Petition for Writ of Certiorari — Archer-Daniels-Midland Co. v. United States

Supreme Court brief1995

Ask Donna

What actually matters in this document.

Text

941261 JAN 2 5 1995

™ OFFICE OF JHE cep,

In THE

Supreme Court of the United States

OCTOBER TERM, 1994

ARCHER-DANIELS-MIDLAND COMPANY, on its own behalf

and as common parent of an affiliated group of corpo-

rations, FILEISCHMANN-KURTH MALTING COMPANY,

INCORPORATED, and COEVAL, INCORPORATED,

¥, Petitioners,

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

PETITION FOR A WRIT OF CERTIORARI

JOSEPH ANGLAND *

FELIX B. LAUGHLIN

DAVID E. WATTS

DEWEY BALLANTINE

1301 Avenue of the Americas

New York, NY 10019-6092

(212) 259-8000

A. JAMES SHAFTER

KEHART, SHAFTER, HUGHES

& WEBBER, P.C.

Suite 500

First of America Center

P.O. Box 871

Decatur, IL 62525-0871

(217) 428-4689

Attorneys for Petitioners

* Counsel of Record

WILSON - Eras Printine Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Can a clear statutory provision be overridden by

an equally clear but inconsistent statement in congres-

sional committee reports?

2. In determining whether statutory language has more

than one plausible interpretation, can an interpretation

be deemed plausible if it involves reading an introduc-

tory clause to imply a limitation on the first of the three

mathematical formulae it governs when it is undisputed

that the limitation should not be applied to the third

formula?

(i)

RULE 29.1 STATEMENT

The parents and subsidiaries (other than those that

are wholly owned or otherwise not publicly held) of the

parties to the proceeding in the lower courts are:

Acatos & Hutcheson Plc.

American Maize-Products Co.

Overseas Shipholding Group, Inc.

Pilgrims Pride Corporation

i Preity i id ea a aes NI Goer

TABLE OF CONTENTS

Page

oR ee EP 2 8 yg | a eae i

I I TE sessed tteernicedasenisccadecowiensnets li

py ie 8 gy |» A aaa iv

Nee ssnucmnchabbneunmeosneses 1

es apleuodbaibecaleccasessmnve 2

STATUTORY AND REGULATORY PROVISIONS

a sciuannusbatncoeeneseawens 2

Nee ds eisudiveanssesedcumess 3

a 3

B. ADM’s DISC Transactions .................................... 4

ee a cucusntuseauensboecnentinewatens 5

REASONS FOR GRANTING THE PETITION .......... 7

I. THE PETITION SHOULD BE GRANTED TO

OVERRULE THE HOLDING THAT LEGIS-

LATIVE HISTORY CAN OVERRIDE THE |

LANGUAGE OF A STATUTE THAT IS COM-

oP bs | os) Sn 9

II. THE PETITION SHOULD BE GRANTED TO

ESTABLISH THAT AN INTERPRETATION

OF A STATUTE THAT LEADS TO INTER-

NAL CONTRADICTIONS IS NOT PLAUSI-

at i schseaeieione 13

Ill. THIS CASE IS A PARTICULARLY APPRO-

PRIATE VEHICLE FOR CLARIFYING THE

PERTINENT LEGAL PRINCIPLES ................. 17

ad ial leicester estinesinanisanssinwontsicwinten 18

TABLE OF AUTHORITIES

CASES Page

Atkins v. Parker, 472 U.S. 115 (1985) ......0.0..0002..... 9

Brown v. Gardner, 115 S. Ct. 552 (1994) ....0.200000... 14,15

Edwards v. Valdez, 789 F.2d 1477 (10th Cir.

III sccccscnicsateeeppiaclnahusei'e akial stein intlRia Min Dace 12

G.U.R. Co. v. Commissioner, 117 F.2d 187 (7th

Cs MAID scceckiesticioecistessuciiichadcaetnniniasnalahbaianebnaeichdaidariapt ita 16

Green v. Bock Laundry Machine Co., 490 U.S. 504

CIE <cosicecctecsisidhciosiutissbicanceeecacaesiacataabaleheneciacatieerteai es se 9

International Brotherhood of Electrical Workers, ;

Local Union No. 474 v. NLRB, 814 F.2d 697 '

Er Meee SIND so hiccea hcaitiaecicnlendesln cceietaetncaciaiees 12 2

Nalle v. Commissioner, 997 F.2d 1134 (5th Cir. :

SRE RES PR Dp Ret RNR PN LRiree SO eR 12 ;

Patterson v. Shumate, 112 S. Ct. 2242 (1992) ........ 9 3

Ratzlaf v. United States, 114 S. Ct. 655 (1994)...... 14 :

Rubin v. United States, 449 U.S. 424 (1981)........ 9

United States v. Taylor, 487 U.S. 326 (1988) ........ 10 ;

STATUTORY PROVISIONS

en a cau eeeebial 16

a onledecatinaanieaanareieieaisih 8

, LE |, EEG oats ieee nea vey en mem ee 8

DC is bacideistiscciinninensenbcanega 16 4

anc csnenctcceccscmsocccivs 2, 16 ‘

II sivdicitinisinnintncnmcenipiaanmanidas 7

» Rbk Cee Sf nnn 2, 4, 6, 9, 18, 14, 15, 16, 18 ;

, Sik Fee | | TCT ¢ ) RRC eeeeCreeNennennnEraren TE 4,5, 10, 13, 14

ID ooivcecceinevasecssrsvnrsanesientnbiciitnnsiaeenell 4,5, 13

I ee ecinssncnnnsenenscrssnesaesaniniesenanmveiaied 4, 13,14

- | __ SERSERrr erceveke ae sees 4 4

os ocisnalahnenenbuneeinnakantel 2

re ae I GP iaedenecinnekaccitecccinccnscbinsienntsiaannsess 5

REGULATORY PROVISIONS

26 C.F.R. § 1.61-3 (a) .................... ic eeihcsueabdinectanaiedie 16

iss ccinrnnniamnnivananaioniad eit 4

pf A RE EC | | |) ae enn T Se aan ry 3,14

, tee § RES SE Let f | : Ceneee nea imenenOn 14

TABLE OF AUTHORITIES—Continued

LEGISLATIVE MATERIALS

H.R. Rep. No. 533, 92d Cong., Ist Sess. 74 (1971)...

S. Rep. No. 4387, 92d Cong., lst Sess. 107-08

ED sicicesicciinicdetacthiciiinian tiealaia anal Eee Sol

TREATISES AND ARTICLES

Arthur P. Hall, The High Cost of Tax Compliance

for U.S. Business, 63 Tax Notes 887 (1994)........

Erwin N. Griswold, Js the Tax Law Going to

Seed?, 11 Am. J. Tax Pol’y 1 (1994) 00.

Patricia M. Wald, Some Observations on the Use

of Legislative History in the 1981 Supreme

Court Term, 68 Iowa L. Rev. 195 (1988)........

Page

In THE

Supreme Court of the United States

OCTOBER TERM, 1994

No.

ARCHER-DANIELS-MIDLAND COMPANY, on its own behalf

and as common parent of an affiliated group of corpo-

rations, FLEISCHMANN-KURTH MALTING COMPANY,

INCORPORATED, and COEVAL, INCORPORATED,

m Petitioners,

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Seventh Circuit

PETITION FOR A WRIT OF CERTIORARI

Archer-Daniels-Midland Company (“ADM”), on. its

own behalf and as common parent of an affiliated group

of corporations, Fleischmann-Kurth Malting Company,

Incorporated and Coeval, Incorporated, petition for a writ

of certiorari to the United States Court of Appeals for

the Seventh Circuit.

OPINIONS BELOW

The opinion of the court of appeals (App., infra, 1a-

8a) is reported at 37 F.3d 321 (7th Cir. 1994). The

opinion of the district court (App., infra. 9a-24a) is re-

ported at 798 F. Supp. 505 (C.D. Ill. 1992).

JURISDICTION

The judgment of the court of appeals was entered on

October 3, 1994. A petition for rehearing with a sug-

gestion for rehearing en banc was denied on November 2,

1994. App., infra, 25a-26a. The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254(1).

STATUTORY AND

REGULATORY PROVISIONS INVOLVED

26 U.S.C. § 994(a),’ as in effect at the relevant time,

provided as follows:

(a) IN GENERAL.—In the case of a sale of ex-

port property to a DISC by a person described in sec-

tion 482, the taxable income of such DISC and such

person shall be based upon a transfer price which

would allow such DISC to derive taxable income at-

tributable to such sale (regardless of the sales price

actually charged) in an amount which does not ex-

ceed the greatest of —

(1) 4 percent of the qualified export receipts

on the sale of property by the DISC plus 10 per-

cent of the export promotion expenses of such

DISC attributable to such receipts,

(2) 50 percent of the combined taxable in-

come of such DISC and such person which is

attributable to the qualified export receipts on

such property derived as the result of a sale by

the DISC plus 10 percent of the export promo-

tion expenses of such DISC attributable to such

receipts, or

(3) taxable income based upon the sale price

actually charged ‘but subject to the rules pro-

vided in section 482).”

1 Unless otherwise indicated, all section references herein are to

the Internal Revenue Code, 26 U.S.C., as in effect at the relevant

time, or to the regulations promulgated thereunder, 26 C.F.R.

2 Section 482 requires related parties to set fair market prices

for their transactions—(i.e., prices that would result from arm’s

Treasury Regulation § 1.994-1(e)(1)(i), the “no-loss

rule,” provides as follows:

(e) Methods of applying paragraphs (c) and (d)

of this section—(1) Limitation on DISC income (“no

loss” rule)—(i) In general. Except as otherwise pro-

vided in this subparagraph, neither the gross receipts

method nor the combined taxable income method may

be applied to cause in any taxable year a loss to the

related supplier, but either method may be applied

to the extent it does not cause a loss. A loss to a

related supplier would result if the taxable income of

the DISC would exceed the combined taxable income

of the related supplier and the DISC. If, however,

there is no combined taxable income of the DISC and

the related supplier (because; for example, a com-

bined loss is incurred), a transfer price (or commis-

sion) will not be deemed to cause a loss to the related

supplier if it allows the DISC to recover an amount

not in excess of its costs (if any).

STATEMENT

A. The Statutory Scheme

In order to improve the balance of payments by en-

couraging exports by U.S. companies, Congress in 1971

added to the Internal Revenue Code provisions governing

DISCs—Domestic International Sales Corporations.

App., infra, 2a. These provisions permitted U.S. com-

panies to obtain tax benefits by using a separate corpora-

tion—a DISC—as a vehicle for making export sales. Id.

A DISC could either buy the export property from its

related company at a bargain price and resell it abroad,

or it could be deemed a sales agent for the related com-

pany and be paid a commission on the sale. Id. at 11a.

The DISC would realize income on the transactions, but

the payment of tax was deferred on about half the in-

come. Id. at 10a-1la. Meanwhile, the bargain sale or

length negotiations between unrelated parties). Thus, the third

formula simply provides that the prices be set at fair market value.

commission payments to the DISC reduced the taxable in-

come of the related party. See id.

The greater the income the DISC realized, the greater

the tax deferral to the related party. Through section

994(a)—set forth above—Congress carefully limited the

income that could be attributed to the DISC: the price

in the transaction between the DISC and the related party

had to be set so that the DISC’s taxable income did not

exceed the amount computed under whichever of the three

pricing formulae the taxpayer elected. App., infra, 2a.

In 1975, the Internal Revenue Service (“IRS”) issued

the so-called no-loss rule which provided that the inter-

company pricing formulae of section 994(a)(1) (4 per-

cent of export receipts) and section 994(a)(2) (50%

of combined taxable income) would not apply to the ex-

tent that the price so calculated would “cause in any

taxable year a loss to the related supplier.” App., infra,

lla. The no-loss rule expressly provided that the no-loss

limitation does not apply to the arm’s length pricing

formula of section 994(a)(3). See App., infra, 13a.

B. ADM’s DISC Transactions

ADM established a DISC, and during the years 1975

through 1978 ADM and its related companies used the

DISC to make over $3.5 billion in qualified export sales. In

establishing the prices for the transactions with its DISC,

ADM elected the first of the three pricing alternatives

under section 994(a): the transactions with the DISC

were priced so that the DISC realized taxable income

equal to “4 percent of the qualified export receipts.” *

ADM’s application of the 4-percent-of-exports formula

resulted, in some cases, in losses to ADM on its export

3 Section 994(a) literally governs the pricing only for DISCs

that buy and resell the export property, not for DISCs that act as

commission agents. Section 994(b), however, directs the Secretary

of the Treasury to prescribe regulations for commission DISCs

that are consistent with the rules in section 994(a). Those regula-

tions appear at 26 C.F.R. § 1.994-1(d).

ne SON Tee ee RN a En ee

sales. Recognizing that the no-loss rule purported to pro-

scribe such a result, ADM filed its tax returns in con-

formity with the no-loss rule and paid the taxes shown

as due of those returns. App., infra, 14a. It then

claimed a refund on the ground that the no-loss rule was

invalid because it squarely conflicted with the statutory

language which imposed no such limit on the 4-percent-of-

gross-receipts formula. Jd. at 15a. Following denial of

the refund claim, it commenced this refund action in the

United States District Court for the Central District of

Illinois. The jurisdiction of the district court was based

on 28 U.S.C. § 1346(a) (1).

C. Proceedings Below

The sole issue before the district court was the validity

of the no-loss rule.* App., infra, 9a. Because there was

no dispute as to any material facts, the parties cross-

moved for summary judgment. Jd. The district court

held that the language of section 994(a)(1) unambig-

uously permitted ADM to set the price in its DISC trans-

actions so that the DISC realized taxable income equal

to 4 percent of gross export receipts, notwithstanding that

this generated losses for ADM on its export sales. App.,

infra, 22a-24a. It thus held that the no-loss rule repre-

sented an impermissible attempt to alter the clear mathe-

matical formula set forth in the statute. See id. at 22a.

The court recognized that the no-loss rule was consistent

with a sentence in the congressional committee reports,°

4The complaint also addressed the tax treatment of certain

insurance transactions, but the parties settled that issue.

5 The following language relating to sections 994(a)(1) and

(2) appeared in the two committee reports:

Under the first of the iwo new rules, a DISC may earn that

portion of the combined taxable income arising on the sale

by a DISC of export property purchased from a related person

which does not exceed 4 percent -of the qualified export re-

ceipts from the sale, pius 10 percent of the DISC’s export

promotion expenses attributable to the sale. Income may not,

"zi

but it held that those reports could not override the clear

statutory language. /d. at 22a-23a. The district court

thus granted summary judgment for ADM for a refund

of $17,908,898 in taxes, plus interest. Jd. at 27a-28a.

In a 2-1 decision, the court of appeals reversed. Jd. at

la-8a. The majority did not suggest that ADM’s inter-

pretation of the statute was inconsistent with the statutory

language or that it would lead to any absurd result. In

a single sentence, however, the majority suggested that

reading the introductory language of section 994(a) as

implying that the 4-percent-of-gross-receipts method is

capped at the amount of taxable income derived from

export sales “is not inevitable, but it is plausible,” and

thus justifies the no-loss rule which is supported by the

sentence in the committee reports. App., infra, Sa.

The majority defended its reliance on legislative history i

by stating that “the slogan that Congress votes on the

bill and not on the report strikes us as pretty empty”;

and further, that “[iJf [a member of Congress] (or his

staff) cannot rely on [committee reports] as a guide to

the meaning of the statute, we are not sure what he is

supposed to do.” Jd. The dissenting opinion concluded

that “Congress did not enact the ‘no-loss rule,” and it

would thus have affirmed the judgment of the district

court. Id. at 8a.

nema. 34 ~

haere

however, be allocated to the DISC under this (or the second)

rule to the extent it would result in the related person who

sold the products to the DISC incurring a loss on the sale.

H.R. Rep. No. 533, 92d Cong., Ist Sess. 74 (1971), reprinted in

1971 U.S.C.C.A.N. 1825, 1887; S. Rep. No. 437, 92d Cong., 1st

Sess. 107-08 (1971), reprinted in 1971 U.S.C.C.A.N. 1918, 2013.

REASONS FOR GRANTING THE PETITION

The Court should grant this petition in order to resolve

two important and related issues regarding the proper use

of legislative history in construing statutes. The impor-

tance of this case does not derive from the significance of

the particular statutory language involved; indeed, the

DISC provisions were supplanted after 1984 by foreign

sales corporations provisions that contain an explicit in-

come limitation on the comparable gross receipts for-

mula.* It is thus unlikely that the construction of this

particular language is of enduring significance. In con-

trast, however, the two issues regarding the use of legisla-

tive history in statutory construction are of signal impor-

tance, and the resolution of those issues by the Seventh

Circuit conflicts with decisions of other courts of appeals

and threatens to eviscerate this Court’s pronouncements

on the subject. Moreover, this case is a singularly appro-

priate vehicle for this Court to use to resolve these issues

because it is not plagued by (1) any dispute as to the

facts (indeed, the facts were stipulated) or (2) any con-

flict within the legislative history (the parties agree that

the only legislative history that addresses the issue is the

sentence that appears in the committee reports that sup-

ports the IRS position).

This Court has held that the plain language of a

statute will control, notwithstanding legislative history

to the contrary, except in exceptional circumstances.

There is no claim that this case presents an exceptional!

circumstance such as a scrivener’s error or a literal word-

ing of a statute that produces an absurd and clearly

unintended result. The court of appeals recognized

that the taxpayer’s interpretation more broadly carries

out the statutory purpose of encouraging exports (App.,

infra, 4a); moreover, the statute’s balance-of-payments

objective is directly served by export receipts without

6 Section 925(d).

regard to the amount of income they produce.’ Nor

is this a case in which the legislative history serves to

define a word or phrase in the statute that at first might

have appeared clear but whose ambiguity is revealed by

the legislative history; the committee reports state that there

is a no-loss limitation, but they point to no language in

the statute as the source of that limitation. Instead, the

statute prescribes three pricing formulae with specificity,

and a sentence in the committee reports simply asserts a

limitation on two of the three pricing formulae that has

no roots in any statutory language.

The court of appeals erred in two important respects

in upholding the no-loss rule. First, the court carved out

a new and unwarranted exception to the proposition that

the plain language of a statute should control. Ignoring

this Court’s holdings to the effect that committee reports

cannot be treated as law (although they can shed light

on the meaning of words used in a statute), the court of

appeals held that committee reports should dominate

statutory construction in complex areas such as the tax

code (See App., infra, 5a), where congressmen allegedly

lack the time to study the statute and thus rely on the

committee reports.

Second, and even more perniciously, the court of ap

peals adopted an approach that guts the basic proposition

that the plain language of a statute should govern. To

justify its reliance on legislative history, it suggested (in

a single sentence) that the statute was ambiguous because

a suggested interpretation of a phrase in the introductory

7™The court of appeals noted that absent the no-loss rule the

DISC provisions would enable ADM to reduce the taxes payable

with respect to non-export activities. App., infra, 3a-4a. Under

the Internal Revenue Code, however, it is the rule, not the excep-

tion, that credits or deductions designed as an incentive for one

activity may be used to decrease the tax liability with respect to

other activities. F’.g., section 66 (investment tax credits); section

167(k) (accelerated depreciation). The incentive for the desired

activity is provided by any reduction of tax liability, whatever the

source of that liability.

language of section 994(a) arguably would render “plau-

sible” the IRS’s interpretation of the statute. App., infra,

5a. The suggested interpretation of that introductory

phrase not only stretches those words beyond any normal

reading, it leads to an impossible result because the phrase

introduces and governs all three pricing formulae and it

is undisputed that the limitation the court of appeals reads

into the language does not in fact apply to the third

formula. Thus, the court of appeals holds that a statute

Should be treated as ambiguous even when there is only

one construction that does not lead to a grammatical and

logical contradiction. If that is the case, then the basic

proposition about honoring the clear language of a statute

becomes meaningless, because all it takes to circumvent

that proposition is the assertion of a litigating position

(regardless of its grammatical and logical indefensibility )

that the statute admits of more than one interpretation.

I. THE PETITION SHOULD BE GRANTED TO OVER-

RULE THE HOLDING THAT LEGISLATIVE HISs-

TORY CAN OVERRIDE THE LANGUAGE OF A

STATUTE THAT IS COMPLEX OR TECHNICAL

With very rare exceptions, an unambiguous statute

should be given its plain meaning, notwithstanding legisla-

tive history to the contrary. Patterson v. Shumate, 112

S. Ct. 2242, 2248 (1992); Rubin v. United States, 449

U.S. 424, 430 (1981). This Court has recognized, how-

ever, that legislative history can play an important role

in statutory construction. For example, it can reveal what

Congress really intended when the statutory language

yields an absurd and obviously unintended result. See,

e.g., Green v. Bock Laundry Machine Co., 490 USS.

504, 527 (1989) (Scalia, J., concurring). Most com-

monly, it can shed light upon the intended meaning of

statutory words and phrases, thus facilitating a choice

among competing reasonable interpretations of a statute.

See, e.g., Atkins v. Parker, 472 U.S. 115, 124-26 (1985).

The court of appeals, however, did not use legislative his-

tory in any such appropriate fashion; rather, it misused

legislative history by relying on it to override statutory

language on the theory that, in the case of complex and

technical statutes such as the Internal Revenue Code pro-

visions at issue here, the committee reports, rather than

the statutes themselves, are the focal points for congress-

men and their staffs. See App., infra, 5a.

The court of appeals emphasized the role it would

accord legislative history:

Legislative history is in bad odor in some influential

judicial quarters, see, e.g., United States v. Taylor,

487 U.S. 326, 344-46 (1988) (concurring opinion)

but it continues to be relied on heavily by most Su-

preme Court Justices and lower-court judges; and in

the case of statutory language as technical and arcane

as that of the DISC provisions, the slogan that Con-

gress votes on the bill and not on the report strikes

us as pretty empty. Even advised by his personal staff

a member of Congress would have great difficulty

figuring out the purport of 26 U.S.C. § 994(a)(1)

without the aid of the committee reports. If he (or

his staff) cannot rely on them as a guide to the mean-

ing of the statute, we are not sure what he is supposed

to do.

App., infra, 5a. Thus, the court of appeals’ view is that

in the case of complex statutes (including, presumably,

those that upon careful review would admit of only one

reasonable interpretation), a court may skip over the

statutory language and go straight to the committee re-

ports to ascertain the statute’s meaning. Yet it is exactly

such a usage that gives legislative history the “bad odor”

to which the court refers, with the resulting pressure for

development of overly restrictive principles of statutory

construction.

The court of appeals’ view is erroneous and demands

correction. This Court, quite properly, has not created a

complexity exception to the principle that unambiguous

statutory language controls; it has never held that statutes

must be both plain and simple to merit construction by

reference to their language rather than to unenacted legis-

lative history.

Complex statutes may prove ambiguous more often

than simple statutes, but that is by no means clear. Quite

possibly, the interrelationship between the provisions of

a complex statufe, and the use of the same words in sev-

eral places, may eliminate some otherwise reasonable con-

structions. Moreover, regardless of whether complex stat-

utes are generally more prone to ambiguity than their

simple counterparts, there is no basis for permitting legis-

lative history to trump particular statutory language that,

although complex, admits of only one reasonable con-

struction.

The court of appeals opinion was not only wrong, it

d.mands correction by this Court. Admittedly, this Court

has often ruled that legislative history should not override

clear statutory language, and an isolated court of appeals

decision that overlooked that rule might do little to upset

that body of precedent. This court of appeals decision,

however, could be construed as an exception to or refine-

ment of the general principle in the case of complex stat-

utes. This decision could thus spawn erroneous decisions

from courts even though they are well aware of the gen-

eral principle this Court has adopted.

The view of statutory construction adopted by the court

of appeals in this case is particularly troublesome if it is

accepted as a principle of construction of tax provisions.

The Internal Revenue Code is extremely complicated, and

those complications apply to millions of taxpayers.* The

cost to taxpayers of compliance is presently enormous,”

and that cost would substantially increase if, as the court

8“ The] present tax law has spun out complications to the extent

that it is truly monstrous.” Erwin N. Griswold, Js the Tax Law

Going to Seed?, 11 Am. J. Tax Pol’y 1. (1994).

®The estimated 1993 costs to U.S. business of Federal tax

compliance is $123.4 billion. Arthur P. Hall, The High Cost of Tax

Compliance for U.S. Business, 63 Tax Notes 887 (1994).

of appeals holds, it is not sufficient to comply with the

clear language of a statute if that language is not entirely

consistent with legislative history.

This Court should take this opportunity to affirm that

clear language of the Internal Revenue Code prevails in

the absence of a patent scrivener’s error or the creation

of an absurd result, that the court of appeals’ view to the

contrary in this case is rejected, and that the governing

principle is that applied by the Fifth Circuit in Nalle v.

Commissioner, 997 F.2d 1134, 1140 (Sth Cir. 1993),

which stated, in the course of holding a Treasury regula-

tion invalid:

The Commissioner cannot explain away this ultimate

incompatibility of his regulation with the statute by

reference to the legislative history; where a plain

reading of the statute precludes the Commissioner’s

interpretation, no legislative history—be it ever so

favorable—can redeem it.

The Fifth Circuit recognized that a substantial additional

burden would be imposed on taxpayers if plain language

included as a part of complex tax legislation cannot be

relied on without first searching for inconsistencies in un-

enacted materials. In sharp contrast, the court of appeals

opinion in this case in effect suggests that a member of

Congress (or his staff) need not be concerned with statu-

tory language—if he cannot rely on committee reports as

a guide to meaning, “we are not sure what he is supposed

to do.” App., infra, 5a.

Contrary to the court of appeals opinion, other circuit

courts construing the Internal Revenue Code or other com-

plex legislation similarly have rejected use of legislative

history to override clear statutory language despite such

complexity. See, e.g., International Brotherhood of Elec-

trical Workers, Local Union No. 474 v. NLRB, 814 F.2d

697 (D.C. Cir. 1987) (National Labor Relations Act);

Edwards v. Valdez, 789 F.2d 1477 (10th Cir. 1986)

(Federal Unemployment Tax Act).

Il. THE PETITION SHOULD BE GRANTED TO

ESTABLISH THAT AN INTERPRETATION OF A

STATUTE THAT LEADS TO INTERNAL CONTRA-

DICTIONS IS NOT PLAUSIBLE

The court of appeals’ sole attempt to reconcile its in-

terpretation of the statute with the statutory language was

its passing suggestion that a phrase in the introductory

language of section 994(a) can plausibly be read as im-

posing a no-loss limitation on the “4 percent of the quali-

fied export receipts” test of section 994(a)(1). App.,

infra, 3a. Even if (contrary to fact) this were a plausible

construction of the phrase viewed in isolation, it is an

impossible interpretation here because that language ap-

plies equally to all three pricing formulae, and it is un-

disputed that the no-loss limitation does not apply to the

third pricing formula.

As noted above, the introductory language of section

994(a) allows the taxpayer to establish a price for the

transactions with its DISC so as to allow the DISC “to

derive taxable income attributable to [the export] sale”

in an amount that does not exceed the greatest of the

amounts computed according to the three formulae that

follow: the 4-percent-of-qualified-export-receipts test of

section 994(a)(1), the 50-percent-of-combined-profits

test of section 994(a)(2), and the arm’s-length-pricing

test of section 994(a)(3). The court of appeals did not

suggest that any language in section 994(a)(1) itself im-

poses a no-loss limitation. Rather, it finds this limitation

in the introductory language. The entire discussion of the

relevant language by the court is as follows:

The exporter is allowed to fix a transfer price that

will allow its “DISC to derive taxable income attrib-

utable to [the export] sale,” 26 U.S.C. § 994(a), and

in our hypothetical sale ADM has no income from its

export sales. To read section 994(a) as implying that

the 4-percent-of-gross-receipts method of calculating

DISC income in subsection (1) is capped at the

amount of taxable income derived from export sales

is not inevitable, but it is plausible... .

App., infra, Sa.

Even assuming that the phrase “derive taxable income

attributable to [the export] sale” could, in isolation, be

read as imposing a no-loss limitation, the structure of the

Statute precludes such an interpretation here. The intro-

ductory language of section 994(a), including the quoted

phrase, governs the arm’s length formula of section 994

(a)(3) to the same extent that it governs the 4-percent

formula of section 994(a)(1). The IRS, however, ac-

knowledges that the arm’s length method is not subject to

any no-loss limitation, and the no-loss regulation so pro-

vides both by text and example. See Treas. i‘eg.

§ 1.994-1(e)(1)(i) and (g) Example (5). Yet if this

is the case, then the introductory language of section

994(a) cannot possibly be read to impose a no-loss limi-

tation. It is grammatically impossible to argue that the

introductory language limits the 4-percent formula with-

out limiting the arm’s length formula.

Given that the introductory language applies to both

of these formulae, the court of appeals necessarily gives

the very same phrase two different meanings when ap-

plied to the two formulae, an approach that defies both

logic and precedent. As this Court recently observed,

“[a]mbiguity is a creature not of definitional possibilities

but of statutory context.” Brown v. Gardner, 115 S. Ct.

552, 555 (1994). In Ratzlaf v. United States, 114 S. Ct.

655, 660, 662 (1994), this Court held that a single for-

mulation of statutory text should be construed the same

way each time it is called into play, despite “contrary

indications in the statute’s legislative history.” In Brown,

10 Likewise, the committee reports state a no-loss limitation only

with respect to the first two pricing formulae, not to the arm’s

length formula. See supra, at 5 n.65.

this Court emphasized that the “presumption that a given

term is used to mean the same thing throughout a statute

. . . [is] surely at its most vigorous when a term is re-

peated within a given sentence.” 115 S. Ct. at 555 (cita-

tion omitted). The present case is even more extreme; it

involves a single phrase unambiguously applied equally

to all three subsections indented beneath it.

We recognize that there may be statutes that, because

of errors in drafting, admit of no interpretation that

avoids grammatical error or logical contradiction. In such

cases, courts of necessity must select one of the imperfect

choices before them. This is not such a case. Neither

the IRS nor the court of appeals was able to identify any

grammatical or logical contradiction, or inconsistency

with the clear statutory purpose, ensuing from ADM’s

construction of the statute. Simply put, ADM’s construc-

tion works, and the IRS’s construction does not.

Even absent the contradiction noted above, the mean-

ing the court of appeals ascribes to the phrase in question

would not qualify as plausible. The introductory lan-

guage provides for setting a price for the transaction with

the DISC so that the DISC “derive[s] taxable income

attributable to [the export] sale” (App., infra, 5a) not in

excess of that allowed by the three formulae that follow.

The court of appeals decision rests on its suggestion that

it is plausible to read the phrase “attributable to” to im-

pose a no-loss limitation. See id. To the contrary, such

a reading is not plausible. If income equal to 4 percent

of export receipts is “attributed to” the DISC, then by

definition this is income “attributable to” the DISC’s ex-

port sales. There is nothing about the phrase “attributa-

ble to”—or any other words in the introductory language

of section 994(a)—that suggests that the DISC’s income

cannot exceed the combined income on the export sales,

thus generating a loss for the DISC’s related supplier.

The court of appeals reads the statute as if (1) it allo

cated a certain limited amount—the combined taxable

income on the export sale—between the DISC and the

related supplier, and (2) taxable income cannot be nega-

tive. See App., infra, 5a-6a. Both propositions must be

true to support the court of appeals’ position. In fact,

neither is. The statute does not state or imply that it is di-

viding up a specified amount of income between the DISC

and the supplier; it speaks instead of establishing the DISC’s

income by attributing (not “allocating”) to the DISC 4

percent of ADM’s export receipts without reference to

ADM’s export income. (The supplier’s income is thus a

result, not a determinant, of the DISC’s income.) More-

over, it is undisputed that taxable income may be positive

or negative under the Internal Revenue Code;”*' thus,

even if section 994(a) were viewed as dividing up tax-

able income, that would be fully consistent with assigning

taxable income equal to 4 percent of receipts to the

DISC and a negative amount of taxable income to the

supplier.

This Court should grant the petition in order to make

clear that the IRS and courts cannot circumvent the

principle that legislative history cannot override an un-

ambiguous statute simply by finding a statute to be am-

biguous whenever a party formulates a litigating position,

however strained, that two meanings are possible. Where,

as here, one interpretation is a plain reading of the words,

leads to no logical problem, more directly serves the

clear statutory purpose of providing export incentives, and

produces no absurd result, an alternative interpretation

11 Section 63(a) defines “taxable income” as “gross income

minus the deductions allowed by” the Code. Treasury Regulation

§ 1.61-3(a) defines “gross income” as “total sales, less the cost of

goods sold, plus any income from investments and from incidental

or outside operations or sources.” Thus, “gross income” and

“taxable income” can be negative amounts. Cf. G.U.R. Co. v. Com-

missioner, 117 F.2d 187 (7th Cir. 1941) (allocating to a related

party a loss on a sale of stock under the predecessor of section 482

(which provision authorized allocation of gross income or deduc-

tions)). When Congress wants to limit “taxable income” to a

positive amount, it does so in the statute. See, e.g., section

172(b) (2) (“the taxable income so computed shall not be con-

sidered to be less than zero”).

a ©

that leads to a logical contradiction cannot be deemed

plausible. In such a case, the statute (having only one

plausible interpretation) is unambiguous and _ legislative

history cannot be used to trump the statutory language.

This issue is of unusual significance. A party (or a

court) in any case can propound multiple interpretations

of statutory language. If the mere articulation of multiple

interpretations, without regard to whether more than one

interpretation creates a logically consistent statute, suffices

to generate an ambiguity that merits resort to legislative

history, then the principle that unambiguous statutory

language should govern has been effectively gutted. The

Court should grant the petition to establish that this essen-

tial principle of statutory construction is not so easily

evaded.

Ill. THIS CASE IS A PARTICULARLY APPROPRIATE

VEHICLE FOR CLARIFYING THE PERTINENT

LEGAL PRINCIPLES

This case represents a particularly good vehicle for

clarifying the legal principles regarding the use of legisla-

tive history in statutory construction.

First, because the facts are fuliy stipulated, the case

presents a pure question of law.

Second, this is the rare case where there is no conflict

in the legislative history. If using legislative history to

construe statutes may properly be viewed as “looking over

a crowd and picking out your friends,” ’* then ADM may

properly be viewed as without friends. Although one can

question the extent to which a single sentence in the

committee reports expresses statutory intent, there are no

contrary statements. Thus, the case presents a question

of when legislative history is material, not about which

party finds more support in that history.

12 Patricia M. Wald, Some Observations on the Use of Legislative

History in the 1981 Supreme Court Term, 68 Iowa L. Rev. 195, 214

(1983) (quoting Judge Leventhal).

CONCLUSION

Nothing in the statutory language explicitly imposes

a no-loss limitation on the DISC pricing formulae. More-

over, it is not conceivable that one would read the intro-

ductory language of section 994(a) to imply such a limi-

tation unless, prompted by the sentence in the committee

reports, one consciously strove to find a statutory phrase

on which to attempt to justify the reports. That is what

the court of appeals did here. Contending that committee

reports depict what Congress really intended, the court

of appeals imposed a construction on a statutory phrase

that conflicts with the normal usage of the statutory words

and that leads to a clear internal contradiction. Legisla-

tive history surely has an important role to play in statu-

tory construction, but not the role allotted to it here. The

Court should grant the petition to clarify the presently

somewhat confused principles governing statutory con-

struction and to distinguish between the proper use and

the abuse of legislative history.

Respectfully submitted,

JOSEPH ANGLAND *

FELIX B. LAUGHLIN

DAVID E. WATTS

DEWEY BALLANTINE

1301 Avenue of the Americas

New York, NY 10019-6092

(212) 259-8000

A. JAMES SHAFTER

KEHART, SHAFTER, HUGHES

& WEBBER, P.C.

Suite 500

First of America Center

P.O. Box 871

Decatur, IL 62525-0871

(217) 428-4689

Attorneys for Petitioners

Date: January 25, 1995 * Counsel of Record

A ee ae ETT RE EE Sy. hae one

POSE eet eae TS reed MCR ET te ol rey

ey My 8a Lote ear y SOS

3 tte ‘

=, “y ¥s 4 Leen a

: , -

4 ? -

~ aps 5

g “

4 >

4 a

t y

rs ‘

* ay vis ’ k ty > 4 $44 ‘ zs =

$ ‘ - » 2 + : .

- J m ote t “34 : $

. ‘ 5 ae ed ; i *

. a ;

; : * : ea - 4 $ .

‘ y . * Ne :

4 an y a # 5

Sees etre eee Ape ate Re eer ean

os ” Fe 3 Crete PL A eT, Ree 3 at hie Oak, e ot BF rs ¥ % 5

; J

APPENDIX A

IN THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

No. 93-3939

ARCHER-DANIELS-MIDLAND COMPANY, on its own behalf

and as common parent of an affiliated group of corpo-

rations, FLEISCHMANN-KURTH MALTING COMPANY,

INCORPORATED, and COEVAL, INCORPORATED,

Plaintiffs-A ppellees,

UNITED STATES OF AMERICA,

Defendant-A ppellant.

Appeal from the United States District Court

for the Central District of Illinois, Danville Division

No. 89 C 2325—Harold A. Baker, Judge

ARGUED May 17, 1994—DeEcipDED OCTOBER 3, 1994

Before PosNER, Chief Judge, and HILL* and RIPPLE,

Circuit Judges.

POSNER, Chief Judge. The district judge ordered the

government to refund some $18 million in taxes (plus a

good deal of interest, since the taxable years in suit are

* Hon. James C. Hill of the Eleventh Circuit, sitting by desig-

nation.

1975 through 1978) to Archer-Daniels-Midland, the agri-

cultural giant; and the government appeals. The quarrel

is over the meaning of the “DISC” provisions of the Inter-

nal Revenue Code, 26 U.S.C. §§ 991-997, which allowed

exporters such as ADM to defer federal income tax on

income (or, as ADM would have it,- on gross receipts in

some cases) obtained from those exports. We say “al-

lowed” (past tense) because these provisions have been

superseded by the provisions on Foreign Sales Corpora-

tions, 26 U.S.C. §§ 921-27; see 2 Joseph Isenbergh, Jn-

ternational Taxation: U.S. Taxation of Foreign Taxpay-

ers and Foreign Income 4 33.3 (1990), though issues

similar to those in this case may arise under the successor

provisions as well. See 26 C.F.R. § 1.925(a)-1T(e) (1).

Here is how the tax shelter, created in 1971 to stimu-

late agricultural exports (though not limited to such ex-

ports), worked. The exporter creates a DISC (Domestic

International Sales Corporation), which is simply an ac-

counting entity that has the happy property of not being

subject to federal income tax, although some of its income

is taxed to the DISC’s owner (in this case ADM) at once

and the rest is taxed to him later. The DISC’s income is

determined by the price at which the owner (called a

“related supplier”) transfers output to it for sale abroad

nominally by the DISC. The tax benefits of exporting

through a DISC would be maximized if the owner could

set a transfer price of zero, for then his entire export

income would be attributed to the DISC. Congress didn’t

want to go that far to stimulate exports, so it provided

in 26 U.S.C. § 994(a) that the taxable income of the

DISC and of the DISC’s owner “shall be based upon a

transfer price which would allow such DISC to derive i

taxable income attributable to such [export] sale (regard- \

less of the sale price actually charged) in an amount

which does not exceed the greatest of—” and three al-

ternatives are listed. Only two need be discussed. The

second—logically the first as it seems to us, since the

statute is designed to shelter income made in export sales

hearers

—is 50 percent of “the combined taxable income of the

DISC and [its owner] which is attributable to the” export

sale, plus some expenses which we can ignore. § 994

(a)(2). The first—logically the second because it is de-

signed to provide a benefit when the income from the

export sale is too slight to yield a substantial benefit

under the first subsection—is “4 percent of the qualified

export receipts on the sale of property by the DISC” plus,

again, certain expenses that we can ignore. § 994(a)(1).

ADM argues, and the district court agreed, 798 F. Supp.

505 (C.D. Ill. 1992), that this subsection allows it to

set a transfer price that will give the DISC taxable in-

come (taxable to the DISC’s owner that is, with some of

the tax deferred) equal to 4 percent of ADM’s gross re-

ceipts from agricultural exports.

The Treasury Department disagrees. In an interpretive

regulation that the district court invalidated, 26 C.F.R.

§ 1.1994-1(e)(1)(i), the Department takes the position

that subsection (1) of section 994(a) in effect supple-

ments subsection (2). Subsection (2) allows the exporter

to shift half its export income to the DISC; but should

its total income, and therefore one half of that total, be

meager (it might be zero), it can use subsection (1) to

shield a percentage of its gross receipts (a larger figure

than income) up to 4 percent. So, for example, if the

exporter has sales of $100, and income of $10, it can

shift $5 to the DISC via subsection (2), because $5 is

50 percent of $10. But if its income were only $6, it

could shift $4 to the DISC by using subsection (1) in-

stead, since $4 is 4 percent of $100. That is under the

regulation. But under ADM’s and the district judge’s

interpretation, even if the combined income of the DISC

and its owner is zero or even negative, the owner can still

shift income equal to 4 percent of its export sales to the

DISC—provided that it has income elsewhere in its busi-

ness, for otherwise the maneuver would confer no benefit

on it.

Suppose, then, that ADM had just two divisions, and

one exported agricultural products and the other manu-

factured children’s toys for sale in the United States, and

the first just broke even and the second was profitable;

the first had gross receipts of $100, costs of $100, and

income therefore of zero (so that subsection (2) would be

worthless to it), and the second had income of $10 (its

gross receipts and costs are irrelevant). ADM would fix

a transfer price to the DISC of $96, generating income

of $4 for the DISC, that being 4 percent of ADM’s gross

receipts from exports. Since ADM’s total income is in

fact only $10 in this example, none of it export income,

the effect of its maneuver would be—if ADM’s interpreta-

tion of the statute is sustained—to obtain favorable tax

treatment for 40 percent of its domestic income.

ADM is right to point out that the basic purpose of

the DISC program—the encouragement of agricultural

exports—would be served by such an interpretation, be-

cause it would encourage unprofitable as well as profit-

able, exports, whereas the Treasury Department’s inter-

pretation would encourage only the profitable ones. But

reference to purpose cannot be conclusive in a case, such

as this, where neither interpretive alternative would thwart

the statute’s purpose and the issue rather is how far the

legislature wanted to go in subordinating competing pur-

poses, such as the raising of government revenues by tax-

ation. Under either interpretation, exports are encour-

aged; they are encouraged more by the taxpayer’s inter-

pretation than by the tax collectors’; but the question is

whether Congress legislated that degree of encouragement.

Rodriguez v. United States, 480 U.S. 522, 525-26 (1987)

(per curiam); Stomper v. Amalgamated Transit Union,

No. 93-3468, slip op. at 6-7 (7th Cir. June 22, 1994);

Bushendorf v. Freightliner Corp., 13 F.3d 1024, 1026

(7th Cir. 1993). Perhaps mindful that reference to pur-

pose is inconclusive in a case such as this, ADM argues

that its interpretation is also compelled by, rather than

merely being consistent with, the statutory language. It

is not compelled. The exporter is allowed to fix a transfer

price that will allow its “DISC to derive taxable income

attributable to [the export] sale,” 26 U.S.C. § 994(a),

and in our hypothetical sale ADM has no income from

its export sales. To read section 994(a) as implying that

the 4-percent-of-gross-receipts method of calculating DISC

income in subsection (1) is capped at the amount of

taxable income derived from export sales is not inevitable,

but it is plausible, and it is supported by the legislative

history. Both committee reports describe the 4 percent

of gross receipts method as a way of calculating a ceiling

on allowable income. H.R. Rep. No. 533, 92d Cong.,

Ist Sess. 74 (1971); S. Rep. No. 437, 92d Cong., Ist Sess.

107 (1971). Legislative history is in bad odor in some

influential judicial quarters, see, e.g., United States v.

Taylor, 487 U.S. 326, 344-46 (1988) (concurring opin-

ion) but it continues to be relied on heavily by most

Supreme Court Justices and lower-court judges; and in

the case of statutory language as technical and arcane as

that of the DISC provisions, the slogan that Congress

votes on the bill and not on the report strikes us as pretty

empty. Even advised by his personal staff a member of

Congress would have great difficulty figuring out the pur-

port of 26 U.S.C. § 994(a)(1) without the aid of the

committee reports. If he (or his staff) cannot rely on

them as a guide to the meaning of the statute, we are not

sure what he is supposed to do.

Interpreted as ADM would interpret it, subsection (1)

would have potentially far-reaching effects that we hesitate

to impute to Congress without evidence that they were

intended—effects such as encouraging —purely domestic

businesses to acquire export subsidiaries as tax shelters.

A more plausible office to attribute to the subsection is

that of serving as a complement to the next subsection.

The exporter who has a low profit margin can use subsec-

tion (1) to shelter income up to 4 percent of his sales and

the exporter with a high profit margin can use subsection

(2) to shelter up to half his profits without regard to his

total sales. Evenhanded treatment of low-margin and high-

margin exporters is achieved. The statute could be clearer

but in light of the considerations that we have discussed it

adequately supports the Treasury’s regulation, to which

we are supposed to accord a certain amount of deference

even when as in this case it is “interpretive”—promulgated

pursuant to the Treasury’s general rulemaking authority—

rather than being “legislative” in the sense of having been

promulgated pursuant to a specific grant by Congress of

authority to regulate the area in question. Cottage Savings

Ass'n v. Commissioner, 499 U.S. 554, 560-61 (1991);

Gehl Co. v. Commissioner, 795 F.2d 1324, 1328-29 (7th

Cir. 1986).

The judgment for ADM is therefore

REVERSED.

HILL, J., dissenting dubitante:

At the outset, I make two acknowledgments. First, if

the Secretary of the United States Treasury Department

has the authority, in the form of regulation, to modify the

Congressional statute before us by executive amendment,

then the “no-loss rule” applies, and the opinion of the

panel, as written by Chief Judge Posner, is absolutely cor-

rect. Second, the law, as crafted by the Treasury Depart-

ment and approved by our panel today, may indeed be

better than the one enacted by Congress.’

Nevertheless, I am unwilling to place my imprimatur

upon Executive Branch legislation that makes changes in

the statute that the Treasury Secretary believes are

needed.2 If the law is clear and unambiguous, Id follow

the law. If the law is unclear, then I’d give great defer-

ence to the interpretation of the agency involved. But, if

the law says “drive from Washington to Baltimore,” and

the regulations say, “stop overnight in Annapolis,” this

direct conflict with the controlling statute should be de-

clared invalid.

As I have said many times, I look respectfully upon the

men and women of Congress as grownups who know what

they are doing.’ I find it inappropriate to patronize them

1“It may be that the Act now created by our Court is a better

or more complete Act than the one actually passed by the Congress.

Who knows? Its deficiency is that .. . [it] was never submitted to

the people’s elected representatives and edotped by them.” Wilson

v. First Houston Inv. Corp. 566 F.2d 1235, 1243 (5th Cir. 1978)

(Hill, J., dissenting), vacated. 444 U.S. 959 (1979).

2This is a personality disorder often found in bureaucrats and

federal judges.

3 “But if another course is to be chosen, the fine men and women

who have been elected to represent the people are quite competent

to the task. The judiciary should neither assume the responsibility

nor usurp authority not delegated to it.” Roberts v. Austin, 632

F.2d 1202, 1215 (5th Cir.1980) (Hill, J., concurring specially),

cert. denied, 454 U.S. 975 (1981).

by noting their imperfect work and quietly correcting it.

Moreover, I have even greater respect for Article I, Sec-

tion 1 of the United States Constitution that confers the

power to legislate upon these fine men and women. It

doesn’t confer that power upon the Treasury Department.

It doesn’t confer that power upon us, the judiciary.

Without the “no-loss rule,” the judgment of the district

court is correct. Having—not without some hesitation—

concluded that Congress did not enact the “no-loss rule,”

I would affirm the judgment of the district court.

So I dissent.*

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

4 This is probably just another example of the ongoing tension

between the legislative, executive and judicial branches as to their

appropriate roles under the Constitution.

APPENDIX B

[Filed Sep. 8, 1992]

IN THE UNITED STATES DISTRICT COURT

FOR THE CENTRAL DISTRICT OF ILLINOIS

Case Number 89-2325

ARCHER-DANIELS-MIDLAND COMPANY, éf al.,

Plaintiffs,

Vs.

UNITED STATES OF AMERICA,

Defendant.

ORDER

Archer-Daniels-Midland Company (ADM) brought this

action against the United States of America on behalf of

itself and as the common parent of an affiliated group of

corporations. ADM is seeking a refund of federal taxes

along with interest paid to the United States for the tax

years 1975 through 1978. The parties have filed cross

motions for partial summary judgment. (docket #17 and

19) The only issue involved in these motions is whether

Treas. Reg. § 1.994-1(e)(1)(i), 26 C.F.R. § 1.994-

1(e)(1)(i), which limits the use of two methods for

determining the taxable income of a domestic interna-

tional sales corporation (DISC), is valid. For the rea-

sons set forth below, the court agrees with the plaintiffs

that Treas. Reg. § 1.994-1(e)(1) (i) is invalid.

1 The remaining issue in the case concerns the taxation of insur-

ance transactions involving ADM’s two wholly-owned foreign sub-

sidiaries engaged in the insurance business.

a NE

10a

I. INTERNAL REVENUE CODE SECTION

AND TREASURY REGULATION

Congress enacted the DISC provisions, 26 U.S.C.

$§ 991-997," as a part of the Revenue Act of 1971. The

purpose of the provisions “was to provide tax incentives

for United States firms to increase their exports and to

remove the previous tax disadvantage of firms engaged in

export activities through domestic corporations instead of

through foreign subsidiaries.” Thomas International, Ltd.

v. United States, 773 F.2d 300, 301 (Fed. Cir. 1985),

cert. denied, 475 U.S. 1045 (1986); LeCroy Research

Sys., Corp. v. Commissioner, 751 F.2d 123, 124 (2d Cir.

1984). These provisions authorize the exporters to estab-

lish DISCs as separate subsidiaries to handle foreign sales

and leases. The basic function of a DISC, under section

993, “is the selling or leasing of export property which

has been created by someone else in the United States for

ultimate use outside the United States.” Gehl Co. v. Com-

missioner, 795 F.2d 1324, 1326 (7th Cir. 1986) (quoting

Bittker & Eustice, Federal Income Taxation of Corpora-

tions and Shareholders 4 17.14.2 (4th ed. 1979)). In

essence, a DISC may be only a shell corporation whose

sole function is to receive income from foreign sales by the

parent corporation. Thomas International, 773 F.2d at

301; see Dresser Indus. v. Commissioner, 911 F.2d 1128,

1131 (Sth Cir. 1990) (“Typically, a DISC is a paper

company without facilities, employees, or inventory of

its own.”).

The tax advantages of the DISC provisions stem from

the fact that a DISC is not subject to federal income

tax on its income from export sales. Durbin Paper Stock

Co. v. Commissioner, 80 T.C. 252, 254 (1983). In-

stead, approximately one-half of the DISC’s earnings is

taxed to its shareholders as constructive dividends. The

remainder of the earnings is not taxed until actually dis-

2 All statutory references in this order are to sections of the

Internal Revenue Code of 1954 (26 U.S.C.).

OO St tt~—sCS

lla

tributed to the shareholders. See Gehl, 795 F.2d at 1327;

Thomas International, 773 F.2d at 301; LeCroy, 751

F.2d at 124. However, the statute provides that the ex-

empted earnings must be used in export activities and

not diverted to production for the domestic market or

to production overseas. To fulfill the purposes of the

DISC provisions, the DISC scheme includes strict require-

ments for qualification as a DISC and provisions regulat-

ing “transactions and transfers involving the flow of the

DISC’s tax-deferred profits to related entities.” Gehl, 795

F.2d at 1326.

The DISC can participate in export transactions in two

different ways. In each type of transaction, the DISC

deals with a “related supplier” * in the sale of export prop-

erty* to a third party. In the first type of transaction,

the DISC operates as a principal in the resale of export

property that the DISC purchased from the related sup-

plier. Here the DISC earns income on the resale which

the related supplier would otherwise have earned. In

the second type of transaction, the DISC acts as a com-

mission agent facilitating the sale of export property

directly from the related supplier to the third party. The

DISC’s earnings in this transaction include commissions

which the related supplier can deduct as commission ex-

penses to reduce taxable income.

One provision that regulates the flow of the DISC’s

profits to related entities is section 994. This section sets

forth inter-company pricing rules used to determine the

DISC’s taxable income. As established in this section,

DISC taxable income is “based on a. . . ‘deemed’ trans-

3A “related supplier” is a related party as defined in 26 U.S.C.

§ 482 that engages in a transaction with the DISC under the

rules of 26 U.S.C. § 994. In this case, ADM and its affiliated cor-

porations acted as the related suppliers for their DISC, Ardanco,

Inc., a wholly-owned DISC of ADM.

4For the purposes of the DISC provisions, export property is

defined in 26 U.S.C. § 993(c).

12a

fer price for export goods provided to the DISC by its

parent or related supplier.” Dresser, 911 F.2d at 1131.

The statute includes three alternative formulas for deter-

mining the “deemed transfer price.” Jd. Section 994(a)

states:

In the case of a sale of export property to a DISC by

a [related supplier], the taxable income of such DISC

and such person shall be based upon a transfer price

which would allow such DISC to derive taxable

income attributable to such sale (regardless of the

sales price actually charged) in an amount which

does not exceed the greatest of —

(1) 4 percent of the qualified export receipts on

the sale of such property by the DISC plus 10 per-

cent of the export promotion expenses of such DISC

attributable to such receipts,

(2) 50 percent of the combined taxable income

of such DISC and [the related supplier] which is

attributable to the qualified export receipts on such

property derived as the result of a sale by the DISC

plus 10 percent of the export promotion expenses

of such DISC attributable to such receipts, or

(3) taxable income based upon the sale price ac-

tually charged (but subject to the rules provided in

section 482).

26 U.S.C. § 994(a). The three alternative inter-company

pricing methods for computing the taxable income from

the export sales are known as the 4 percent gross receipts

method, the combined taxable income method, and the

section 482 method.°

5 The government explains that this third method was the tra-

ditional arm’s-length method used to determine taxable income

and the first two methods are the special ones created to promote

exports by U.S. companies. See Government’s Memo in Support of

Summary Judgment at 8. (Government’s First Memo at 8) (docket

# 20).

13a

Although section 994(a) specifically applies only to

transactions in which the DISC acts as a principal, section

994(b) directs the Secretary to prescribe rules to apply

when the DISC acts as a commission agent.® The rules

are found in inter-company pricing rules for DISCs, 26

C.F.R. § 1.994-1(d) (1991). These rules apply the 4

percent gross receipts method (called simply the “gross

receipts method” in the regulations) and the combined

taxable income method in sections 994(a)(1) and (2) to

commissions.

The Secretary also has issued regulations concerning

the application of the three pricing methods. Treas-

ury Reg. 1.994-1(e)(1) (i) limits the situations in which

the 4 percent gross receipts method and the combined

taxable income method may be applied. The regulation

provides:

(e) Methods of applying paragraphs (c) and (d) of

this section—(1) Limitation on DISC income (“no

loss” rule)—(i) In general. Except as otherwise

provided in this subparagraph, neither the gross re-

ceipt method nor the combined taxable income

method may be applied to cause in any taxable year

a loss to the related supplier, but either method may

be applied to the extent it does not cause a loss. A

loss to a related supplier would result if the taxable

income of the DISC would exceed the combined

taxable income of the related supplier and the DISC.

If, however, there is no combined taxable income

6 Section 994(b) provides:

The Secretary shall prescribe regulations setting forth—

(1) rules which are consistent with the rules set forth in

this subsection (a) for the application of this section in the

case of commissions, rentals, and other income, and

(2) rules for the allocation of expenditures in computing

combined taxable income under subsection (a) (2) in those

cases where a DISC is seeking to establish or maintain a

market for export property.

14a

of the DISC and the related supplier (because, for

example, a combined loss is incurred), a transfer

price (or commission) will not be deemed to cause

a loss to the related supplier if it allows the DISC

to recover an amount not in excess of its costs (if

any).

26 C.F.R. § 1.994-1(e)(1)(i) (1991). Under this reg-

ulation, also called the no-loss rule, a party, such as ADM,

cannot use the 4 percent gross receipts method if the

application of that method would result in a loss for the

related supplier. ADM challenges the validity of this

regulation.

Il. FACTS

Since the parties have agreed to the facts surrounding

the transactions and have submitted a stipulation stating

the facts (docket #18), the court will review the facts

briefly. In March, 1972, ADM incorporated a wholly-

owned subsidiary, Ardanco, Inc. (Ardanco), to act as a

DISC of ADM within the meaning of Section 992(a).

Stipulation para. 10. During the tax years 1975 through

1978, Ardanco received commissions and transfer price

income from transactions with its related suppliers, ADM,

ADM Milling Company, ADM Export Company, Ross &

Rowe, Inc., and Tabor & Company. Stipulation 44 21-22.

In each of those years, transactions involving Ardanco

and its related suppliers were subject to suppliers’ agree-

ments that provided that “the transfer price paid . . . by

Ardanco ... or the commission . . . payable to Ardanco

. will be established in accordance with a formula

whick will entitle Ardanco to derive the maximum tax-

able income from such sales which may be allocated to

it under the intercompany pricing rules as set forth in

section 994 of the Internal Revenue Code.” Stipulation

21. ADM established intercompany accounts payable

and accounts receivable based upon the pricing methods

in section 994(a) and, in its tax returns, computed its

commissions and transfer prices applying the no-loss limi-

tation. Stipulation 4 22-23.

15a

ADM now argues, as it did in protests and refund

claims filed for the years 1975 through 1978, that the

no-loss rule is contrary to the 4 percent gross receipts

method in section 994(a)(1) and is invalid. Stipulation

424. Without the no-loss limitation, ADM’s taxable in-

come would decrease and Ardanco’s taxable income

would increase. ADM seeks a refund based on the calcu-

lation of its taxes under the 4 percent gross receipts

method, without the limitation of the no-loss rule.

Ill. DISCUSSION

Summary judgment is appropriate on the issue of the

validity of the no-loss regulation since no material facts

exist concerning this issue. The court’s role in determin-

ing the validity of a Treasury regulation is limited. Gehl,

795 F.2d at 1328. Ordinarily, a court should defer to

the regulation if the court concludes that “the regulation

‘implement[s] the congressional mandate in some reason-

able manner.’” United States v. Vogel Fertilizer Co., 455

U.S. 16, 24 (1982) (quoting United States v. Correll,

389 U.S. 299, 307 (1967)); Gehl, 795 F.2d at 1328

(listing citations); see American Medical Assoc. v. United

States, 887 F.2d 760, 770 (7th Cir. 1989) (“Treasury

regulations ‘must be sustained unless unreasonable and

plainly inconsistent with the revenue statutes’”). But this

general deferential standard is only the beginning of the

necessary analysis. This standard is further refined by the

source of authority under which the challenged regula-

tion was issued.” Gehl, 795 F.2d at 1328 (citations

omitted ).

The Commissioner may issue a regulation under the

general grant of authority to “prescribe all needful rules

and regulations,” section 7805(a), or under a specific

statutory grant of authority. Gehl, 795 F.2d at 1328.

A court owes less deference to a, regulation issued under

section 7805(a)’s general grant of authority, an inter-

pretative regulation, than to a regulation issued under a

l6a

specific grant of authority, .a legislative regulation. Rowan

Cos. v. United States, 452 U.S. 247, 253 (1981); Gehl,

795 F.2d at 1328. When reviewing a legislative regula-

tion, a court’s inquiry is limited to “whether the inter-

pretation or method is within the delegation of authority.”

Rowan, 452 U.S. at 253. Legislative regulations are con-

trolling “unless they are arbitrary, capricious, or mani-

festly contrary to the statute.” Dresser, 911 F.2d at 1137

(citations omitted). A court will uphold an interpreta-

tive regulation as a reasonable interpretation of the con-

gressional mandate only if it harmonizes with the stat-

ute’s language, origin, and purpose. Vogel, 455 U.S. at

25; National Muffler Dealers Ass’n v. United States, 440

U.S. 472, 477 (1979). But the court must “scrutinize a

regulation’s fidelity to the overall statutory framework and

legislative history.” Water Quality Ass’n Employees’

Benefit Corp. v. United States, 795 F.2d 1303, 1305-06

(7th Cir. 1986) (when appropriate, court may substitute

its judgment for an agency’s when the regulation is in-

terpretative). Thus, the weight that the court will ac-

cord to the regulation depends on the regulation’s source

of authority. Dresser, 911 F.2d at 1137.

A. Source of Authority

The source of the authority for Treas. Reg. § 1.994-

(e)(1)(i) is not clear. The government argues that the

no-loss rule is valid either as a legislative regulation au-

thorized by section 994(b)(1) or as an interpretative

regulation. To support its assertion that the no-loss rule

is a legislative regulation, the government explains that

the three inter-company pricing methods in section 994(a)

literally apply only to a DISC operating on a buy-sell

basis. When a DISC, like Ardanco, also acts as a

commission agent, it must look to the regulations prom-

ulgated under section 994(b)(1) to obtain the DISC

tax benefits. Treasury Reg. § 1.994-1(d)(2) allows com-

mission DISCs to use the 4 percent gross receipt method.

17a

The challenged “no-loss” rule is located in the next

subparagraph (e) of the regulation, which sets forth

the “methods of applying paragraphs (c) and (d)

of this section.” Accordingly, it is apparent that the

“no-loss” rule is part of an integral set of regula-

tory provisions authorized by I.R.C. Section 994(b)

(1) for establishing the parameters of the intercom-

pany pricing methods for a commission DISC situa-

tion.

Government’s Second Memo at 6. (docket #26)

ADM argues that the regulation is interpretative be-

cause neither section 994 nor any other DISC provision

in the code gives the Treasury Department the regulatory

authority to limit the 4 percent method. Specifically,

ADM asserts that the only statutory grant of authority

relating to the inter-company pricing rules is found in

section 994(b)(1) and (2). The grant of authority in

section 994(b)(1) does not encompass the authority to

promulgate the no-loss rule, ADM contends, because this

section provides only for the extension of the three pric-

ing methods in section 994(a) to DISC commission trans-

actions. Section 994(b)(1) directs the Secretary to issue

regulations that set forth “rules which are consistent with

the rules set forth in subsection (a) for the application

of this section in the case of commissions, rentals, and

other income.” The inclusion of the words “consistent

with” indicates that section 994(b)(1) does not author-

ize the Secretary to promulgate regulations, such as the

no-loss rule, which limit the inter-company pricing meth-

ods. In addition, the no-loss rule applies to commission

DISCs and to DISCs acting as the principal in a transac-

tion. The grant of authority in section 994(b)(2) is also

irrelevant here, according to ADM, because it deals only

with the combined taxable income method. ADM also

points to the Treasury Decision issuing the rules that states

the decision is issued under the authority of section 7805.

T.D. 7364, 1975-2 C.B. 315, 328.

18a

Although no court has determined whether the no-loss

rule is a legislative or interpretative regulation, several

courts have discussed section 994(b)(1)’s grant of au-

thority in regulation to other DISC regulations. In Gehl,

the Seventh Circuit discussed whether section 994(b)(1)

authorized the Secretary to promulgate Treas. Reg. § 1.993-

2(d)(2). The Court quoted the Committee Reports ex-

plaining the grant of authority in section 994(b) (1):

[T]he Secretary of the Treasury may prescribe by

regulations intercompany pricing rules, consistent

with those provided by the bill, in the case of export

transactions where the DISC does not take title to

the property, but instead, acts as a commission agent

for the sale, or is a lessee of the property which it

then subleases to its customers.

Gehl, 795 F.2d at 1329 (quoting S. Rep. No. 437,

92d Cong., Ist Sess. 108 (1971), reprinted in 1971

U.S.C.C.A.N. 1918, 2014; H.R. Rep. No. 533, 92d Cong.,

Ist Sess. 75 (1971), reprinted in 1971 U.S.C.C.A.N.

1825, 1888).* Another court explained the grant of au-

thority in section 994(b)(1) as “expressly delegat[ing] to

the Commissioner the authority to issue regulations re-

garding the amount of commissions to be charged in

transactions between related persons.” CWT Farms, Inc.

v. Commissioner, 79 T.C. 1054, 1066 (1982), aff'd, 755

F.2d 790 (11th Cir. 1985), cert. denied, 477 U.S. 903

(1986).

In Dresser, the Fifth Circuit analyzed the source of

authority of Treas. Reg. § 1.994-1(c)(6)(v). Just as in

this case, the Treasury Decision promulgating the regula-

tion at issue in Dresser stated that the regulation was is-

7 Because the Gehl court agreed with the Commissioner that the

source of the regulation’s authority did not affect the outcome of

the analysis in that case, the court assumed, without deciding,

that the challenged regulation was issued under the general grant

of authority in section 7805(a) and applied the less deferential

standard. 795 F.2d at 1329-30.

CS ae a ek a eee. s

ee eee ee

19a

sued under the general grant of authority in section 7805

(a). However, the court stated that it was “not bound

by mere nomenclature used by the issuing agency.” 911

F.2d at 1138. Instead, the court found that the proper

approach to determining the regulation’s source of au-

thority was to examine the statutory language and the

regulation itself. Jd. at 1138-1139. After analyzing the

language and the legislative history of section 994(b),

the court concluded that “Congress intended the tax treat-

ment of commission DISCs to be consistent with the

treatment of buy-sell DISCs. Congress specifically author-

ized the Secretary to make rules ensuring that consist-

ency.” Jd. at 1139. In finding that Treas. Reg. § 1.994-1

(c)(6)(v) is a legislative regulation, the court relied on

two facts: (1) the regulation “is directed exclusively to

the calculation of deemed intercompany transfer prices

in the case of commission DISCs,” and, thus, falls within

the rulemaking authority granted in section 994(b), and

(2) the regulatory provisions which “fall squarely within

the specific grant of rulemaking authority set out in code

section 994(b),” section 1.994-1(d), incorporate section

1.994-1(c)(6) by reference. Jd. at 1140.*

Following the analysis set forth in Dresser, the court

concludes that Treas. Reg. § 1.994-1(e)(1)(i) is an in-

terpretative regulation. Section 994(b) authorizes the

Secretary to prescfibe regulations for determining the

deemed transfer price in transactions involving commis-

sion DISCs and to ensure consistency in the treatment

of commission and buy-sell DISCs. The no-loss rule ex-

ceeds this grant of authority. Although the no-loss rule

directly relates to the calculation of the deemed transfer

8 In LeCroy, the court found that Treas. Reg. § 1.994-1(e) (8)

is a legislative regulation since it furthers the same goal as the

rules governing payments in a section 994 transaction and prevents

the circumvention of other statutory limitations on DISCs. 751

F.2d at 125-26. But see Thomas International, 773 F.2d at 303.

Like the regulation at issue in Dresser, the challenged regulation

in LeCroy related exclusively to commission DISCs.

20a

price of export goods under section 994, it applies a

limitation to the calculation of the transfer price in

transactions involving both commission DISCs and buy-

sell DISCs. In addition, the government does not argue

that the no-loss rule furthers the same goal as the rules

in section 994 and, thus, must come under the same grant

of authority. See Gehl, 795 F.2d at 1329 (discussing

LeCroy).

B. The Terms that the Regulation Interprets

After determining the source of authority of a chal-

lenged regulation, the general deferential standard used in

assessing the validity of a regulation is refined further by

focusing on the term that the regulation interprets. Gehl,

795 F.2d at 1330. “Where the term that the regulation

purports to interpret has already been specifically defined

by Congress, the Commissioner’s authority to promulgate

the regulation is relatively more circumscribed than if

the term used is a general one that was not further de-

fined by Congress.” Id. (citing Vogel, 455 U.S. at 24);

Thomas International, 773 F.2d at 303. In other words,

if the statutory language is unambiguous, the Commis-

sioner has less freedom to define and interpret it. A reg-

ulation that contradicts the unambiguous language of the

statute or adds a requirement to the statute without a

valid reason cannot stand. CWT Farms, 79 T.C. at 1062

(citations omitted); Arrow Fastener Co. v. Commissioner,

76 T.C. 423, 430 (1981). “Finally, although a regula-

tion does not clearly contradict or limit the provisions of

the statute it purports to interpret, it is nonetheless in-

valid if it is inconsistent with the statute’s origin and

purpose.” CWT Farms, 79 T.C. a 1062 (citing Vogel,

455 US. at 26).

ADM maintains that section 994(a)(1) is unambig-

uous. The Congressional language in section 994(a),

ADM contends, is clear and precise in its creation of a

mathematical formula for establishing the taxable income

Ww aegh handel Sheet i ieee eee

Ley |

21a

of a DISC. ADM rejects any contention that section 994

is merely a general framework and insists that, if Con-

gress had intended to enable the Treasury Department to

lower the 4 percent formula in certain situations, Con-

gress would have given the Treasury Department such

explicit regulatory power.

The government, on the other hand, argues that section

994(a) does not state a clear mathematical rule. And,

according to the government, the Secretary followed the

express intent of the Congressional Committees by prom-

ulgating the no-loss rule. The government relies on reports

of the House Ways and Means Committee, the Senate

Finance Committee, and the Joint Committee on Internal

Revenue Taxation which include this statement concern-

ing section 994(a)(1) and (2):

Under the first of the two new rules, a DISC may

earn that portion of the combined taxable income

arising on the sale by a DISC of export property

purchased from a related person which does not ex-

ceed 4 percent of the qualified export receipts from

the sale, plus 10 percent of the DISC’s export promo-

tion expenses attributable to the sale. Income may

not, however, be allocated to the DISC under this

(or the second) rule to the extent it would result

in the related person who sold the products to the

DISC incurring a loss on the sale.

H.R. Rep. No. 533, 92d Cong., Ist Sess. 74 (1971),

reprinted in 1971 U.S.C.C.A.N. 1825, 1887; S. Rep. No.

437, 92d Cong., Ist Sess. 107-108 (1971), reprinted in

1971 U.S.C.C.A.N. 1918, 2013; Joint Committee on Tax-

ation, General Explanation of the Revenue Act of 1971,

at 102 (1972).

To support the no-loss rule as a reasonable interpreta-

tion of section 994(a), the government disputes ADM’s

characterization of section 994(a) as a mathematical for-

mula. To the government, the language of the statute

clearly demonstrates that 994(a) is not a mathematical

22a

formula and is appropriate for regulatory interpretation.

Specifically, the fact that the language in section 994(a)

allows the DISC to derive taxable income which “does

not exceed the greatest of” the three pricing methods in-

dicates that Congress intended to create a general frame-

work which the Secretary would interpret. This language

does not mandate the use of a specific 4 percent mathe-

matical formula at all times; rather, any amount less than

the amount calculated under the 4 percent method “does

not exceed” the statutory limitation and can be used.

The court finds that the language of section 994(a)

is unambiguous. Unlike statutory sections which con-

tain terms that require further definition, such as “ac-

counts receivable,” section 994(a) has been specifically

defined by Congress. The government’s reliance on the

phrase “an amount which does not exceed the greatest

of” is misplaced. The plain meaning of this phrase when

followed by three alternative methods is that the tax-

payer can choose one of the three methods, including

one that allows the DISC to derive less taxable income

than another method. If the government’s interpretation

of this phrase were correct, the Secretary could promul-

gate regulations forcing the DISC to receive any amount

less than the amount calculated under the three methods.

Such a result would contradict the DISC provisions’ pur-

pose of encouraging exports. The Secretary cannot add

a restriction or limitation to an unambiguous statutory

provision. Durbin Paper, 80 T.C. at 257; Arrow Fastener,

76 T.C. at 431.

Moreover, because the court does not find doubt con-

cerning the meaning of the terms in section 994(a), it

will not look to the legislative history to discover a limi-

tation that Congress did not include in the statute. See

In re Sinclair, 870 F.2d 1340, 1344 (7th Cir. 1989)

(“Legislative History helps us learn what Congress meant

by what it said, but it is not a source of legal rules com-

peting with those found in the U.S. Code.”). Although

the Committee reports indicate that the provisions do

q ——orrrsr

23a

not allow the related supplier to take a loss, the statute,

as enacted, does not include this limitation. In addition,

the government has not persuaded the court that the no-

loss rule is in harmony with the statute’s origin and pur-

pose. Unlike the regulation at issue in Gehl or Thomas

International, the government has not argued that this

regulation is necessary to prevent circumvention of another

statutory section in the DISC scheme. See Gehl, 795

F.2d at 1330; Thomas International, 773 F.2d at 304.

Finally, the government cannot argue that the goal of

encouraging exports through the use of domestic subsidi-

aries is furthered by this provision.

The government also asserts that sections 994(a)(1)

and (2) only address the allocation of taxable income

between the DISC and the related supplier, whereas the

no-loss rule deals with the export transactions that re-

sult in less than zero taxable income for the related

supplier.

Specifically, the no-loss rule addresses the related

but distinct issue of whether the related supplier may

claim a deduction for a Joss from the sale of export

property which results in taxable income of less that

$0 to the related supplier. The no-loss rule does

not “modify” or “amend” the statutory provision,

which clearly does not address the issue of the allow-

ance of loss deduction.

Government’s First Memo at 14. (docket #20) More-

over, the no-loss rule, according to the government, im-

plements Congressional intent concerning the related sup-

plier’s ability to take a loss deduction. See Government's

Second Memo at 11-15 for further argument concerning

allocation of income under section 994(a). (docket #26)

With this argument, the government appears to be trying

to justify the no-loss rule even if section 994(a) is un-

ambiguous.

ADM asserts that the government’s attempt to char-

acterize the no-loss rule as dealing with the allowance

24a

of deductions misreads section 994(a). Using ADM’s

reasoning, section 994(a) does not allocate taxable in-

come; instead, section 994(a) provides the basis for de-

termining taxable income or, in other words, establishes

the taxable income of the related supplier and the DISC

from the export transaction. ADM claims that the gov-

ernment cannot and does not dispute the fact that the

related supplier can have negative taxable income under

the 4 percent method. If the taxable income is a negative

amount, the unambiguous 4 percent method does not

allow the Secretary to come in and change the result.

In addition, ADM contends that the Internal Revenue

Code sections dealing with deductions cannot support

the no-loss rule. See Plaintiff's Second Memo at 8-9.

(docket #23)

Cases discussing the inter-company pricing rules in

section 994(a) refer to them as allocating profits, Gehl,

795 F.2d at 1327, as establishing a “deemed” transfer

price used to calculate income, Dresser, 911 F.2d at

1131, and as allocating income. Even assuming that the

purpose of the three methods in section 994(a) is to

allocate income, the government’s argument does not sup-

port the addition of a restriction to an unambiguous

statutory section.

IT IS THEREFORE ORDERED that the plaintiffs’

motion for partial summary judgment is GRANTED; the

defendant’s motion for partial summary judgment is

DENIED.

IT IS FURTHER ORDERED that the court will hold

a status hearing in this case by telephone conference call

on October 20, 1992, at 10:30 a.m.

ENTER THIS 8th day of September, 1992.

/s/ Harold A. Baker

HAROLD A. BAKER

United States District Judge

25a

APPENDIX C

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Chicago, Illinois 60604

November 2, 1994

Before Hon. Richard A. Posner, Chief Circuit Judge

Hon. James C. Hill, Circuit Judge*

Hon. Kenneth F. Ripple, Circuit Judge

No. 93-3939

ARCHER-DANIELS-MIDLAND COMPANY, on its own behalf

and as common parent of an affiliated group of cor-

porations, FLEISCHMANN-KURTH MALTING COMPANY,

INCORPORATED, and COEVAL, INCORPORATED,

Plaintiffs-A ppellees,

UNITED STATES OF AMERICA,

Defendant-A ppellant.

Appeal from the United States District Court

for the Central District of Illinois, Danville Division

No. 89 C 2325—Harold A. Baker, Judge

* Hon. James C. Hill, of the Eleventh Circuit, sitting by desig-

nation.

26a

ORDER

On October 13, 1994, plaintiffs-appellees filed a peti-

tion for rehearing with a suggestion for rehearing en banc.

All the judges on the original panel have voted to deny

the petition, and none of the active judges has requested

a vote on the suggestion for rehearing en banc. The pe-

tition is therefore DENIED.

27a

APPENDIX D

[Filed Oct. 12, 1993]

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF ILLINOIS

Case Number: 89-2325

ARCHER-DANIELS-MIDLAND COMPANY, (on its own behalf

and as common parent of an affiliated group of cor-

porations), FLEISCHMANN-KURTH MALTING Co., INC.,

and CoEVAL, INC.

vs.

UNITED STATES OF AMERICA

JUDGMENT IN A CIVIL CASE

| [XX] Decision by Court. This action came to trial or

hearing before the Court. The issues have been

tried or heard and a decision has been rendered.

| IT IS ORDERED AND ADJUDGED that the claims

| for relief designated as insurance matters set forth in the

Complaint in this matter in paragraphs 20 through 34

and 70 through 72, and, insofar as they are based on

the grounds stated in paragraphs 20 through 34, the

claims set forth in paragraphs 43 through 64, 74 through

84, 92 through 95, and 102 through 120, be dismissed with

prejudice pursuant to the stipulation of the parties filed

July 7, 1993, each party to bear its own costs, including

any possible attorneys fees or other expenses of litiga-

tion, with respect to such claims.

| IT IS FURTHER ORDERED that the plaintiffs shall

recover from the defendant United States of America pur-

suant to claims for relief, relating to the plaintiffs’ do-

28a

mestic international sales corporation, set forth in the

Complaint in this matter in paragraphs 35 through 42,

and, insofar as they are based on the grounds stated in

paragraphs 35 through 42, the claims set forth in para-

graphs 43 through 64, 73 through 84, 92 through 95, and

101 through 120, the sums of $2,116,171 in taxes and

$578,108 in assessed interest for 1974, $4,859,697 in

taxes and $2,286,572 in assessed interest for 1975,

$9,547 and $751 in taxes attributable to carryback tax

credits with respect to the separate returns for 1975 of

Fleischmann-Kurth Malting Co., Inc. and Coeval, Inc.,

respectively, $4,139,230 in taxes and $2,048,820 in as-

sessed interest for 1976, $2,666,746 in taxes and

$157,506 in assessed interest for 1977, $4,116,484 in

taxes and $2,858,285 in assessed interest for 1978 (to-

talling refunds of $17,908,896 in taxes and $7,929,291

in assessed interest), and statutory interest on all such

amounts as provided by 26 U.S.C. 6621, each party to

bear its own costs, including any possible attorneys fees

or other expenses of litigation, with respect to such

claims.

JOHN M. WATERS

Clerk

/s/ Mary C. Burnstein

(By) Deputy Clerk

Date October 12, 1993

— T

ah era fh, Meet aa a eee, tee fee

FEEL AE og RMSE MET NARD

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.