after the return due dates and 9 years after section 1.8824(a)(2) and (3)(i), Income Tax Regs., was promulgated is hardly
indicative of a foreign corporation seeking to comply with U.S.
tax laws.
In conclusion, it is not respondent herein who is
attempting to resurrect anything, see majority op. p. 84.
Rather, it is the majority opinion that would resurrect AngloAm. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711
(1938), and that would ignore later Board of Tax Appeals and
Court of Appeals opinions and litigation that concluded that the
statutory language of the predecessor of section 882(c)(2) was
incomplete and ambiguous and necessitated the adoption and
3
(...continued)
1984). Note the prospective only effective date of the
regulation at issue herein, for taxable years ending after July
31, 1990. Sec. 1.882-4(a)(3)(i), Income Tax Regs.
-99application by the courts of a foreign corporation filing
deadline for purposes of the predecessor of section 882(c)(2).
Section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax
Regs., reflects the Commissioner’s and the Secretary’s
consistent and similar conclusion.
The specific foreign
corporation tax return filing deadline that is reflected in the
regulation incorporates aspects of the judicially crafted
deadline, is flexible to take into account unusual situations,
but also is modestly tightened up to reflect updated tax
administration concerns relating to foreign corporate tax
compliance.
For the reasons stated, I respectfully dissent from this
Opinion which invalidates section 1.882-4(a)(2) and (3)(i),
Income Tax Regs.
HOLMES, J., agrees with this dissenting opinion.
-100HALPERN, J., dissenting:
I.
Introduction
This case involves the deference (if any) that we must show
the Secretary of the Treasury’s (Secretary’s) construction of
the Internal Revenue Code.
The majority holds that we need show
no deference to the Secretary’s construction found in section
1.882-4(a)(2) and (3)(i), Income Tax Regs., imposing a timely
filing requirement on foreign corporations.
regulation to be invalid.
It holds the
I disagree.
In Chevron, U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, 842-843 (1984), the Supreme Court set forth
a sequential approach for determining whether an agency’s
construction of a statute it administers should be given
deference:
First, always, is the question whether Congress has
directly spoken to the precise question at issue. If
the intent of Congress is clear, that is the end of
the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of
Congress. * * * [I]f the statute is silent or
ambiguous with respect to the specific issue, the
question for the court is whether the agency’s answer
is based on a permissible construction of the statute.
Id. (fn. ref. omitted).
That approach was reaffirmed by the
Supreme Court in Atl. Mut. Ins. Co. v. Commissioner, 523 U.S.
382, 389 (1998) (a case involving the validity of an income tax
regulation), in which, with respect to the second question, the
Court added the admonition:
“[T]he task that confronts us is to
-101decide, not whether the Treasury Regulation represents the best
interpretation of the statute, but whether it represents a
reasonable one.
See Cottage Savings Assn. v. Commissioner, 499
U.S. 554, 560-561 (1991).”
Accordingly, the questions in the instant case are: (1)
Whether, in denying a foreign corporation an allowance for
deductions and credits (without distinction, deductions) unless
the foreign corporation files a true and accurate income tax
return within the time limits set forth in section 1.882-4(a)(2)
and (3)(i), Income Tax Regs., the Secretary has contradicted the
unambiguously expressed intent of Congress; and, if that cannot
be said, (2) whether the time limits imposed by the Secretary
constitute a permissible construction of section 882(c)(2).
Before proceeding, it may be helpful to establish some
terminology regarding the time for filing returns.
majority’s use of the term “timely” confusing.
I find the
For example, on
page 4 of its report, the majority uses the term “timely” to
mean both a return filed on or before the due date established
by section 6072 (see note 3) and a return filed after the due
date but before the “arbitrary 18-month deadline * * * devised
by the Secretary.”
I use the term “on-time” to describe a
return filed on or before the date established by the relevant
provision of a statute and the term “timely” to describe a
return filed after that date but before some date after which
-102the filing would be considered untimely (e.g., the “terminal
date” described by the Court of Appeals for the Fourth Circuit
in Blenheim Co. v. Commissioner, 125 F.2d 906, 910 (4th Cir.
1942), affg. 42 B.T.A. 1248 (1940)).
II.
First Question: Has Congress Directly Spoken to the
Precise Question at Issue?
If a foreign corporation files its income tax return on or
before the due date prescribed in section 6072(c), the return is
on-time.
Moreover, no provision of subtitle F deprives a
foreign corporation of the benefit of deductions claimed on a
return simply because the return was not on-time.
Indeed, in
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711
(1938), our predecessor, the Board of Tax Appeals (the Board),
held that section 233 of the Revenue Act of 1928, ch. 852, 45
Stat. 849 (a precursor to section 882(c)(2)), could not be read
to make an on-time return a prerequisite to a foreign
corporation’s having the benefit of deductions to which it was
otherwise entitled:
“[I]f Congress had intended to deprive a
foreign corporation of its right to * * * [a deduction] if it
did not file its return within the time prescribed, we think it
would have said so.”
Id. at 715 (emphasis added).
Thereafter,
h
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