UNITED STATES TAX COURT



        SWALLOWS HOLDING, LTD., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8045-02.               Filed January 26, 2006.



     P is a foreign corporation whose only substantial
asset is unimproved land in the United States. On its
1994, 1995, and 1996 Federal income tax returns, P
recognized rent and option income and claimed
deductions for taxes and licenses, the result of which
was a reported loss for each year. P filed each return
after its due date, but before any contact from R. R
determined that sec. 882(c)(2), I.R.C., precluded P
from deducting its expenses because it filed its
returns untimely. In Anglo-Am. Direct Tea Trading Co.
v. Commissioner, 

(1938), a setting
similar to that here, the Board held that sec. 233 of
the Revenue Act of 1928, ch. 852, 45 Stat. 849, and the
Revenue Act of 1932, ch. 209, 47 Stat. 230, an almost
verbatim predecessor to sec. 882(c)(2), I.R.C., did not
include a timely filing requirement and rejected R’s
contrary interpretation. Subsequently, the Court of
Appeals for the Fourth Circuit construed like
predecessor text similarly, also in rejection of R’s
contrary interpretation. See Blenheim Co. v.
                                -2-

     Commissioner, 

(4th Cir. 1942), affg.
     

(1940); Ardbern Co. v. Commissioner,
     

(4th Cir. 1941), modifying and remanding
     on other grounds 

(1940). R continues to
     adhere to his rejected interpretation and now attempts
     to support that interpretation by citing Treasury
     regulations issued in 1990. Those regulations
     interpret sec. 882(c)(2), I.R.C., to provide that a
     foreign corporation generally is entitled to deduct its
     expenses only if it files a timely return.
          Held: A timely filing requirement is not found in
     a plain reading of sec. 882(c)(2), I.R.C.
          Held, further, the timely filing requirement in
     the regulations is invalid in that it is unreasonable
     under a plain reading of sec. 882(c)(2), I.R.C., and an
     application of the considerations set forth in Natl.
     Muffler Dealers Association v. United States, 

(1979).



     Phillip L. Jelsma, for petitioner.

     Thomas A. Dombrowski and Nina E. Chowdhry, for respondent.


     LARO, Judge:   Petitioner petitioned the Court to redetermine

respondent’s determination of deficiencies in its Federal income

taxes for its taxable years ended May 31, 1994, 1995, and 1996

(1994, 1995, and 1996 taxable years, respectively; collectively,

subject years), and additions thereto under section 6651(a)(1).1

The deficiencies and additions to tax are as follows:




     1
       Unless otherwise noted, section references are to the
applicable versions of the Internal Revenue Code of 1986. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                  -3-

                                              Addition to tax
             Taxable Year       Deficiency    Sec. 6651(a)(1)

               1994             $7,200            $1,800.00
               1995              5,850             1,462.50
               1996              1,800               450.00

     We decide whether petitioner may deduct the ordinary and

necessary expenses it incurred during the subject years.      The

expenses relate to income treated as effectively connected to the

conduct of a trade or business in the United States (effectively

connected income), and petitioner claimed the expenses on its

Federal income tax returns, which it filed before any contact

from respondent.   Respondent determined in the notice of

deficiency that section 882(c)(2) precludes petitioner from

deducting its expenses because it did not file its returns

timely.   Respondent concedes that the expenses are deductible if

section 882(c)(2) does not include a timely filing requirement.

     In Anglo-Am. Direct Tea Trading Co. v. Commissioner,

(1938), the Board of Tax Appeals (Board) held that

section 233 of the the Revenue Act of 1928, ch. 852, 45 Stat.

849, and the Revenue Act of 1932, ch. 209, 47 Stat. 230, an

almost verbatim predecessor to section 882(c)(2), did not include

a timely filing requirement.2    In so holding, the Board construed



     2
       As will be discussed, the relevant text of sec. 882(c)(2),
“in the manner prescribed in subtitle F”, is substantially the
same as the related text of the predecessors to sec. 882(c)(2).
We refer interchangeably to the relevant text of sec. 882(c)(2)
and the related text of its predecessors as the relevant text.
                                -4-

the earlier section's requirement that a foreign corporation file

a true and accurate return “in the manner prescribed in this

title” and rejected respondent’s argument that the word “manner”,

as it appeared in the quoted text, meant that the foreign

corporation could deduct its expenses only if it filed its

returns timely; i.e., before the time set forth in a predecessor

to section 6072.3   Subsequently, the Court of Appeals for the

Fourth Circuit in Ardbern Co. v. Commissioner, 

(4th

Cir. 1941), modifying and remanding on other grounds 

(1940), quoted and applied the Anglo-Am. Direct Tea Trading

Co. holding favorably and without reservation.   The Court of

Appeals for the Fourth Circuit in Blenheim Co. v. Commissioner,

(4th Cir. 1942), affg. 

(1940), also

acknowledged the Anglo-Am. Direct Tea Trading Co. holding,

construed the relevant text not to contain any reference to time,

and stated that Congress had enacted the relevant text in 1928

intending to allow a foreign corporation to deduct its expenses

upon its filing of a tax return.

     In 1990, the Secretary issued section 1.882-4(a)(2) and

(3)(i), Income Tax Regs. (disputed regulations).   The disputed

regulations interpret section 882(c)(2) to provide that a foreign

corporation generally is entitled to deduct its expenses only if


     3
       Sec. 6072, entitled “Time For Filing Income Tax Returns”,
provides dates by which an income tax return must be filed in
order to be timely.
                                 -5-

it files a timely return.    Under the relevant part of the

disputed regulations, a return is timely if it is filed before an

arbitrary 18-month deadline (18-month deadline) devised by the

Secretary.4    The Secretary issued the disputed regulations

stating that section 882(c)(2) contains a “clear” requirement

that a foreign corporation file its return timely in order to

deduct its expenses.    The Secretary made no mention of the

consistent interpretation of the relevant text by the Court of


     4
         The regulations explain the 18-month deadline as follows:

     For taxable years of a foreign corporation ending after
     July 31, 1990, whether a return for the current taxable
     year has been filed on a timely basis is dependent upon
     whether the foreign corporation filed a return for the
     taxable year immediately preceding the current taxable
     year. If a return was filed for that immediately
     preceding taxable year, or if the current taxable year
     is the first taxable year of the foreign corporation
     for which a return is required to be filed, the
     required return for the current taxable year must be
     filed within 18 months of the due date as set forth in
     section 6072 and the regulations under that section,
     for filing the return for the current taxable year. If
     no return for the taxable year immediately preceding
     the current taxable year has been filed, the required
     return for the current taxable year (other than the
     first taxable year of the foreign corporation for which
     a return is required to be filed) must have been filed
     no later than the earlier of the date which is 18
     months after the due date, as set forth in section
     6072, for filing the return for the current taxable
     year or the date the Internal Revenue Service mails a
     notice to the foreign corporation advising the
     corporation that the current year tax return has not
     been filed and that no deductions (other than that
     allowed under section 170) or credits (other than those
     allowed under sections 33, 34 and 852(b)(3)(D)(ii)) may
     be claimed by the taxpayer. [Sec. 1.882-4(a)(3)(i),
     Income Tax Regs.]
                               -6-

Appeals for the Fourth Circuit and the Board not to include any

timely filing requirement.

     Petitioner argues that section 882(c)(2) does not contain a

timely filing requirement and that the disputed regulations are

invalid as inconsistent with that section.5   Respondent argues

that section 882(c)(2) provides clearly that a foreign

corporation must file its return timely in order to deduct its

expenses and that the disputed regulations are a proper

interpretation of that provision.    Respondent asks the Court now

to accept his interpretation, which he acknowledges is the same

as that rejected in Anglo-Am. Direct Tea Trading Co. v.

, and its progeny, and to disavow all contrary

interpretations expressed by the Court of Appeals for the Fourth

Circuit and the Board.

     We agree with petitioner that section 882(c)(2) does not

contain a timely filing requirement and that the disputed

regulations are invalid to the extent discussed herein.   We hold

that petitioner may deduct its expenses.   On the basis of our

holding and a concession by respondent that section 6651(a) is

inapplicable if petitioner is entitled to deduct its expenses, we

also hold without further discussion that petitioner is not



     5
       Petitioner also makes numerous other arguments which are
pertinent only if the disputed regulations are valid. Given our
holding herein that the disputed regulations are invalid, we need
not and do not decide any of petitioner’s other arguments.
                                    -7-

liable for any addition to tax determined by respondent under

section 6651(a).

                             FINDINGS OF FACT

       Many facts were stipulated and are found accordingly.      We

incorporate herein by this reference the stipulated facts and the

exhibits submitted therewith.

I.    Background

       Petitioner is a Barbados corporation whose mailing address

was in Bridgetown, Barbados, when its petition was filed with the

Court.    It is an accrual method taxpayer that for Federal income

tax purposes files a Form 1120-F, U.S. Income Tax Return of a

Foreign Corporation (Form 1120-F), on the basis of a fiscal year

ending on May 31.      Its sole activity during the subject years was

owning 160 acres of unimproved real estate (U.S. real estate) in

San Diego County, California, and receiving option and rental

income from the U.S. real estate.         Petitioner has never engaged

in a trade or business in the United States, and it does not have

a separate business activity in Barbados.

II.    Petitioner’s Formation and Issuance of Additional Shares

       Raimundo Arnaiz-Rosas (Rosas) is a citizen and resident of

Mexico.    He acquired the U.S. real estate on December 30, 1986.

In June 1991, he formed petitioner as his wholly owned

corporation.       He transferred the U.S. real estate to petitioner

on November 21, 1991.
                                 -8-

       Aurora Elsa Arnaiz (Arnaiz) is the sister of Rosas.    She is

a citizen and resident of Mexico.      On June 1, 1992, petitioner

issued additional shares of its stock to Arnaiz.      Afterwards,

Arnaiz owned 52 percent of petitioner’s stock, and Rosas owned

the remaining 48 percent.

III.    Petitioner’s Initial Tax Return

       On September 14, 1992, petitioner filed a Form 1120-F with

respondent’s service center in Philadelphia, Pennsylvania

(Philadelphia Service Center), for its short taxable year from

June 27, 1991, through May 31, 1992 (1992 taxable year).      The

return (petitioner’s initial return) was petitioner’s first

Federal income tax return.    That return was prepared by Francisco

A.F. Cervantes (Cervantes), petitioner’s tax adviser and

certified public accountant in California.      As to petitioner’s

1992 taxable year, petitioner’s initial return reported that

petitioner had no income or expense, that it had not engaged in a

trade or business in the United States, and that it had no

effectively connected income.    Petitioner’s initial return also

reported that petitioner’s business activity was real estate and

that its product or service was investment.      Petitioner’s initial

return also reported that petitioner was incorporated in Barbados

and that petitioner was subject to income tax under the laws of

Barbados.
                                 -9-

IV.    U.S. Real Estate

       The U.S. real estate has been vacant land throughout the

subject years.    During the subject years, an apparently unrelated

entity leased from petitioner approximately 10 acres of the U.S.

real estate for use as a skydiving landing zone.    Pursuant to the

lease agreements, the lessee was responsible for maintenance

costs, utilities, license fees, personal property taxes, and

other costs associated with its use of the leased property.

Between March 16, 1993, and April 1, 1996, another apparently

unrelated entity held an option to purchase a portion of the U.S.

real estate.

       During the respective subject years, petitioner realized

rental income of $12,000, $18,000, and $12,000 as to the lease

and $36,000, $21,000, and zero dollars as to the option.     During

the same respective years, petitioner incurred expenses totaling

$77,059, $62,418, and $40,041 for real property taxes payable to

the County of San Diego, franchise taxes payable to the State of

California, and other fees.

V.    Petitioner’s Tax Returns Other Than the Initial Return

       On July 23, 1999, petitioner filed with the Philadelphia

Service Center a Form 1120-F for its taxable year ended May 31,

1993 (1993 taxable year).    Also on that date, petitioner

voluntarily (before any contact from respondent) filed with the

Philadelphia Service Center a Form 1120-F for each of the subject
                                 -10-

years (collectively, subject returns).    Cervantes first advised

petitioner in 1999 that it had to file the four returns, and

Cervantes prepared those returns shortly after giving this

advice.6   Petitioner had no communications with Cervantes as of

the time of this advice going back to the earlier time at which

petitioner’s initial return was filed.    When the four returns

were filed, respondent had no knowledge that the returns were

overdue.

     The four returns filed in 1999 each listed petitioner’s U.S.

employer identification number and reported that petitioner was

incorporated in Barbados, that petitioner was subject to income

tax under the laws of Barbados, and that petitioner was not

liable for a United States branch profits tax.    Each return also

reported that petitioner’s business activity was real estate and

that its product or service was investment.    Each return also

reported that petitioner had not engaged in a trade or business

in the United States, but that petitioner had realized a taxable

loss effectively connected with the conduct of a trade or

business in the United States.    None of the returns included a

statement under section 1.871-10(d)(1)(ii), Income Tax Regs.,

reporting that petitioner was making an election under section

882(d)(1).   Because respondent with petitioner’s acquiescence has



     6
       Cervantes also prepared petitioner’s Federal income tax
returns for several years following the subject years.
                                -11-

treated the subject returns as such an election, petitioner’s

income from the U.S. real estate for the subject years is treated

as effectively connected income.

     On its Form 1120-F for its 1993 taxable year, petitioner

recognized option income of $16,290 and deducted an expense for

taxes of $52,081, resulting in a reported taxable loss of

$35,791.    On the respective subject returns, petitioner

recognized rental income of $12,000, $18,000, and $12,000 and

option income of $36,000, $21,000, and zero dollars.   Petitioner

also on the respective subject returns deducted expenses for

taxes and licenses in the total amounts of $77,059, $62,418, and

$40,041, resulting in reported losses (without consideration of

any net operating loss (NOL) carryforward) of $29,059, $23,418,

and $28,041.   Petitioner reported on its Form 1120-F for its 1994

taxable year that it had available as an NOL carryover its prior

year’s loss of $35,791.   Petitioner reported on its Form 1120-F

for its 1995 taxable year that it had available as an NOL

carryover its prior years’ losses totaling $64,850 ($29,059 +

$35,791).   Petitioner reported on its Form 1120-F for its 1996

taxable year that it had available as an NOL carryover its prior

years’ losses totaling $88,268 ($23,418 + $29,059 + $35,791).
                                   -12-

VI.    Respondent’s Determination

       On January 31, 2002, respondent issued the notice of

deficiency to petitioner for the subject years.7      Respondent

determined the deficiencies shown therein by disallowing all of

the deductions claimed on the subject returns and applying the

corporate income tax rates of section 11 to petitioner’s gross

income, as reported.      Respondent disallowed the deductions

because none of the returns was filed timely.

                                  OPINION

I.    Burden of Proof

       The Commissioner’s determinations in a notice of deficiency

are generally presumed correct, and taxpayers generally bear the

burden of proving those determinations wrong.      See Rule

142(a)(1); Welch v. Helvering, 

, 115 (1933).         In

certain cases, section 7491(a) places the burden of proof upon

the Commissioner.       Given the manner in which we decide this case,

we need not and do not decide which party bears the burden of

proof in this case.

II.    Parties’ Arguments

       The parties disagree on the section 882(c)(2) requirements

which serve as a prerequisite to a foreign corporation’s

deducting its expenses.      Petitioner argues that it meets those



       7
       Neither party has explained why the notice of deficiency
does not address petitioner’s 1993 taxable year.
                                    -13-

requirements in that it filed true and accurate Federal income

tax returns.     According to petitioner, section 882(c)(2) does not

require that the subject returns be filed timely, and the

disputed regulations are invalid to the extent they impose such a

requirement.     Respondent argues that section 882(c)(2) includes a

clear timely filing requirement and that the disputed regulations

are a valid construction of that requirement.       According to

respondent, petitioner may not deduct its expenses because it did

not file the subject returns timely.

        We agree with petitioner.    To best understand our decision,

we first discuss the relevant provisions and developments in the

law which preceded the issuance of the disputed regulations.        We

then address our interpretation of the relevant text and the

standard by which we judge the disputed regulations to be

invalid.

III.     Relevant Filing Requirements

       Every corporation subject to Federal income tax must file a

Federal income tax return with respect to that tax.      See sec.

6012(a)(2).     The regulations interpret section 6012(a)(2) to

require that such a corporation file a Federal income tax return

even if it does not have any gross or taxable income for the

year.     See sec. 1.6012-2(a)(1), Income Tax Regs.   The regulations

interpret section 6012(a)(2) to apply to foreign corporations to

the extent set forth in section 1.6012-2(g)(1), Income Tax Regs.
                                 -14-

See 

Income Tax Regs., generally

requires that a foreign corporation file a Federal income tax

return on Form 1120-F if it “is engaged in trade or business in

the United States at any time during the taxable year or * * *

has income which is subject to taxation under subtitle A of the

Code (relating to income taxes)”.

     Section 6072 sets the time for the filing of Federal income

tax returns required by section 6012.       A corporation generally

must file its return by the 15th day of the third month following

the close of its taxable year.    See sec. 6072(b); see also sec.

1.6072-2(a), Income Tax Regs.    An exception to this rule is found

in the case of a foreign corporation without an office or place

of business in the United States.       In such a case, the foreign

corporation may file its tax return up until the 15th day of the

sixth month following the close of its taxable year.       See sec.

6072(c); see also sec. 1.6072-2(b), Income Tax Regs.

     Petitioner did not conduct a trade or business in the United

States at any time from its inception through the close of the

last subject year.   Thus, but for an election under section

882(d)(1), petitioner was required by section 6012(a), as

interpreted by section 1.6012-2(a)(1) and (g)(1), Income Tax

Regs., to file a Federal income tax return for a taxable year

included within that period only if it had income subject to
                                 -15-

Federal income tax.8   Petitioner had no such income for its first

taxable year but did have such income for each of its taxable

years thereafter through the close of the last subject year.    For

each of the subject years, therefore, petitioner was required to

file a Form 1120-F with the Commissioner.   Because petitioner was

within the rule of section 6072(c) for each of those years, the

due dates of the subject returns were November 15, 1994, 1995,

and 1996, respectively.

IV.   Place for Filing Returns

      Section 6091(b)(2) sets forth the rules concerning the place

where a corporation must file its Federal income tax returns.

That section was enacted as part of the Internal Revenue Code of

1954 (1954 Code), ch. 736, 68A Stat. 752, to replace section

53(b)(2) of the Internal Revenue Code of 1939 (1939 Code), ch. 2,

53 Stat. 28.   Former section 53(b)(2), which also appeared in the

Revenue Act of 1928, 45 Stat. 808, and the Revenue Act of 1932,

47 Stat. 189, provided:

           (2) CORPORATIONS.--Returns of corporations shall
      be made to the collector of the district in which is
      located the principal place of business or principal
      office or agency of the corporation, or, if it has no
      principal place of business or principal office or
      agency in the United States, then to the collector at
      Baltimore, Maryland.


      8
       Petitioner would have been required by sec. 6012(a), as
interpreted by sec. 1.6012-2(a)(1) and (g)(1), Income Tax Regs.,
to file a return for any taxable year in which it had a sec.
882(d)(1) election in effect. Such an election was in effect as
to petitioner only during the subject years.
                                -16-


Thus, before the enactment of the 1954 Code, a foreign

corporation such as petitioner was required to file its Federal

income tax returns at Baltimore, Maryland.

     Since the enactment of the 1954 Code, a corporation

generally must file its Federal income tax returns with the

District Director for the internal revenue district in which is

located the corporation’s principal place of business, principal

office, or agency.   See sec. 6091(b)(2)(A); see also sec.

1.6091-2(b), Income Tax Regs.   The rule is different where a

foreign corporation has no principal place of business, principal

office, or agency in any internal revenue district.   See sec.

6091(b)(2)(B)(i), (iii).   In that case, section 6091(b)(2)(B)(i)

and (iii) allows the Secretary to designate by regulation the

place where the foreign corporation’s return will be filed.

     As relevant here, section 1.6091-3(f), Income Tax Regs.

(before amendment on September 15, 2004, by T.D. 9156, 2004-2

C.B. 669, 671), generally required that a foreign corporation

file its Federal income tax returns with the “Director of

International Operations, Internal Revenue Service, Washington,

D.C. 20225, or the district director, or the director of the

service center, depending on the appropriate officer designated

on the return form or in the instructions issued with respect to

such form”.   That section was issued by the Secretary in 1959.

See T.D. 6364, 1959-1 C.B. 546, 604.   In the 1972 instructions
                                -17-

for Form 1120-F, the Commissioner directed that “All foreign

corporations (whether or not engaged in a trade or business

within the U.S.) must file their return with the Internal Revenue

Service Center * * * [in] Philadelphia, Pennsylvania 19155”.

Previously, the instructions for Form 1120-F had stated that “All

foreign corporations (whether or not engaged in a trade or

business within the United States) must file their return with

the “Director of International Operations, Internal Revenue

Service Center, Washington, D.C. 20225”.   See, e.g., the 1971

instructions for Form 1120-F.

     The instructions for the subject returns state that

taxpayers must file their Forms 1120-F “with the Internal Revenue

Service Center, Philadelphia, PA 19255”.   In accordance with

these instructions, petitioner filed the subject returns with the

Philadelphia Service Center.9




     9
       Sec. 7482(b)(1)(B) provides rules as to venue for appeal
by a corporation without a principal place of business, principal
office, or agency in a judicial circuit. In such a case, venue
is the United States Court of Appeals for the circuit in which is
located “the office to which was made the return of the tax in
respect of which the liability arises”. 

filed the subject returns in Philadelphia, Pa., an appeal of this
case would appear to be to the Court of Appeals for the Third
Circuit. As noted supra pp. 15-16, a foreign corporation such as
petitioner was required before the enactment of the 1954 Code to
file its Federal income tax returns at Baltimore, Md. Venue for
appeal in that case was the Court of Appeals for the Fourth
Circuit.
                                -18-

V.   Section 882

     A.   Overview

     A foreign corporation engaged in a trade or business within

the United States is taxable under section 11, 55, 59A, or

1201(a) on its taxable income that is effectively connected

income, see sec. 882(a)(1); such taxation is consistent with that

of a domestic corporation.   A foreign corporation not engaged in

a trade or business within the United States is taxable at a flat

rate of 30 percent of the amount received from “interest (other

than original issue discount as defined in section 1273),

dividends, rents, salaries, wages, premiums, annuities,

compensations, remunerations, emoluments, and other fixed or

determinable annual or periodical gains, profits, and income”,

but only to the extent that the income is received from sources

within the United States (U.S. source income).   Sec. 881(a)(1).

A foreign corporation is not taxable in the United States on its

income that is neither effectively connected income nor U.S.

source income.     See 

corporation that realizes U.S. source income that

is not effectively connected income may elect to treat the U.S.

source income as effectively connected income if the U.S. source

income is derived from real property located in the United

States.   See sec. 882(d)(1).   The Commissioner has ruled that a

foreign corporation may not make such an election for a taxable
                                 -19-

year in which it does not derive income from real property in the

United States.    See Rev. Rul. 91-7, 1991-1 C.B. 110; see also

sec. 1.871-10(a), Income Tax Regs.

     For purposes of section 882(a)(1), a foreign corporation

generally determines its taxable income by including in its gross

income only its effectively connected income.     See sec.

882(a)(2).     Whether the foreign corporation may claim deductions

against its gross income to arrive at taxable income depends on

section 882(c)(2).    Under that section, a

     foreign corporation shall receive the benefit of the
     deductions and credits allowed to it in this subtitle
     only by filing or causing to be filed with the
     Secretary a true and accurate return, in the manner
     prescribed in subtitle F, including therein all the
     information which the Secretary may deem necessary for
     the calculation of such deductions and credits. * * *

     B.   History of Relevant Provisions

          1.     Predecessors to Section 882(c)(2)

     We trace section 882(c)(2) to its origin in section 233 of

the Revenue Act of 1928.    There, Congress provided:

     SEC. 233.    ALLOWANCE OF DEDUCTIONS AND CREDITS.

          A foreign corporation shall receive the benefit of
     the deductions and credits allowed to it in this title
     only by filing or causing to be filed with the
     collector a true and accurate return of its total
     income received from all sources in the United States,
     in the manner prescribed in this title; including
     therein all the information which the Commissioner may
     deem necessary for the calculation of such deductions
     and credits.
                                -20-

Congress enacted section 233 of the Revenue Act of 1928 in the

same form as the related bill had been introduced in the House of

Representatives.   See H.R. 1, sec. 233, 70th Cong., 1st Sess.

(1927).   The committee reports underlying this enactment do not

explain the section’s intent or breadth.

     Section 233 of the Revenue Act of 1928 was reenacted

verbatim in the Revenue Act of 1932, 47 Stat. 230, the Revenue

Act of 1934, ch. 277, 48 Stat. 737, the Revenue Act of 1936, ch.

690, 49 Stat. 1717, and the Revenue Act of 1938, ch. 289,

52 Stat. 531.    The same provision also was codified verbatim in

the 1939 Code, 53 Stat. 79, except that Congress placed the word

“chapter” in the two places where the word “title” had appeared

in the previous statute.10   Compare section 233 of the 1939 Code

with section 233 of the Revenue Act of 1938.

     In the 1954 Code, Congress recodified section 233 of the

1939 Code in former section 882(c)(1), 68A Stat. 282, with slight

modifications.   Section 882(c)(1) of the 1954 Code provided:




     10
       The 1939 Code was approved and published on Feb. 10,
1939. See 53 Stat. iii. The 1939 Code “is an enactment without
change of the 1939 edition of the Codification of Internal
Revenue Laws prepared by * * * the staff of the Joint Committee
on Internal Revenue Taxation, with the assistance of the
Department of the Treasury and the Department of Justice.”
53 Stat. iii. The underlying bill was introduced in the House
Committee on Ways and Means on Jan. 18, 1939. See 53 Stat. iii.
                                 -21-

             (c) Allowance of Deductions and Credits.--

                (1) Deductions allowed only if return
           filed.--A foreign corporation shall receive
           the benefit of the deductions allowed to it
           in this subtitle only by filing or causing to
           be filed with the Secretary or his delegate a
           true and accurate return of its total income
           received from all sources in the United
           States, in the manner prescribed in subtitle
           F, including therein all the information
           which the Secretary or his delegate may deem
           necessary for the calculation of such
           deductions.

The House committee report underlying the 1954 Code stated as to

this action:    “Subsection (c), relating to necessity for filing

of returns by foreign corporations in order to secure allowance

of deductions and credits, is, in substance, identical with

sections 232, 233, and 234, 1939 Code.”    H. Rept. 1337, 83d

Cong., 2d Sess. A246 (1954); see also S. Rept. 1622, 83d Cong.,

2d Sess. 417 (1954) (same statement except omits the words “and

credits”).

     Section 882 of the 1954 Code was next amended in the Foreign

Investors Tax Act of 1966, Pub. L. 89-809, sec. 104(b)(1), 80

Stat. 1555.    A stated purpose of that act was “To provide

equitable tax treatment for foreign investment in the United

States”.   Foreign Investors Tax Act of 1966, 80 Stat. 1539.    To

that end, Congress renumbered section 882(c)(1) of the 1954 Code

with slight modification as section 882(c)(2) and added a new

section 882(d).    Foreign Investors Tax Act of 1966, sec.
                               -22-

104(b)(1), 80 Stat. 1556.   As to the first action, the House

committee report stated:

     Deductions and credits allowed only if return filed.

          Paragraph (2) of section 882(c) continues the
     substance of the rule contained in section 882(c)(1) of
     existing law that a foreign corporation is to receive
     the benefit of the allowable deductions only by filing
     a true and accurate return of its total income
     (including income subject to tax under section 881(a));
     a technical amendment has been provided, however, to
     make clear that the return must also include the income
     derived from sources without the United States which is
     effectively connected with the conduct of a trade or
     business within the United States. This rule has also
     been extended to apply to credits against tax, such as
     the foreign tax credit, other than the credit provided
     by section 32 for tax withheld at the source or the
     credit provided by section 39 for certain users of
     gasoline and lubricating oil. As so amended, section
     882(c)(2) is consistent with section 874(a) of the
     code, as amended by section 3(d) of the bill. [H.
     Rept. 1450, 89th Cong. 2d Sess. 90 (1966).]

As to the addition of section 882(d), the Senate committee report

stated:

     As a general rule, the bill provides that income of a
     nonresident alien or foreign corporation will be
     subject to the flat 30-percent (or lower treaty) rate
     if it is not effectively connected with the conduct of
     a trade or business within the United States. The
     regular individual or corporate rates apply to income
     which is effectively connected to the conduct of a U.S.
     trade or business. However, the foreigner may elect to
     treat real property income as if it were income
     effectively connected with a U.S. business. This is to
     permit the deductions attributable to this real
     property income to be deducted from it. * * * [S.
     Rept. 1707, 89th Cong., 2d Sess. 19 (1966), 1966-2 C.B.
     1059, 1071.]
                                 -23-

Cf. 

1966-2 C.B. at 1076-1077, where the Senate

committee noted as to nonresident aliens owning property in the

United States that

     Taxing income on real property at a flat 30-percent
     rate without the allowance of allocable
     deductions--which in the case of this type of income
     may be relatively large--may result in quite heavy tax
     burdens on this type of income. Your committee agrees
     with the House that the law in this area should be
     clarified and doubts whether the disallowance of
     deductions in such cases is appropriate. Moreover, the
     disallowance of deductions in such cases would tend to
     discourage foreign investment in U.S. realty.

          2.    Section 217 of the Revenue Act of 1918

                 a.   Overview

     Ten years before the Revenue Act of 1928, 45 Stat. 791,

Congress enacted in section 217 of the Revenue Act of 1918, ch.

18, 40 Stat. 1069, a provision applicable to nonresident aliens.

This provision was substantially similar to section 233 of the

Revenue Act of 1928, except that section 217 used the words

“nonresident alien individual” rather than the words “foreign

corporation”.   Section 217 of the Revenue Act of 1918 provided:

     NONRESIDENT ALIENS--ALLOWANCE OF DEDUCTIONS AND
     CREDITS.

           Sec. 217. That a nonresident alien individual
     shall receive the benefit of the deductions and credits
     allowed in this title only by filing or causing to be
     filed with the collector a true and accurate return of
     his total income received from all sources corporate or
     otherwise in the United States, in the manner
     prescribed by this title, including therein all the
     information which the Commissioner may deem necessary
     for the calculation of such deductions and credits:
     * * *
                                 -24-

     Section 217 of the Revenue Act of 1918 was reenacted in

subsequent revenue acts, see, e.g., Revenue Act of 1924, ch. 234,

sec. 217(g), 43 Stat. 275; Revenue Act of 1926, ch. 27, sec.

217(g), 44 Stat. 32; Revenue Act of 1928, ch. 852, sec. 215(a),

45 Stat. 848; Revenue Act of 1932, ch. 208, sec. 215(a), 47 Stat.

229, and was codified in the 1939 Code as section 215(a), ch. 2,

53 Stat. 77.     It was recodified in the 1954 Code as section

874(a), 68A Stat. 281.    Section 874 of the 1954 Code was

identical in substance with sections 215 and 216 of the 1939

Code, H. Rept. 1337, 83d Cong., 2d 

at A245, and is

virtually identical to section 882(c)(2) except that the latter

section uses the words “foreign corporation” instead of the words

“nonresident alien individual”.

     From the outset, the Secretary interpreted section 217 of

the Revenue Act of 1918 as providing that a nonresident alien was

allowed deductions upon the alien’s filing of a true and accurate

Federal income tax return and that the alien’s tax liability

would be assessed without the benefit of deductions if the

Commissioner had to prepare a substitute return for the alien.

That interpretation was set forth in Article 311 of Regulations

45 as follows:

          Art. 311. Allowance of deductions and credits to
     nonresident alien individual.--Unless a nonresident
     alien individual shall render a return of income as
     required in article 404 [i.e., “a full and accurate
     return on form 1040 (revised) or form 1040 A (revised)
     of his income received from sources within the United
                                   -25-

        States, regardless of amount”], the tax shall be
        collected on the basis of his gross income (not his net
        income) from sources within the United States. Where a
        nonresident alien has various sources of income within
        the United States, so that from any one source or from
        all sources combined the amount of income shall call
        for the assessment of a surtax, and a return of income
        shall not be filed by him or on his behalf, the
        Commissioner will cause a return of income to be made
        and include therein the income of such nonresident
        alien from all sources concerning which he has
        information, and he will assess the tax and collect it
        from one or more of the sources of income within the
        United States of such nonresident alien, without
        allowance for deductions or credits. * * *

                   b.   Relationship to Former Section 233

     The Court of Appeals for the Fourth Circuit has observed

that Article 311 of Regulations 45 contains the Secretary’s

longstanding construction of section 217 of the Revenue Act of

1918.     See Blenheim Co. v. 

.      That

court has stated that Congress is presumed to have included that

construction in section 233 as enacted as part of the Revenue Act

of 1928 and as later reenacted.      See 

v.

Gage, 

(1930); Morgan v. Commissioner, 

(1940)).

             3.   Section 235 of the Revenue Act of 1928

     Section 235 of the Revenue Act of 1928, 45 Stat. 849, was a

predecessor to section 6072 and provided the due date for filing

the Federal income tax returns of a foreign corporation without

an office or place of business in the United States.         Section 235

of the Revenue Act of 1928 provided:
                                 -26-

      SEC. 235. RETURNS.

           In the case of a foreign corporation not having
      any office or place of business in the United States
      the return, in lieu of the time prescribed in section
      53(a)(1), shall be made on or before the fifteenth day
      of the sixth month following the close of the fiscal
      year, or, if the return is made on the basis of the
      calendar year then on or before the fifteenth day of
      June. If any foreign corporation has no office or
      place of business in the United States but has an agent
      in the United States, the return shall be made by the
      agent.

Section 235 of the Revenue Act of 1928 was reenacted verbatim in

the Revenue Act of 1932, 47 Stat. 230.    Compare section 235 of

the Revenue Act of 1932 with section 235 of the Revenue Act of

1928.

VI.   Relevant Caselaw

      A.   Overview

      This Court has observed that sections 874(a) and 882(c)(2),

because similar in text and legislative intent, are to be

interpreted in pari materia.    See Espinosa v. Commissioner,

, 152 (1996).   The Court has also observed that few

opinions discuss the text of these sections in the context of

Federal income tax returns submitted to the Commissioner

untimely.11   

  All of the cases discussing the


      11
       The paucity of cases is not surprising. Before the
enactment of the 1954 Code, all cases interpreting the
predecessors of sec. 882(c)(2) were appealable to the Court of
Appeals for the Fourth Circuit. See supra note 9. As will be
discussed, the view of that court was set forth by the end of
1942 in three opinions. In addition, as also will be discussed,
                                                   (continued...)
                               -27-

relevant text are in the setting of former section 233.    Only one

case discusses the text of section 874(a), and no case discusses

the predecessors of that section.

     B.   Anglo-Am. Direct Tea Trading Co.

     In the seminal case of Anglo-Am. Direct Tea Trading Co. v.

Commissioner, 

(1938), the taxpayer was a foreign

corporation with no offices or agents in the United States, and

it did not transact any business in the United States.    During

its taxable years ended November 30, 1932 and 1933, the taxpayer

received gross income in the form of dividends from a wholly

owned domestic corporation.   In March 1935, the Commissioner

learned of the dividends, determined that the taxpayer had not

filed Federal income tax returns for its taxable years of

receipt, and discussed this matter with one of the taxpayer’s

officers.   On or about April 15, 1935, without informing the

taxpayer that he was doing so, the Commissioner’s revenue agent

prepared substitute Federal income tax returns for those taxable

years of receipt.   Before the substitute returns were accepted by

the Commissioner, the taxpayer on April 18, 1935, filed

delinquent Federal income tax returns that included the dividends

in its gross income and claimed corresponding deductions for



     11
      (...continued)
the Secretary’s regulations construing the relevant text did not
state until 1990 that a timely filed return was required as a
condition to a foreign corporation’s deducting its expenses.
                               -28-

dividends received.   The Commissioner denied the deductions

reported on those returns.

     Section 23 of the Revenue Act of 1928, 45 Stat. 799, and the

Revenue Act of 1932, 47 Stat. 179, allowed the taxpayer to deduct

from its gross income any dividend received from a domestic

corporation.   The Commissioner argued that notwithstanding this

law, the phrase in section 233 of the 1928 and 1932 Revenue Acts

that conditioned the allowance of deductions on the filing of

returns “in the manner prescribed in this title” meant that

deductions were allowable to a foreign corporation only if it

filed its return before the time specified in section 235 of the

1928 and 1932 Revenue Acts.   Under section 235 of the 1928 and

1932 Revenue Acts, the taxpayer’s returns had to be filed by May

30, 1933 and 1934, respectively, in order to be timely.    The

Commissioner argued more specifically that Congress intended that

the word “manner” be construed broadly as including a timeliness

requirement or, in other words, a reference to the timely filing

requirements found elsewhere in the applicable revenue acts.

     The Board, in a reviewed opinion with no recorded dissent,

disagreed with the Coommissioner’s interpretation of the relevant

text and held that the taxpayer was entitled to its deductions

even though its returns had been filed untimely.   See Anglo-Am.

Direct Tea Trading Co. v. 

at 716.     The Board

reached this holding by carefully examining Congress’s use in the
                                  -29-

revenue acts of the words “manner” and “time” and by literally

applying the word “manner” in accordance with the word’s “usual

and ordinary meaning of ‘mode, method, mien, style, or way’”.

   The Board concluded that the word “manner” was not

intended by Congress to, and thus did not, include any element of

time, let alone impose a requirement that a foreign corporation

file its return by a certain date in order to deduct its

expenses.     

  The Board stated:   “A careful reading

of sections 233 and 235 discloses no indication of a legislative

intent to extend the meaning of ‘manner’ so as to include ‘time’.

Neither section provides that the deductions may not be allowed

unless the return is filed within the time prescribed.”       

   The Board added that if Congress had intended to deprive a

foreign corporation of its right to a deduction when it did not

file a timely Federal income tax return, it would have said so.

also supported its conclusion by analyzing the

“structure” of the revenue acts.     The Board concluded from that

analysis:

       They seem to have a more or less common pattern. Thus
       section 52 governs the manner of filing corporation
       returns, section 215(a) deals with the manner of filing
       returns by or for nonresident aliens, section 251(f)
       the manner of filing returns by citizens of the United
       States who are in receipt of income from sources within
       possessions of the United States, and section 233 the
       manner of filing returns for a foreign corporation.
       Sections 53, 217, and 235 deal with the time and place
       of filing returns, while sections 56, 218, and 236 deal
       with payment. Inasmuch as separate sections deal with
       “manner” and “time”, we think it highly improbable that
                                -30-

     Congress ever intended to include the element of time
     in the section dealing primarily with the manner of
     filing. * * * [

-716.]

     C.   Mills, Spence & Co.

     In Mills, Spence & Co. v. Commissioner, a Memorandum Opinion

of the Board of Tax Appeals dated Oct. 5, 1938, the Board

followed its decision in Anglo-Am. Direct Tea Trading Co. v.

.    In Mills, Spence & Co., the taxpayer was a

foreign corporation that had no offices in the United States but

derived income from sources within the United States, thus

requiring it to file Federal income tax returns.     On July 19,

1934, the Commissioner informed the taxpayer that it had to file

tax returns for 1930 through 1933 because it had received during

those years gross income subject to Federal income tax.     The

taxpayer filed those returns on February 21, 1936, reporting net

losses for each year.   Subsequently, the Commissioner issued a

notice of deficiency to the taxpayer that disallowed all of the

deductions claimed on the returns.     The Commissioner argued

before the Board that the taxpayer’s failure to file its tax

returns timely meant that it was precluded by section 233 of the

1928 and 1933 Revenue Acts from deducting its expenses.     The

Board disagreed, stating:

          That the petitioner received the gross incomes,
     incurred the expenses, and sustained the net losses as
     set out in the tabulation is not in dispute. The
     contention of respondent is that such expenses are not
     deductible, for the sole reason that the petitioner,
     being a foreign corporation, is prohibited from
                              -31-

     receiving the benefit of such deductions by the
     provisions of section 233 of the Revenue Acts of 1928
     and 1932, because none of its returns for the periods
     involved was timely filed. The gist of his contention
     is that the words in those sections “in the manner
     prescribed in this title” embrace timely filing of
     returns within their meaning and that, consequently,
     deductions are allowable to a foreign corporation only
     when its returns are filed within the time specified in
     section 235 of the Revenue Acts of 1928 and 

. Under this section, 235, petitioner should have
     filed its returns for the periods involved on or before
     June 15 of each of the years 1931, 1932, 1933, and
     1934, but did not file any returns until February 21,
     1936, when it filed returns for all the periods. The
     respondent argues that as a consequence of such
     untimely filing of the returns the petitioner is not
     entitled to the deductions of the expenses involved and
     that the tax should be computed upon its gross income.

          We do not agree with respondent’s contention. It
     is unnecessary to assign any reason for such conclusion
     other than to say that our decision on this point is
     clearly controlled by the holding of the Board in
     Anglo-American Direct Tea Trading Co., Ltd.,
     promulgated October 4, 1938, 36 B.T.A. No. 94.
     Accordingly we hold that petitioner is entitled to the
     deduction of the expenses as set out in the above
     tabulation and that respondent erred in computing
     petitioner’s taxes on the basis of its gross income.
     [Mills, Spence & Co. v. 

; fn. ref.
     omitted.]

     D.   Am. Inv. and Gen. Trust Co.

     In Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum

Opinion of the Board of Tax Appeals dated April 13, 1939, the

Board again applied its holding in Anglo-Am. Direct Tea Trading

Co. v. Commissioner, 

(1938).   The Board found that

the taxpayer, a foreign corporation, had not filed its 1929 and

1930 Federal income tax returns timely.   The Commissioner again
                                -32-

argued that this finding meant that the taxpayer was not entitled

to its deductions.    The Board disagreed, stating:

     this is not a “no return” case. It is obvious,
     however, that the petitioner was delinquent in filing
     its returns. The returns were due not later than
     June 15, 1930 and June 15, 1931, whereas they were not
     filed until after June 12, 1934. The Commissioner
     argues that this foreign corporation can not receive
     the benefit of the deductions and credits allowed under
     Title I of the Revenue Act of 1928 because the filing
     of the delinquent returns was not the filing of returns
     “in the manner prescribed” in Title I. This same
     argument has been considered and rejected by the Board
     in the case of Anglo-American Direct Tea Trading Co.,
     Ltd., 

. It is rejected here on authority
     of that case. [Am. Inv. and Gen. Trust Co., Ltd. v.
     

.]

     E.   Taylor Sec., Inc.

     Next, the Board decided Taylor Sec., Inc. v. Commissioner,

(1939).    There, the Commissioner issued a notice of

deficiency to the foreign corporation taxpayer on March 23, 1937.

That notice reflected substitute returns that the Commissioner

had prepared for the taxpayer’s 1930 through 1935 taxable years,

using only the taxpayer’s income.      On June 16, 1937, the taxpayer

petitioned the Board as to the notice of deficiency, and the

Commissioner answered the petition shortly thereafter.     On

October 20, 1938, the taxpayer was notified by the Board that a

hearing was set for a stated session of the Board beginning

December 5, 1938.    Subsequently, after the Board continued the

date of that hearing until January 16, 1939, the taxpayer filed

its 1930 through 1935 tax returns on December 13, 1938.
                               -33-

     The Board held that the taxpayer was not entitled to its

claimed deductions because it had not filed a return as required

by the statute.   In rejecting any argument that the taxpayer’s

returns were “returns” for this purpose, the Board distinguished

Anglo-Am. Direct Tea Trading Co. v. 

, on the

grounds that there the taxpayer had filed its returns before the

notice of deficiency was issued, those returns had been audited

(not the returns prepared by the revenue agent), and the returns

prepared by the revenue agent had never been accepted by the

Commissioner.   See Taylor Sec., Inc. v. 

at

702-703.   The Board stated:

          Here the question is whether the petitioner, by
     filing returns after the respondent made his
     determination of deficiencies under the circumstances
     presented, relieved itself of the adverse condition in
     which it was situated by reason of section 233 and is
     entitled to the benefits to which it would otherwise
     have been entitled by the timely filing of returns. In
     our opinion it may not.

     * * * we are unable to conclude that in enacting
     section 

, it was the intention of Congress
     that delinquent returns filed by a foreign corporation
     after the respondent’s determination should constitute
     the returns required as a prerequisite to the allowance
     of the credits and deductions ordinarily allowable to
     the corporations. * * * By section 233 the allowance
     to foreign corporations of the credits and deductions
     ordinarily allowable is specifically predicated upon
     such corporations filing returns. In view of such a
     specific prerequisite it is inconceivable that Congress
     contemplated by that section that taxpayers could wait
     indefinitely to file returns and eventually when the
     respondent determined deficiencies against them they
     could then by filing returns obtain all the benefits to
     which they would have been entitled if their returns
     had been timely filed. Such a construction would put a
                                -34-

     premium on evasion, since a taxpayer would have nothing
     to lose by not filing a return as required by statute.
     [

]

     F.   Ardbern/Blenheim

     One year later, the Board decided Ardbern Co. v.

Commissioner, 

(1940), and Blenheim Co. v.

Commissioner, 

(1940).   In Ardbern, the taxpayer

was a foreign corporation that attempted to file Federal income

tax returns for 1929 through 1932 in June 1937.   The taxpayer

tendered those returns to the Commissioner’s revenue agent, but

the agent refused to accept them believing that the returns had

to be filed with the Collector of Internal Revenue at Baltimore,

Maryland.   The agent did not inform the taxpayer how to file

those returns properly.   On July 3, 1937, the Commissioner issued

a notice of deficiency to the taxpayer for the years in question

and, 6 days later, prepared substitute returns for the taxpayer.

On September 29, 1937, the taxpayer petitioned the Board with

respect to the matter, and the Commissioner answered that

petition on December 7, 1937.   On October 28, 1938, the taxpayer

filed its 1929 through 1932 Federal income tax returns with the

Collector of Internal Revenue at Baltimore, Maryland, claiming

deductions and reporting no tax due.

     The Board applied Taylor Sec., Inc. v. 

,

and sustained the Commissioner’s disallowance of deductions.     The

Board stated:
                              -35-

          Petitioner did not, by the lodgment of returns
     with * * * [the revenue agent], discharge the duty
     which the statute laid upon it. Also, the action of
     petitioner in filing returns with the collector at
     Baltimore on October 28, 1938, was ineffective to bring
     it within the limitations of the statute so as to
     entitle it to the benefit of deductions. These returns
     were filed (a) after respondent had determined the
     deficiencies and prepared returns for petitioner under
     section 3176 of the Revised Statutes, as amended, and
     (b) after the petition and answer had been filed and
     the case was at issue before the Board, and only
     approximately two and one-half months prior to the
     hearing. Returns filed under such circumstances do not
     meet the requirements of section 233. Taylor
     Securities, Inc., 

. On the point under
     discussion, the facts of the instant proceeding are not
     distinguishable in any material respect from those of
     the Taylor case. On authority of that decision and for
     the reasons therein stated, which need not be repeated
     here, respondent’s action in computing the present
     deficiencies without the allowance of deductions is
     approved. [Ardbern Co. v. Commissioner, 41 B.T.A at
     919-920.]

     Upon appeal, the Court of Appeals for the Fourth Circuit

modified and remanded the Board’s decision on the authority of

Anglo-Am. Direct Tea Trading Co. v. Commissioner, 

(1938).   The court stated:

     fair dealing between the Government and a taxpayer
     would require the agent to whom the returns were
     improperly tendered for filing to advise the taxpayer
     as to the official and place where the returns should
     be filed. Here the agent Muller rejected the returns
     on the sole ground that they were improperly executed
     and did not notify the taxpayer that the returns could
     in no event be filed with him. Soon after the refusal
     to accept the returns the deficiency was determined
     against the taxpayer.

          It is conceded that, if the return which taxpayer
     attempted to file before Muller in June 1937 had been
     properly filed before the Collector at Baltimore,
     taxpayer would have been entitled to the deductions
                               -36-

     claimed, which represented expense incurred in
     connection with the earning of the income taxed. The
     deductions are denied merely because they were not
     claimed in a return properly filed until after the
     deficiency assessment had been made against taxpayer
     upon a return filed for him by the Commissioner in
     which no deductions were allowed. We think, however,
     that when return was filed by the Commissioner for the
     taxpayer, he should have given him the benefit of
     proper deductions for expense of doing business, of
     which he had been notified by the return which taxpayer
     had attempted to file with his agent, or, at least,
     that taxpayer should be allowed such deductions when,
     upon the assessment of a deficiency against him, he
     shows that prior to its assessment he attempted in good
     faith to file a return in which such deductions were
     claimed. This is nothing but elementary justice, and
     we find nothing in the statute which forbids it. The
     return made by the Commissioner was clearly not based
     upon the best available information.

           While there is a specific penalty of 25 per centum
     fixed for failure to file tax returns, Section 291,
     Revenue Act of 1928, * * * there is no provision that
     there shall be an added penalty in the form of not
     allowing the delinquent taxpayer deductions to which it
     otherwise would be entitled. The Board held in
     Anglo-American Direct Tea Trading Co. v. Commissioner,
     

: “Inasmuch as separate sections deal
     with “manner” and “time,” we think it highly improbable
     that Congress ever intended to include the element of
     time in the section dealing primarily with the manner
     of filing. We hold, therefore, that the mere fact the
     return was not filed within the time prescribed by
     section 235 does not, under the circumstances here
     presented, preclude the allowance of deductions
     claimed.” [Ardbern Co. v. 

.]

     The Board also followed Taylor Sec., Inc. v. Commissioner,

(1939), in Blenheim Co. v. Commissioner, 

(1940).   There, the taxpayer was a foreign corporation that

on June 15, 1935, filed a 1934 personal holding company return

(Form 1120H) reporting income consisting only of dividends
                                -37-

received from domestic corporations.   The Commissioner learned

that the taxpayer had not filed a corporate income tax return

(Form 1120) for that year and asked the taxpayer to do so.     The

taxpayer declined.   On April 28, 1938, the Commissioner prepared

a substitute return for the taxpayer and, on May 18, 1938, issued

to it a notice of deficiency.   On August 9, 1938, the taxpayer

filed a Form 1120 for 1934.

     The Board held that the filing of Form 1120H did not satisfy

the requirements of section 233 of the 1928 and 1932 Revenue Acts

because the personal holding company surtax was separate and

distinct from the corporate income tax.   

   As to

the Form 1120 filed by the taxpayer for 1934, the Board stated:

          Undoubtedly a taxpayer may litigate a
     determination of respondent on the basis of a return
     made by * * * [the Commissioner]. But, a “return”
     filed by a taxpayer after such a return has been
     prepared and filed for him by respondent, under the
     circumstances existing here, is a nullity and does not
     comply with section 

. The taxpayer can not
     thus take advantage from an alleged return submitted by
     the taxpayer not only after respondent’s filing of its
     return * * * but also after the issuance of a notice of
     deficiency. Taylor Securities, Inc., 

.
     * * * [Id. at 1251.]

     On appeal, the Court of Appeals for the Fourth Circuit

affirmed.   The court first quoted section 233 of the 1928 and

1932 Revenue Acts and then stated with respect thereto:   “It is

true that this section contains no reference to a time element.”

Blenheim Co. v. 

.   The court then

noted that section 233 of the 1928 and 1932 Revenue Acts applied
                               -38-

only to foreign corporations and explained that Congress intended

to impose special conditions on foreign corporations vis-a-vis

domestic corporations.   The court stated:

          The difficulty here encountered by the
     Commissioner in attempting to ascertain the
     petitioner’s correct income tax is a striking example
     of the many administrative problems inherent in the
     application of the federal income tax to foreign
     corporations. This has prompted Congress to impose
     special conditions on such corporations. Indeed,
     unless a foreign corporation is induced voluntarily to
     advise the Commissioner of all of its income
     attributable to sources within the United States and of
     the exact nature of all deductions from such income,
     the Commissioner may never learn even of the
     corporation’s existence, and, in any event, he will
     probably be unable to determine the correct amount of
     its taxable income.

          The situation is pregnant with possibilities of
     tax evasion. In express recognition of this fertile
     danger to the orderly administration of the income tax
     as applied to foreign corporations, Congress
     conditioned its grant of deductions upon the timely
     filing of true, proper and complete returns. This is
     in addition, of course, to the 25% penalty provided by
     Section 291 of the 1934 Act for both foreign and
     domestic corporations which either file no return or a
     late return unless “reasonable cause” for the failure
     to file a timely return is shown. * * * [

.]

     As to the “terminal date” that the Board had adopted in

Taylor Sec., Inc. v. 

, the Court of Appeals

for the Fourth Circuit explained that this date was justified

notwithstanding the absence in the statute of a time element.

The court stated:

          The conclusion that the preparation of a return by
     the Commissioner a reasonable time after the date it
     was due terminates the period in which the taxpayer may
     enjoy the privilege of receiving deductions by filing
                              -39-

     its own return, is consistent not only with the
     intention of Congress * * * but also with
     considerations of sound administrative procedure and
     the generally accepted rule concerning the number of
     returns which may be filed.

          This terminal date, which the Board of Tax Appeals
     first adopted in Taylor Securities v. Commissioner,
     

(1939), is directed against those foreign
     corporations which instead of being induced voluntarily
     to advise the Commissioner of their domestic
     operations, might find their interests best served by
     filing no return whatever, and then waiting until such
     time, if any, as the Commissioner discovers their
     existence and acquires sufficient information about
     their income on which to base a return. Unless they
     are precluded from then obtaining the deductions and
     credits under such circumstances, such foreign
     corporation can, if detected, come in for the first
     time after the Commissioner has made a return and
     suffer no economic loss other than the general 25% late
     filing penalty which applies to domestic as well as
     foreign corporations.

          Without prescribing an absolute and rigid rule
     that whenever the Commissioner files a return for a
     foreign corporation the taxpayer is completely and
     automatically denied the benefit of deductions or
     credits, we yet hold that the facts of the instant case
     justify a disallowance of deductions which petitioner
     might otherwise have been entitled to claim, had it
     filed a timely return in compliance with the statutory
     requirement. [Blenheim Co. v. 

.]

The Court of Appeals for the Fourth Circuit also found in the

legislative history of section 217 of the Revenue Act of 1918

further support for that conclusion and its reading of the

statute to the effect that a foreign corporation was entitled to

deduct its expenses upon the filing of an accurate and complete

return:
                              -40-

          It will thus be noted that Section 233 relating to
     foreign corporations, which made its first appearance
     in the Revenue Act of 1928, 26 U.S.C.A. Int. Rev. Acts,
     page 419, is almost verbally identical with this
     section governing nonresident aliens which has been a
     part of the revenue laws since 1918. The application
     of Section 217 of the 1918 Act is clear. From the
     outset the Treasury Regulations have expressly provided
     that no deductions were allowable to nonresident aliens
     unless an accurate and complete return was filed, and
     the filing of the return by the Commissioner fixed the
     tax liability. * * *

                    *    *    *      *   *   *    *

          The foregoing regulation [Article 311 of Treasury
     Regulations 45] states specifically that deductions are
     allowable to a nonresident alien only if a return is
     filed, and, if no return has been filed at the time the
     Commissioner prepares a return for the taxpayer, the
     tax shall be assessed with no allowance for deductions.
     Congress may be presumed to have adopted this
     longstanding administrative construction when it
     enacted and reenacted Section 233. Brewster v. Gage,
     1930, 

, 

, 

, Morgan
     v. Commissioner, 1940, 

, 626, 

,
     

, 1035. [Id. at 910.]

The Court of Appeals for the Fourth Circuit distinguished its

holding in Ardbern Co. v. Commissioner, 

(4th Cir.

1941), stating:

     A substantially different factual situation is
     presented in the case before us. Here the Commissioner
     prepared a return only after he had unsuccessfully made
     repeated requests to the taxpayer to do so, and only
     after the taxpayer had flouted all of these requests.
     Then, after the Commissioner had assessed a deficiency
     on the basis of his return, but only then, the
     petitioner filed its petition for review by the Board
     and also a return.

          Unless the deductions are here denied, Section 233
     will become a meaningless provision, for if, after the
     Commissioner has earnestly attempted to obtain a return
     by the taxpayer and has waited a reasonable time before
                               -41-

     filing his own return, the taxpayer may still enjoy the
     privilege of all deductions and credits, there is then
     no inducement to foreign corporations voluntarily to
     file timely returns. In the absence of demonstrable
     fraud, they will, by self-serving uncooperative
     conduct, suffer no loss other than the general late
     filing penalty which is applicable to domestic as well
     as foreign corporations. Such a construction of the
     statute would put a premium on tax evasion and would
     reduce the administration of the tax laws to mere idle
     activity. [

-910.]

     G.   Georday Enters.

     In Georday Enters. v. Commissioner, 

(4th Cir.

1942), affg. a Memorandum Opinion of the Board of Tax Appeals, a

companion case to Blenheim Co. v. Commissioner, 

(4th

Cir. 1942), the Court of Appeals for the Fourth Circuit affirmed

the Board’s denial of deductions under section 233 of the 1928

and 1932 Revenue Acts.   The court noted that the case for the

disallowance was even stronger than in Blenheim because the

taxpayer did not attempt to file a return voluntarily until after

a petition had been filed with the Board.   The court stated:

     On the issues of the timeliness of Georday’s federal
     income tax return and the imposition of a 25% penalty,
     our decision in the Blenheim case is determinative.
     The case for disallowance of Georday’s deductions is
     even stronger here because Georday failed to file a
     return voluntarily not only after a return had been
     filed for it by the Commissioner and after a deficiency
     letter had been sent to it, but even after a petition
     to the Board had been filed. In point of time, Georday
     filed its return more than five years after the date on
     which it was due.

          Georday, therefore, clearly failed to file its
     return within the reasonable terminal period prescribed
     in the Blenheim case and is now precluded from
     obtaining the benefits of any deductions it might have
                                -42-

     otherwise been entitled to claim had it filed a timely
     return. * * * [Georday Enters. v. 

     at 388.12]

     H.   Espinosa

     While each of the previously discussed cases dealt with the

applicability of former section 233 to a foreign corporation,

Espinosa v. Commissioner, 

(1996), involved the

applicability of section 874(a) to a nonresident alien taxpayer.

In Espinosa, the Commissioner had mailed a letter to the taxpayer

on November 13, 1992, asking him if he had filed returns and, if

he had not, instructing him to file returns or otherwise respond.

The letter stated that the Commissioner would file substitute

returns for the taxpayer if the taxpayer did not respond by

December 1, 1992.    On January 12, 1993, the taxpayer had not yet

responded, and the Commissioner wrote the taxpayer a second

request, adding that “your tax liability [will be determined]

based on the information we have” if the taxpayer did not respond

within 20 days.

     On February 3, 1993, after the taxpayer had again failed to

respond, the Commissioner notified the taxpayer that the

Commissioner had filed substitute returns for the taxpayer for

1987 through 1991.   On March 23, 1993, the Commissioner notified

the taxpayer that the substitute returns had been computed


     12
       The “terminal period prescribed in the Blenheim case”
(emphasis added) is the point where the Commissioner prepared a
substitute return for the taxpayer.
                                -43-

without the benefit of any deductions.    On October 7, 1993, the

taxpayer submitted Federal income tax returns for 1987 through

1991; apparently, these returns were never filed by the

Commissioner.    The returns reported net losses from rental

properties located in the United States.    On January 13, 1994,

the Commissioner issued a notice of deficiency to the taxpayer

for 1987 through 1991.    The Commissioner determined in the notice

of deficiency that the taxpayer was liable for deficiencies and

additions to tax as ascertained from the substitute returns.

Pursuant to section 874(a), the Commissioner did not allow the

taxpayer to deduct any of his related expenses.13

     This Court upheld the Commissioner’s determination, deciding

that a nonresident alien may not avoid the sanctions of section

874(a) by filing returns after the Commissioner has prepared

returns for the taxpayer, but before the Commissioner has issued

a notice of deficiency.    See Espinosa v. 

at

150, 158.   The Court noted that the Commissioner before preparing

the substitute returns had informed the taxpayer that he had not

filed a Federal income tax return and had given him a reasonable

time to do so.    

     13
       Although the Commissioner in the notice of deficiency had
characterized the taxpayer’s rental income as effectively
connected income, the Court was careful to note that neither
party in that case had questioned whether the taxpayer had made a
valid election to support that characterization. See Espinosa v.
Commissioner, 

, 150 (1996).
                               -44-

     Respondent argues in this case that the Court in Espinosa v.

at 156, interpreted Anglo-Am. Direct Tea

Trading Co. v. Commissioner, 

(1938), to hold solely

that a foreign corporation’s (or nonresident alien’s) filing of a

Federal income tax return after the due date set forth in section

6072 (and its predecessors) is not the only factor to consider in

determining whether the corporation (or alien) is entitled to

deduct its expenses.   We disagree.   The Court in Espinosa on the

referenced page made the following observation as to Anglo-Am.

Direct Tea Trading Co.:   “while a terminal date does exist [after

which a foreign corporation or nonresident alien can no longer

claim the benefit of deductions by filing a Federal income tax

return], the timely filing requirements of section 6072(c) are

not determinative as to whether a taxpayer [the corporation or

alien] is entitled to the benefit of deductions.”    The Court in

Espinosa did not limit Anglo-Am. Direct Tea Trading Co. to that

observation or to any other point.    In fact, as the Board

explained its holding in Anglo-Am. Direct Tea Trading Co. shortly

after rendering it:

          In the Anglo-American Co. case, it was held that
     the phrase in section 233 of the Revenue Acts of 1928
     and 1932, “in the manner prescribed in this title”, did
     not mean within the time prescribed in the titles of
     the respective acts and the allowance of the credits
     and deductions otherwise allowable by such acts was not
     dependent under section 233 on the filing of returns
     within the time prescribed by said acts. [Taylor Sec.,
     Inc. v. 

.]
                               -45-

Accord Am. Inv. and Gen. Trust Co. v. Commissioner, a Memorandum

Opinion of the Board of Tax Appeals dated April 13, 1939; Mills,

Spence & Co. v. Commissioner, a Memorandum Opinion of the Board

of Tax Appeals dated Oct. 5, 1938.    In addition, the Court of

Appeals for the Fourth Circuit in Ardbern Co. v. 

, quoted and applied favorably the following

holding from Anglo-Am. Direct Tea Trading Co. in deciding for the

taxpayer:

     Inasmuch as separate sections deal with “manner” and
     “time,” we think it highly improbable that Congress
     ever intended to include the element of time in the
     section dealing primarily with the manner of filing.
     We hold, therefore, that the mere fact the return was
     not filed within the time prescribed by Section 235
     does not, under the circumstances here presented,
     preclude the allowance of deductions claimed.

     I.   Inverworld, Inc.

     In Inverworld, Inc. v. Commissioner, T.C. Memo. 1996-301,

the taxpayer was a foreign corporation that had not as of the

time of trial filed a Federal income tax return for any of the

relevant years.   All of those years predated the effective date

of the disputed regulations.   See discussion infra p. 48.

The taxpayer noted that the applicable regulations had been

issued in 1957 and that those regulations did not contain a

timely filing requirement.   The taxpayer argued that such a

requirement was therefore not applicable to the relevant years.

The Court did not decide that argument.   Instead, the Court

applied the opinions of the Court of Appeals for the Fourth
                                   -46-

Circuit in Blenheim v. Commissioner, 

(4th Cir.

1942), and Ardbern Co. v. 

, and held that

section 882(c)(2) applied to deny the taxpayer the benefit of any

deductions for those years because the taxpayer had never filed a

return.

VII.        Regulations Interpreting Section 882(c)(2) and Its
            Predecessors

       A.     Background

       The Secretary never issued regulations interpreting former

section 233.       Since the enactment of section 882 of the 1954

Code, the Secretary has issued four sets of regulations

interpreting the relevant text of that section.       The first set of

regulations was issued in 1957 (1957 regulations) and was amended

in 1990 through the second set of regulations (1990 regulations),

which contain the disputed regulations.       The third set of

regulations was issued in 2002 (2002 temporary regulations) as

temporary regulations amending a portion of the 1990 regulations.

The fourth set of regulations was issued in 2003 (2003

regulations) and finalized the 2002 temporary regulations.14



       14
       In addition to the three sets of regulations that were
issued after the 1957 regulations, the Secretary in 1980 issued
one other set of regulations (1980 regulations) that pertained to
the 1957 regulations. See T.D. 7749, 1981-1 C.B. 390. The 1980
regulations amended the 1957 regulations by adding a new
paragraph (c), the substance of which is now reflected in sec.
1.882-4(b), Income Tax Regs. Because the 1980 regulations relate
to a subject that is not relevant to our analysis, we make no
further reference to them.
                                 -47-

     B.   1957 Regulations

     On October 23, 1957, the Secretary filed in the Federal

Register the 1957 regulations interpreting section 882 of the

1954 Code.   See sec. 1.882-4, Income Tax Regs., 22 Fed. Reg. 8362

(Oct. 23, 1957).   According to those regulations, section 882 of

the 1954 Code pertained to “resident corporations”; i.e.,

corporations with a trade or business in the United States, and

such a corporation could deduct its expenses only if it filed a

true and accurate Federal income tax return in accordance with

section 6012 and the regulations thereunder.    The 1957

regulations stated that a foreign corporation would be taxed on

its gross income, without the benefit of any deductions, if it

did not so file such a return.    The 1957 regulations did not

require that the required return be filed by a set time.    Nor did

the 1957 regulations state that the relevant text included a

timely filing requirement.   The 1957 regulations stated in

relevant part:

          § 1.882-4 Allowance of Deductions to Foreign
     Corporations.--* * *

          (b) Resident foreign corporations.--(1) Return
     necessary. A resident foreign corporation shall
     receive the benefit of the deductions allowed to it
     with respect to the income tax, only if it files or
     causes to be filed with the district director, in
     accordance with section 6012 and the regulations
     thereunder, a true and accurate return of its total
     income received from all sources within the United
     States.
                                 -48-

          (2) Tax on gross income. If a return is not so
     filed, the tax shall be collected on the basis of gross
     income, determined in accordance with § 1.882-1 but
     without regard to any deductions otherwise allowable.

     C.   1990 Regulations

     On December 10, 1990, the Secretary issued the 1990

regulations to amend section 1.882-4, Income Tax Regs., as

adopted in 1957.   See sec. 1.882-4, Income Tax Regs., 55 Fed.

Reg. 50830 (Dec. 11, 1990), T.D. 8322, 1990-2 C.B. 172.     The

amendments were first published as proposed regulations.     See

sec. 1.882-4, Proposed Income Tax Regs., 54 Fed. Reg. 31547

(July 31, 1989).   In the preamble to the proposed regulations,

the Secretary explained:     “Since the filing of a timely return is

one of the requirements set forth in subtitle F, these

regulations provide that otherwise allowable deductions and

credits will be allowed only if a return is filed by the time

limits as set forth in these regulations.”     

the 1990 regulations became effective July 31, 1990, for taxable

years ended after that date.    See sec. 1.882-4, Income Tax Regs.,

supra, T.D. 8322, 1990-2 C.B. at 172.

     The 1990 regulations added to the 1957 regulations a general

requirement that a foreign corporation file its Federal income

tax return timely; i.e., generally before the 18-month deadline,

in order to deduct its expenses for the year covered by the

return.   As respondent asserts in brief, a timely filing

requirement was added because:
                              -49-

          When Anglo-American and its progeny were decided,
     the scale and nature of international business activity
     was markedly different from today’s modern business
     environment. At that time, international travel was a
     time-consuming and cumbersome endeavor. Transatlantic
     air travel was in its infancy, zeppelins and cruise
     ships were the predominant means of travel. Books and
     records were in paper, not electronic form. Data and
     information was transmitted via mail.

          In the years since Anglo-American, there have been
     dramatic changes and increases in the nature and level
     of international business activity. International air
     travel is commonplace, taking hours instead of days.
     Books and records are now maintained in electronic form
     on computers. Data, information, and money are
     transmitted around the world in electronic form.
     Businesses have instantaneous access to information via
     the internet. Documents are delivered via overnight
     delivery or by facsimile.

     Section 1.882-4(a)(2), Income Tax Regs., as amended in 1990,

states:

          (2) Return necessary. A foreign corporation shall
     receive the benefit of the deductions and credits
     otherwise allowed to it with respect to the income tax,
     only if it timely files or causes to be filed with the
     Philadelphia Service Center, in the manner prescribed
     in subtitle F, a true and accurate return of its
     taxable income which is effectively connected, or
     treated as effectively connected, for the taxable year
     with the conduct of a trade or business in the United
     States by that corporation. * * *

Section 1.882-4(a)(3)(i), Income Tax Regs., as amended in 1990,

goes on to set forth filing deadlines by which to measure whether

the timely filing requirement has been met.   See supra note 4.

Section 1.882-4(a)(3)(ii), Income Tax Regs., as amended in 1990,

also states, without further explanation, that “The filing

deadlines set forth in paragraph (a)(3)(i) of this section may be
                               -50-

waived by the District Director or Assistant Commissioner

(International), in rare and unusual circumstances if good cause

for such waiver, based on the facts and circumstances, is

established by the foreign corporation.”

     As to the inclusion of the timely filing requirement, the

preamble to the 1990 regulations states in relevant part:

          Commentators questioned the validity of the filing
     deadlines as set forth in the proposed regulations.
     The filing deadlines were not eliminated in the final
     regulations, however, since the statute clearly
     provides for the denial of deductions and credits if
     returns are not filed in a timely manner. This
     requirement is justified because of different
     administrative and compliance concerns with regard to
     nonresident alien individuals and foreign corporations.
     [T.D. 

, 1990-2 C.B. at 172, 55 Fed. Reg.
     50827 (Dec. 11, 1990).]

Among the referenced commentators was the American Bar

Association Section of Taxation (ABAST).   See Letter from Holden,

Chair, Section of Taxation, American Bar Association Section of

Taxation (May 25, 1990), reprinted in 90 TNT 120-28 (June 7,

1990).   The ABAST commented that the timely filing requirement

was inconsistent with section 882(c)(2) and supported that

comment by citing Anglo-Am. Direct Tea Trading Co. v.

Commissioner, 

(1938), Blenheim Co. v. Commissioner,

(4th Cir. 1942), Ardbern Co. v. Commissioner,

(4th Cir. 1941), and Georday Enters. v.

Commissioner, 

(4th Cir. 1942), all of which, the

ABAST stated, rejected such a requirement.   See Letter from
                                   -51-

.     The ABAST also observed that there had been

“almost countless tax bills over the past 50 years, including

recodifications in 1939, 1954 and 1986" and concluded that

Congress must have acquiesced in the interpretation set forth in

those cases.     

Temporary Regulations

     On January 28, 2002, the Secretary filed with the Federal

Register the 2002 temporary regulations consisting of section

1.882-4T(a)(3)(ii), (iii), and (iv), Temporary Income Tax Regs.,

67 Fed. Reg. 4217 (Jan. 29, 2002).        These temporary regulations

amended the waiver standard prescribed in section 1.882-4, Income

Tax Regs., as amended in 1990, and listed examples of the amended

standard.    The 2002 temporary regulations were effective for open

years for which a request for a waiver was filed on or after

January 29, 2002.

     E.     2003 Regulations

     On March 7, 2003, the Secretary replaced the 2002 temporary

regulations with the 2003 regulations.       See 68 Fed. Reg. 11313

(March 7, 2003).       The 2003 regulations allow the Commissioner to

waive the 18-month deadline prescribed in the 1990 regulations if

the foreign corporation “establishes to the satisfaction of the

Commissioner or his or her delegate that the corporation, based

on the facts and circumstances, acted reasonably and in good

faith in failing to file a U.S. income tax return”.       Sec.
                                -52-

1.882-4(a)(3)(ii), Income Tax Regs.    Section 1.882-4(a)(3)(ii)

and (iii), Income Tax Regs., as finalized in the 2003

regulations, is effective for open years for which a request for

a waiver is filed on or after January 29, 2002.      See sec.

1.882-4(a)(3)(iv), Income Tax Regs.

     In the case of the subject returns, the 18-month deadlines

are May 15, 1996, 1997, and 1998, respectively (i.e., 18 months

after the 15th day of the sixth month after the close of the

taxable year).

VIII.   Secretary’s Authority To Issue Regulations

     The Secretary may issue two types of regulations.     See

Tutor-Saliba Corp. v. Commissioner, 

, 7 (2000); Estate

of Pullin v. Commissioner, 

, 795 (1985); see also E.I.

duPont de Nemours & Co. v. Commissioner, 

, 135 (3d

Cir.), affg. 

(1994).    The first type, legislative

regulations, are issued pursuant to a specific delegation from

Congress to the Secretary.    The second type, interpretative

regulations, are issued under the general authority vested in the

Secretary under section 7805(a).

     Respondent acknowledges that the disputed regulations are

interpretative regulations.    Section 7805(a) reflects a broad

delegation of general authority from Congress to the Secretary to

prescribe all needful rules and regulations for the enforcement

of the Internal Revenue Code.    See United States v. Correll,
                                -53-

, 306-307 (1967).    The authority delegated to the

Secretary, however, is not limitless and, if exercised

improperly, may usurp the role of Congress as the legislator in

our system of Government.    The Secretary’s authority to issue

regulations is not the power to make law; it is the power to

carry into effect the will of Congress as expressed in the

statute under which the regulations are prescribed.    See

Manhattan Gen. Equip. Co. v. Commissioner, 

, 134-135

(1936).    When a statute’s provisions are unambiguous, and its

directive is specific, the Secretary has no power to amend that

statute by regulation.    See Koshland v. Helvering, 

,

447 (1936).

IX.   This Court’s Review of an Interpretative Regulation

      This Court is empowered to invalidate a regulation that

exceeds the authority of the Secretary to issue it.    See, e.g.,

Profl. Equities, Inc. v. Commissioner, 

(1987); Estate

of Pullin v. 

; Stephenson Trust v.

Commissioner, 

, 288 (1983); Estate of Boeshore v.

Commissioner, 

, 527 (1982); Washington v.

Commissioner, 

(1981), affd. 

(D.C. Cir.

1982).    When this Court reviews an interpretative Federal tax

regulation, we generally apply the analysis set forth by the

Supreme Court in Natl. Muffler Dealers Association v. United
                                 -54-

States, 

(1979).15   See, e.g., Robinson v.

Commissioner, 

, 70 (2002); Walton v. Commissioner,

, 597-598 (2000); UnionBancal Corp. v. Commissioner,

, 317 (1999).   Under Natl. Muffler, which like the

present case involved an interpretative regulation issued under

section 7805(a), an interpretative regulation is valid if it

implements a congressional mandate in a reasonable manner.16        See

Natl. Muffler Dealers Association v. United 

at 476-

477 (citing United States v. Cartwright, 

, 550

(1973); United States v. Correll, supra at 307); see also United

States v. Cleveland Indians Baseball Co., 

, 218-219

(2001); Newark Morning Ledger Co. v. United States, 

,

575-576 (1993); Rowan Cos. v. United States, 

,

252-253 (1981).   We must defer to a Federal tax regulation that

is reasonable under this standard.      Cf. United States v. Mead

Corp., 

(2001); Smiley v. Citibank (S.D.), N.A.,

, 739 (1996).



     15
       A task force of the American Bar Association has recently
concluded likewise that the Supreme Court primarily reviews
interpretative Federal tax regulations under the analysis set
forth in Natl. Muffler Dealers Association v. United States,

(1979). See Salem et al., ABA Section of Taxn.
Report of the Task Force on Judicial Deference, 104 Tax Notes
1231 (2004).
     16
       Legislative regulations, by contrast, are upheld “unless
arbitrary, capricious, or manifestly contrary to the statute”.
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 

, 844 (1984).
                               -55-

     An interpretative Federal tax regulation is reasonable under

Natl. Muffler Dealers Association v. United 

, only

if it “harmonizes with the plain language of the statute, its

origin, and its purpose.”   

see also United States v.

Vogel Fertilizer Co., 

, 26 (1982).   For this purpose,

     A regulation may have particular force if it is a
     substantially contemporaneous construction of the
     statute by those presumed to have been aware of
     congressional intent. If the regulation dates from a
     later period, the manner in which it evolved merits
     inquiry. Other relevant considerations are the length
     of time the regulation has been in effect, the reliance
     placed on it, the consistency of the Commissioner’s
     interpretation, and the degree of scrutiny Congress has
     devoted to the regulation during subsequent
     re-enactments of the statute. [Natl. Muffler Dealers
     Association v. United 

at 477.]

     Following its decision in Natl. Muffler Dealers Association

v. United 

, the Supreme Court decided Chevron

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 

(1984).   There, the Supreme Court stated:

          When a court reviews an agency’s construction of
     the statute which it administers, it is confronted with
     two questions. First, always, is the question whether
     Congress has directly spoken to the precise question at
     issue. If the intent of Congress is clear, that is the
     end of the matter; for the court, as well as the
     agency, must give effect to the unambiguously expressed
     intent of Congress.9 If, however, the court determines
     Congress has not directly addressed the precise
     question at issue, the court does not simply impose its
     own construction on the statute, as would be necessary
     in the absence of an administrative interpretation.
     Rather, if the statute is silent or ambiguous with
     respect to the specific issue, the question for the
     court is whether the agency’s answer is based on a
     permissible construction of the statute.
                               -56-
          9
           The judiciary is the final authority on issues
     of statutory construction and must reject
     administrative constructions which are contrary to
     clear congressional intent. * * * If a court,
     employing traditional tools of statutory construction,
     ascertains that Congress had an intention on the
     precise question at issue, that intention is the law
     and must be given effect.

     [Id. at 842-843 (some fn. refs. omitted; citations
     omitted).]

     The question arises from the timing of these two decisions

whether the Supreme Court intended for Chevron U.S.A., Inc. v.

Natural Res. Def. Council, 

, to replace Natl. Muffler

Dealers Association v. United 

, in the review of a

Federal tax regulation.   We have previously stated with respect

to that question: “we are inclined to the view that the impact of

the traditional, i.e., National Muffler standard, has not been

changed by Chevron, but has merely been restated in a practical

two-part test with possibly subtle distinctions as to the role of

legislative history and the degree of deference to be accorded to

a regulation.”   Central Pa. Sav. Association & Subs. v.

Commissioner, 

, 392 (1995); see also 

(discussing the review of Federal tax regulations under Natl.

Muffler in relation to Chevron); cf. E.I. duPont de Nemours & Co.

v. Commissioner, 

(3d Cir. 1994) (questioning whether

Chevron applies to interpretative Federal tax regulations).

Here, we conclude likewise that we need not parse the semantics

of the two tests to discern any substantive difference between
                                 -57-

them.     While we apply a Natl. Muffler analysis, our result under

a Chevron analysis would be the same.

X.   Review of the Disputed Regulations

     A.    Overview

     We conclude that the timely filing requirement in the

disputed regulations does not harmonize with the plain language,

origin, or purpose of the relevant text of section 882(c)(2).    A

plain reading of the relevant text in the context of the Internal

Revenue Code shows that the text includes no timely filing

requirement.    Where, as here, the Secretary has prescribed a

regulation that is inconsistent with the plain meaning of a

statute, the regulation is invalid, and any deference to the

Secretary’s interpretation of that statute under Natl. Muffler

Dealers Association v. United States, 

(1979), is

unwarranted.    Such is especially so where, as here, the disputed

regulations also are unreasonable under an analysis of Natl.

Muffler Dealers Association v. United 

at 477.

     B.    Plain Meaning of the Relevant Text

     We begin our analysis of the relevant text with the words

used therein.    We apply the plain meaning of the words used in a

statute unless we find that a word’s plain meaning is ambiguous.

See Garcia v. United States, 

, 76 n.3 (1984); see also

Ex parte Collett, 

(1949).     When interpreting a

statute, “[t]he judiciary is the final authority on issues of
                                -58-

statutory construction”.    Chevron U.S.A., Inc. v. Natural Res.

Def. Council, 

at 843 n.9; see also Volkswagenwerk v.

FMC, 

, 272 (1968); FTC v. Colgate-Palmolive Co.,

, 385 (1965).

     We agree with the holdings in Anglo-Am. Direct Tea Trading

Co. v. Commissioner, 

(1938), and its progeny, that

the plain meaning of the word “manner”, as used in the relevant

text, does not include an element of time.   For purposes of our

Federal tax system, Congress has consistently used the word

“time” together with the word “manner” when it intended to

include the meanings of both words in a single taxing section.

In the Revenue Act of 1928, for example, from which section 233

emanated, Congress used both words in sections 115(g) and 291.

The former section addressed the situation where “a corporation

cancels or redeems its stock * * * at such time and in such

manner as to make the distribution and cancellation or redemption

in whole or in part essentially equivalent to the distribution of

a taxable dividend”.   Revenue Act of 1928, ch. 852, sec. 115(g),

45 Stat. 822.   The latter section provided that additions to tax

for failure to file a tax return “shall be collected at the same

time and in the same manner and as part of the tax”.   Revenue Act

of 1928, ch. 852, sec. 291, 45 Stat. 857.

     In the 1939 Code, when the relevant text was first codified,

Congress again used the words “time” and “manner” together when
                               -59-

it intended to include the meanings of both words in a single

statutory provision.   See, e.g., 1939 Code secs. 55(b)(1) and

(2), (d)(1)(B), 115(g), 291, 821(b), 864(b), 1203, 1420(c), 1421,

1502, 1522, 1530(b), 1604, 1716, 1902(b), 2190, 2471, 2701,

2802(d)(2), 2803(d), 2854, 2903(c), 2905, 3150(b)(1), 3271,

3310(c), 3448(a), 3461, 3467(b), 3612(e), 3640, 3701, 3704(b),

3975, 3976(a).   Many of those instances applied specifically to

the time and manner of the filing of a return.   See, e.g., 1939

Code secs. 821(b) and 864(b) (“The return required of the

executor under subsection (a) shall be filed at such times and in

such manner as may be required by regulations made pursuant to

law”), 2471 (“Such returns shall contain such information and be

made at such times and in such manner as the Commissioner, with

the approval of the Secretary, may by regulations prescribe”),

2701 (same language), 3448(a) (same language), 3461 (same

language), 3467(b) (same language); see also 1939 Code secs. 1203

(stating the specific time by which a return must be filed and

that the “return shall contain such information and be made in

such manner as the Commissioner with the approval of the

Secretary may by regulations prescribe”), 1604 (similar

language), 1716 (similar language).

     In the 1954 Code, when Congress recodified the relevant text

with a reference to “subtitle F”, Congress continued to use the

words “time” and “manner” together to express its intent to
                               -60-

include both meanings in a single provision.    See, e.g., 1954

Code secs. 6033(b), 6036, 6081(b), 6103(b)(1) and (d)(1)(B),

6201(a), 6205(a)(1) and (b), 6302(c), 6335(b), 6338(b), 6413(b),

7204 for instances where Congress upon enactment of the 1954 Code

used both words in a single provision in subtitle F (then secs.

6001 through 7852).   Congress did likewise in the Foreign

Investors Tax Act of 1966, when it legislated as to section 882,

and in the 1986 Code, when it recodified the relevant text a

second time.   As to the former legislation, see, e.g., secs. (as

amended by the Foreign Investors Tax Act of 1966) 871(d)(3),

981(d).   As to the latter legislation, see, e.g., 1986 Code secs.

6033(b), 6036,   6038(a)(2), 6038A(a), 6038B(a), 6039C(c)(4),

6039D(a) and (c), 6039F(a)(1), 6045(d), 6047(b), 6050A(a),

6050K(a), 6053(c)(1), 6059(c), 6081(b), 6096(c), 6103(f)(4)(A)

and (B) and (p)(1), 6104(a)(1)(A), 6157(a)(2), 6164(b),

6166(b)(7), 6167(a), 6201(a), 6205(a)(1) and (b), 6230(i),

6302(c), 6324A(a) for instances where Congress upon enactment of

the 1986 Code used both words in a single provision in subtitle F

(then secs. 6001 through 7872); see also 1986 Code sec. 6039(a)

(stating the specific time by which a “written statement” must be

furnished “in such manner and setting forth such information as

the Secretary may by regulations prescribe”).

     We believe that Congress acted intentionally and purposely

when it included both “time” and “manner” in single sections of
                                 -61-

the referenced statutes but omitted the word “time” in favor of

only the word “manner” in other single sections of those

statutes; e.g., as in section 882(c)(2) and its predecessors.

See BFP v. Resolution Trust Corp., 

, 537-538 (1994);

Chicago v. Envtl. Def. Fund, 

, 338 (1994); Keene

Corp. v. United States, 

, 208 (1993); Russello v.

United States, 

, 23 (1983).   In construing a statute,

we must give a definite meaning to every word and expression

found therein, Dubuque & P.R. Co. v. Litchfield, 

, 77

(1859); Early v. Doe, 

, 617 (1853), and we must shy

away from interpreting a statute in a way that would render any

part of it redundant or surplusage, see Platt v. Union Pac. R.R.

Co., 

, 58-59 (1878).    See Jones v. United States, 

, 857 (2000); United States v. Menasche, 

,

538-539 (1955); see also United States v. Olympic Radio &

Television, Inc., 

, 235-236 (1955) (in applying the

traditional rules of statutory construction, a court should

assume that Congress uses language in a consistent manner, unless

otherwise indicated).   Such is especially so where, as here, we

understand Congress’s use of the word “manner” in the referenced

Code sections as giving context to that word.   We understand that

use to refer to items of information and not to refer to the time

for the filing of a return or the furnishing of any other

document.   We conclude that Congress, by using only the word
                               -62-

“manner” in section 882(c)(2), did not intend to include in that

provision any element of time.17    Nor do we believe that Congress

intended for the word “manner” in that situation to have a

flexible definition to be prescribed by the Secretary in order to

carry out the text’s general purpose, as was the case in Chevron

U.S.A., Inc. v. Natural Res. Def. Council, 

.

Instead, we believe that the word “manner”, when used in the

relevant text, was intended by Congress to have only the single

definition that we decide herein.

     Respondent requests that we defer to the Secretary’s

interpretation of the word “manner” to include a timely filing

requirement.   We decline to do so.   Because we find the meaning

of the word “manner” as used in section 882(c)(2) to be plain and

unambiguous, any deference that we would otherwise accord to the

Secretary’s interpretation of the word “manner” is unwarranted.18


     17
       In fact, as to the 18-month period set forth in the
regulations, it is not only arbitrary but without any statutory
basis at all. As we understand the Secretary’s formation of that
period, it corresponds to 1 year after the 6-month extended due
date of the return. See T.D. 8322, 1990-2 C.B. 172, 172-173,
55 Fed. Reg. 50827 (Dec. 11, 1990); see also sec. 6081(a)
(generally allowing the Secretary to grant extensions of up to
6 months). Where that 1-year rule came from, we do not know.
     18
       A term is ambiguous if it is “‘capable of being
understood in two or more possible senses or ways’”. Chickasaw
Nation v. United States, 

, 94 (2001) (quoting
Webster’s Ninth New Collegiate Dictionary 77 (1985)). Although
the disputed regulations are contrary to our construction of the
text, as is the construction of the relevant text by respondent,
we do not believe that these contrary interpretations mean that
                                                   (continued...)
                              -63-

See United States v. Mo. Pac. R. Co., 

, 280 (1929);

United States v. Tanner, 

, 663 (1893); Swift Co. v.

United States, 

, 695 (1881); see also Atl. Mut. Ins.

Co. v. Commissioner, 

, 387 (1998).   Deference is

especially unwarranted where, as here, the Secretary’s

construction of the relevant text does not fill in a gap left

open by the statute as to a timeliness requirement but simply

adopts respondent’s unsuccessful litigating position, with total

disregard to firmly established judicial precedent,19 and adds an


     18
      (...continued)
the relevant text as of the issuance of the disputed regulations
was reasonably capable of being understood in two or more senses
or ways. The Treasury Department was not the first authoritative
body to have interpreted the relevant text. That text had
previously been construed on a number of occasions by both the
Court of Appeals for the Fourth Circuit and the Board. In
addition, contemporaneous to the seminal interpretation of the
relevant text in Anglo-Am. Direct Tea Trading Co. v.
Commissioner, 

(1938), Congress codified the text in
the 1939 Code without any significant change from the text
construed by the Board in Anglo-Am. Direct Tea Trading Co..
Then, after both the Court of Appeals for the Fourth Circuit and
the Board had repeatedly and consistently construed the relevant
text as not including a timely filing requirement, Congress
recodified the relevant text in the 1954 and 1986 Codes, again
without any significant change. Given the multiple legislative
reenactments of the relevant text and the consistent and
unanimous prior interpretations of that text by the Court of
Appeals for the Fourth Circuit and the Board, we do not believe
that the relevant text as of the time of the disputed regulations
was reasonably capable of being understood in the sense advocated
by respondent and adopted by the Secretary in the form of the
disputed regulations.
     19
       We include the Board in our references to the judiciary.
Although the Board was established as “an independent agency in
the executive branch of the Government”, Revenue Act of 1924, ch.
                                                   (continued...)
                               -64-

impermissible restriction to the statute.20   The functional

reasons for deference to agencies; i.e., the agencies’ expertise

and experience, do not carry the same force when interpreting the

word “manner” for purposes of the relevant text.   The judiciary

has enough expertise and experience to ascertain congressional

intent with respect to that word, and any deference that is owed

to the Secretary does not mean that the judiciary as a matter of

course should simply ratify an unauthorized assumption by the

Secretary of major policy decisions properly made by Congress;

e.g., here, a foreign corporation’s forfeiture of deductions

absent its filing of a timely tax return.21   Cf. Estate of


     19
      (...continued)
234, sec. 900(a), (k), 43 Stat. 336, 338, the Court of Appeals
for the Third Circuit has noted that the Board “for all practical
purposes [was] a judicial tribunal operating in the federal
judicial system”. Stern v. Commissioner, 

, 707-708
(3d Cir. 1954), revg. on other grounds 

(1953).
     20
       The improper addition to the statute is easily seen by
comparing sec. 882(c)(2) with sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990. The two sections are essentially the
same, except that the regulation includes the word “timely”.
Respondent has not explained why sec. 1.882-4(a)(2), Income Tax
Regs., as amended in 1990, stated that a return must be filed
both “timely” and “in the manner prescribed in section F” if, as
he argues, the concept of “time” is subsumed within the statutory
phrase “in the manner prescribed in subtitle F”.
     21
       Absent a clear expression of legislative intent, we
believe it unreasonable to conclude, as did the Secretary in the
disputed regulations, that Congress intended for a foreign
corporation to forfeit any deduction of its otherwise deductible
ordinary and necessary business expenses simply because it filed
its tax return untimely. Cf. S. Rept. 1707, 89th Cong., 2d Sess.
26-27 (1966), 1966-2 C.B. 1059, 1076-1077 (noting as to
                                                   (continued...)
                               -65-

Applebaum v. Commissioner, 

, 381-382 (3d Cir. 1983)

(Adams, J., concurring), affg. T.C. Memo. 1982-278.   Courts “are

not obliged to stand aside and rubber-stamp their affirmance of

administrative decisions that they deem inconsistent with a

statutory mandate or that frustrate the congressional policy

underlying a statute”.   NLRB v. Brown, 

, 291 (1965);

accord FEC v. Democratic Senatorial Campaign Comm., 

,

32 (1981).

     C.   Application of Natl. Muffler

     We also conclude that the Secretary’s interpretation of a

timely filing requirement is unreasonable under an analysis of

the considerations discussed in Natl. Muffler Dealers Association

v. United 

.    That case requires that we

take into account the following considerations:   (1) Whether the

regulation is a substantially contemporaneous construction of the

statute by those presumed to have been aware of congressional

intent; (2) the manner in which a regulation dating from a later

period evolved; (3) the length of time that the regulation has

been in effect; (4) the reliance placed upon the regulation;

(5) the consistency of the Secretary’s interpretation; and




     21
      (...continued)
nonresident aliens owning property in the United States that
their “allocable deductions * * * may be relatively large” and
that not allowing such deductions “may result in quite heavy tax
burdens”).
                                -66-

(6) the degree of scrutiny Congress has devoted to the regulation

during subsequent reenactments of the statute.    

of these considerations reinforces our

conclusion that the disputed regulations are invalid.   The

regulations were issued in 1990, 62 years after the relevant text

was enacted and 72 years after the enactment of the parallel

provision of section 217 of the Revenue Act of 1918.    Thus, the

disputed regulations are not a “substantially contemporaneous

construction of the statute by those presumed to have been aware

of congressional intent”.   

  We therefore inquire into

the manner in which the disputed regulations evolved.   See 

regulations were issued after both the Court of

Appeals for the Fourth Circuit and the Board had repeatedly and

consistently held that the relevant text did not include a timely

filing requirement.22   The regulations also were issued after

multiple reenactments of the relevant text, none of which altered

the judiciary’s construction of the text, and merely adopted

respondent’s unsuccessful litigating position.   The Secretary’s

statement accompanying the issuance of the disputed regulations,



     22
       The relevant meaning that we distill from the referenced
cases of the Court of Appeals for the Fourth Circuit and the
Board is twofold. First, a foreign corporation must file a tax
return in order to deduct its expenses. Second, the
Commissioner’s preparation of a substitute return for the
corporation is generally considered to be the corporation’s
return for Federal income tax purposes and divests the taxpayer
of its entitlement to file a return for itself.
                                 -67-

“the statute clearly provides for the denial of deductions and

credits if returns are not filed in a timely manner”, see

Preamble of T.D. 8322, 1990-2 C.B. at 172, flies in the face of

the judiciary’s prior holdings that the relevant text does not

include a timely filing requirement and the like interpretation

by the ABAST and the other commentators referenced in the

preamble to the regulations.23   The Secretary’s statement is even

a departure from his previous interpretation set forth in the

1957 regulations.24   The 1957 regulations make no mention of a

timely filing requirement but allow a resident foreign

corporation to deduct its expenses if it files a true and

accurate Federal income tax return in accordance with section

6012 and the regulations thereunder.    We also note as to our

analysis under Natl. Muffler Dealers Association v. United

, that the disputed regulations had only been in

effect for approximately 3 years as of the first year in issue.



     23
       In fact, if anything is “clear”, it is that the statute
does not contain any time requirement and that the Secretary’s
inclusion of one in the disputed regulations is ultra vires.
     24
       Of course, the mere fact that the Secretary has changed
his interpretation of a statutory term does not necessarily mean
that the latter interpretation is invalid. See Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, 

;
Dickman v. Commissioner, 

, 343 (1984). Courts should
accord considerably less deference, however, to an agency’s
statutory interpretation that conflicts with the agency’s
previous interpretation of the same statute. See Pauley v.
BethEnergy Mines, Inc. 

, 698 (1991); INS v.
Cardoza-Fonseca, 

, 446 n.30 (1987).
                                -68-

     As to the remaining two considerations, i.e., the degree of

scrutiny that Congress has devoted to the regulation in question

during subsequent reenactments of the statute and the reliance

placed on that regulation, these considerations also do not

support the Secretary’s issuance of the disputed regulations.      As

to the former, section 882(c)(2) has not been amended since the

issuance of the disputed regulations.   As to the latter,

petitioner obviously did not rely upon the disputed regulations

when it filed the subject returns untimely.   In fact, the record

before us persuades us that petitioner filed those returns

relying on the belief that it would be taxed on the same taxable

base as that of a domestic corporation (i.e., gross income less

deductions).   Given the relevant text, its legislative history,

the 1957 regulations, and the longstanding judicial precedents,

we have no doubt that taxpayers and their advisers would have

reasonably concluded immediately before the issuance of the

disputed regulations that the relevant text did not include a

timely filing requirement and would have reasonably concluded

upon the issuance of those regulations that such issuance was an

unreasonable attempt by the Secretary to circumvent the firmly

established legal terrain.25   In fact, as to petitioner, it did

almost everything that Congress envisioned as to foreign


     25
       We have found no authority, nor has respondent cited any,
to support respondent’s position that the relevant text contains
a timely filing requirement.
                               -69-

taxpayers and their investment in real property in the United

States; petitioner invested in the U.S. real estate and

voluntarily filed Federal income tax returns reporting that

income net of the expenses related thereto.

     For sake of completeness, we also note the legislative

reenactment doctrine.   Under that doctrine, Congress is presumed

to have known of the administrative and judicial interpretations

of a statutory term reenacted without significant change and to

have ratified and included that interpretation in the reenacted

term.   See Newark Morning Ledger Co. v. United 

; Pierce v. Underwood, 

, 567 (1988);

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 

, 381-382 (1982); Lorillard v. Pons, 

, 580-581

(1978); see also Dresser Indus. v. United States, 

,

614 (5th Cir. 2001); Kovacs v. Commissioner, 

,

129-130 (1993), affd. without published opinion 

(6th Cir. 1994); cf. Cannon v. Univ. of Chicago, 

,

696-697 (1979) (“It is always appropriate to assume that our

elected representatives, like other citizens, know the law”.).

See generally 2A Sands, Sutherland on Statutory Construction

§ 49.09 (4th ed. 1973), and cases cited therein.   The legislative

reenactment doctrine applies with vigor where Congress reenacts

statutory text mainly in its entirety, see Dutton v. Wolpoff

& Abramson, 

, 655 (3d Cir. 1993), or where a prior
                               -70-

judicial interpretation of that text has been relied upon and

never questioned by the judiciary as of the time of reenactment,

see Cannon v. Univ. of Chicago, supra at 696-697 (prior

interpretation of a statute “was repeatedly cited with approval

and never questioned during the ensuing five years”); see

also Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, supra

at 378-379.   In the light of the legislative reenactment

doctrine, we presume that Congress upon reenacting the relevant

text without significant change as part of the 1939, 1954, and

1986 Codes, as well as part of the Foreign Investors Tax Act of

1966, was mindful of the relevant judicial interpretations and

included within the reenacted text the judiciary’s interpretation

that the text contains no timely filing requirement.26    See

Dutton v. Wolpoff & Abramson, supra at 655; cf. Kovacs v.

at 129-130 (concluding by application of the

legislative reenactment doctrine that Congress had adopted a

prior Board decision when it amended section 104(a)(2) in 1982

and 1989, and when it enacted the Internal Revenue Codes of 1939,

1954, and 1986).

     This presumption is further supported by considering the

setting of each of the reenactments of the relevant text



     26
       In fact, respondent concedes that Congress knows of
Anglo-Am. Direct Tea Trading Co. v. Commissioner, 

(1938), and that it is significant that Congress has never
amended the relevant text after that case.
                               -71-

following its interpretation by the judiciary.   First, when the

relevant text was codified in the 1939 Code, that text had

recently been construed in Anglo-Am. Direct Tea Trading Co. v.

Commissioner, 

(1938), a unanimous reviewed opinion

of the Board, as including no timely filing requirement.27

Second, as of each of the times when the text was reenacted in

the 1954 Code, the Foreign Investors Tax Act of 1966, and the

1986 Code, Anglo-Am. Direct Tea Trading Co. had been cited

repeatedly, favorably, and without reservation by both the Court

of Appeals for the Fourth Circuit and the Board.   As of each of

those times, the Court of Appeals for the Fourth Circuit also had

decided Blenheim Co. v. Commissioner, 

(4th Cir.

1942), which confirmed the holding of Anglo-Am. Direct Tea

Trading Co. that the relevant text contained no reference to a

time element and stated that Congress, in initially enacting the

text as part of the Revenue Act of 1928, had adopted a

longstanding administrative construction of a parallel provision

to the effect that a foreign corporation may deduct its expenses

if it files a return before respondent prepares a substitute

return for it.   We also note the legislative history underlying

the 1954 Code to the effect that Congress did not then believe

that a timely filing requirement was included within section 882.


     27
       The 1939 Code was enacted approximately 4 months after
the release of Anglo-Am. Direct Tea Trading Co. v. 

.
                                -72-

While no committee report makes any mention of such a

requirement, the House and Senate committee reports both note

specifically the “necessity for filing of returns by foreign

corporations in order to secure allowance of deductions”.       See

S. Rept. 1622, 83d Cong., 2d 

at 417; H. Rept. 1337,

83d Cong., 2d 

at A246.    The fact that Congress was

keenly aware of the foreign tax provisions when it enacted the

1954 Code also is seen from its inclusion in that act of section

6091(b)(2).    That section allowed the Secretary to move all

appeals of the issue at hand from the Court of Appeals for the

Fourth Circuit, which had decided the issue unfavorably to

respondent, to another circuit of his liking.

       Third, as part of the Foreign Investors Tax Act of 1966, we

note the substantial amendments which Congress made to section

882.    In relevant part, Congress added a new section 882(d) that,

among other things, allowed a foreign corporation to elect to

treat real property income as if it were effectively connected

income.    A stated purpose of this legislation was to promote

foreign investment in real property located in the United States.

As an inducement to such foreign investment, Congress intended to

allow foreigners to deduct their expenses related to those

investments.    The disputed regulations work against this intent

in that the regulations deny a foreign corporation the taking of

its expenses upon the filing of an untimely return, with the
                                -73-

result that the foreign corporation is required to pay taxes on

its gross (rather than net) income.    We know of no statutory

authority under which any type of taxpayer forfeits an

entitlement to deduct substantiated ordinary and necessary

business expenses simply because the taxpayer files a tax return

untimely.    While respondent proffers section 882(c)(2) as such

authority in the case of a foreign corporation, that section does

not explicitly support that proffer.

     We also bear in mind the Foreign Investors Tax Act of 1966’s

legislative history, which adds to our understanding that

Congress was then mindful of the interpretations set forth in

Anglo-Am. Direct Tea Trading Co. v. 

, and its

progeny.    The House committee report, for example, refers

specifically to “existing law”, states that a foreign corporation

is entitled to benefit from its deductions “by filing a true and

accurate return of its total income”, and makes no mention of a

timely filing requirement.    See H. Rept. 1450, 89th Cong., 2d

at 90.    The Senate committee report likewise makes

no mention of a timely filing requirement.    The Senate committee

report, on the other hand, does state in a manner consistent with

our view that the committee intended for section 882(d) to allow

a foreign corporation to treat its real property income as

effectively connected income in order to deduct its expenses

related to that income.    See S. Rept. 1707, 89th Cong., 2d Sess.,
                               -74-

supra at 19, 1966-2 C.B. at 1071.     The Senate report also

expresses Congress’s reluctance through the Foreign Investors Tax

Act of 1966 to disallow a nonresident alien’s deductions related

to his or her investment in U.S. real estate because such a

disallowance “would tend to discourage foreign investment in U.S.

realty”.   S. Rept. 1707, 89th Cong., 2d 

at 26-27,

1966-2 C.B. at 1076-1077.

     Respondent acknowledges that the disputed regulations are

invalid if the relevant text is unambiguous in including no

timely filing requirement.   In contrast to the Secretary’s

statement in the preamble to the 1990 regulations, respondent

argues that the caselaw suggests that the relevant text is

ambiguous.   Respondent observes that some of this caselaw states

that a foreign corporation must file a “timely” return in order

to benefit from its deductions.   Respondent notes especially the

court’s use of the word “timely” in Blenheim Co. v. 

at 908-910, 912.

     We disagree with respondent that the caselaw interprets the

relevant text as including the Secretary’s timely filing

requirement.   In Blenheim Co. v. Commissioner, 

(4th

Cir. 1942), the Court of Appeals for the Fourth Circuit did state

that a foreign corporation must file a “timely” return in order

to deduct its expenses; however, the court used the word “timely”

to mean that the foreign corporation had to file its return
                              -75-

before respondent prepared a substitute return for it.   The

“timely” reference in that and in the other cases is to such a

“terminal date” found not in the statute but (1) “first adopted

in Taylor Sec. v. Commissioner”, 

(1939), and

(2) subsequently followed in Blenheim Co. v. 

at 910, and Georday Enters. v. 

.28

See also Blenheim v. Commissioner, 42 B.T.A at 1251 (preparation

of a substitute return by the Commissioner makes any later return

prepared by the taxpayer a “nullity”, which, in turn, means that

the taxpayer’s later return is not a “return” within the meaning

of former sec. 233); Taylor Sec., Inc. v. 

at

703 (Board declined to conclude that Congress intended that

delinquent returns filed by a foreign corporation after the


     28
       Respondent acknowledges that the terminal date in Taylor
Sec., Inc. v. Commissioner, 

(1939), Blenheim Co. v.
Commissioner, 

(4th Cir. 1942), affg. 

(1940), and Georday Enters. v. Commissioner, 

(4th
Cir. 1942), was the point where the Commissioner prepared a
substitute return for the taxpayer. The Court of Appeals for the
Fourth Circuit stated as to this point that it is consistent
with, among other things, “the generally accepted rule concerning
the number of returns which may be filed.” Blenheim Co. v.

at 910. While the court also stated that
this point is not an “absolute and rigid rule”, we understand
that statement to mean that a foreign corporation may in certain
cases be entitled to benefit from its deductions where the
Commissioner has prepared a substitute return for the
corporation. In fact, had the Court of Appeals for the Fourth
Circuit adopted such an “absolute and rigid rule” in Blenheim,
its actions would have been inconsistent with its earlier holding
in Ardbern Co. v. Commissioner, 

(4th Cir. 1941),
modifying and remanding 

(1940), that the foreign
corporation was entitled to its deductions even though the
Commissioner had filed substitute returns for it.
                                -76-

Commissioner’s determination are “returns” within the meaning of

former sec. 233).    Contrary to respondent’s assertion that the

Court of Appeals for the Fourth Circuit and the Board construed

the statute to impose a timely filing requirement, those

tribunals, in referencing the word “timely”, were adopting a

judicial limitation based on (1) the statute’s requirement that a

foreign corporation file a tax return in order to deduct its

expenses and (2) their conclusion that a foreign corporation

could not file such a return if a return had already been

prepared for it by the Commissioner.

     D.    Natl. Cable

     In the recent case of Natl. Cable & Telecomm. Association v.

Brand X Internet Servs., 545 U.S.      , 

(2005),

the Supreme Court decided the validity of a regulation that

construed a statute inconsistently with a prior judicial

interpretation.   The Court held that “A court’s prior judicial

construction of a statute trumps an agency construction otherwise

entitled to Chevron deference only if the prior court decision

holds that its construction follows from the unambiguous terms of

the statute and thus leaves no room for agency discretion.”    

  The Court stated:   “Only a judicial precedent holding

that the statute unambiguously forecloses the agency’s

interpretation, and therefore contains no gap for the agency to

fill, displaces a conflicting agency construction.”    

                                 -77-

The Court noted that its decisions in Neal v. United States,

(1996), Lechmere, Inc. v. NLRB, 

,

536-537 (1992), and Maislin Indus., U.S., Inc. v. Primary Steel,

Inc., 

, 131 (1990), “allow a court’s prior

interpretation of a statute to override an agency’s

interpretation only if the relevant court decision held the

statute unambiguous.”     Natl. Cable & Telecomm. Association v.

Brand X Internet 

at        , 125 S. Ct. at 2700.

        Given that the Supreme Court has historically reviewed

Federal tax regulations primarily under the reasonableness test

of Natl. Muffler Dealers Association v. United States, 

(1979), the question arises whether Natl. Cable & Telecomm.

Association v. Brand X Internet 

, which neither

cited Natl. Muffler nor involved a Federal tax regulation,

applies to Federal tax regulations.     We do not decide that

question because we conclude that Natl. Cable is distinguishable

from this case and, thus, its holding is not controlling here.

While we take seriously the Supreme Court’s holding in Natl.

Cable, we likewise take seriously that Court’s discussion of its

rationale for, and the context of, that holding.     After

considering that discussion, and the significant contrasts

between that case and the case before us, we are persuaded for

numerous reasons that the holding of Natl. Cable does not govern

here.
                                 -78-

     First, the issue in Natl. Cable & Telecomm. Association v.

Brand X Internet 

, was whether broadband was subject

to regulation as a telecommunications service.   Before ruling,

the Federal Communications Commission (FCC) had carefully

considered technological developments and its own related

interpretations.   The Supreme Court’s extensive discussion of the

FCC’s work on its ruling suggests that it was exactly the kind of

agency decision that is most entitled to deference.   Here, we

find no corresponding record of the Secretary’s consideration of

whether the relevant text in 1990 included a timely filing

requirement; the Secretary’s rationale for adopting the disputed

regulations is at best perfunctory.

     Second, the Supreme Court in Natl. Cable & Telecomm.

Association v. Brand X Internet 

, noted that the FCC

had not previously ruled on the question at hand, but that its

ruling regarding broadband was consistent with prior FCC rulings.

Here, the Secretary in 1990 directly altered regulations adopted

in (and unchanged since) 1957.    Thus, unlike Natl. Cable, the

instant case raises questions as to the reasonableness and how

much deference applies when the Secretary issues an

interpretative regulation that reverses long-settled law.

     Third, in Natl. Cable & Telecomm. Association v. Brand X

Internet 

, the FCC was not a party to AT&T Corp. v.

Portland, 

(9th Cir. 2000), the prior case that the
                               -79-

Court of Appeals for the Ninth Circuit had treated as

controlling.   Here, the Commissioner was the unsuccessful party

in all of the cases holding that timely filing is not required

for a foreign corporation to claim its deductions and credits.

In addition, unlike the FCC, the Secretary through the disputed

regulations is attempting to overturn the outcome of those cases

through his general regulatory authority.

     Fourth, AT&T Corp. v. 

, which the Supreme

Court declined to permit to “trump” the FCC ruling, had been

decided only approximately 5 years before Natl. Cable & Telecomm.

Association v. Brand X Internet 

.     Here, Anglo-Am.

Direct Tea Trading Co. v. Commissioner, 

(1938), and

its progeny were decided approximately 50 years before the

disputed regulations were issued.     Thus, in Natl. Cable the

Supreme Court was not faced with the question of whether a

longstanding judicial interpretation is entitled to more

deference than a recent judicial interpretation.    Nor was that

Court faced with the question of the effect of the reenactment of

the underlying statute on a prior judicial interpretation.       The

case of Natl. Cable also did not involve an agency that was

seeking to reverse course from a preexisting, decades old

regulatory position that was consistent with judicial precedents

of even greater antiquity.
                               -80-

     Moreover, apart from the previously mentioned differences,

the Court in Natl. Cable & Telecomm. Association v. Brand X

Internet 

, stated that regulatory interpretations

do not prevail over a contrary previous judicial interpretation

when the judicial tribunal referred to the interpreted statute

as unambiguous.   Although the judicial tribunals in Ardbern Co.

v. Commissioner, 

(4th Cir. 1941), Blenheim Co. v.

Commissioner, 

(4th Cir. 1942), and Anglo-Am. Direct

Tea Trading Co. v. 

, did not state explicitly

that they were applying the unambiguous meaning of the word

“manner”, we believe that they did so, given their analysis and

the fact that their interpretation of that word was purely one

of statutory construction that resulted from the employment of

traditional tools of statutory construction.   “It is

emphatically, the province and duty of the judicial department

to say what the law is”, Marbury v. Madison, 

, 177

(1803), and “If a court, employing traditional tools of

statutory construction, ascertains that Congress had an

intention on the precise question at issue, that intention is

the law and must be given effect”, Chevron U.S.A., Inc. v.

Natural Res. Def. Council, 

n.9; see also

INS v. Cardoza-Fonseca, 

, 432 (1987).   Moreover,

where “the only or principal dispute relates to the meaning of

the statutory term, the controversy must ultimately be resolved,
                                 -81-

not on the basis of matters within the special competence of the

* * * [agency], but by judicial application of canons of

statutory construction.”     Barlow v. Collins, 

, 166

(1970).     Compare Chevron U.S.A., Inc. v. Natural Res. Def.

Council, 

at 845 (Supreme Court exercised a very

limited review of an agency’s regulations after the Court

concluded that Congress had left a gap in the statute for the

agency to fill), with INS v. Cardoza-Fonseca, supra at 446

(Supreme Court rejected an agency’s interpretation of a statute

after the Court concluded that the question before it was a

“pure question of statutory construction for the courts to

decide”).

     In Anglo-Am. Direct Tea Trading Co. v. 

,

the Board was the first judicial body to construe the relevant

text.     It construed the meaning of the word “manner” plainly

using traditional tools of statutory construction.     The Court of

Appeals for the Fourth Circuit performed a similar textual

construction in Blenheim Co. v. 

at 908, by

simply reading and applying the words of section 233 of the

Revenue Act of 1934.29    The referenced decisions of the Court of


     29
       In Ardbern Co. v. 

(4th Cir.
1941), the Court of Appeals for the Fourth Circuit noted that
respondent had conceded that the taxpayer would have been
entitled to its claimed deductions if the return which the
taxpayer had attempted to file with the revenue agent had instead
been filed with the Collector at Baltimore. The court,
                                                  (continued...)
                               -82-

Appeals for the Fourth Circuit and the Board turned not on the

need to fill in a gap that Congress left in the statute but on a

matter of pure statutory construction.    Those judicial tribunals

gave effect to the relevant text by reading the text literally

and without reference to any contrary argument that the text was

ambiguous as to the inclusion of a timely filing requirement.

The judicial tribunals’ reading of the word “manner” was

consistent with that word’s accepted meaning in legislative

practice, as seen from the Board’s discussion in Anglo-Am.

Direct Tea Trading Co. of the “structure” of the revenue acts.

     Respondent with a citation to his nonacquiscence in

Anglo-Am. Direct Tea Trading Co. v. 

, see

1939-1 C.B. (pt. 1) 39, argues on brief that the holdings in

Anglo-Am. Direct Tea Trading Co. and Ardbern Co. v.

, as to the construction of former section

233 are incorrect and invites the Court to disavow those

holdings.   We decline that invitation.   We also disagree with

respondent’s argument that the applicability of the rationale of

the court in Ardbern is limited to those cases where a



     29
      (...continued)
therefore, primarily limited its analysis of whether the statute
included a timely filing requirement to the statement of the
Board quoted supra p. 36. The court did point out, however, that
no provision in the Revenue Act of 1934, ch. 277, 48 Stat. 680,
precluded a late filing taxpayer who filed a return from
receiving the benefit of the deductions to which the taxpayer was
otherwise entitled. See 

                               -83-

compelling equitable consideration is present so as to serve

elementary justice.   The Court of Appeals for the Fourth Circuit

held specifically in Ardbern Co. v. 

at 426,

that former section 233 does not forbid a taxpayer from

deducting expenses when the taxpayer files, or attempts in good

faith to file, a return claiming those deductions before the

Commissioner determines a deficiency against the taxpayer or

files a substitute return on the taxpayer’s behalf.   Accord

Blenheim v. 

at 908 (“It is true that this

section [section 233 of the 1928 and 1932 Revenue Acts] contains

no reference to a time element.”).

XI.   Conclusion

      On the basis of the foregoing, we conclude that the

disputed regulations are invalid to the extent described herein.

Given the plain meaning of the relevant text and the historical

setting laid out in detail in this Opinion, including caselaw,

legislation, legislative history, and regulations, the

Secretary’s adoption of a timely filing requirement and his

attempted sub silentio overruling of contrary judicial and

administrative precedents is unreasonable under Natl. Muffler

Dealers Association v. United States, 

(1979).30


      30
       We note that this case is strikingly similar to Anglo-Am.
Direct Tea Trading Co. v. Commissioner, 

(1938),
where the taxpayer was allowed to receive the benefit of its
deductions upon the untimely filing of returns more than
                                                  (continued...)
                              -84-

Congress is the legislator in our system of Government and when

an interpretation must be made of a tax bill enacted into law,

both the judicial and executive branches of Governments, the

latter acting through the Treasury Department, may render that

interpretation in their own constitutionally permitted ways.

As one of those ways, however, it is not reasonable for the

Secretary (or anyone else for that matter) to construe a

statute’s unambiguous meaning in a manner contrary to that

intended by Congress in passing the legislation.   Such is

especially so where, as here, the Secretary attempts to

circumvent longstanding judicial decisions that have arrived at

the plain meaning of a statute enacted decades before.    After

the passage of over a half of a century, during which the law on

this subject has remained settled and has been relied upon by

both taxpayers and the Government alike, it is simply wrong for

the Secretary to attempt to resurrect a failed litigating

position through the issuance of interpretative regulations.31


     30
      (...continued)
18 months after their due date. Indeed, the facts in support of
an allowance of deductions are even stronger here. While the
taxpayer in Anglo-Am. Direct Tea Trading Co. filed its returns
only after respondent discovered that the returns were overdue,
petitioner filed its returns before any contact from respondent.
     31
       Congress is the only body that may amend the relevant
text. Respondent makes no assertion that the Secretary ever
asked Congress to amend the text to change the holding of
Anglo-Am. Direct Tea Trading Co. v. 

, and its
progeny that the text does not include a timely filing
                                                  (continued...)
                              -85-

     We hold, contrary to respondent’s determination, that

section 882(c)(2) does not preclude petitioner from deducting

the expenses claimed on the subject returns.   We have considered

all arguments made by the parties as to the manner in which we

resolve this case and have found those arguments not discussed

herein to be without merit.


                                          Decision will be entered

                                     for petitioner.

     Reviewed by the Court.

     GERBER, COHEN, WELLS, COLVIN, VASQUEZ, GALE, THORNTON,
MARVEL, HAINES, GOEKE, WHERRY, and KROUPA, JJ., agree with this
majority opinion.

     CHIECHI and FOLEY, JJ., concur in result only.




     31
      (...continued)
requirement. Nor have we found that such was the case. Instead,
respondent invites this Court to take a fresh look at the
relevant text in the light of the disputed regulations, to reject
the judiciary’s almost 70-year-old interpretation of that text,
and to “incorporate [into the text] the timely filing concept as
embodied in the regulation”. Respondent asserts that not reading
a timely filing requirement into the statute “is administratively
unworkable * * * [in that it] would permit foreign taxpayers to
live off the U.S. fisc indefinitely, file their returns only when
20-20 hindsight suggests it is in their own best interests to do
so, and put the Service at an extreme disadvantage in performing
its statutory duties.” To say the least, such equitable
arguments are made more appropriately to Congress than to the
judiciary.
                               -86-

     SWIFT, J., dissenting:   For the reasons explained below, I

respectfully disagree with the majority opinion.

     (1) The majority opinion fails properly to distinguish the

pre-1990 “no-regulation environment” of the cited court opinions

from the environment or authority that came into existence upon

promulgation in 1990 of section 1.882-4(a)(2) and (3)(i) and

(ii), Income Tax Regs.

     With regard to such a change in the regulatory environment

applicable to a particular Federal law question, the Supreme

Court recently stated in Natl. Cable & Telecomm. Association v.

Brand X Internet Serv., 545 U.S.      , 

, 2700

(2005):


     allowing a judicial precedent to foreclose an agency from
     interpreting an ambiguous statute * * * would allow a
     court’s interpretation to override an agency’s. Chevron’s
     premise is that it is for agencies, not courts, to fill
     statutory gaps. * * * The better rule is to hold judicial
     interpretations contained in precedents to the same
     demanding Chevron step one standard that applies if the
     court is reviewing the agency’s construction on a blank
     slate: Only a judicial precedent holding that the statute
     unambiguously forecloses the agency’s interpretation, and
     therefore contains no gap for the agency to fill, displaces
     a conflicting agency construction. [Citing Chevron U.S.A.,
     Inc. v. Natural Res. Def. Council, Inc., 

, 843-
     844 n.11 (1984).]


     Based on this recent Supreme Court explanation in Natl.

Cable & Telecomm. Association of Chevron deference to be given

Federal agency regulatory authority, I do not believe that 1930s

and 1940s court opinions construing the predecessor of section
                               -87-

882(c)(2) preempted respondent’s regulatory authority to

promulgate in 1990 a specific administrative rule with regard to

section 882(c)(2).   See Chevron U.S.A., Inc. v. Natural Res.

Def. Council, Inc., 

, 843-844 (1984).

     In light of Natl. Cable, we should be focusing herein on an

analysis of the reasonableness of the filing deadline reflected

in section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs.,

as promulgated in 1990, vis-a-vis the filing deadline reflected

in the court opinions that had been extant for approximately 50

years.   The majority opinion’s analysis, see majority op. pp.

65-69, however, of the reasonableness of the 1990 regulation is

quite inadequate.

     For the reasons set forth in the discussion below, section

1.882-4(a)(2) and (3)(i) and (ii), Income Tax Regs., constitutes

a reasonable administrative rule promulgated by the Commissioner

and the Treasury Department and reasonably fills in a gap in the

statutory language of section 882(c)(2).

     (2) The 1930s and 1940s court opinions adopted and applied

a tax return filing deadline to the ability of foreign

corporations to qualify for deductions and credits under the

predecessor of section 882(c)(2).     The court opinions in Taylor

Sec., Inc. v. Commissioner, 

(1939); Ardbern Co. v.

Commissioner, 

(4th Cir. 1941), modifying and

remanding 

(1940); Blenheim Co. v. Commissioner,
                               -88-

(4th Cir. 1942), affg. 

(1940);

Georday Enters. v. Commissioner, 

(4th Cir. 1942),

affg. a Memorandum Opinion of the Board of Tax Appeals, clearly

clarified and modified Anglo-Am. Direct Tea Trading Co. v.

Commissioner, 

(1938), and adopted and applied a

tax return filing “deadline”, “timely filing date”, “cutoff”, or

“terminal date” (whatever one chooses to call it) to the

entitlement of foreign corporations to deductions and credits

under the predecessor of section 882(c)(2).

     As the Board of Tax Appeals explained in Taylor Sec., Inc.

v. 

at 703-704:


     In view of such a specific prerequisite [that foreign
     corporate taxpayers file tax returns] it is inconceivable
     that Congress contemplated by that section that taxpayers
     could wait indefinitely to file returns and eventually when
     the respondent determined deficiencies against them they
     could then by filing returns obtain all the benefits to
     which they would have been entitled if their returns had
     been timely filed. Such a construction would put a premium
     on evasion, since a taxpayer would have nothing to lose by
     not filing a return as required by statute.


     In light of the above 1939 clarification by the Board of

Tax Appeals to its earlier 1938 opinion arguably to the contrary

in Anglo-Am. Direct Tea Trading 

, it is Taylor Sec.,

Inc., not Anglo-Am., that is to be regarded as the lead pre-

regulation court case.   See Blenheim Co. v. 

at 910, in which the Court of Appeals for the Fourth Circuit

acknowledges that it is Taylor Sec., Inc. that (in spite of the
                              -89-

prior Anglo-Am. opinion) first adopted a foreign corporation tax

return “terminal date” or filing deadline (for purposes of

allowing deductions and credits to foreign corporations).

     Thus, for more than 50 years, prior to 1990 when the

regulation in issue herein was promulgated and since the 1939

issuance of the opinion of the Board of Tax Appeals in Taylor

Sec., Inc., section 882(c)(2) and its predecessor were

interpreted and were held by Federal courts to be unclear and

incomplete as to the above corporate filing deadline, and the

courts recognized the need for and applied such a deadline.   As

the Court of Appeals for the Fourth Circuit stated explicitly in

Blenheim Co. v. 

at 908:


     It is true that this section contains no reference to a
     time element. Nevertheless, we feel that the so-called
     normal tax return filed by petitioner on Form 1120 was not
     a sufficient or timely compliance with Section 233 [the
     predecessor of section 882(c)(2)] to entitle the petitioner
     to the deductions claimed therein. * * *


     The above “judicially recognized need” for a foreign

corporate filing deadline (for purposes of allowing deductions

and credits under section 882(c)(2) and its predecessor)

provides perhaps the strongest support for the conclusion that

the regulation in issue is reasonable (i.e., the regulation

simply reflects the attempt by respondent and by the Treasury

Department to address via a formally promulgated regulation the
                               -90-

same need the courts addressed in Taylor Sec., Inc. v.

, and its progeny).

     (3) The majority opinion’s description of section 1.882-

4(a)(2) and (3)(i), Income Tax Regs., as simply a reflection of

respondent’s “unsuccessful litigating position”, majority op.

p. 63, is inaccurate, which inaccuracy perhaps is explained by

the failure of the majority opinion to consider the specifics of

the filing deadline set forth in the regulation.

     Although it early on, see majority op. note 4, sets forth

the language of section 1.882-4(a)(3)(i), Income Tax Regs., the

majority opinion provides only two single-sentence, general

explanations of the filing deadline set forth therein, see

majority op. pp. 5, 48, and nowhere does the majority opinion

attempt to compare the filing deadline that was adopted and

applied by Taylor Sec., Inc. and its progeny with the specifics

of the filing deadline set forth in the regulation.

     In that regard, the following explanation of the specifics

of the filing deadline set forth in section 1.882-4(a)(2) and

(3)(i), Income Tax Regs., may be helpful.

     Section 1.882-4(a)(2) and the first sentence of (3)(i),

Income Tax Regs., explains that the “timely filing” deadline set

forth therein applies only in determining a foreign

corporation’s entitlement to deductions and credits under

section 882(c)(2).   It does not constitute a generic timely
                               -91-

filing deadline that applies to foreign corporations under other

provisions of the Code.   For example, the timely filing deadline

of the above regulation does not apply for purposes of section

6072(c).

     Section 1.882-4(a)(3)(i), Income Tax Regs., then proceeds,

for purposes of allowing deductions and credits under section

882(c)(2) for a current taxable year, to divide foreign

corporations required to file Federal tax returns into two

categories:   First, those that for the prior taxable year filed

an income tax return (and those for which the current taxable

year is the taxpayers’ first taxable year for which a Federal

tax return is required) (category 1 corporation) and, second,

those that for the prior taxable year were required to but did

not file a Federal tax return (category 2 corporation).

      For purposes of allowing deductions and credits under

section 882(c)(2) for the current year, section 1.882-

4(a)(3)(i), Income Tax Regs., provides that for a category 1

corporation (prior year tax return filed or first year tax

return required) the filing deadline for the current taxable

year is a fixed 18 months after the due date for the current

year tax return.   Where, prior to the filing by a category 1

corporation of its current year tax return within this 18-month

period, respondent notifies the corporation (that no tax return

has been filed for the current year and that no deductions or
                               -92-

credits under section 882(c)(2) will be allowed), the 18-month

filing deadline set forth in the regulation represents a

lengthening of the return filing deadline that would have

applied under Taylor Sec., Inc. v. Commissioner, 

(1939), and its progeny (under which respondent’s prior

notification would have established the deadline).

     Where a category 1 corporation files its tax return for the

current year after the 18-month period, but before respondent

notifies the taxpayer, the fixed 18-month filing deadline of the

regulation would apply, and the regulation represents a

shortening of the filing deadline that would have applied under

Taylor Sec., Inc. and its progeny.

     For purposes of allowing the deductions and credits under

section 882(c)(2) for the current year for a category 2

corporation (tax return for the prior year not filed), section

1.882-4(a)(3)(i), Income Tax Regs., provides that a foreign

corporation must file its tax return for the current year before

the earlier of either respondent’s notification to the

corporation (that no tax return has been filed for the current

year and that no deductions or credits under section 882(c)(2)

will be allowed) or 18 months after the due date for the current

year tax return.   Where respondent so notifies a category 2

corporation within the specified 18-month period, this filing
                              -93-

deadline constitutes the same filing deadline as would have

applied under Taylor Sec., Inc. and its progeny.

     For a category 2 corporation that files its tax return

after the 18-month period but before respondent notifies the

taxpayer, the 18-month filing deadline of the regulation would

apply, and the regulation represents a shortening of the filing

deadline that would have applied under Taylor Sec., Inc. and its

progeny.

     In effect, the filing deadline set forth in section 1.882-

4(a)(3)(i), Income Tax Regs., significantly incorporates and

reflects aspects of the filing deadline of Taylor Sec., Inc. and

its progeny, but it shortens that deadline to no later than 18

months after the due date of the current year tax return, and it

lengthens that deadline to 18 months after the tax return due

date for a foreign corporation that filed a tax return for the

prior year and that received notification from respondent prior

to filing its tax return.1

     As is evident, contrary to the majority opinion’s

contention that section 1.882-4(a)(2) and (3)(i), Income Tax


     1
        I regard the notification to foreign corporations
described in sec. 1.882-4(a)(3)(i), Income Tax Regs. (that no tax
return has been filed for the current year and that no deductions
or credits under sec. 882(c)(2) will be allowed), as not
materially different from the notification mentioned in Taylor
Sec., Inc. v. Commissioner, 

(1939), and its progeny
(that respondent has prepared a substitute tax return or issued a
notice of deficiency in which a corporation’s deductions and
credits under sec. 882(c)(2) were not allowed).
                                -94-

Regs., “simply adopts respondent’s unsuccessful litigating

position”, majority op. p. 63, or seeks to “resurrect * * *

[respondent’s] failed litigating position”, majority op. p. 84,

the regulation in issue incorporates significant aspects of the

judicially crafted filing deadline that was in effect for many

years prior to 1990.

     It would seem obvious that the increased number of foreign

corporation Federal income tax returns filed with respondent in

today’s world (as distinguished from the 1930s when the cases

relied on by the majority opinion were decided) and the

increasingly complex tax laws and tax administration applicable

thereto would support, per se, respondent’s effort, by properly

promulgated regulation, to modify and clarify, in the above

modest manner, the return filing deadline that has been

applicable to foreign corporations.

     Further, it is appropriate to emphasize that the regulation

at issue herein provides in subdivision (ii) of section 1.882-

4(a)(3), Income Tax Regs., a good cause, facts and circumstances

exception to the return filing deadline otherwise applicable

under section 1.882-4(a)(3)(i), Income Tax Regs.   This aspect of

the 1990 regulation is consistent with the facts and

circumstances filing deadline that was applied by the Court of

Appeals for the Fourth Circuit in Ardbern Co. v. Commissioner,

(4th Cir. 1941).
                               -95-

     Lastly on this point, in 1938 respondent’s litigating

position in Anglo-Am. Direct Tea Trading Co. v. Commissioner, 

(1938), was that the return filing deadline for

purposes of the predecessor of section 882(c)(2) was the same as

the statutory due date for filing foreign corporation tax

returns.   By 1941, if not earlier, respondent’s litigating

position had changed, and respondent was conceding that foreign

corporation tax returns filed late but before respondent’s

notification to foreign corporations would be considered timely

under the predecessor of section 882(c)(2).   See Ardbern Co. v.

at 426.

     In summary on this point, the filing deadline reflected in

section 1.882-4(a)(3)(i) and (ii), Income Tax Regs.,

incorporates significant aspects of the judicially crafted

foreign corporation tax return filing deadline and is quite

different from respondent’s original litigating position in 1938

in Anglo-Am. Direct Tea Trading Co.

     (4) The majority opinion, see majority op. p. 77, suggests

that section 1.882-4(a)(2) and (3)(i), Income Tax Regs., is

inconsistent with the Treasury regulation promulgated in 1957;

namely, sec. 1.882-4, Income Tax Regs.   To the contrary, the

1957 regulation was silent as to any tax return filing deadline

under section 882(c)(2); just as section 882(c)(2) is silent

still today as to any such deadline.   Section 1.882-4(a)(2) and
                              -96-

(3)(i) and (ii), Income Tax Regs., thus fills a gap not only in

the language of section 882(c)(2), but also in the language of

the 1957 regulation; just as Taylor Sec., Inc. and its progeny

filled a gap in the language of the predecessor of section

882(c)(2).

     (5) In its discussion of the legislative reenactment

doctrine, see majority op. pp. 69-74, the majority opinion

ignores a significant limitation on the legislative reenactment

doctrine as follows:


     [The legislative reenactment doctrine] does not apply where
     nothing indicates that the legislature had its attention
     directed to the administrative interpretation upon
     reenactment. [2B Singer, Sutherland Statutory Construction
     § 49:09 (6th ed. 2000).]


     In this case, in reenacting section 882(c)(2) and its

predecessor, no evidence indicates that Congress had “its

attention directed” to any of the 1930s and 1940s court opinions

involving a deadline for foreign corporations to file their tax

returns in order to preserve deductions and credits under the

predecessor of section 882(c)(2).    Absent such evidence, any

application herein of the legislative reenactment doctrine would

be inappropriate.2




     2
        A vague statement in one of respondent’s briefs that
Congress “was aware of” the early Board of Tax Appeals and other
court opinions is puzzling and ambiguous.
                              -97-

     As the Court of Appeals for the Seventh Circuit explained

in Bell Fed. Sav. & Loan Association v. Commissioner, 

, 230 (7th Cir. 1994), revg. T.C. Memo. 1991-368:


     However, neither * * * [the taxpayer] nor the tax court has
     pointed to any occasion when Congress even mentioned the
     old--or new--regulation. This fact is important to the
     workings of the re-enactment doctrine for a relevant factor
     in a court’s review is “the degree of scrutiny Congress has
     devoted to the regulation during subsequent re-enactments
     of the statute.” * * * [Citing National Muffler Dealers
     Assoc., Inc. v. United States, 

, 477 (1979).]
     The regulations and statutes involved in this area are too
     complex for us to venture to assume Congress’s intent
     through its silence. Therefore, we choose to not second-
     guess the Treasury on this matter. The Sixth Circuit was
     correct when it stated:

          The re-enactment doctrine is merely an interpretive
          tool fashioned by the courts for their own use in
          construing ambiguous legislation. It is most useful
          in situations where there is some indication that
          Congress noted or considered the regulations in effect
          at the time of its action. Otherwise, the doctrine
          may be as doubtful as the silence of the statutes and
          legislative history to which it is applied. * * *
          [Quoting Peoples Fed. Sav. & Loan Association v.
          Commissioner, 

, 302-303 (6th Cir. 1991),
          revg. T.C. Memo. 1990-129.]


     We also have applied this particular limitation to the

legislative reenactment doctrine.    In Ashland Oil, Inc. v.

Commissioner, 

, 363 (1990),3 we refused to apply the


     3
        We also have stated that, “we do not believe that the
legislative reenactment doctrine can be applied to bar reasonable
amendments to regulations where * * * the change is made only
prospectively from the date of the announcement of the proposed
change.” Wendland v. Commissioner, 

, 384 (1982),
affd. sub nom. Redhouse v. Commissioner, 

(9th Cir.
                                                   (continued...)
                                 -98-

legislative reenactment doctrine to a revenue ruling because

“Without affirmative indications of congressional awareness and

consideration, we decline to cloak this revenue ruling with the

aura of legislative approval.”

     (6) Finally, rather than expressing sympathy for

petitioner, see majority op. pp. 68, 72-74, whose Federal income

tax returns were due on November 15 of each year, the fact that

petitioner filed each of its 1993, 1994, 1995, and 1996 Federal

corporate income tax returns on July 23, 1999, some 2-5 years

after the return due dates and 9 years after section 1.882-

4(a)(2) and (3)(i), Income Tax Regs., was promulgated is hardly

indicative of a foreign corporation seeking to comply with U.S.

tax laws.

     In conclusion, it is not respondent herein who is

attempting to resurrect anything, see majority op. p. 84.

Rather, it is the majority opinion that would resurrect Anglo-

Am. Direct Tea Trading Co. v. Commissioner, 

(1938), and that would ignore later Board of Tax Appeals and

Court of Appeals opinions and litigation that concluded that the

statutory language of the predecessor of section 882(c)(2) was

incomplete and ambiguous and necessitated the adoption and



     3
      (...continued)
1984). Note the prospective only effective date of the
regulation at issue herein, for taxable years ending after July
31, 1990. Sec. 1.882-4(a)(3)(i), Income Tax Regs.
                              -99-

application by the courts of a foreign corporation filing

deadline for purposes of the predecessor of section 882(c)(2).

     Section 1.882-4(a)(2) and (3)(i) and (ii), Income Tax

Regs., reflects the Commissioner’s and the Secretary’s

consistent and similar conclusion.   The specific foreign

corporation tax return filing deadline that is reflected in the

regulation incorporates aspects of the judicially crafted

deadline, is flexible to take into account unusual situations,

but also is modestly tightened up to reflect updated tax

administration concerns relating to foreign corporate tax

compliance.

     For the reasons stated, I respectfully dissent from this

Opinion which invalidates section 1.882-4(a)(2) and (3)(i),

Income Tax Regs.

     HOLMES, J., agrees with this dissenting opinion.
                                 -100-

      HALPERN, J., dissenting:

I.   Introduction

      This case involves the deference (if any) that we must show

the Secretary of the Treasury’s (Secretary’s) construction of

the Internal Revenue Code.    The majority holds that we need show

no deference to the Secretary’s construction found in section

1.882-4(a)(2) and (3)(i), Income Tax Regs., imposing a timely

filing requirement on foreign corporations.   It holds the

regulation to be invalid.    I disagree.

      In Chevron, U.S.A., Inc. v. Natural Res. Def. Council,

Inc., 

, 842-843 (1984), the Supreme Court set forth

a sequential approach for determining whether an agency’s

construction of a statute it administers should be given

deference:

      First, always, is the question whether Congress has
      directly spoken to the precise question at issue. If
      the intent of Congress is clear, that is the end of
      the matter; for the court, as well as the agency, must
      give effect to the unambiguously expressed intent of
      Congress. * * * [I]f the statute is silent or
      ambiguous with respect to the specific issue, the
      question for the court is whether the agency’s answer
      is based on a permissible construction of the statute.

omitted).   That approach was reaffirmed by the

Supreme Court in Atl. Mut. Ins. Co. v. Commissioner, 

, 389 (1998) (a case involving the validity of an income tax

regulation), in which, with respect to the second question, the

Court added the admonition:    “[T]he task that confronts us is to
                              -101-

decide, not whether the Treasury Regulation represents the best

interpretation of the statute, but whether it represents a

reasonable one.   See Cottage Savings Assn. v. Commissioner, 

, 560-561 (1991).”

     Accordingly, the questions in the instant case are: (1)

Whether, in denying a foreign corporation an allowance for

deductions and credits (without distinction, deductions) unless

the foreign corporation files a true and accurate income tax

return within the time limits set forth in section 1.882-4(a)(2)

and (3)(i), Income Tax Regs., the Secretary has contradicted the

unambiguously expressed intent of Congress; and, if that cannot

be said, (2) whether the time limits imposed by the Secretary

constitute a permissible construction of section 882(c)(2).

     Before proceeding, it may be helpful to establish some

terminology regarding the time for filing returns.   I find the

majority’s use of the term “timely” confusing.   For example, on

page 4 of its report, the majority uses the term “timely” to

mean both a return filed on or before the due date established

by section 6072 (see note 3) and a return filed after the due

date but before the “arbitrary 18-month deadline * * * devised

by the Secretary.”   I use the term “on-time” to describe a

return filed on or before the date established by the relevant

provision of a statute and the term “timely” to describe a

return filed after that date but before some date after which
                               -102-

the filing would be considered untimely (e.g., the “terminal

date” described by the Court of Appeals for the Fourth Circuit

in Blenheim Co. v. Commissioner, 

, 910 (4th Cir.

1942), affg. 

(1940)).

II.   First Question: Has Congress Directly Spoken to the
      Precise Question at Issue?

      If a foreign corporation files its income tax return on or

before the due date prescribed in section 6072(c), the return is

on-time.   Moreover, no provision of subtitle F deprives a

foreign corporation of the benefit of deductions claimed on a

return simply because the return was not on-time.      Indeed, in

Anglo-Am. Direct Tea Trading Co. v. Commissioner, 

(1938), our predecessor, the Board of Tax Appeals (the Board),

held that section 233 of the Revenue Act of 1928, ch. 852, 45

Stat. 849 (a precursor to section 882(c)(2)), could not be read

to make an on-time return a prerequisite to a foreign

corporation’s having the benefit of deductions to which it was

otherwise entitled:    “[I]f Congress had intended to deprive a

foreign corporation of its right to * * * [a deduction] if it

did not file its return within the time prescribed, we think it

would have said so.”    

(emphasis added).    Thereafter,

however, both the Board and the Court of Appeals for the Fourth

Circuit acknowledged that the allowance of deductions to a

foreign corporation was a privilege, which should be terminated

at some point to assure the proper administration of the income
                               -103-

tax.    Georday Enters. v. Commissioner, 

, 388 (4th

Cir. 1942), affg. a B.T.A. Memorandum Opinion; Blenheim Co. v.

at 909-910; Ardbern Co. v. Commissioner, 

(4th Cir. 1941), modifying and remanding 

(1940); Taylor Sec., Inc. v. Commissioner, 

, 703

(1939).

       In Blenheim Co. v. 

at 908, the Court of

Appeals did state that section 233 of the Revenue Act of 1934,

ch. 277, 48 Stat. 737, “contains no reference to a time

element.”    It found, however, that the return filed by the

taxpayer was “[n]evertheless * * * not a sufficient or timely

compliance with Section 233 to entitle the petitioner to the

deductions claimed therein.”    

  It held

that, in subjecting foreign corporations to section 233 of the

1934 Act, “Congress conditioned its grant of deductions upon the

timely filing of true, proper and complete returns.”     

(emphasis added).

       In Taylor Sec., Inc. v. 

, the Board

concluded that, once the Commissioner determined a deficiency in

tax, a taxpayer could not avoid the effect of section 233 by

thereafter filing a return.    The Board stated:

       [W]e are unable to conclude that in enacting section
       233 * * * it was the intention of Congress that
       delinquent returns filed by a foreign corporation
       after the respondent's determination should constitute
       the returns required as a prerequisite to the
       allowance of the credits and deductions ordinarily
                               -104-

     allowable to the corporations. * * * In view of such
     a specific prerequisite it is inconceivable that
     Congress contemplated by that section that taxpayers
     could wait indefinitely to file returns and eventually
     when the respondent determined deficiencies against
     them they could then by filing returns obtain all the
     benefits to which they would have been entitled if
     their returns had been timely filed. Such a
     construction would put a premium on evasion, since a
     taxpayer would have nothing to lose by not filing a
     return as required by statute.

     More recently, in Espinosa v. Commissioner, 

(1996), the issue was whether untimely returns filed by a

nonresident alien individual were sufficient to avoid the

disallowance of deductions under section 874(a) (which contains

language virtually identical to the language in question in

section 882(c)(2)).   We upheld the disallowance of deductions

under section 874(a), concluding:

     [W]hile sections 874(a) and 882(c)(2) contain no
     explicit time limit, the policy behind these
     provisions, as applied by the case law, dictates that
     there is a cut-off point or terminal date after which
     it is too late to submit a tax return and claim the
     benefit of deductions. If no cut-off point existed,
     taxpayers would have an indefinite time to file a
     return, and these provisions would be rendered
     meaningless. * * *

(emphasis added).

     As the above discussion suggests, no case has said that

section 822(c)(2) does not (or its precursors did not) make

timely filing a prerequisite to receiving the benefit of

deductions.   Nor does the body of cases discussing section
                               -105-

822(c)(2) and its precursors provide guidance of general

applicability concerning timeliness; it merely resolves issues

created by unique fact patterns on a case-by-case basis.

Although those cases do not unambiguously establish the limits

of timeliness, they clearly establish that timely filing is

required.    Those cases treat section 882(c)(2) as if it were

incomplete:    Timeliness is required, but timeliness is not

defined.    Timeliness is anchored by section 6072 to the date

required for filing the return, but neither section 882(c)(2)

nor any other provision of the Code tells us when the line runs

out.    This case does not involve the question of whether a line

can be drawn to enforce section 882(c)(2); that has already been

decided in the affirmative.    This case involves the question of

who gets to draw the line: the courts or the Secretary?    The

clearly expressed intent of Congress to the contrary not being

apparent, the Secretary is not deprived of his authority under

section 7805(a) to draw that line (i.e., to establish needful

rules and regulations for the enforcement of section 882(c)(2)).

III.    Second Question: Is the Secretary’s Regulation Based on a
        Permissible Construction of the Statute?

       Having reached the second step in our sequential analysis,

the question that we must answer is whether the timely filing

rule found in section 1.882-4(a)(2) and (3)(i), Income Tax

Regs., is based on a permissible construction of the statute.
                              -106-

In Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 

-844, the Supreme Court said:

     If Congress has explicitly left a gap for the agency
     to fill, there is an express delegation of authority
     to the agency to elucidate a specific provision of the
     statute by regulation. Such legislative regulations
     are given controlling weight unless they are
     arbitrary, capricious, or manifestly contrary to the
     statute. Sometimes the legislative delegation to an
     agency on a particular question is implicit rather
     than explicit. In such a case, a court may not
     substitute its own construction of a statutory
     provision for a reasonable interpretation made by the
     administrator of an agency. [Fn. refs. omitted.]

     Section 882(c)(2) does not specifically make the allowance

of deductions to a foreign corporation contingent on a timely

filed return, nor does it grant the Secretary express authority

to prescribe regulations defining timeliness for purposes of

section 882(c).   In promulgating section 1.882-4(a)(2) and

(3)(i), Income Tax Regs., the Secretary exercised his rulemaking

authority under section 7805(a), which gives the Secretary

general authority to "prescribe all needful rules and

regulations for the enforcement" of the Internal Revenue Code.

See T.D. 8322, 1990-2 C.B. 172.1   The appropriate standard for



     1
        In Boeing Co. v. United States, 

, 448 (2003),
the Supreme Court said of another Treasury regulation issued
under the authority of sec. 7805(a): “Even if we regard the
challenged regulation [sec. 1.861–8(e)(3) (1979), Income Tax
Regs.] as interpretive because it was promulgated under §
7805(a)'s general rulemaking grant rather than pursuant to a
specific grant of authority, we must still treat the regulation
with deference. See Cottage Savings Assn. v. Commissioner, 

, 560-561 (1991).”
                              -107-

determining whether section 1.882-4(a)(2) and (3)(i), Income Tax

Regs., is based on a permissible construction of section

882(c)(2) is whether it represents a “reasonable” interpretation

of that section.   See Atl. Mut. Ins. Co. v. 

.2

     To be more specific, we must determine whether the 18-month

limitation found in section 1.882-4(a)(3), Income Tax Regs., is

reasonable, since the otherwise applicable filing limitation

found in section 1.882-4(a)(2) and (3)(i), Income Tax Regs.,

construes the statute in a similar (indeed, in a more generous)

manner than the courts have construed it.    See Judge Swift’s

dissent p. 90.   I have already quoted our report in Espinosa v.

, to the effect that the policy behind

section 882(c)(2) implies a cutoff point or terminal date after

which it is too late to submit a tax return and claim the

benefit of deductions.   The question is thus one of line

drawing, and the majority has failed to convince me that the

line drawn by the Secretary is unreasonable.    Judges Holmes and

Swift have adequately dealt with the majority’s conclusion to

the contrary, and I have nothing to add.    I also fully join



     2
        I am not ready to join Judge Holmes in concluding that,
in United States v. Mead Corp., 

(2001), the Supreme
Court “clarified the law, by conflating the standard of
‘reasonableness’ with the standard of ‘arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.’”
Judge Holmes’s dissent p. 141.
                              -108-

Judge Holmes’s criticism of the majority’s distinction of Natl.

Cable & Telecomm. Association. v. Brand X Internet Servs., 545

U.S. __, 

(2005).   Since we are faced here with a

question of line drawing, the Secretary’s reasonably drawn line

necessarily supersedes the line drawn by any court.     See Natl.

Cable & Telecomm. Association, supra at 2700.

IV.   Conclusion

      For the reasons stated, I would uphold section 1.882-

4(a)(2) and (3)(i), Income Tax Regs., as a reasonable exercise

of the Secretary’s authority under section 7805(a) to draw

lines.

      SWIFT, J., agrees with this dissenting opinion.
                               -109-
     HOLMES, J., dissenting:   The issue in this case is easy to

understand.   Section 882(c)(2) denies foreign corporations that

have U.S. income the benefit of the deductions and tax credits

they would otherwise get if they fail to file returns “in the

manner prescribed by subtitle F.”      Section 6072--which is part

of the Code’s subtitle F--imposes a time limit for filing

foreign corporate returns.   Before 1990, courts had construed

the phrase in section 882(c)(2)--“in the manner prescribed by

subtitle F”--as meaning neither “foreign corporations must file

their returns by the deadline set in section 6072" nor “foreign

corporations have till the end of time to file,” but rather that

“foreign corporations have only until the Secretary, after a

reasonable time, prepares a substitute return.”      The regulation

that we invalidate today replaced the old “reasonable time

standard” with an 18-month grace period1 beyond section 6072's

deadline, and replaced the preparation of a substitute return

with a written notice.   The 18-month grace period might be

shorter or longer than the old judicially-constructed one.      It

is undeniably more definite.




     1
       As Judge Swift carefully explains, see dissent supra pp.
90-93, the disputed regulation is fairly complex and establishes
a number of exceptions to the general 18-month rule; for
simplicity’s sake, I refer to the regulation as creating an 18-
month grace period.
                              -110-

     Upholding this regulation should be almost trivially easy.

“So long as the Commissioner issues regulations that ‘implement

the congressional mandate in some reasonable manner,’ * * * we

must defer to the Commissioner’s interpretation.   Only if the

code has a meaning that is clear, unambiguous, and in conflict

with a regulation does a court have the authority to reject the

Commissioner’s reasoned interpretation and invalidate the

regulation.”   Redlark v. Commissioner, 

, 939 (9th

Cir. 1998), revg. 

(1996).   For the Secretary to

issue a regulation giving a clear 18-month grace period doesn’t

contradict anything in the Code, at least anything clearly and

unambiguously in the Code.2


     2
       Our Court has met with limited success in finding
regulations unreasonable after the extensive review of the sort
we do today. See Pac. First Fed. Sav. Bank v. Commissioner, 

(1990) (invalidating sec. 1.593-6(b)(1)(iv), Income Tax
Regs. after plenary review of statute and legislative history),
revd. 

, 805 (9th Cir. 1992) (“we cannot usurp the
Treasury’s authority and invalidate the regulation unless it is
an unreasonable construction”), disagreed with by Peoples Fed.
S&L v. Commissioner, 

, 300 (6th Cir. 1991) (“a court
may not substitute its own construction for the reasonable
interpretation of an agency”), disagreed with again by Bell Fed.
Sav. & Loan Association v. Commissioner, 

,227 (7th
Cir. 1994), revg. T.C. Memo. 1991-368 (“choice among reasonable
interpretations is for the Commissioner, not the courts”), and
finally abrogated, Cent. Pa. Sav. Association & Subs. v.
Commissioner, 

(1995); see also Redlark v.
Commissioner, 

(1996) (invalidating sec. 1.163-
9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409
(Dec. 22, 1987) after plenary review of statute and legislative
history), revd. 

(9th Cir. 1998) (using language
quoted in text above), disagreed with by Allen v. United States,
                                                   (continued...)
                                -111-

     I respectfully dissent, because today’s opinion lays down

new and misleading trails through three different parts of the

jungle of administrative law:

     !    It misapplies the plain meaning rule;

     !    It greatly extends the doctrine of legislative
          reenactment to overturn a regulation; and

     !    It rejects the recent teaching of the Supreme
          Court in Brand-X3 on the necessity of deferring
          to an administrative agency’s decision to issue a
          regulation overturning caselaw.

     I also write separately to highlight what I think is a

serious confusion in the appropriate way we should review

regulations that have gone through notice-and-comment

rulemaking, especially those that change existing law.   Much of

the majority’s exhaustive recitation of the history of section

882 and its regulation arises from the different factors that we




     2
      (...continued)

(4th Cir. 1999) (regulation need not be “best
possible means of implementing the statute” if it’s reasonable),
and disagreed again with Kikalos v. Commissioner, 

,
796-797 (7th Cir. 1999), revg. T.C. Memo. 1998-92 (“[i]t is not
our role to determine the most appropriate interpretation of the
statute, but simply to assess whether the regulation reflects a
reasonable construction”), and finally abrogated, Robinson v.
Commissioner, 

(2002).
     3
       Natl. Cable & Telecomm. Assn. v. Brand X Internet Servs.,
546 U.S. ___, 

(2005).
                                -112-

use in applying National Muffler4 compared to Chevron.5      This

case may therefore be a good vehicle for appellate guidance on

whether National Muffler continues to be in good working order

after Chevron, Mead,6 and Brand X.

                                 I.

     The majority begins its analysis, as I agree we should,

with the question of whether section 882's phrase “in the manner

prescribed by subtitle F” has an unambiguous meaning.     Whether

National Muffler or Chevron applies, there is no doubt that if

Congress has spoken on the issue, no regulation in conflict can

survive.    “If the intent of Congress is clear, that is the end

of the matter; for the court, as well as the agency, must give

effect to the unambiguously expressed intent of Congress.”

; see also National 

.

     But what materials should a court look at to decide whether

a statutory phrase is unambiguous?      The answer is in Natl. R.R.

Passenger Corp. v. Boston & Maine Corp., 

, 417

(1992) (citations omitted):    “a court must look to the structure


     4
       National Muffler Dealers Assn., Inc., v. United States,

(1979).
     5
       Chevron U.S.A., Inc., v. Natural Resources Defense
Council, Inc., 

(1984).
     6
         United States v. Mead Corp., 

(2001).
                              -113-

and language of the statute as a whole.   If the text is

ambiguous and so open to interpretation in some respects, a

degree of deference is granted to the agency.”7

     The majority crane their necks away from the actual words

of section 882 and its place in the Code to look at whether the

regulation “adopts respondent’s unsuccessful litigating

position, with total disregard for judicial precedent,” majority

op. p. 63, and at the legislative reenactment doctrine, majority

op. p. 62 note 18.   As I discuss later on, these factors are

only relevant, if at all, in reviewing a regulation based on a

text that we’ve already found to be ambiguous.    The majority’s

strongest point, though, is their cataloging of the various

times in the Code where a phrase like “at the time and in the

manner prescribed” appears.   The absence of the first part of

the phrase, they reason, means that the second part--“in the

manner prescribed” has no “time element” because Congress must



     7
       Whether a court should look to the text alone in deciding
if a statute is ambiguous, as in Natl. R.R. Passenger, or to the
text plus legislative history, as Chevron implies, see 

, is a matter of some controversy. See Coke v.
Long Island Care at Home, Ltd., 

, 127 n.2 (2d Cir.
2004) (collecting cases); see also Tax Analysts v. Commissioner,

, 103-104 (D.C. Cir. 2003); Hosp. Corp. of America &
Subs. v. Commissioner, 

, 144 (6th Cir. 2003) affg.

(1996). It doesn’t matter in this case because the
legislative history of section 882 shows no congressional intent
one way or the other about when a foreign corporation must file
its return to avoid loss of deductions. See infra p. 122.
                                -114-

have known what it was doing when it included “manner” and left

out “time”.     Majority op. pp. 58-60.   They conclude:

             We understand that use [i.e., of the word
             “manner”] to refer to items of information
             and not to refer to the time for the filing
             of a return or the furnishing of any other
             document. We conclude that Congress, by
             using only the word “manner” in section
             882(c)(2), did not intend to include in that
             provision any element of time.* * *

Majority op. pp. 61-62.8

     This was also more or less the reasoning of our

predecessor, the Board of Tax Appeals, in Anglo-Am. Direct Tea

Trading Co. v. Commissioner, 

(1938).         But there

are at least two problems with this reasoning.      The first is

that, as is usually the case with a statute as old and overgrown

as the Code, there are counterexamples of the use of the word

“manner.”    Consider, for example, section 179(c).    This section

gives small businesses the option of expensing capital

purchases.    Such an election “shall be made in such manner as

the Secretary may by regulations prescribe.”      He prescribed such



     8
       The Code governs the “place” of filing returns as well as
their “time” and “manner.” Part VII of subtitle F has detailed
rules, which the IRS has supplemented with extensive regulations.
Treas. Regs. 1.6091-1, 20.6091-1, 25.6091-1, 31.6091-1, 40.6091-
1, 41.6091-1, 44.6091-1, 53.6091-1, 55.6091-1, 156.6091-1,
157.6091-1T, 301.6091-1, 1.6091-2, 1.6091-3, 1.6091-4. Given
today’s narrow reading of “manner prescribed under subtitle F,”
we may someday have to decide whether a return that a foreign
corporation intentionally sends astray could trigger a loss of
deductions.
                              -115-

a regulation, sec. 1.179-5(a), Income Tax Regs., and it

restricts the time in which a taxpayer can make this election,

given the practical needs of a tax system based on periodic

returns.   The same is true of elections by a reciprocal insurer

under section 835(c)(2), which requires a consent “in such

manner as the Secretary shall prescribe.”   The Secretary

prescribed the manner in a regulation, which again requires

filing of such consents by a particular time.   See sec. 1.826-

1(c), Income Tax Regs.

     This is hardly surprising.   While I agree that we should

always construe the words of a statute to have their original

public meaning, it is also true that we can--indeed, we should--

recognize that even tax statutes are written against a

background of common law legal usage.   And it is generally the

case that when a legal instrument omits explicit time limits to

do something permitted or required, it does not ordinarily mean

that there are no time limits at all.   See 1 Restatement,

Contracts 2d, sec. 41 (1981); 1 Corbin, Corbin on Contracts,

sec. 2.16 at 203 (1993) (“[i]f the offeror has not communicated

a specific time limit with sufficient definiteness, the power of

acceptance by the offeree continues for a reasonable time * * *

[w]hat is a reasonable time, in any case, is a question of fact

to be determined by a consideration of all the circumstances

existing when the offer [is made]”); e.g., Staples v. Pan-Am.
                               -116-

Wall Paper & Paint Co., 

, 702 (3d Cir. 1933) (as

offer “contained no time limitation for acceptance, it was

incumbent upon the plaintiff to accept within a reasonable

time”); Minneapolis & St. Louis R.R. Co. v. Columbus Rolling-

Mill Co., 

, 151 (1886) (“[i]f the offer does not

limit the time for its acceptance, it must be accepted within a

reasonable time”).

     I’m not saying that we need to canvass contract law to

construe the Code, only suggesting that the observation that

Congress used the word “manner” without specifying “time” is not

the end of the argument.    The context in which the word occurs

suggests that imputation of a reasonable time limit is not a

departure from the ordinary legal meaning of the word--any more

than imputation of a reasonable delivery time in a contract for

delivery of specified goods, 1 Restatement, Contracts 2d sec. 33

(1981), or imputation of a reasonable time for closing a

conveyance of property, 1 Restatement, Property (Mortgages) 3d

sec. 7.2 (1997) would be.    And before today, I knew of no place

in the Code where a Court has held that “manner” without “time”

means “anytime at all.”

     The reason for imputing some time limits on filing returns

or making elections is one of practical necessity.    And this is

where the majority’s invocation of Anglo-American is so

unintentionally radical, because the second problem with its
                                -117-

discussion of the plain meaning of “manner” is that it

misunderstands the import of the many opinions from the 1930s

and 1940s that in effect did set a filing deadline for foreign

corporations if they wanted to qualify for deductions and other

credits.   The BTA’s opinion in Taylor Securities Inc. v.

Commissioner, 

(1939), and the opinions of the

Fourth Circuit in Ardbern Co. v. Commissioner, 

(4th

Cir. 1941), modifying and remanding 

(1940);

Blenheim Co. v. Commissioner, 

(4th Cir. 1942),

affg. 

(1940); and Georday Enterprises v.

Commissioner, 

(4th Cir. 1942), all disagreed with a

reading of Anglo-American as disallowing any limits on late

filing.

     As the Board of Tax Appeals explained in Taylor Securities:

           In view of such a specific prerequisite [that
           foreign corporate taxpayers file tax returns]
           it is inconceivable that Congress contemplated
           by that section that taxpayers could wait
           indefinitely to file returns and eventually
           when the respondent determined deficiencies
           against them they could then by filing returns
           obtain all the benefits to which they would
           have been entitled if their returns had been
           timely filed. Such a construction would put a
           premium on evasion, since a taxpayer would have
           nothing to lose by not filing a return as
           required by 

.

     The Fourth Circuit recognized long ago that Taylor

Securities was an innovation.    

.   It is
                                -118-

therefore Taylor Securities, not Anglo-American that was--until

today, at least--the controlling pre-regulation case.     And Taylor

Securities accommodated the Commissioner’s need for some point at

which he could assess delinquent taxes owed by a foreign

corporation that had failed to file its own return.     Taylor

Securities and its progeny were precisely the sort of case-by-

case development of reasonableness that one would expect in

response to the absence of a specific mention of time in section

882.

       Where our Opinion leaves the Commissioner after today’s

ruling is very unclear.9   Current IRS practice, even when the

Commissioner prepares a substitute return under section 6020(b),

is to encourage nonfilers to prepare and file a return, if for no

other reason than to stop the addition to tax for failure to

timely file.    See sec. 6651(g)(1), (a)(1); In re Rank, 

(N.D. Ohio 1993) (noting number of exceptions to recognition

of substitute return, giving taxpayer continuing incentive to

file); Saltzman, IRS Practice & Procedure, par. 4.02 (citing

examples in Code where taxpayer may file a return after

substitute return prepared to challenge Commissioner’s



       9
       The majority seems to soften its analysis by suggesting at
a couple points that the Commissioner can still enforce section
882 by again preparing substitute returns. See majority op. pp.
65 note 22, 75. But the Opinion also states that this cannot be
an “absolute and rigid rule.” Majority op. p. 74 note 28.
                               -119-

determinations).   If the majority’s hesitance to explicitly

overrule Taylor Securities is an endorsement of what was, over 60

years ago, “the generally accepted rule concerning the number of

returns which may be filed,” majority op. p. 75 note 28, quoting

, it will just cause more confusion

given the intervening evolution in the effect of substitute

returns.

                                II.

     Having concluded that the plain language of section 882

invalidates the regulation, the majority could have stopped.

Instead, as an alternative holding, it goes on to analyze the

reasonableness of the regulation under National Muffler--asking

whether the regulation “(harmonizes with the plain language of

the statute, its origin, and its purpose.)”    Majority op. p. 55

(quoting National 

).

     Applying National Muffler, the majority concludes that the

regulation is out of tune with the statute not just because it

fails to harmonize with section 882's plain language but because

the regulation:

     !     is “not a ‘substantially contemporaneous
           construction of the statute,’”

     !     “merely adopted respondent’s unsuccessful
           litigating position,”

     !     “conflicts with the agency’s previous
           interpretation of the same statute,”
                              -120-

     !    had been in effect for only a short time before
          being challenged,

     !    was not issued after a revision to section 882,
          and

     !    was not relied on by petitioner to his detriment.

See majority op. pp. 65-67.

     Each of these statements is at least arguably true--though

it seems a stretch to say that a bright-line 18-month grace

period is so substantially different from the old reasonable-

time-before-letting-the-IRS-bring-the-curtain-down-by-filing-a-

substitute-return test as to be in “conflict”.   And each of the

factors the majority cites is concededly relevant in a National

Muffler analysis.   These counts, though, don’t add up to a

successful indictment of the regulation’s reasonableness.     For

what really seems to trouble the majority is that this regulation

was promulgated years after section 882 or its predecessor was

enacted, and that it disregarded the caselaw that had built up in

the meantime.   These related issues are the “legislative

reenactment” and “Brand-X” problems.

                                  A.

     According to the majority, the legislative reenactment

doctrine means that “Congress is presumed to have known of the

administrative and judicial interpretations of a statutory term

reenacted without significant change and to have ratified and

included that interpretation in the reenacted term.”   Majority
                               -121-

op. p. 69.   The majority then marches through the history of the

reenactments of section 882--both the great codifications of

1939, 1954, and 1986, and a minor amendment (having nothing to do

with the filing requirement) in 1966--before reaching its

conclusion that Congress “was mindful of the relevant judicial

interpretations and included within the reenacted text the

judiciary’s interpretation.”   Majority op. p. 70.

     I don’t agree that this is right formulation of the

legislative reenactment doctrine, at least when it is used to

invalidate, rather than uphold, a regulation.   In a lengthy

discussion of the doctrine, the D.C. Circuit held:

          The district court mistakenly relied on the
          familiar notion that Congress is presumed to
          be aware of administrative interpretations of
          a statute or regulation when it adopts such
          language in a statute. Though courts have
          stated this general proposition, usually as a
          defense to a later attack against the same
          interpretation, no case has rested on this
          presumption alone as a basis for holding that
          the statute required that interpretation.* * *

AFL-CIO v. Brock, 

, 916 n.6 (D.C. Cir. 1987).

     Even if we wanted to be pioneers, I am quite leery of the

majority’s formulation.   Elsewhere in Brock, the D.C. Circuit

summarized its understanding of the doctrine to require “express

congressional approval of an administrative interpretation if it

is to be viewed as statutorily mandated.”   

   Other
                                -122-

appellate courts have likewise been careful in limiting the

doctrine:

     !      “Mere reenactment is insufficient. It must also
            appear that Congress expressed approval of the
            agency interpretation. That is to say, the
            doctrine applies when Congress indicates not only
            an awareness of the administrative view, but also
            takes an affirmative step to ratify it.” Isaacs
            v. Bowen, 

, 473 (2d Cir. 1989);

     !      “When the congressional discussion preceding
            reenactment makes no reference to the * * *
            regulation, and there is no other evidence to
            suggest that Congress was even aware of the * * *
            interpretive position[,] ‘we consider the * * *
            reenactment to be without significance.’”* * *
            Am. Bankers Ins. Grp. v. United States, 

, 1335-36 (11th Cir. 2005) (quoting
            Am. Online v. United States, 

, 580-
            581 (2005)).

See also Peoples Fed. Sav. & Loan Association. of Sidney v.

Commissioner, 

, 302 (9th Cir. 1991) (doctrine is

“most useful in situations where there is some indication that

Congress noted or considered the regulations in effect at the

time of its action”).

     The majority’s reliance on legislative reenactment should

have ended when it could find no affirmative evidence that

Congress knew of any of the Fourth Circuit or BTA cases that it

describes.    The legislative history that the majority quotes and

summarizes features only vague references to “existing law.”

Majority op. p. 73.
                               -123-

     Of course, the majority also describes at great length the

absence of even a mention of a timely filing requirement in any

of the various legislative histories that it pores through.        They

reason that the absence of any disagreement with the existing BTA

and Fourth Circuit precedents shows that Congress intended to

ratify those precedents.   See majority op. pp. 70-71.    This is an

innovation.   If taken seriously, it would freeze existing

judicial constructions and IRS regulations in place whenever

Congress reenacted a portion of the Code, forcing us to treat

them as if they were part of the statutory language and blocking

the Secretary from changing regulations without persuading

Congress to change the Code.

     This cannot be right.

                                  B.

     The majority is, I think, also wrong about the amount of

deference the Secretary owes to caselaw when he writes a

regulation.

     This is the Brand-X problem.      In that case, the FCC had

issued a declaratory rule interpreting the term “telecommunica-

tions service” under its general authority to enforce the

Telecommunications Act of 1934.     Brand X, 

, 2695

(2005).   According to this new regulation, broadband cable modems

were not a “telecommunication service.”     This was a change in the

law, at least in the Ninth Circuit, because in AT&T Corp. v.
                                -124-

Portland, 

, 880 (9th Cir. 2000), that court had

specifically ruled that broadband cable modems were a

“telecommunications service.”

     The Supreme Court began its analysis by citing the FCC’s

broad grant of regulation-writing power--very similar to the

Secretary’s in section 7805(a)--of prescribing “such rules and

regulations as may be necessary in the public interest.”     Brand

.    The Court recognized that the regulation

did change existing caselaw but reasoned:

             A court’s prior judicial construction of a
          statute trumps an agency construction
          otherwise entitled to Chevron deference only
          if the prior court decision holds that its
          construction follows from the unambiguous
          terms of the statute and thus leaves no room
          for agency discretion.* * *

     The majority distinguishes Brand X in several ways:

     !    the FCC gave a more careful consideration of
          developments in the field than the Secretary did
          here;

     !    Brand X did not involve a change in the agency’s
          own interpretation;

     !    the FCC was not a party in the court case whose
          holding it was reversing; and

     !    the FCC’s new regulation was promulgated only five
          years after the contrary caselaw.

Majority op. pp. 78-81.
                               -125-

     These distinctions should not make a difference--the Supreme

Court did not balance carefulness of consideration, prior

litigation history, or the amount of time that had passed between

the caselaw and the new regulation.    It simply looked to see if

the agency had been delegated broad regulatory authority and

whether its construction of an ambiguous statutory phrase was

reasonable.   Brand 

.   Conflicting

precedent would have mattered only if that precedent had held the

phrase “telecommunications service” to have an unambiguous

meaning contrary to the regulation.    

  And in this

case, the majority can point to no precedent that holds the

absence of a time restriction in section 882 unambiguously means

that there is no time restriction.

                               III.

     Finding the regulation unreasonable under National Muffler,

even if section 882 is ambiguous, raises some very difficult

issues at the intersection of administrative and tax law.    I

think the majority has erred, both in relying so heavily on the

disputed regulation’s change to existing law and in being so

skeptical about whether Brand X even applies to tax regulations,

majority op. p. 77.   I also think those errors are examples of

how difficult some of these issues have proven to be for trial

courts conscientiously trying to follow their reviewing courts’

precedents.   In the spirit of Eberhart v. United States, 546 U.S.
                                 -126-

___, 

, 407 (2005), revg. 

(7th Cir.

2004), I think it important not to hide these troublesome issues

and hope that their effects in this case will help those likely

to review our decision.

                                 A.

     The first issue is whether it is still correct to say, as we

did ten years ago, that

          we are inclined to the view that the
          impact of the traditional, i.e., National
          Muffler standard, has not been changed by
          Chevron, but has merely been restated in
          a practical two-part test * * *

Central Pa. Sav. Association & Subs. v. Commissioner, 

, 392 (1995) (quoted at majority op. p. 56).    Both National

Muffler and Chevron do tell courts to review regulations for

their reasonableness.     But the factors that each test tells us to

consider can be quite different.

     National Muffler--at least as our Court has applied it--

requires a top-to-bottom review of the regulation to see if it is

in harmony with the “plain language of the statute, its origin,

and its purpose.”   National 

.   It

requires us to consider whether a regulation:

          is a substantially contemporaneous
          construction of the statute by those
          presumed to have been aware of
          congressional intent. If the regulation
          dates from a later period, the manner in
          which it evolved merits inquiry. Other
          relevant considerations are the length of
                                 -127-

           time the regulation has been in effect,
           the reliance placed on it, the consistency
           of the Commissioner’s interpretation, and
           the degree of scrutiny Congress has
           devoted to the regulation during
           subsequent re-enactments of the statute.
           * * *

gives great weight to the consistency of an

agency’s position over time, consistency with judicial prece-

dent,10 and any reliance interest the public might have

developed.   This makes a regulation that changes existing law

more likely to be invalidated.   And this is logical--if a court

has to consider factors focusing on the Secretary’s justification

for changing his position, there will be some cases where they

will be decisive.   See, e.g., Pac. First Fed. Sav. Bank v.

Commissioner, 

(1990) (discussed supra note 2).

      Chevron review places substantially less emphasis on

justification for regulatory change.     It expressly recognizes

that there can be a range of permissible alternatives, and

directs a court to decide only if the agency’s regulation is “a

permissible construction of the statute.”     

       This seems to be a special concern for our Court. See,
e.g., Ga. Fed. Bank v. Commissioner, 

, 114 (1992)
(later vacated and remanded) (regulations contrary to judicial
precedents “created a greater inconsistency than they resolved”);
Redlark, 

(“The nuts and bolts of this case is that
the Commissioner continues to disagree with the pre-TRA judicial
view”); see also majority op. p. 63 (deference unwarranted where
Secretary has “total disregard to firmly established judicial
precedent”).
                                -128-

843.    After Chevron, “there is a range of permissible

interpretations * * * [and] the agency is free to move from one

to another, so long as the most recent interpretation is

reasonable its antiquity should make no difference.”      Barnhart v.

Walton, 

, 226 (2002) (Scalia, J., concurring in part

and concurring in judgment).

       It’s important to recognize that, in most cases, applying

either National Muffler or Chevron will end up producing the same

result--when a statute is ambiguous, agencies do have

considerable leeway in devising regulations that clarify the law.

But the most important class of cases in which results under the

two tests diverge is the one into which this case falls--when an

agency writes a regulation that changes existing law, either in

the form of a previous regulation or judicial construction.     The

Supreme Court has consistently held that Chevron allows such

reversals.11   Chevron is such an important case because it was so

explicit in recognizing that resolution of ambiguities in a


       11
       See, e.g., Brand X, 545 U.S.    , 125 S. Ct. at 2699
(2005) (agency reversal permissible as it is charged with
interpreting ambiguous statutes); Smiley v. Citibank (South
Dakota), N.A., 

, 742 (1996) (prior contradictory
agency position is not fatal); Rust v. Sullivan, 

,
186-187 (1991) (changing circumstances require that an agency’s
position not be “carved in stone”). Of course, such changes are
permissible under National Muffler too. (Indeed, National
Muffler involved a regulation that changed existing 

.) But they would seem to be less probable
because of the National Muffler factors that concentrate on
consistency in the law over time.
                                 -129-

statute is more “a question of policy than of law. * * *   When

Congress, through express delegation or the introduction of an

interpretive gap in the statutory structure, has delegated

policy-making authority to an administrative agency, the extent

of judicial review of the agency’s policy determinations is

limited.”   Pauley v. BethEnergy Mines, Inc., 

, 696

(1991).

     We have, in some cases at least, viewed the decision to

analyze a regulation under National Muffler as a mandate to

undertake a review of the Secretary’s legal analysis, construing

“reasonableness” under National Muffler almost as meaning “the

most reasonable construction.”    Compare the majority’s analysis

in today’s Opinion to the minimal deference given regulations

under Skidmore v. Swift & Co., 

, 140 (1944):     “The

weight * * * in a particular case will depend upon the

thoroughness evident in its consideration, the validity of its

reasoning, its consistency with earlier and later pronouncements,

and all those factors which give it the power to persuade, if

lacking power to control.”

     This “hard look” deference simply doesn’t reflect the

contemporary understanding of administrative law that regulations

are a way to make policy choices, not just a way to interpret

ambiguous statutory phrases.   I agree with the majority that the

judicial interpretations of section 882(c)(2) in the years before
                               -130-

the regulation was issued are more in keeping with the actual

words of the Code than are the words of the regulation.   But this

is due to the different competencies of judges and regulation

writers.   Regulation writers are doing their jobs when they make

up safe harbors and lay down deadlines; for judges to do so--

instead of setting up fact-bound tests of “reasonableness”--looks

like an exercise of legislative or administrative, rather than

judicial, power.

     My disagreement with the majority is not just a disagreement

about how to apply National Muffler.   Instead, I think the

problem lies in a very subtle distinction between National

Muffler and Chevron--“reasonableness” using the National Muffler

factors is taken to mean “is the Secretary construing the statute

reasonably?,” while under Chevron it means “is the Secretary

behaving unreasonably by violating the statute in the course of

exercising his delegated authority to set policy?”   Both cases

look to reasonableness,12 but in different ways.   The majority’s

condemnation of the Secretary’s 18-month grace period, majority



     12
       The Supreme Court’s continuing citations to National
Muffler after Chevron all stand for this general proposition.
See Boeing Co. v. United States, 

, 451 (2003); United
States v. Cleveland Indians Baseball Co., 

, 219
(2001); Atl. Mut. Ins. Co. v. Commissioner, 

, 389
(1998); Commissioner v. Estate of Hubert, 

, 127
(1997); Newark Morning Ledger Co. v. United States, 

,
576 (1993); Cottage Sav. Assn. v. Commissioner, 

,
560-561 (1991).
                               -131-

op. p. 62 note 17, illustrates this.   It rhetorically asks:

“Where that * * * rule came from, we do not know.”   Majority op.

p. 62 note 17.   The fact is that the Secretary routinely makes

tax law more certain by using his regulatory authority under

section 7805(a) to dredge safe harbors and stake well-defined

boundaries.   See, e.g., sec, 1.401(a)(4)-2(b) Income Tax Regs.

There are undoubtedly hundreds more such instances scattered

throughout the five thick volumes of title 26 of the Code of

Federal Regulations.   They (or at least most of them) survive

Chevron review because they are “permissible constructions” in

the sense that they don’t violate the Code, not in the sense that

they interpret the Code in the same way a judge using normal

canons of statutory interpretation would.   If each of these

detailed regulations had to survive scrutiny by matching it up

against general statutory language and asking “where did this

come from?,” instead of “does the Code prohibit it?” today’s

Opinion would ignite a thoroughgoing revolution in tax law.

                               B.

     This observation brings me to the next two issues today’s

decision raises--should regulations issued under section 7805(a)

receive Chevron deference?   And what would such deference look

like?

     The key text here is the famous passage from Chevron where

the Supreme Court said:
                                  -132-

          If Congress has explicitly left a gap for the
          agency to fill, there is an express delegation
          of authority to the agency to elucidate a
          specific provision of the statute by
          regulation. Such legislative regulations are
          given controlling weight unless they are
          arbitrary, capricious, or manifestly contrary
          to the statute. Sometimes the legislative
          delegation to an agency on a particular
          question is implicit rather than explicit. In
          such a case, a court may not substitute its own
          construction of a statutory provision for a
          reasonable interpretation made by the
          administrator of an 

(fn. refs. omitted).

     What is an “express delegation of authority to the agency to

elucidate a specific provision of the statute by regulation?”

And what is the difference between reviewing a regulation to

decide whether it is “arbitrary, capricious, or manifestly

contrary to the statute” in contrast to a “reasonable

interpretation?”

     I’ll discuss each in turn.

                                  1.

     The majority accurately states our Court’s general rule - if

the Secretary issues a regulation under section 7805(a), we call

it “interpretive” and analyze its validity under National

Muffler, but if the Secretary issues a regulation under a more

specific grant of authority, we call it “legislative,” and

analyze its validity under Chevron.       Walton v. Commissioner, 

, 597 (2002).
                                 -133-

     Understanding the problem this causes requires a brief

introduction into the ambiguity of the terms “interpretive” and

“legislative” when used to describe regulations.      In tax law,

“legislative” regulations are those issued by the Secretary under

a specific grant of authority in a particular Code section.

“Interpretive” regulations, on the other hand, are all those

regulations issued under the Secretary’s general authority to

prescribe all “needful rules and regulations.”     See sec. 7805(a).

“Interpretive” regulations issued under sec. 7805(a) are,

however, almost always sent through notice-and-comment

rulemaking.13

     In administrative law, these same terms mean something

different.    Under the Administrative Procedure Act, “legislative

regulations” are those that create new legal duties binding on

the parties and the courts.     Merrill & Watts, Agency Rules With

the Force of Law: The Original Convention, 116 Harv. L. Rev. 467,

477 (2002).     They must generally be subjected to notice-and-

comment rulemaking.    5 U.S.C. sec. 553(b) (2000).

“Interpretative” regulations, in contrast, only clarify existing




     13
       Saltzman, IRS Practice & Procedure, 2d ed., par. 3.02[2];
sec. 601.601, Statement of Procedural Rules.
                               -134-

duties; and they do not bind the public, and do not go through

notice-and-comment rulemaking.14

     There can be little doubt that, in this classification, both

general and specific authority tax regulations are intended to

bind the public and have the force of law.   The IRS and Treasury

use the same regulation-writing process for both general and

specific authority regulations, subjecting both to the same

painstaking review under the IRS’s “Regulation Drafting

Handbook,” I.R.M. 32.1.5.   Both types are issued as Treasury

decisions, and both are signed by an Assistant Treasury Secretary

and the IRS Commissioner.   And when the Code penalizes taxpayers

for “disregard of rules and regulations,” sec. 6662, it penalizes

them for disregard of either type of regulation.   See sec.

1.6662-3(b)(2), Income Tax Regs.

     Chevron’s distinction between explicit and implicit

congressional delegations of authority certainly doesn’t reflect

any difference between general and specific authority

regulations.   The Court there cited to four cases as examples of




     14
       The confusing nomenclature prompted one academic to
propose calling Treasury regulations issued under section 7805
“general authority” regulations, and Treasury regulations issued
under other sections “specific authority” regulations.
Coverdale, “Court Review of Tax Regulations and Revenue Rulings
in the Chevron Era,” 64 Geo. Wash. L. Rev. 35, 55 (1995). I
adopt this convention for the remainder of this Opinion.
                                 -135-

“express delegations.”     

n.12.   But look

at the statutes involved

     !     42 U.S.C. § 607(a): whether a child “has been
           deprived of parental support or care by reason of
           the unemployment (as determined in accordance with
           standards prescribed by the Secretary),” Batterton
           v. Francis, 

, 419 (1977);

     !     42 U.S.C. § 1396a(a)(17)(B): “taking into account
           only such income and resources as are, as
           determined in accordance with standards prescribed
           by the Secretary, available to the applicant,”
           Schweiker v. Gray Panthers, 

, 43-44
           (1981);

     !     Communications Act of 1934, § 200: “The
           Commission may, in its discretion, prescribe the
           forms of any and all accounts, records, and
           memoranda,” AT&T v. United States, 

,
           235 (1936); and

     !     25 U.S.C. § 9: “The President may prescribe such
           regulations as he may think fit for carrying into
           effect the various provisions of any act relating
           to Indian affairs, and for the settlement of the
           accounts of Indian affairs,” Morton v. Ruiz, 

, 231 n.25 (1974).

     The first two delegations are the kind that tax lawyers

would say lead to “legislative” regulations--they are delegations

of authority to fill in a gap in one particular section of a

statute.   But the second two delegations are entirely as broad as

section 7805(a)’s power to make “all needful rules and

regulations under this title.”

     To make the contrast sharper, consider the two cases cited

by the Court in Chevron as examples of a “legislative delegation
                                 -136-

to an agency on a particular question [that] is implicit rather

than explicit”

     !    INS v. Jong Ha Wang, 

, 140 (1981),
          analyzing reviewability of the Attorney General’s
          decision to suspend deportation of an illegal
          alien under 8 U.S.C. § 1254(a)(1) if it would
          “result in extreme hardship * * *,” and

     !    Train v. NRDC, 

, 67 (1975) analyzing
          reviewability of the EPA Administrator’s approval
          of a state’s Clean Air Act plan under 42 U.S.C.
          § 1857c(5)(a)(2) requiring him to approve a plan
          “if he determines that it was adopted after
          reasonable notice and hearing.”

     Neither of these two cases involved direct review of

regulations at all, but instead were reviews of individual

decisions by agencies in the course of which they had to construe

disputed statutory terms.

     In short, I think that the contrast that Chevron made was

between review of regulations put through notice-and-comment

rulemaking, and construction of statutory terms in the course of

administrative adjudication.15    Reading Chevron this way makes

sense when one considers the Administrative Procedure Act itself,

which tells courts to use one standard in reviewing formal

regulations--are they “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law?,” 5 U.S.C.

§ 706(2)(A), see Motor Vehicle Manufacturers Association of


     15
       This is the consensus view in nontax fields. See
Cunningham & Repetti, “Textualism and Tax Shelters,” 24 Va. Tax
Rev. 1, 43-45 (2004).
                               -137-

United States, Inc. v. State Farm, 

, 41-45 (1983); and

another standard in reviewing administrative adjudications--are

they “unsupported by substantial evidence?,” 5 U.S.C. § 706(2)(E)

(which has been interpreted as going to “the reasonableness of

what the agency did,” United States v. Carlo Bianchi & Co., 

, 715 (1963) (emphasis added)).

     Mead makes this clearer--it says that the Court has

“recognized a very good indicator of delegation meriting Chevron

treatment in express congressional authorizations to engage in

the process of rulemaking or adjudication that produces

(2001).   It then lists, among

other cases to prove that point, Atlantic Mut. Ins. Co v.

Commissioner, 

(1998), a case in which we were

reversed after invalidating a regulation issued under section

7805(a).16


     16
       

n.12. Many, perhaps most, of the
cases cited in that footnote involve general authority
regulations. E.g. Shalala v. Ill. Council on Long Term Care,
Inc., 

(2000)[issued under 42 U.S.C. sec. 1395cc(b)(2)
(“Secretary may [act] * * * as may be specified in
regulations”)]; United States v. Haggar Apparel Co., 

(1999)[issued under 19 U.S.C. sec. 1502(a) (Secretary may
“establish and promulgate such rules and regulations not
inconsistent with the law”)]; AT&T Corp. v. Ia. Util. Bd., 

(1999)[issued under 47 U.S.C. sec. 201(b) (“Commissioner
may prescribe such rules and regulations as may be necessary”)];
United States v. O’Hagan, 

(1997)[issued under 15
U.S.C. sec. 78j(b) (authorizing “rules and regulations as the
[SEC] Commissioner may prescribe as necessary or appropriate”)];
Am. Hospital Assn. v. NLRB, 

(1991)[issued under 29
                                                   (continued...)
                              -138-

     After Mead, I don’t think it possible to draw distinctions

between the deference owed tax regulations issued under section

7805(a) and those issued under more specific authority.17   See

Boeing Co. v. United States, 

, 448 (2003) (dismissing

dispute over distinctions between general and specific authority

regulations because both must be treated with deference).

     If applying Chevron instead of National Muffler would lead

to a different result, this discussion might still not matter--

National Muffler (and the pre-Chevron cases that relied on it,

United States v. Vogel Fertilizer Co., 

(1982); Rowan

Cos. v. United States, 

(1981) were all tax cases,



     16
      (...continued)
U.S.C. sec. 156 (“authority from time to time to make, amend, and
rescind * * * such rules and regulations as may be necessary”)];
Sullivan v. Everhart, 

(1990)[issued under 42
U.S.C.(a) 401 et seq. (Secretary authorized to “make rules and
regulations and to establish procedures not inconsistent with
this subchapter, which are necessary”)]; Massachusetts v. Morash,

(1989)[issued under 29 U.S.C. sec. 1135 (“the
Secretary may prescribe such regulations as he finds necessary or
appropriate”)]; K Mart Corp. v. Cartier, Inc., 

(1988)[issued under 19 U.S.C. sec. 1526(d)(4) (“Secretary may
prescribe such rules and regulations as may be necessary”)].
     17
       See also Vermuele, “Mead in the Trenches,” 71 Geo. Wash.
L. Rev. 347, 350 (2003) (notice-and-comment rulemaking a safe-
harbor category); but see Coke v. Long Island Care at Home, Ltd.,

, 132 n.5 (2d Cir. 2004); Merrill, “The Mead
Doctrine: Rules and Standards, Meta-Rules, and Meta-Standards,”
54 Admin. L. Rev. 807, 814-15 (2002) (notice-and-comment
rulemaking begets Chevron deference only if regulation intended
to have force of law). (That distinction wouldn’t matter here,
because general authority tax regulations are intended to have
the force of law.)
                               -139-

and the rule is that we are bound to follow the cases that more

directly control until and unless they are expressly overruled.

Agostini v. Felton, 

(1997), quoted by 

.

     But our Court has a special problem in trying to find the

precedents it should follow--appeals from our decisions go to

twelve different courts of appeal, and the question of what

review a general authority regulation issued under section 7805

should get has already led to divergent results.   Some of our

reviewing courts have concluded that general authority

regulations don’t qualify for Chevron deference, and some have

concluded that they qualify only as an implicit delegation on a

particular question and read Chevron as silently incorporating

National Muffler and its factors as a test of “reasonableness.”

And some read Chevron as requiring review of general authority

regulations under an arbitrary-and-capricious standard.

     The resulting circuit split was noted as long ago as 1998.

See Bankers Life and Casualty Co. v. United States, 

,

982 (7th Cir. 1998).   And it seems only to have become more

pronounced:

     !    Second Circuit--Gen. Elec. Co. v. Commissioner,
          

, 154 n.8 (2001) (noting conflict but
          not taking sides)

     !    Third Circuit--E.I. du Pont de Nemours & Co. v.
          Commissioner, 

, 135-36 and n.23 (1994)
          (less deference to general authority regulations,
                     -140-

    but leaving open possibility of considering the
    question); see also the nontax cases Cleary v.
    Waldman, 

, 807 (1999) (Chevron
    deference applies to notice-and-comment rules);
    Elizabeth Blackwell Health Center for Women v.
    Knoll, 

, 190 (1995) (interpretive rules
    get only Skidmore deference);

!   Fourth Circuit--Snowa v. Commissioner, 

, 197 (1997) (general authority regulations get
    National Muffler review under Chevron);

!   Fifth Circuit--Nalle v. Commissioner, 

, 1138 (1993) (National Muffler review rather
    than Chevron);

!   Sixth Circuit--Peoples Fed. Sav. & Loan
    Association. of Sidney v. Commissioner, 

, 300 (1991) (Chevron review for
    “reasonableness”); Hospital Corp. of Am. & Subs.
    v. Commissioner, 

, 141 (2004);

!   Seventh Circuit--Bankers Life & Cas. Co. v. United
    States, 

, 983 (1998) (Chevron review
    for “reasonableness”);

!   Eighth Circuit--United States v. Tucker, 

, 965 (2000) (National Muffler review)

!   Ninth Circuit--Redlark v. Commissioner, 

, 940 (1998) (Chevron arbitrary-and-capricious
    review);

!   Tenth Circuit--In re Craddock, 

, 1258
    (1998) (National Muffler review)

!   Eleventh Circuit--Beard v. United States, 

, 1520-21 (1993) (Chevron arbitrary-and-
    capricious review);

!   D.C. Circuit--Tax Analysts v. Commissioner, 

, 102-03 (2003) (Chevron review); and

!   Fed. Circuit--Schuler Indus. Inc. v. United
    States, 

, 755 (1997) (National Muffler
    deference)
                              -141-

                               2.

     How would review of this regulation look under Chevron?

     Here again, I think that Mead has clarified the law, by

conflating the standard of “reasonableness” with the standard of

“arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law.”   See 

.18

     On what “reasonableness” means in the post-Mead world, I

generally agree with Judges Swift and Halpern.19   The question is

one of line-drawing, and substituting an 18-month rule for an

indeterminate and case-by-case consideration of the facts

certainly seems reasonable.    It does nothing more than substitute

more definite deadlines for less definite ones and allows the

Commissioner to trigger them by sending a notice rather than

filing a substitute return.




     18
       See also Sunstein, Law and Administration after Chevron,
90 Colum. L. Rev. 2071, 2093 (1990) (“Chevron might be taken to
suggest that whenever an agency is entrusted with implementing
power--whether to be exercised through rulemaking or
adjudication--agency interpretations in the course of exercising
that power are entitled to respect so long as they are
reasonable”). See also CHW West Bay v. Thompson, 

,
1223 (9th Cir. 2001) (summarizing caselaw on Chevron step two as
requiring reasonableness in substantive interpretation and in the
process of making the decision).
     19
       There is an extensive commentary on Chevron step-two
standards. See Polsky, “Can Treasury Overrule the Supreme
Court?,” 84 B.U.L. Rev. 185, 192 (2004); Cunningham & Repetti,
supra n.15, 24 Va. Tax Rev. at 49.
                              -142-

     I will only add a cite to Motor Vehicle Mfrs. Assn. of the

United States, Inc. v. State Farm, 

(1983).      In that

case, the Supreme Court wrote that a regulation was arbitrary and

capricious if:

          the agency has relied on factors which Congress
          has not intended it to consider, entirely
          failed to consider an important aspect of the
          problem, offered an explanation for its
          decision that runs counter to the evidence
          before the agency, or is so implausible that it
          could not be ascribed to a difference in view
          or the product of agency expertise.* * *

see also Sunstein, 90 Colum. L. Rev. at 2104-2105.

     That is of course far from what happened here.   The

Secretary faced an ambiguous phrase in a Code section,

unambiguously aimed at giving foreign corporations a major

incentive to file their returns.   He also learned by experience

that some taxpayers would wait to file until a notice of

deficiency was issued, Anglo-American, 

, or would

file only after starting a case in this Court, Blenheim, 

, or would refuse to file even after a revenue agent came

calling, Ardbern, 

.    To issue a regulation with a

fixed grace period and provision for exceptions reflected

experience, failed to consider no aspect of the problem, and ran

counter to no reasonable evidence before him.   The regulation did

change existing law, but under Chevron and Brand-X, the Secretary

should be allowed to “change the law”--even if the law is our
                               -143-

caselaw--by regulation, vetted by notice-and-comment, and tested

against only a very liberal notion of reasonableness.

     I respectfully dissent.

     Swift, J., agrees with this dissenting opinion.