76 T.C. 423">*423 OPINION

Respondent determined the following deficiencies in petitioners' Federal income taxes:

We are asked to pass on the validity of a regulation applying to Domestic International Sales Corporations (DISCs). Congress provided special tax benefits to DISCs to encourage exports, but required that 95 percent of their assets be "qualified export assets." Section 993(b)(7)² states that obligations of the Export-Import Bank of the United States (Ex-Im Bank obligations) are qualified export assets. Section 1.993-2(h)(2), Income Tax Regs., disqualifies Ex-Im Bank obligations to the extent their adjusted 76 T.C. 423">*424 bases exceed accumulated DISC income. The validity of this limitation is the sole issue presented. ³

This case was submitted fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulation of facts and the attached exhibits are incorporated herein by this reference.

Arrow Fastener Co., Inc. (hereinafter 1981 U.S. Tax Ct. LEXIS 161">*163 referred to as Arrow), is a corporation organized on October 28, 1966, under the laws of the State of New Jersey. At the time of the filing of the petition in this case, Arrow's principal place of business was located in Saddle Brook, N.J.

Arrow Fastener Sales Corp. (hereinafter referred to as Sales) is a corporation organized on May 17, 1972, under the laws of the State of New Jersey. At the time of the filing of the petition in this case, Sales' principal place of business was located in Saddle Brook, N.J.

Arrow Fastener International, Ltd. (hereinafter referred to as International), is a corporation organized on February 14, 1968, under the laws of the State of New Jersey. At the time of the filing of the petition in this case, International's principal place of business was located in Saddle Brook, N.J.

Since its incorporation, Arrow has been engaged in the business of manufacturing stapling machines and staples. Sales and International are both wholly owned subsidiaries of Arrow engaged in the business of exporting stapling machines and staples.

On or about July 31, 1972, Sales made a valid election under section 992(b) to be treated as a DISC. On December 20, 1972, Sales purchased 1981 U.S. Tax Ct. LEXIS 161">*164 an obligation in the amount of $ 1,011,040.67 issued by the Export-Import Bank of the United States due April 30, 1973. Sales was inactive during its first taxable year ending December 31, 1972, and thus reported no income, deductions, or accumulated DISC income on its Federal income tax return for 1972. The obligation referred to above, having been held on December 31, 1972, was listed as an asset on the corporation's balance sheet on the return.

Subsequent to the redemption of the aforementioned Ex-Im Bank obligation, Sales purchased another Ex-Im Bank obligation 76 T.C. 423">*425 on May 9, 1973, which was due on May 4, 1974, in the amount of $ 985,854.17. This Ex-Im Bank obligation was held by Sales on December 31, 1973, and was shown as an asset on Schedule L of Sales' 1973 Federal income tax return, filed with the District Director, Brookhaven Service Center, Holtsville, N.Y. The 1973 return revealed two sources of income: qualified export receipts from the sale of export property of $ 637,369.33, and interest on the Ex-Im Bank obligations of $ 51,648.96. After subtracting cost of goods sold of $ 290,003.05, gross income was reported as $ 399,015.24. Accumulated DISC income was shown as $ 1981 U.S. Tax Ct. LEXIS 161">*165 156,341.37.

In his statutory notice of deficiency, respondent determined that Sales did not qualify as a DISC for its taxable year 1973 because, as of the close of that year, its basis in Ex-Im Bank obligations exceeded its accumulated DISC income by approximately $ 620,000, and pursuant to the regulation in issue ( sec. 1.993-2(h)(2), Income Tax Regs.), this excess investment was not a qualified export asset. If respondent is correct, Sales fails to meet the requirement of section 992(a)(1)(B) that 95 percent of its assets be qualified export assets. ⁴

On or about October 1, 1972, International made a valid election under section 992(b) to be treated as a DISC. At the close of its taxable year ending September 30, 1973, International 1981 U.S. Tax Ct. LEXIS 161">*166 had total assets of $ 1,233,568.50 ($ 1,093,148.46 of working capital and $ 140,420.04 of trade receivables). On its 1973 Federal income tax return filed with the District Director, Brookhaven Service Center, Holtsville, N.Y. International reported gross income of $ 580,385.77 ($ 1,064,928 in qualified export receipts from the sale of export property less $ 484,542.23 cost of goods sold). The sale of export property was International's only reported source of income. Accumulated DISC income at the end of its fiscal year 1973 was $ 202,260.03.

On November 16, 1973, International purchased an Ex-Im Bank obligation at a cost of $ 990,000, with a maturity of May 4, 1974. This obligation was renewed on May 10, 1974, at a cost of $ 971,875. International held the original Ex-Im Bank obligation 76 T.C. 423">*426 at the close of the sixth and seventh months following the end of its 1973 taxable year, and held the renewed obligation at the end of the eighth month. The adjusted basis of these obligations exceeded International's accumulated DISC income at the end of each of the sixth, seventh, and eighth months by approximately $ 500,000.

Section 993(b)(4) and the regulations thereunder treat money, bank 1981 U.S. Tax Ct. LEXIS 161">*167 deposits, and other similar temporary investments which are reasonably necessary to meet the working capital requirements of the corporation as qualified export assets. The respondent determined that of the $ 1,093,148.46 reported by International as working capital at the end of the taxable year 1973, over $ 1 million of this amount was in excess of the working capital requirements of the corporation ("excess working capital") pursuant to section 1.993-2(e), Income Tax Regs., and thus did not constitute qualified export assets. ⁵

However, under section 993(b)(9), amounts on deposit in the United States, other than reasonable working capital, can constitute qualified export assets if used within the period prescribed in the regulations to acquire other qualified export assets. ⁶ Thus, International's 1981 U.S. Tax Ct. LEXIS 161">*168 bank deposits in the United States, to the extent they were in excess of required working capital, were treated by the respondent as "funds awaiting investment" at the close of the taxable year 1973 in accordance with section 1.993-2(j), Income Tax Regs.

"Funds awaiting investment" are treated as qualified export assets (see sec. 1.993-2(a)(9), Income Tax Regs.) only if two tests are met. First, they must be bank deposits in the United States, at the end of the taxable year, in excess of required working 76 T.C. 423">*427 capital. Second, the funds must be reinvested in qualified export assets after the end of the taxable year. The reinvestment requirement is met if on the last day of each of the sixth, seventh, and eighth month after the close of the taxable year the sum of the bases of 1981 U.S. Tax Ct. LEXIS 161">*169 the qualified export assets equals or exceeds 95 percent of the sum of the adjusted basis of all assets held on the last day of the taxable year. ^{71981 U.S. Tax Ct. LEXIS 161">*170} International timely invested the "funds awaiting investment" in Ex-Im Bank obligations. Nevertheless, respondent concluded that International did not meet the qualified export asset test (sec. 992(a)(1)(B)) due to the excess of Ex-Im Bank obligations over accumulated DISC income at the end of each of the months referred to above. ( Sec. 1.993-2(h)(2), Income Tax Regs.) This again requires that we pass on the validity of section 1.993-2(h)(2), Income Tax Regs.

During its taxable year ended September 30, 1973, Arrow engaged in sales transactions with its subsidiaries, Sales and International, and on its 1973 Federal income tax return filed with the District Director, Brookhaven Service Center, Holtsville, N.Y., reported income received from these transactions. Additionally, Arrow reported a deemed dividend from International. ⁸ The respondent 1981 U.S. Tax Ct. LEXIS 161">*171 issued notices of deficiency to Arrow, 76 T.C. 423">*428 International, and Sales, for their taxable year 1973, based on the disqualification of Sales and International as DISCs. ^{91981 U.S. Tax Ct. LEXIS 161">*172}

These cases concern the qualification of Arrow's two subsidiaries (Sales and International) as Domestic International Sales Corporations (DISCs). Respondent determined that both Sales and International failed to qualify as DISCs for their 1973 taxable years. Sales is alleged to have failed the qualified export assets test of section 992(a)(1)(B), and, consequently, the qualified export receipts test of section 992(a) (1)(A). ^{101981 U.S. Tax Ct. LEXIS 161">*173} International is alleged to have violated section 992(a)(1)(B). In both cases, the underlying basis for the respondent's determination is that a portion of the Export-Import Bank obligations (Ex-Im Bank obligations) held by each corporation are not qualified export assets under the regulation.

At the heart of this controversy is one of the respondent's regulations, section 1.993-2(h)(2), whose validity is being challenged. We agree with the petitioners that the regulation is invalid.

In 1971, Congress enacted sections 991 to 997 giving special tax treatment to corporations which qualified under section 992 as DISCs. The requirements for qualification are stringent. Two of these requirements, sections 992(a)(1)(A) and 992(a)(1)(B), 76 T.C. 423">*429 depend in part upon the amount of "qualified export assets" held by the corporation. Section 993(b)^{111981 U.S. Tax Ct. LEXIS 161">*175} lists various types of property which will be considered "qualified export assets." This list includes 1981 U.S. Tax Ct. LEXIS 161">*174 obligations issued by the Export-Import Bank of the United States. Sec. 993(b)(7). This paragraph contains no limitation on its face as to the amount of such obligations which can be held as "qualified export assets."

Nevertheless, respondent has promulgated regulations that limit the amount of Ex-Im Bank obligations which are to be considered as "qualified export assets" to (the lesser of the adjusted basis of such obligations or) the amount of accumulated DISC income reduced by the amount of outstanding producer's loans. Challenge has been made only to section 1.993-2(h)(2), Income Tax Regs., ^{121981 U.S. Tax Ct. LEXIS 161">*176} and we will deal solely with the validity of 76 T.C. 423">*430 this portion of the regulations under section 993(b)(7). ¹³

The Commissioner has broad authority to promulgate all needful regulations. Sec. 7805(a). It is well settled that Treasury regulations "must be sustained unless unreasonable and plainly inconsistent with the statutes." As they constitute contemporaneous constructions by those charged with administration of these statutes, they "should not be overruled except for weighty reasons." Bingler v. Johnson, 394 U.S. 741">394 U.S. 741, 394 U.S. 741">750 (1969); Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 333 U.S. 496">601 (1948); 1981 U.S. Tax Ct. LEXIS 161">*177 Fawcus Machine Co. v. United States, 282 U.S. 375">282 U.S. 375, 282 U.S. 375">378 (1931).

It is equally clear, however, that the regulations must be harmonious with the statute, and a regulation which is in conflict with the statute is invalid to that extent. Citizen's National Bank of Waco v. United States, 417 F.2d 675">417 F.2d 675 (5th Cir. 1969). Where the provisions of the statute are unambiguous and its directive specific, there is no power to amend it by regulations. Koshland v. Helvering, 298 U.S. 441">298 U.S. 441, 298 U.S. 441">447 (1936).

The statute clearly and unequivocally states that "obligations issued, guaranteed, or insured, in whole or in part, by the Export-Import Bank of the United States" are "qualified export assets." Congress apparently felt that the importance of the policies subserved by Ex-Im Bank in facilitating exports warranted this treatment. ¹⁴ Certainly, Congress knew how to frame exceptions if it so wished, for in dealing with producer's loans, it included a limitation in the statute that resembles the limitations on Ex-Im Bank obligations included in the regulation here in question (see sec. 993(d)(1)(A)). If Congress had contemplated the application of a similar limitation on Ex-Im Bank obligations, it would have 1981 U.S. Tax Ct. LEXIS 161">*178 provided it, or in the context of the statute we are considering, provided specifically for regulations incorporating such a limitation.

76 T.C. 423">*431 Congress followed the latter course in several instances in the statutory provisions relating to DISCs. We note that the statute specifically authorizes respondent to draft regulations for qualified export assets encompassed by section 993(b)(9) (relating 1981 U.S. Tax Ct. LEXIS 161">*179 to funds awaiting investment). Additionally, the statute specifically authorizes respondent to draft regulations excluding from "qualified export receipts" income derived under special circumstances from the "sale, exchange, lease, rental, or other disposition of export property, and from services." (Sec. 993(a)(2).) See also sec. 992(a)(2).

There are other aspects of the statute before us that convince us that respondent has inappropriately promulgated regulations amending the statute. For example, section 993(b)(4) expressly limits the amount of cash, bank deposits, and other temporary investments constituting qualified export assets to those "reasonably necessary to make the working capital requirements of such corporation." In contrast, the statute contains no limitations of any kind on the Ex-Im Bank obligations which may qualify as export assets.

In short, we find the statute clear and unambiguous, and respondent has no power to promulgate a regulation adding provisions that he believes Congress should have included. Helvering v. Credit Alliance Corp., 316 U.S. 107">316 U.S. 107 (1942); Commissioner v. Callahan Realty Corp., 143 F.2d 214">143 F.2d 214 (2d Cir. 1944); Caterpillar Tractor Co. v. United States, 218 Ct. Cl. 517">218 Ct. Cl. 517, 589 F.2d 1040">589 F.2d 1040 (1978); 1981 U.S. Tax Ct. LEXIS 161">*180 1 J. Mertens, Law of Federal Income Taxation, sec. 3.21, p. 46 (1974 rev.).

Respondent nevertheless contends that the regulation in question merely interprets the statute in a reasonable way by excluding a corporation from qualification unless it is substantially engaged in exporting. The regulation produces this result, respondent argues, by affording preferential treatment to accumulated DISC income that is used to acquire qualified export assets. Respondent notes that this is consistent with the legislative history which states that "substantially all of the [DISC's] gross receipts and assets must be export related." H. Rept. 92-533 (1971), 1972-1 C.B. 498, 503; S. Rept. 92-437 (1971), 1972-1 C.B. 559, 565.

Respondent has made the best of a very poor case, but he simply begs the question. Of course Congress required substantially all of a DISC's receipts and assets to be "export related," 76 T.C. 423">*432 and then went on to spell out what it meant with some particularity. We must decide what assets are sufficiently export related to be qualified export assets -- do export related assets include Ex-Im Bank obligations as provided in the statute by Congress, or only those Ex-Im Bank obligations 1981 U.S. Tax Ct. LEXIS 161">*181 not in excess of accumulated DISC income, as provided in the regulations by respondent. We believe, for the reasons stated, that Ex-Im Bank obligations qualify without the limitations provided by respondent.

Respondent's concern that inactive or investment-type activities may qualify for a DISC was addressed by Congress in providing that a personal holding company is ineligible to be a qualified DISC (sec. 992(d)(2)). We also note that section 993(b)(4) and section 993(b)(9) limit the amount of nonworking capital a DISC may hold. These provisions may not be as complete as respondent would have drafted, but he may not complete them by disqualifying Ex-Im Bank obligations as export assets that plainly qualify under the statute. ^{151981 U.S. Tax Ct. LEXIS 161">*182} The statute is clear, and the legislative history does not in any way indicate that Congress contemplated any such limitation as the Commissioner has provided in regulations section 1.993-2(h)(2). See Conf. Rept. 92-553 (1971), 1972-1 C.B. 644, 666; S. Rept. 92-437 (1971), 1972-1 C.B. 559, 565, 614; H. Rept. 92-533 (1971), 1972-1 C.B. 498, 502, 534.

Decision will be entered under Rule 155.