Respondent proposed regulations under section 901 in 1979, sec. 1.901-2, Proposed Income Tax Regs., 44 Fed. Reg. 36071 (June 20, 1979), and issued temporary regulations in 1980, sec. 4.901-2, Temporary Income Tax Regs., 45 Fed. Reg. 75647 (Nov. 17, 1980); see Phillips Petroleum Co. v. Commissioner, 104 T.C. 256">104 T.C. 256, 104 T.C. 256">285 (1995) (construing these temporary regulations). On April 5, 1983, respondent issued new proposed regulations. 1996 U.S. Tax Ct. LEXIS 36">*53 Sec. 1.901-2, Proposed Income Tax Regs., 48 Fed. Reg. 14640 (Apr. 5, 1983). The regulations under section 901, section 1.901-2, Income Tax Regs., were adopted on October 12, 1983. T.D. 7918, 1983-2 C.B. 113. The parties do not dispute that the regulations apply to petitioner for the years in issue.

To understand how the regulations apply here, we must consider a series of defined terms and phrases in the regulations. We begin with the definition of income tax. The regulations define income tax as follows:

§ 1.901-2. Income, war profits, or excess profits tax paid or accrued. -- (a) Definition of income, war profits, or excess profits tax -- (1) In general. * * * Whether a foreign levy is an income tax is determined independently for each separate foreign levy. A foreign levy is an income tax if and only if --

107 T.C. 51">*62 Except to the extent otherwise provided in paragraphs (a) (3) (ii) and (c) of this section, a tax either is or is not an income tax, in its entirety, for all persons subject to the 1996 U.S. Tax Ct. LEXIS 36">*54 tax. * * *

Respondent concedes that the OMT is a tax under section 1.901-2(a) (2) (i), Income Tax Regs. However, the parties dispute whether the "predominant character of the tax is that of an income tax in the U.S. sense." The regulations describe that requirement as follows:

(F3) Predominant character. The predominant character of a foreign tax is that of an income tax in the U.S. sense --

(i) If, within the meaning of paragraph (b) (1) of this section, the foreign tax is likely to reach net gain in the normal circumstances in which it applies * * *

hus, for a tax to be creditable under the regulations, it must be likely to reach net gain in the normal circumstances in which it applies. ³ Under the regulations, that standard is met "if and only if the tax, judged on the basis of its predominant character" meets specified realization, gross receipts, and net income requirements. Sec. 1.901-2(b) (1), Income Tax Regs. The regulations provide in part as follows:

(b) Net gain -- (1) In general. A foreign tax is likely to reach net gain in the normal circumstances in which it applies if 1996 U.S. Tax Ct. LEXIS 36">*55 and only if the tax, judged on the basis of its predominant character, satisfies each of the realization, gross receipts, and net income requirements set forth in paragraphs (b) (2), (b) (3) and (b) (4), respectively, of this section.

Respondent concedes that the OMT meets the realization and gross receipts requirements but contends that it does not meet the net income requirement of section 1.901-2(b) (4), Income Tax Regs. Thus, for present purposes the OMT is creditable, 1996 U.S. Tax Ct. LEXIS 36">*56 according to section 1.901-2(b) (1), Income Tax Regs., "if and only if" it meets the net income requirement.

A foreign tax meets the net income requirement of section 1.901-2(b) (4), Income Tax Regs., ⁴ if, judged on the basis of 107 T.C. 51">*63 its predominant character, the base of the tax is computed by reducing gross receipts to permit --

(1) recovery of significant costs and expenses attributable to gross receipts, sec. 1.901-2(b) (4) (i) (A), Income Tax Regs.; or

(2) recovery of significant costs and expenses computed under a method that is likely to produce an amount that approximates, or is greater than, recovery of such significant costs and expenses, sec. 1.901-2(b) (4) (i) (B), Income Tax Regs.

1996 U.S. Tax Ct. LEXIS 36">*57 A foreign tax also meets the net income requirement of section 1.901-2(b) (4), Income Tax Regs., if it provides allowances that "effectively compensate" for nonrecovery of significant costs or expenses. Sec. 1.901-2(b) (4) (flush language), Income Tax Regs. Petitioner prevails if the OMT meets one or more of these net income requirements.

A recap may be helpful. The task of deciding whether the predominant character of the OMT is that of an income tax in the U.S. sense is simplified because the terms and clauses in the regulations just described tie the "predominant character" inquiry to several specific tests. To summarize, for a tax to be creditable:

1. Its predominant character must be that of an income tax in the U.S. sense. Sec. 1.901-2(a) (1) (ii), Income Tax Regs.

2. Its predominant character is that of an income tax in the U.S. sense if it is "likely to reach net gain in the normal circumstances in which it applies". Sec. 1.901-2(a) (3) (i), Income Tax Regs.

3. It is likely to reach net gain in the normal circumstances in which it applies if and only if the tax, judged on the basis of its predominant character, meets (among other requirements) the net income requirement. 1996 U.S. Tax Ct. LEXIS 36">*58 Sec. 1.901-2(b) (1), Income Tax Regs.

107 T.C. 51">*64 4. It meets the net income requirement if, judged on the basis of its predominant character, ⁵ it meets one of three tests. Sec. 1.901-2(b) (4), Income Tax Regs. We next consider whether it meets one of these tests.

C. Whether the OMT Meets the Net Income Requirement in Section 1.901-2(b) (4) (i) (B), Income Tax Regs.

Under one of the three net income tests, a tax meets the net income requirement if, judged on the basis of its predominant character, the base of the tax is computed by reducing gross receipts to permit recovery of significant costs and expenses under a method that is likely to produce an amount that approximates or exceeds recovery of such significant costs or expenses. Sec. 1.901-2(b) (4) (i)1996 U.S. Tax Ct. LEXIS 36">*59 (B), Income Tax Regs. Because of respondent's concessions, the OMT is creditable if it meets that test.

1. Consideration of Representative OMT Data

Petitioner offered evidence intended to prove that the processing allowance is likely to approximate or exceed nonrecoverable expenses. Petitioner's evidence consisted of a broadly representative study of OMT tax returns filed from 1968 to 1980. Petitioner's study showed that the processing allowance far exceeded the nonrecoverable expenses both in the aggregate for all returns studied and for a large majority of OMT returns.

We agree with petitioner that use of broadly representative data is an appropriate way to show whether the processing allowance is likely to exceed nonrecoverable expenses. Two factors lead us to that conclusion. First, both the processing allowance and the amount of nonrecoverable expenses vary from year to year and from taxpayer to taxpayer. Whether one is likely to exceed the other is a factual question. Accord Texasgulf, Inc. v. United States, 17 Cl. Ct. 275">17 Cl. Ct. 275 (1989), modified per order (Apr. 16, 1992). Whether the processing allowance is likely to approximate or exceed nonrecoverable1996 U.S. Tax Ct. LEXIS 36">*60 expenses can be shown by actual OMT data. Second, we think it is appropriate to consider industry data because a foreign 107 T.C. 51">*65 tax either is or is not an income tax, in its entirety, for all persons subject to it. Sec. 1.901-2(a) (1) (flush language), Income Tax Regs.⁶ Whether a tax is creditable for all persons subject to it can be shown by multiyear data from a broadly representative group of taxpayers subject to the tax.

2. Expert Testimony

Petitioner's expert was Robert B. Parsons (Parsons). He prepared a report entitled "Study of Ontario Mining Tax Returns" (Parsons OMT Report) and an "Overview of the Ontario Mining Industry".⁷ The Parsons OMT Report was based on a review of 213 OMT returns that represented about 80 percent of the total OMT paid from 1968 to 1980. The mining operators which filed those returns had about 68 percent of Ontario's mineral production during that period.

1996 U.S. Tax Ct. LEXIS 36">*61 William J. Hallett (Hallett) was respondent's expert. He testified about the OMT returns that Parsons analyzed. Parsons prepared a memorandum that rebutted parts of Hallett's testimony.

We are not bound by the opinion of any expert witness, and we may accept or reject expert testimony exercising our sound judgment. Helvering v. National Grocery Co., 304 U.S. 282">304 U.S. 282, 304 U.S. 282">295 (1938); Fitts' Estate v. Commissioner, 237 F.2d 729">237 F.2d 729, 237 F.2d 729">732-733 (8th Cir. 1956), affg. T.C. Memo. 1955-269; IT & S of Iowa, Inc. v. Commissioner, 97 T.C. 496">97 T.C. 496, 97 T.C. 496">508 (1991).

3. Petitioner's Study of OMT Taxpayers

Respondent concedes that the Parsons OMT Report included a representative cross-section of OMT taxpayers. Only one significant taxpayer did not give its OMT tax returns to Parsons for the study. Respondent's expert stated that this taxpayer's information would not have materially changed the results of the Parsons OMT Report. Parsons analyzed returns as filed; i.e., before assessment by the Mine Assessor. Later, Parsons obtained records of the Mine Assessor's adjustments to the filed returns. 1996 U.S. Tax Ct. LEXIS 36">*62 He included assessment data in his 107 T.C. 51">*66 rebuttal memorandum to the extent it was available. The parties stipulated that the data (but not the opinions and conclusions) in the Parsons OMT Report was accurate.

Of the 213 returns that Parsons reviewed, 145 returns (68.1 percent) reported OMT liability. Nonrecoverable expenses exceed the processing allowance on only 19 of the OMT returns which reported OMT liability (15.8 percent).

The Parsons OMT Report shows that, in the aggregate, processing allowances claimed by OMT taxpayers dwarfed nonrecoverable expenses:

For the 13-year period, the total amount of processing allowance claimed on returns in the Parsons OMT Report was Can$ 2,237,700,000, which is more than three times the total amount of nonrecoverable expenses (Can$ 705,200,000).

Parsons concluded that the aggregate amount of processing1996 U.S. Tax Ct. LEXIS 36">*63 allowance claimed by OMT taxpayers in his report exceeded their aggregate amount of nonrecoverable expenses by 3.2 to 1. Respondent does not dispute that conclusion. Total processing allowances claimed on returns exceeded nonrecoverable expenses for 11 of the 13 years in the Parsons OMT Report.

The Parsons OMT Report also shows that the processing allowances claimed by the vast majority of OMT taxpayers in 107 T.C. 51">*67 the study exceeded those taxpayers' nonrecoverable expenses. The Parsons OMT Report also shows that nonrecoverable expenses exceeded processing allowances in 21 of 145 returns from eight OMT taxpayers.

4. Respondent's Expert

Hallett concluded that nonrecoverable expenses exceeded the processing allowance in only 60 of 213 OMT returns in the Parsons OMT Report if all OMT returns are considered, whether or not tax was due. Nineteen of those 60 returns were from taxpayers that owed OMT.

Hallett stated his opinion that the nonrecoverable expenses were significant. His opinion, even if correct, does not affect the result here. We need not decide whether nonrecoverable costs are significant because we decide the case by considering whether the processing allowance is likely to1996 U.S. Tax Ct. LEXIS 36">*64 exceed nonrecoverable expenses under section 1.901-2(b) (4) (i) (B), Income Tax Regs. The question under section 1.901-2(b) (4) (i) (B), Income Tax Regs., is not whether the nonrecoverable expenses are significant; it is whether the processing allowance is likely to approximate or exceed them. ⁸

5. Conclusion

Petitioner has shown that the processing allowance exceeded nonrecoverable expenses both in the aggregate and for the vast majority of OMT taxpayers. We conclude that the OMT processing allowance was likely to approximate or1996 U.S. Tax Ct. LEXIS 36">*65 exceed the nonrecoverable expenses for the years in issue.

D. Respondent's Contentions

Respondent contends that petitioner has not proven that the OMT meets the requirements of section 1.901-2(b) (4) (i) (B), Income Tax Regs., because, according to respondent, (1) this case is governed by cases decided before the 1983 regulations applied, such as Inland Steel Co. v. 107 T.C. 51">*68 United States, 230 Ct. Cl. 314">230 Ct. Cl. 314, 677 F.2d 72">677 F.2d 72 (1982); and also by Texasgulf, Inc. v. United States, 17 Cl. Ct. 275">17 Cl. Ct. 275 (1989); (2) the OMT is not creditable unless its predominant character is that of an income tax for each OMT taxpayer; and (3) for the OMT to be creditable, the processing allowance must have been intended to compensate for nonrecoverable expenses. We address each of these contentions next.

1. Extent To Which This Case Is Governed by Cases Decided Before the Regulations Were Issued and by Texasgulf, Inc. v. United States

a. Preamble to the 1983 Regulations

Respondent contends that the OMT is not creditable because it fails to meet standards of creditability applied in cases decided before the regulations were issued. 1996 U.S. Tax Ct. LEXIS 36">*66 Respondent contends that the Preamble to section 1.901-2, Income Tax Regs., shows that the regulations adopted prior case law. We disagree; the preamble does not support respondent's broad use of the preregulation cases.

The preamble to the final regulations under section 901, T.D. 7918, 1983-2 C.B., 113, 114, states in part:

Under these final regulations, the predominant character of a foreign tax is that of an income tax in the U.S. sense if the foreign tax is likely to reach net gain in the normal circumstances in which it applies. This standard, found in § 1.901-2(a) (3) (i), adopts the criterion for creditability set forth in Inland Steel Company v. U.S., 677 F.2d 72">677 F.2d 72 (Ct. Cl. 1982), Bank of America National Trust and Savings Association v. U.S., 459 F.2d 513">459 F.2d 513 (Ct. Cl. 1972), and Bank of America National Trust and Savings Association v. Commissioner, 61 T.C. 752">61 T.C. 752 (1974). The regulations set forth three tests for determining if a foreign tax is likely to reach net gain: the realization test, the gross receipts test, 1996 U.S. Tax Ct. LEXIS 36">*67 and the net income test. All of these tests must be met in order for the predominant character of the foreign tax to be that of an income tax in the U.S. sense.

The preamble states that the regulations adopt the creditability criterion from certain cases to use in deciding whether the predominant character of a foreign tax is likely to reach net gain for purposes of section 1.901-2(a) (3) (i), Income Tax Regs. The preamble states that a tax is likely to reach net gain if it meets three tests provided in the regulations. The regulations provide objective and quantitative standards that were not used in cases which decided creditability 107 T.C. 51">*69 of foreign taxes before the regulations became final. Regulations can supersede prior case law to the extent that they provide requirements and definitions not found in prior case law. See Bowater Inc. v. Commissioner, 101 T.C. 207">101 T.C. 207, 101 T.C. 207">212 (1993); Nissho Iwai American Corp. v. Commissioner, 89 T.C. 765">89 T.C. 765, 89 T.C. 765">776-777 (1987).

b. Inland Steel Co. v. United States, and Texasgulf, Inc. v. United States

Respondent contends that 233 Ct. Cl. 314">Inland Steel Co., v. United States supra, and 17 Cl. Ct. 275">Texasgulf, Inc. v. United States, supra,1996 U.S. Tax Ct. LEXIS 36">*68 establish as a matter of law that the OMT is not creditable. We disagree with respondent's contention that either of those cases decided the issue before us here.

The U.S. Court of Claims held in 233 Ct. Cl. 314">Inland Steel Co. v. United States, supra, that the OMT was not creditable and that, for 1964 and 1965, the OMT paid by Caland Ore Co. did not fit the U.S. concept of an income tax primarily because there were significant nonrecoverable expenses (i.e., land expenses, rent, and private royalties). 677 F.2d 72">Id. at 85, 87. In Inland Steel, the U.S. Court of Claims evaluated Caland data for 1964 and 1965. In 1964, Caland could not claim a processing allowance because it sold only unprocessed ore. 677 F.2d 72">Id. at 79, 81. In 1965, Caland could claim a processing allowance equal to not less than 15 percent or more than 65 percent of the profits of the combined mining and processing operations because it sold both unprocessed ore and processed iron pellets. 677 F.2d 72">Id. at 81. Caland reported the minimum 15 percent of combined profits processing allowance on its OMT return for 1965. Id. The record in that case did not include OMT returns for any other OMT taxpayers or any other years.

The U.S. Court1996 U.S. Tax Ct. LEXIS 36">*69 of Claims decided Inland Steel before the 1983 regulations were issued. In Inland Steel, the U.S. Court of Claims analyzed the history and purpose of the OMT and held that a foreign tax was creditable only if it was the "substantial equivalent" of an income tax in the United States. Id. at 79; see also New York & Honduras Rosario Mining Co. v. Commissioner, 168 F.2d 745">168 F.2d at 749. The 1979 proposed regulations included a form of the substantial equivalence test. Sec. 1.901-2(c), Proposed Income Tax Regs., 44 Fed. Reg. 36074 (June 20, 1979). However, this standard was 107 T.C. 51">*70 dropped by the final regulations issued in 1983 and replaced with a "predominant character" test. The use of the "predominant character" and "effectively compensates" tests in section 1.901-2(b) (4), Income Tax Regs., is a change from the history and purpose approach used in the cases decided before the 1983 regulations applied a factual, quantitative approach. This change to a quantitative approach is also made by the provision of the 1983 regulations which provides that the predominant character of a foreign tax is that of an income tax in the U.S. sense, 1996 U.S. Tax Ct. LEXIS 36">*70 if, among other things, the foreign tax "is likely to reach net gain in the normal circumstances in which it applies". Sec. 1.901-2(a) (3) (i), Income Tax Regs.

We have considered the parties' use of industry data in this case. See par. C-1, 285 U.S. 1">supra p. 20. The record contains broadly representative data which shows that the OMT processing allowance effectively compensates for the disallowed deductions. See par. C-3 and 4, 285 U.S. 1">supra pp. 22, 24. The U.S. Court of Claims in Inland Steel Co. v. United States, 230 Ct. Cl. 314">230 Ct. Cl. 314, 677 F.2d 72">677 F.2d 72 (1982), did not have industry-wide data to consider, and the Secretary had not yet promulgated regulations using a quantitative approach. The court in Inland Steel did not discuss the relationship between nonrecoverable expenses and the OMT processing allowance. Based on the Parsons OMT Report, Caland's situation was unusual because most OMT taxpayers could and did claim a processing allowance equal to 65 percent of the maximum combined profits. Thus, the use of the processing allowance by Caland was not typical. For the foregoing reasons, we conclude that we are not bound by Inland Steel in deciding1996 U.S. Tax Ct. LEXIS 36">*71 this case. ⁹

Respondent points out that 233 Ct. Cl. 314">Inland Steel Co. v. United States, supra, focused on the significance of expenses that are nonrecoverable under the OMT. As discussed in paragraph C-4, 285 U.S. 1">supra p. 24, we need not decide whether the nonrecoverable expenses are significant under section 1.901-2(b) (4) (i) (A), Income Tax Regs., because we hold that petitioner meets the requirements under section 1.901-2(b) (4) (i) (B), Income Tax Regs.

107 T.C. 51">*71 In Texasgulf, Inc. v. United States, 17 Cl. Ct. 275">17 Cl. Ct. 275 (1989), the U.S. Claims Court granted the Government's motion for partial summary judgment. The U.S. Claims Court later modified that ruling in an unpublished order. Texasgulf, Inc. v. United States, No. 532-83T (Cl. Ct., Apr. 16, 1992) (order partially denying1996 U.S. Tax Ct. LEXIS 36">*72 summary judgment). In that order, the U.S. Claims Court reaffirmed its opinion in 17 Cl. Ct. 275">Texasgulf, Inc. v. United States, supra, that nonrecoverable expenses under the OMT were significant as a matter of law under Inland Steel Co. v. United States, 677 F.2d 72">677 F.2d at 85. However, in that order, the U.S. Claims Court reversed its holding that the OMT processing allowance does not effectively compensate for expenses that may not be recovered under the OMT as a matter of law. Texasgulf, Inc. v. United States, No. 532-83T (Cl. Ct. Apr. 16, 1992) (order partially denying summary judgment). Thus, the U.S. Claims Court treats that issue as a question of fact. The U.S. Claims Court left for decision based on an appropriate record the question whether the OMT processing allowance effectively compensates for the disallowed deductions. Texasgulf, Inc. v. United States, No. 532-83T (Cl. Ct. Apr. 16, 1992) (order partially denying summary judgment). Our record enables us to make a factual finding on this point; as discussed above, we have found that, judged on the predominant character of the OMT, the processing allowance 1996 U.S. Tax Ct. LEXIS 36">*73 is likely to exceed nonrecoverable expenses.

2. Whether the Predominant Character of the OMT Must Be An Income Tax in the U.S. Sense for Each Taxpayer

Respondent contends that, for a tax to be creditable, its predominant character must be that of an income tax in the U.S. sense for each taxpayer subject to it. Respondent bases this argument on the following language from the regulations: "a tax either is or is not an income tax, in its entirety, for all persons subject to the tax." Sec. 1.901-2(a) (1) (flush language), Income Tax Regs. We disagree. This phrase does not mean that, to be creditable, a tax must be an income tax for each taxpayer subject to it; it means that a tax is creditable by either all, or none, of the taxpayers subject to it, regardless of variations in how the tax applies to each taxpayer subject to it.

Respondent contends that petitioner may not use aggregate data to show that the OMT is creditable. Respondent also contends that if we adopt petitioner's position, the Commissioner 107 T.C. 51">*72 would be required to evaluate each OMT taxpayer every year to determine whether its OMT payment was creditable. We disagree. Use of aggregate data is appropriate because a tax 1996 U.S. Tax Ct. LEXIS 36">*74 is or is not creditable for all taxpayers subject to it. This conclusion does not require the Commissioner to evaluate each OMT taxpayer every year to determine whether its OMT payment is creditable.

3. Whether the Processing Allowance Must Be Intended To Compensate for Nonrecoverable Expenses

Respondent contends that, for the OMT to be creditable, the processing allowance must be intended to compensate for nonrecoverable expenses. Respondent points out that the processing allowance is computed without considering the amount of nonrecoverable expenses and contends that the amount of one bears no predictable relationship to the amount of the other. Respondent contends that the fact that the processing allowance exceeds nonrecoverable expenses for most OMT taxpayers does not make the OMT creditable because that relationship is coincidental. We disagree.

The regulations do not provide that the processing allowance must bear a predictable relationship to nonrecoverable expenses. The regulations do provide that a foreign tax meets the net income requirement if (among other requirements), judged by its predominant character, the tax permits the recovery of nonrecoverable expenses 1996 U.S. Tax Ct. LEXIS 36">*75 under a method that is likely to produce an amount that approximates or is greater than the amount of the nonrecoverable expenses. Sec. 1.901-2(b) (4) (i) (B), Income Tax Regs. The effect of respondent's position would be to exclude from section 1.901-2(b) (4) (i) (B), Income Tax Regs., the words "or is greater than".

E. Conclusion

We conclude that the OMT processing allowance meets the requirements of section 1.901-2(b) (4) (i) (B), Income Tax Regs., and that the OMT is creditable under section 901 for the years in issue.

107 T.C. 51">*73 To reflect the foregoing and concessions,

Decision will be entered under Rule 155.