Boeing Co. v. United States

Summary

The Supreme Court considered whether Treasury Regulation 26 C.F.R. § 1.861-8(e)(3) validly governed the allocation of research and development expenses in calculating combined taxable income under the DISC and FSC export-tax regimes. The Court held that the regulation was a reasonable interpretation of the Internal Revenue Code and related DISC regulations and affirmed the Ninth Circuit. Boeing therefore was not entitled to a refund of additional taxes assessed after the IRS reallocated its research expenses.

Holdings

1. Treasury Regulation § 1.861-8(e)(3) (1979) may validly be applied to allocate Boeing's deductible R&D expenses among products within the relevant two-digit SIC category and to apportion those expenses between Boeing and its export subsidiaries when computing combined taxable income.
2. The taxpayer's choice of transaction grouping under 26 C.F.R. § 1.994-1(c)(7) is controlling as to the grouping of sales and the choice of transfer-pricing method, but it does not give the taxpayer exclusive authority to determine how R&D costs are allocated among the grouped items or apportioned between the DISC and its parent.
3. The terms 'attributable' and 'combined taxable income' in 26 U.S.C. § 994, together with 26 U.S.C. § 861(b), do not prohibit reasonable categorical allocation of R&D expenses under § 1.861-8(e)(3).

Questions Presented

1. Whether Treasury Regulation § 1.861-8(e)(3) (1979), which allocates R&D expenses across products within relevant two-digit SIC categories, was validly applied in computing combined taxable income for DISC and FSC transactions.
2. Whether the DISC statute and related regulations gave Boeing an unqualified right to allocate product-specific R&D expenses only to the products to which Boeing factually related them.
3. Whether the statutory text of 26 U.S.C. §§ 861 and 994, the DISC regulations, and legislative history defeated the Secretary of the Treasury's interpretation and application of the R&D allocation regulation.

Disposition

affirmed