Union Carbide Corporation and Subsidiaries v. Commissioner , 110 T.C. 375 ( 1998 )

110 T.C. No. 28
UNITED STATES TAX COURT
UNION CARBIDE CORPORATION AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3501-94. Filed June 15, 1998.
P, the related supplier of UCFSC, a wholly owned
foreign sales corporation (FSC) within the meaning of
sec. 922, I.R.C., filed a motion for partial summary
judgment, arguing that P is entitled to redetermine its
FSC commission expenses for its taxable years 1987,
1988, and 1989 pursuant to sec. 925(a), I.R.C., and
regulations thereunder. R objects to P's motion and
filed a cross-motion for partial summary judgment,
arguing that P failed to claim additional FSC
commission expenses within the time prescribed by sec.
1.925(a)-1T(e)(4), Temporary Income Tax Regs., 52 Fed.
Reg. 6448 (Mar. 3, 1987).
1. Held: Respondent's cross-motion for partial
summary judgment granted and petitioner's motion for
partial summary judgment denied; sec. 1.925(a)-
1T(e)(4), Temporary Income Tax Regs., supra, requires
that the period of limitations for claiming refunds
under sec. 6511, I.R.C., be open for both petitioner
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and UCFSC in order for petitioner to claim additional
FSC commission expenses for the years in dispute.
2. Held, further, sec. 1.925(a)-1T(e)(4),
Temporary Income Tax Regs., supra, is valid.
Thomas M. Haderlein, James M. O'Brien, Jeffrey M. O'Donnell,
Tamara L. Frantzan, and Jerry L. Robinson, for petitioner.
Steven R. Winningham and Joseph F. Long, for respondent.
OPINION
NIMS, Judge: This matter is before the Court on
petitioner's motion and respondent's cross-motion for partial
summary judgment filed pursuant to Rule 121.
Unless otherwise indicated, all section references are to
sections of the Internal Revenue Code in effect for the years at
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
Respondent determined deficiencies in the Federal income
taxes of petitioner for its taxable years ending December 31,
1987, 1988, and 1989 as follows:
Year Deficiency
1987 $387,887
1988 24,156,481
1989 32,903,323
The issues for decision are: (1) Whether petitioner can
claim additional foreign sales corporation (FSC) commission
expenses pursuant to section 1.925(a)-1T(e)(4), Temporary Income
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Tax Regs., 52 Fed. Reg. 6448 (Mar. 3, 1987) (Regulation), with
respect to export sales made during its taxable years 1987
through 1989, in connection with petitioner's claims for refunds
for overpayment of taxes for those years under section 6511; and,
if not, (2) whether the Regulation is valid.
Petitioner's principal offices were located in Danbury,
Connecticut, at the time the petition was filed.
Background
The facts related below are derived from the Stipulation of
Facts, Foreign Sales Corporation Issue, filed on August 8, 1997,
and attached exhibits. The facts are stated solely for purposes
of deciding the matter before us and are not findings of fact in
the event of a trial of this case. See Coca-Cola Co. & Subs. v.
Commissioner, 106 T.C. 1, 2 (1996).
During the years at issue, petitioner manufactured or
produced various chemicals, plastics, carbon products, and
industrial gases in the United States. Petitioner sold a portion
of its products to customers outside the United States.
On December 31, 1984, petitioner organized Union Carbide
Foreign Sales Corporation (UCFSC) under the laws of the U.S.
Virgin Islands. UCFSC elected to be taxed as an FSC pursuant to
section 922(a)(2) on March 13, 1985. UCFSC operated and
qualified as an FSC throughout the relevant period.
Under an Export Distribution and Commission Agreement
(Agreement) dated December 28, 1984, petitioner paid UCFSC during
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the taxable years at issue amounts intended to be the maximum
commission allowable on foreign trading gross receipts (FTGR)
derived from the sale of its export products. Petitioner
calculated UCFSC's profit each year to be the maximum profit
allowable under the administrative pricing rules of section
925(a) and accompanying regulations.
On its 1987, 1988, and 1989 Forms 1120, U.S. Corporation
Income Tax Return, petitioner reported FSC commission expenses
under section 925(a) in the amounts of $32,670,323, $68,033,199,
and $57,622,379, respectively. For purposes of calculating those
expenses, petitioner used the administrative pricing rule set
forth in section 925(a)(2), which requires taxpayers to determine
the combined taxable income (CTI) of the FSC and the related
supplier attributable to FTGR. For purposes of calculating CTI,
petitioner allocated and apportioned operating expenses pursuant
to the "sales factor" allocation method under section 861 and
accompanying regulations.
UCFSC filed its 1987, 1988, and 1989 Forms 1120-FSC, U.S.
Income Tax Return of a Foreign Sales Corporation, on September
15, 1988, August 22, 1989, and September 10, 1990, respectively.
(UCFSC is not a party in the instant case.)
Petitioner is subject to respondent's Coordinated
Examination Program (CEP). Typically, every income tax return of
a CEP taxpayer is surveyed or examined by respondent, usually in
2- or 3-year cycles. The examination of petitioner's 1987
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through 1989 tax years (1987-89 Cycle) commenced with an audit
notification letter dated April 16, 1990. Shortly thereafter, a
preaudit conference was held between petitioner and respondent's
examination team, at which the parties discussed the scope and
timing of the pending examination.
At the preaudit conference, petitioner was informed that,
because no FSC adjustments had been proposed as a result of
respondent's examination of its 1984-86 Cycle, respondent would
not examine FSC issues in the 1987-89 Cycle. The examination
team requested, and petitioner executed, Forms 872, Consent to
Extend the Time to Assess Tax, for each of the years of the 1987-
89 Cycle. During the course of the examination, respondent did
not seek Forms 872 for UCFSC's corresponding tax years, nor did
petitioner file any protective claims for refund or solicit any
extensions of the periods of limitations for UCFSC's 1987, 1988,
and 1989 tax years. During that time, petitioner did not
anticipate making a redetermination of the FSC commissions paid
to UCFSC during those years.
The limitations periods for respondent to assess
deficiencies under section 6501(a) (limitations on assessment and
collection), and for UCFSC to file claims for refund under
section 6511 (limitations on credit or refund), for UCFSC's 1987,
1988, and 1989 tax years expired on September 15, 1991, August
22, 1992, and September 10, 1993, respectively.
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The examination of petitioner's 1987-89 Cycle resulted in
the issuance of a notice of deficiency to petitioner for those
years on December 7, 1993. Petitioner filed a petition on
February 28, 1994, in which, among other things, petitioner
assigned error to the entire amount of deficiencies determined by
respondent. On May 6, 1994, respondent advised petitioner that
the case had been forwarded to the Internal Revenue Service (IRS)
Appeals Office in an effort to resolve without a trial some or
all of the adjustments set forth in the deficiency notice.
Petitioner first learned of the potential tax benefit of
redetermining its FSC commission expenses for the years in issue
in connection with the preparation of its 1993 tax returns. On
December 15, 1994, petitioner gave written notice to the Appeals
officer who was then considering the case that petitioner
intended to seek additional FSC commission expenses for the years
in issue. The additional FSC commissions were premised on
petitioner's redetermination of the operating expenses allocable
and apportionable using a "production cost" method under section
861(b) to determine CTI, instead of the sales allocation method
previously used on petitioner's returns. On May 5, 1995,
petitioner filed an amendment to its petition (first amendment),
claiming additional FSC commission expenses in the amounts of
$17,578,042, $18,638,279, and $23,111,671, for 1987, 1988, and
1989, respectively. On July 7, 1995, respondent filed an answer
to the first amendment, asserting, among other things, that
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petitioner's claims for additional FSC commissions were not made
within the time prescribed by the Regulation.
On August 21, 1996, petitioner advised respondent of its
intent to amend the petition a second time (second amendment) to
claim additional FSC commission expenses for its 1987, 1988, and
1989 tax years (over and above those claimed in the first
amendment) attributable, among other things, to its use of the
"transaction-by-transaction" method of determining FSC profits
under section 1.925(a)-1T(c)(8), Temporary Income Tax Regs., 52
Fed. Reg. 6446 (Mar. 3, 1987), instead of a determination of FSC
profit based on product groupings, as previously used on
petitioner's returns. The second amendment, filed on October 24,
1996, claimed additional FSC commissions in the amounts of
$1,598,757, $8,911,740, and $28,106,979, for 1987, 1988, and
1989, respectively. On December 4, 1996, respondent filed an
answer to the second amendment, again denying petitioner's claims
because they were not asserted within the time prescribed by the
Regulation.
On August 20, 1996, UCFSC filed amended returns for its
1987, 1988, and 1989 tax years, reporting additional FSC
commission income in the amounts of $19,176,799, $27,550,019, and
$51,218,650, respectively, and resulting additional income tax
due. (These amounts match the total amounts of additional FSC
commission expenses claimed by petitioner in its two amendments
to the petition.) Respondent rejected UCFSC's amended returns,
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and no additional tax has been assessed against UCFSC for the
aforementioned years.
On December 12, 1996, the parties held a telephone
conference call with the Court in which it was agreed that the
threshold issue of whether or not petitioner had timely asserted
its claims for additional FSC commission expenses under the
Regulation would be considered apart from the substantive merits
of those recomputations. On the basis of that discussion,
petitioner filed its motion, and respondent filed its cross-
motion, for partial summary judgment with respect to the
threshold issue, along with supporting memoranda of law.
Discussion
Petitioner asks us to find overpayments of taxes for its
1987, 1988, and 1989 tax years, respectively, based on its
recomputation of the commissions payable to its foreign
subsidiary, UCFSC, during those years pursuant to section 925(a)
and attendant regulations. We have jurisdiction to determine the
amounts of any overpayments with respect to petitioner's 1987,
1988, and 1989 tax years since respondent has determined a
deficiency for each of those years. Sec. 6512(b); Barton v.
Commissioner, 97 T.C. 548, 552 (1991). We must first decide
whether the Regulation precludes petitioner from claiming
additional FSC commission expenses for the years in issue. If we
hold that it does, we must then decide whether the Regulation is
valid.
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For the purpose of petitioner's motion and respondent's
cross-motion, the parties agree that there are no genuine issues
of material fact in dispute and that the matter before us is ripe
for summary judgment. Rule 121(b); Exxon Corp. v. Commissioner,
102 T.C. 721, 725 (1994); Intel Corp. & Consol. Subs. v.
Commissioner, 100 T.C. 616, 619 (1993), affd. 67 F.3d 1445 (9th
Cir. 1995). If we grant petitioner's motion, further proceedings
to determine the amounts of additional FSC commission expenses to
which petitioner is entitled will be required. If, on the other
hand, we grant respondent's cross-motion, no further proceedings
concerning this issue will be necessary.
In deciding the matter before us, we first find it useful to
synopsize the statutory and regulatory framework and history
pertaining to FSC's and their statutory predecessors, domestic
international sales corporations (DISC's).
Congress enacted the DISC provisions in 1971 as a tax
incentive to encourage and increase exports. Revenue Act of
1971, Pub. L. 92-178, sec. 501, 85 Stat. 497, 535. The DISC
provisions are set forth in sections 991 through 997. Those
sections allowed domestic corporations to defer taxes on a
significant portion of profits from export sales similar to the
tax benefits available to corporations manufacturing abroad
through foreign subsidiaries. H. Rept. 92-533, at 58-59 (1971),
1972-1 C.B. 498, 529; S. Rept. 92-437, at 90-91 (1971), 1972-1
C.B. 559, 609. A domestic corporation that conducts its foreign
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operations through a foreign subsidiary generally does not pay
Federal tax on the income from those operations until the
subsidiary's income is repatriated to the domestic parent.
General Dynamics Corp. & Subs. v. Commissioner, 108 T.C. 107, 116
(1997).
Under the DISC provisions, Congress created intercompany
pricing rules for the purpose of limiting the amount of income
that the parent (related supplier) could allocate to the DISC,
thus limiting the amount of tax incentive by means of income
deferral. These rules provided for the price at which the
related supplier was deemed to have sold its products to the
DISC, regardless of whether any price was actually paid. Id. at
117. Section 994(a) provided three alternative pricing methods
for DISC's. The first two methods were safe harbors, created so
that taxpayers might avoid the complexities of section 482. Sec.
994(a)(1) and (2); Brown-Forman Corp. v. Commissioner, 94 T.C.
919, 926 (1990), affd. 955 F.2d 1037 (6th Cir. 1992). However,
under section 994(a)(3), taxpayers could use the rules of section
482 to allocate an arm's-length profit to the DISC if those rules
would allow a greater allocation of profit to the DISC than
either safe harbor. Sec. 994(a)(3); Brown-Forman Corp. v.
Commissioner, supra at 926.
The parent corporation either sold its product to the DISC
for resale in foreign markets, a buy-sell DISC, or paid a
commission to the DISC for selling goods in foreign markets, a
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commission DISC. Brown-Forman Corp. v. Commissioner, supra at
926-927. Although the section 994(a) pricing rules literally
applied only to a buy-sell DISC, they were adopted for commission
DISC's pursuant to statutory authority granted to the Secretary.
Sec. 994(b)(1); sec. 1.994-1(d)(2)(i), Income Tax Regs.
In 1984, Congress enacted the FSC provisions (sections 921
through 927) to replace and cure certain perceived shortcomings
in the DISC provisions for taxable years beginning after December
31, 1984. Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
801(a), 98 Stat. 494, 985; S. Prt. 98-169 (Vol. 1), at 636
(1984); see Brown-Forman Corp. v. Commissioner, supra at 924-925,
946. The Senate Finance Committee explanation of the FSC
legislation states that
In general, where the provisions of the bill are
identical or substantially similar to the DISC
provisions under present law, the committee intends
that rules comparable to the rules in regulations
issued under those provisions will be applied to the
FSC. [S. Prt. 98-169 (Vol. 1), supra at 636.]
As with DISC's, under the FSC provisions, the FSC and its
related supplier remain subject to section 482 but may elect
between two safe harbor pricing methods to determine the profit
of the FSC in order to avoid the complexities of section 482.
Sec. 925(a)(1) and (2). The transfer pricing rules applicable to
FSC's are analogous to the rules applicable to DISC's. Secs.
925(a), 994(a); General Dynamics Corp. & Subs. v. Commissioner,
supra at 117-118. The FSC and related supplier may, subject to
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certain restrictions, select the most favorable of the
administrative pricing methods of section 925(a) in order to
reallocate income generated by export sales from the parent
corporation to the FSC. The FSC provisions permanently exempt a
portion of FSC profits (approximately 65 percent) from tax. Sec.
923(a). The FSC recognizes the nonexempt portion of its taxable
income as income effectively connected with the conduct of a U.S.
trade or business. Sec. 921(d).
Section 925(a) provides in pertinent part:
SEC. 925 (a). In General.--In the case of a sale
of export property to a FSC by a person described in
section 482, the taxable income of such FSC and such
person shall be based upon a transfer price which would
allow such FSC 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) 1.83 percent of the foreign trading gross
receipts derived from the sale of such property by
such FSC,
(2) 23 percent of the combined taxable income
of such FSC and such person which is attributable
to the foreign trading gross receipts derived from
the sale of such property by such FSC, or
(3) taxable income based upon the sale price
actually charged (but subject to the rules
provided in section 482).
Although section 925(a) applies literally only to buy/sell
FSC's, Congress authorized the Secretary to prescribe regulations
setting forth consistent rules with respect to commission FSC's.
Sec. 925(b); General Dynamics Corp. & Subs. v. Commissioner,
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supra at 118; sec. 1.925(a)-1T(d)(2), Temporary Income Tax Regs.,
52 Fed. Reg. 6447 (Mar. 3, 1987).
The Regulation was adopted as part of a comprehensive set of
temporary regulations intended to "provide immediate guidance
necessary to FSC's and their shareholders with respect to
provisions under Title VIII of the Tax Reform Act of 1984
(Foreign Sales Corporations)" and is effective for taxable years
beginning after December 31, 1984. T.D. 8126, 1987-1 C.B. 184,
191-211. The Regulation provides as follows (bracketed numerals
supplied):
(4) Subsequent determination of transfer price,
rental income or commission. [1] The FSC and its
related supplier would ordinarily determine under
section 925 and this section the transfer price or
rental payment payable by the FSC or the commission
payable to the FSC for a transaction before the FSC
files its return for the taxable year of the
transaction. [2] After the FSC has filed its return,
a redetermination of those amounts by the Commissioner
may only be made if specifically permitted by a Code
provision or regulations under the Code. [3] Such a
redetermination would include a redetermination by
reason of an adjustment under section 482 and the
regulations under that section or section 861 and
§ 1.861-8 which affects the amounts which entered into
the determination. [4] In addition, a redetermination
may be made by the FSC and related supplier if their
taxable years are still open under the statute of
limitations for making claims for refund under section
6511 if they determine that a different transfer
pricing method or grouping of transactions may be more
beneficial. [5] Also, the FSC and related supplier
may redetermine the amount of foreign trading gross
receipts and the amount of costs and expenses that are
used to determine the FSC's and related supplier's
profits under the transfer pricing methods. [6] Any
redetermination shall affect both the FSC and the
related supplier. [7] The FSC and the related
supplier may not redetermine that the FSC was operating
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as a commission FSC rather than a buy-sell FSC, and
vice versa. [Sec. 1.925(a)-1T(e)(4), Temporary Income
Tax Regs., 52 Fed. Reg. 6448 (Mar. 3, 1987).]
Petitioner and respondent agree that the Regulation permits
an FSC and its related supplier to redetermine the transfer price
or commission reported on their original returns through the
filing of amended returns, provided that the conditions of the
Regulation are satisfied. The parties lock horns, however, over
the scope of the requirements imposed by the Regulation on the
redetermination of FSC commissions by a related supplier and an
FSC. More specifically, the parties dispute the import of
sentence No. 4 of the Regulation.
Regulations that are valid exercises of the powers of the
Secretary have the force and effect of law. Sim-Air, USA, Ltd.
v. Commissioner, 98 T.C. 187, 198 (1992). The rules for
interpreting regulations resemble those governing the
interpretation of statutes. See, e.g., KCMC, Inc. v. FCC, 600
F.2d 546, 549 (5th Cir. 1979); Intel Corp. & Consol. Subs. v.
Commissioner, 100 T.C. 631. When construing a statute or a
regulation, courts are to give effect to its plain and ordinary
meaning unless doing so would produce absurd or unreasonable
results. Green v. Bock Laundry Mach. Co., 490 U.S. 504, 509
(1989); KCMC, Inc. v. FCC, supra at 549; Exxon Corp. v.
Commissioner, 102 T.C. 721 (1994). The most basic tenet of
statutory construction is to start with the language of the
statute itself. United States v. Ron Pair Enters., Inc., 489
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U.S. 235, 241 (1989). When the plain language of the statute or
regulation is clear and unambiguous, that is where the inquiry
should end. General Dynamics Corp. & Subs. v. Commissioner, 108
T.C. 121-122.
On brief, petitioner presents a plenitude of alternative
arguments in support of its claims for additional FSC commission
expenses for the years in issue. Petitioner's principal
contention is that the plain language of sentence No. 4 requires
only that the party in the overpayment position file its claims
for refund relating to a redetermination of FSC commission
expenses within the allowable time period under section 6511. In
other words, petitioner maintains that the section 6511 period of
limitations need be open only for its own taxes, not those of
UCFSC, in order for petitioner to redetermine its FSC commission
expenses. Thus, petitioner asserts that it can deduct additional
FSC commission expenses in the amounts of $19,176,799,
$27,550,019, and $51,218,650 for 1987, 1988, and 1989,
respectively, subject to any "correlative adjustments" to UCFSC's
returns that, in petitioner's view, are mandated by sentence No.
6 of the Regulation.
Petitioner alternatively argues that, even if a "dual
statute of limitations requirement" inheres in sentence No. 4,
sentence No. 5 literally contains no such requirement.
Therefore, petitioner reasons, it is entitled to claim additional
expenses in the amounts of $17,578,042, $18,638,279, and
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$23,111,671 for 1987, 1988, and 1989, respectively, subject to
any correlative adjustments to UCFSC's returns. The foregoing
amounts are based on the portion of petitioner's FSC
recomputations attributable to its section 861(b) expense
adjustments, as alleged in petitioner's first amendment.
As a further alternative argument, petitioner maintains
that, if taxpayers must satisfy any dual limitations requirement
under the Regulation, the period applicable to the party in the
deficiency position must be based on section 6501 rather than
section 6511. (The limitations periods contained in sections
6501 and 6511 are not uniformly parallel.) In that connection,
petitioner argues that its claims for additional FSC commission
expenses for 1988 and 1989 in the amounts of $18,638,279 and
$51,218,650 are timely because they were made within the periods
for petitioner to file claims for refund under section 6511 and
for respondent to assess correlative deficiencies against UCFSC
under section 6501(e)(1)(A) (the 6-year period of limitations
applicable to omissions from gross income in excess of 25 percent
of the gross income reported on the taxpayer's return).
(Petitioner acknowledges that both of its claims for 1987, as
well as its revised claim for 1988, came after the 6-year period
of limitations had expired with respect to UCFSC for those years,
and are thus barred under this interpretation of the Regulation.)
Respondent argues, on the other hand, that petitioner's
claims are proscribed by the plain language of the Regulation.
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Respondent maintains that sentence No. 4 allows the FSC and the
related supplier to change their administrative pricing method,
or the grouping of transactions to which the methods are applied,
only if such redeterminations are made while the periods of
limitations for making claims for refund under section 6511 are
open for both the FSC and the related supplier (dual section 6511
requirement). Respondent further argues that the dual section
6511 requirement extends to any redeterminations made pursuant to
sentence No. 5 as well.
We agree with respondent. The Regulation is clear and
unambiguous, and that is where our inquiry as to the meaning of
the Regulation must end. See General Dynamics Corp. & Subs. v.
Commissioner, supra at 122.
In response to petitioner's principal argument, the
antecedents of the pronoun "their" in sentence No. 4 are
unequivocally the related supplier and the FSC. Thus, sentence
No. 4 on its face mandates that the period of limitations under
section 6511 be open for both the related supplier and the FSC in
order for FSC commission expenses to be redetermined.
Despite claiming to rely on the plain meaning of the
Regulation, petitioner asks the Court to interpret sentence No. 4
essentially as follows:
In addition, a redetermination may be made by the FSC
and related supplier if either the related supplier's
or the FSC's taxable year is still open under the
statute of limitations for making claims for refund
under section 6511 if they determine that a different
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transfer pricing method or grouping of transactions may
be more beneficial.
Petitioner reasons that a dual section 6511 requirement is
superfluous insofar as sentence No. 6 calls for correlative
adjustments to the returns of the party in the deficiency
position. (Petitioner's argument presupposes that correlative
adjustments are authorized by sentence No. 6 even though the year
of the taxpayer in the deficiency posture may already otherwise
have closed. See discussion infra at pp. 24-25).
We think sentence No. 4 and sentence No. 6 serve different
functions, however. To wit, sentence No. 4 specifies the time
within which redeterminations must be made by the parties,
whereas sentence No. 6 underscores the fact that such
redeterminations cannot be made unilaterally. The interpretation
advanced by petitioner simply flies in the face of the plain
language of the Regulation, and we decline to rewrite the
Regulation to conform with petitioner's tortured construction.
Cf. Brown-Forman Corp. v. Commissioner, 94 T.C. 939.
Petitioner's alternative position regarding redeterminations
under sentence No. 5 is without merit as well. Petitioner
argues, in effect, that since sentence No. 5 speaks to certain
types of changes not permitted by sentence No. 4, sentence No. 5
must not incorporate the timeframe contained in sentence No. 4.
But it defies logic to suppose that, in drafting the Regulation,
the Secretary would have provided sub silentio a disparate rule
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for making redeterminations pursuant to sentence No. 5. Rather,
we conclude that the dual section 6511 requirement set forth in
sentence No. 4 applies equally to redeterminations of FTGR and
the amounts of costs and expenses used to redetermine profits of
the FSC and the related supplier under the transfer pricing
methods of section 925(a). In that connection, we observe that
sentence No. 5 begins with the word "also". According to
Webster's II New Riverside University Dictionary (1988), "also"
means "in addition: likewise." Moreover, the preamble to the FSC
regulations states in pertinent part that a
redetermination may be made by the FSC and related
supplier if their taxable years are open under the
statute of limitations for making claims for refund
under section 6511 if they determine that a different
transfer pricing method or grouping of transactions
would be more beneficial. Likewise, * * * [the FSC and
related supplier] may redetermine the amount of * * *
[FTGR] and the costs and expenses that are used to
determine their profit under the transfer pricing
methods. * * * [T.D. 8126, 1987-1 C.B. at 189;
emphasis added.]
Petitioner has failed to persuade us that sentence No. 5
should be read inconsistently with, and divorced from, the
requirement announced in sentence No. 4. Regulations, like
statutes, "are to be considered, each in its entirety and not as
if each of its provisions was independent and unaffected by the
others." Alexander v. Cosden Pipe Line Co., 290 U.S. 484, 496
(1934); see General Dynamics Corp. & Subs. v. Commissioner, 108
T.C. 121.
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Petitioner's argument regarding the applicability of section
6501 to the party in the deficiency position for purposes of
satisfying the Regulation's terms is also unavailing. While
section 6501 undeniably governs respondent's ability to assess
deficiencies, the Regulation expressly ties taxpayers'
redeterminations of FSC expenses to the period of limitations
under section 6511. These are wholly independent matters, which
petitioner wrongly conflates. Accordingly, we disagree with
petitioner's attempt to insert the limitations period of its
choosing in lieu of section 6511 in order to secure the benefits
of the Regulation.
Lastly, the fact that the Regulation utilizes section 6511
as a point of reference, even though any commission expense
redetermination automatically places one of the taxpayers (either
the FSC or the related supplier) in a deficiency position, does
not effect an absurd or nonsensical result in our judgment. See
Exxon Corp. v. Commissioner, 102 T.C. 728. The dual section
6511 requirement simply specifies an uncomplicated timeframe
within which the taxpayer seeking an additional deduction must
act, nothing more.
Based on the above discussion, we hold that the Regulation
requires that the period of limitations for claiming refunds
under section 6511 be open for both petitioner and UCFSC in order
for petitioner to claim additional FSC commission expenses for
the taxable years in issue.
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Having decided that the Regulation, by its terms, precludes
a redetermination of FSC commission expenses on the undisputed
facts of this case, we now consider petitioner's alternative
contention that the Regulation must be declared invalid.
Section 925(b) authorizes the Secretary to prescribe
regulations with respect to commissions, rentals, and marginal
costing that are consistent with the rules set forth in section
925(a). While there may be a question as to whether the
Regulation falls within the scope of section 925(b) and is
therefore entitled to an "especially high degree of deference" as
a "legislative" regulation, we find it unnecessary to resolve
this question. Cf. Sim-Air, USA, Ltd. v. Commissioner, 98 T.C.
at 194. For reasons discussed below, even under the lesser
degree of deference accorded "interpretative" regulations (those
issued pursuant to the Secretary's general rulemaking authority
under section 7805(a)), we conclude that the Regulation is valid.
Petitioner proffers a number of arguments in support of its
position that the Regulation is both unreasonable and "contrary
to the plain language, origins and purpose of section 925(a)".
See, e.g., National Muffler Dealers Association, Inc. v. United
States, 440 U.S. 472, 477-478 (1979); Sim-Air, USA, Ltd. v.
Commissioner, supra at 194; CWT Farms, Inc. v. Commissioner, 79
T.C. 1054, 1062 (1982), affd. 755 F.2d 790 (11th Cir. 1985).
None are cogent.
- 22 -
Petitioner posits that the Regulation's dual section 6511
requirement precludes taxpayers from maximizing their allowable
FSC commissions via amended returns, in contravention of section
925(a) and congressional intent. In that connection, petitioner
argues that the dual section 6511 requirement improperly adds to
section 925(a) a limitation not envisioned by Congress. To
bolster its position, petitioner quotes in part the Senate
Finance Committee report accompanying the FSC legislation:
Under the administrative pricing rules, the transfer
price from the related supplier to the FSC may be
computed after the FSC sells the goods to a customer.
Furthermore, the FSC and its related supplier may make
adjustments upwards or downwards following the close of
the taxable year in which the FSC sells the goods. [S.
Prt. 98-169 (Vol. 1), supra at 649.]
Petitioner reads the statute and legislative history too
broadly. Section 925(a) itself is silent on the issue of
redeterminations of FSC commission expenses. Cf. Bankers Life &
Cas. Co. v. United States, ___ F.3d ___, ___ (7th Cir., Apr. 17,
1998). Moreover, the legislative history excerpted above does
not mention redeterminations via amended returns--it simply
endorses adjustments to FSC expenses after the relevant tax year
has closed. Cf. E.I. du Pont de Nemours & Co. v. Commissioner,
41 F.3d 130, 137 (3d Cir. 1994), affg. 102 T.C. 1 (1994).
Contrary to petitioner's assertions, the Regulation does not
conflict with the language of the underlying statute, nor is it
inconsistent with legislative intent. See CWT Farms, Inc. v.
Commissioner, supra at 1063-1064. The extent to which Congress
- 23 -
intended taxpayers to be able to redetermine FSC commission
expenses after their original tax returns have been filed is not
explicitly stated in the statute or its legislative history. In
light of the silence of section 925(a) on this score, the
challenged Regulation in no way can be said to contradict or
limit the "unambiguous" language of the statute. Cf. id. at
1064. On the contrary, the Regulation fosters the goal of
section 925(a) of allowing taxpayers to maximize FSC expenses
within certain parameters.
In addition to being entirely consistent with the statute
and legislative history, the dual section 6511 requirement is in
no way unreasonable. See Faltesek v. Commissioner, 92 T.C. 1204,
1210-1211 (1989). Since the returns of both the FSC and the
related supplier are necessarily affected by any redeterminations
under the Regulation, it is logical to require any recomputations
to be made within a timeframe applicable to both taxpayers. To
deny the Secretary the ability to place time constraints on the
benefits conferred by the Regulation would unduly circumscribe
his authority under section 7805(a) to adopt "all needful rules
and regulations" for the enforcement of the revenue statutes.
(Emphasis added.) Moreover, the lack of such a time limit would
raise the specter of ex post facto or retroactive tax planning--a
- 24 -
result which Congress could hardly have intended in enacting the
FSC legislation, notwithstanding its interest in promoting
foreign trade. See Faltesek v. Commissioner, supra at 1210-1211.
Petitioner contends that, in a lengthy audit, to the extent
it is respondent's policy to refuse to grant consents solely for
the purpose of extending the period for taxpayers to file claims
for refund, the Regulation unreasonably bars the related supplier
from claiming additional expenses after the period of limitations
under section 6511 with respect to the FSC has expired.
We disagree. Far from being arbitrary or unreasonable, the
fact that the Secretary chose to confine taxpayers'
redeterminations to a period which may be extended instead of a
fixed timeframe indicates to us that the Secretary was mindful
that a closed-end period conceivably could bar redeterminations
in the case of a lengthy audit. Cf. id. at 1211-1212. In the
case before us, petitioner made no attempt to secure an extension
for UCFSC to file claims for refund for the years at issue.
Moreover, it is not respondent's policy to deny invariably such
extensions. See 2 Audit, Internal Revenue Manual (CCH), sec.
4541.6, at 8161-17 ("A consent, the sole purpose of which is to
extend the period for filing claims for refund, should not be
accepted unless the Chiefs, Examination Division * * *,
authorizes [sic] the acceptance * * * [thereof]." (Emphasis
added)).
- 25 -
In any event, taxpayers ordinarily would not have to ask for
consents during the course of a lengthy audit; respondent would
likely request Forms 872 from a related supplier and an FSC in
order to preserve his ability to assess any FSC-related
deficiencies against one or the other. Here, respondent
presumably did not request Forms 872 from UCFSC because the audit
of the taxpayers' previous 3-year cycle had not yielded any FSC-
related adjustments. It is of course also true, as respondent
recognizes, that regardless of the IRS's willingness or
unwillingness to grant consents, a taxpayer in petitioner's shoes
need only anticipate the possibility of favorable revisions to
its FSC expenses and file a protective claim for refund within
the proper time in order to preserve rights under the Regulation.
Petitioner next argues that the Regulation unreasonably
"creates a double standard, permitting respondent to 'whipsaw'
taxpayers with respect to the Commissioner's FSC recomputations";
i.e., by assessing FSC-related deficiencies against one taxpayer
after the period for the other taxpayer to claim refunds has
expired. Although not identical, we think that the situation
posed by petitioner is analogous to that in Collins Elec. Co. v.
Commissioner, 67 T.C. 911 (1977). In that case we stated that
Section 482 may contemplate a suspension of the
running of the statute of limitation on claims for refund
of the overpayment attributable to the correlative
adjustment or, as the first sentence of section 1.482-
1(d)(2), Income Tax Regs., * * * seems to suggest, may
impose a positive duty on the Commissioner, without regard
- 26 -
to the statute of limitation on refund claims, to refund
such overpayment. * * * [Id. at 924.]
In petitioner's hypothetical situation, sentence No. 6 may compel
respondent to refund such overpayments regardless of the
expiration of section 6511. In any event, this scenario is not
before us, and we need not resolve it at this time. Cf. id. at
924.
Conversely, petitioner argues that the Regulation's dual
section 6511 requirement opens the door for taxpayers to whipsaw
respondent. For example, a related supplier could claim a refund
based on additional FSC commissions while the period of
limitations under section 6511 is open for both the related
supplier and the FSC, but after the period of limitations has
expired under section 6501 for respondent to assess the FSC's
correlative deficiency. Petitioner correctly points out that in
such a case section 6511 would be irrelevant to the assessment of
an FSC's deficiency stemming from additional commission income.
Petitioner also states that the FSC's filing of an amended return
reporting a deficiency does not provide any basis for the
assessment thereof if the period of limitations under section
6501 has expired. See Diamond Gardner Corp. v. Commissioner, 38
T.C. 875, 881 (1962); Melahn v. Commissioner, 9 T.C. 769, 778
(1947); Rev. Rul. 74-580, 1974-2 C.B. 400.
Under the terms of the Regulation, however, petitioner is
not entitled to its claims of additional FSC commission expenses
- 27 -
so as to create a corresponding deficiency for UCFSC inasmuch as
petitioner did not meet the dual section 6511 requirement, and
UCFSC is not a party in this case. Whether or not, under the
scenario conjured up by petitioner, respondent would be able to
assess deficiencies against the FSC, notwithstanding the
expiration of the period of limitations under section 6501, is
not a question before us, and we need not speculate about it.
We conclude that the Regulation's dual section 6511
requirement imposed on taxpayers represents a "reasonable
accommodation of the competing interests of fairness,
administrability, and avoidance of abuse." Atlantic Mut. Ins.
Co. v. Commissioner, 523 U.S. ___, ___ 118 S. Ct. 1413, 1415
(1998). In reaching our conclusion, we recognize that the
Regulation conceivably could have been written in other ways,
including the manner advocated by petitioner. Cf. L & F Intl.
Sales Corp. v. United States, 912 F.2d 377, 381 (9th Cir. 1990).
However, such a possibility is extraneous to our inquiry. See,
e.g., National Muffler Dealers Association, Inc. v. United
States, 440 U.S. at 488 ("The choice among reasonable
interpretations is for the Commissioner, not the courts."); E.I.
du Pont de Nemours & Co. v. Commissioner, 41 F.3d at 136; Brown
v. United States, 890 F.2d 1329, 1338 (5th Cir. 1989).
Petitioner has failed to convince us that the Regulation is
either unreasonable or inconsistent with the underlying statute,
- 28 -
its origin, or its purpose. See Faltesek v. Commissioner, 92
T.C. 1210-1211.
We have considered the remaining arguments of the parties
and, to the extent that they have not been addressed herein, find
them to be either not germane or unconvincing.
In light of the above, we hold that the Regulation is valid
and, since petitioner has failed to follow its provisions, we
further hold that petitioner is not entitled to its claims for
additional FSC commission expenses, in whole or in part, for the
taxable years at issue. Accordingly, respondent's cross-motion
is granted, and petitioner's motion is denied.
To reflect the foregoing,
An order granting
respondent's cross-motion for
partial summary judgment and
denying petitioner's motion
for partial summary judgment will
be issued.