Filed: Oct. 22, 2009
Latest Update: Mar. 03, 2020
Summary: 133 T.C. No. 11 UNITED STATES TAX COURT DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 20320-06. Filed October 22, 2009. For each of the taxable years ended Oct. 31, 1997 through 2001, the total income that P, a consolidated group of corporations, reported in its consolidated return included amounts from the operations during each of those taxable years that the parent of P (Parent) conducted through its foreign branches (Pare
Summary: 133 T.C. No. 11 UNITED STATES TAX COURT DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 20320-06. Filed October 22, 2009. For each of the taxable years ended Oct. 31, 1997 through 2001, the total income that P, a consolidated group of corporations, reported in its consolidated return included amounts from the operations during each of those taxable years that the parent of P (Parent) conducted through its foreign branches (Paren..
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133 T.C. No. 11
UNITED STATES TAX COURT
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20320-06. Filed October 22, 2009.
For each of the taxable years ended Oct. 31, 1997
through 2001, the total income that P, a consolidated
group of corporations, reported in its consolidated
return included amounts from the operations during each
of those taxable years that the parent of P (Parent)
conducted through its foreign branches (Parent’s for-
eign branch operations). In calculating the consoli-
dated tax shown in the consolidated return for the
taxable year at issue ended Oct. 31, 2001, P claimed a
credit for increasing research activities under sec.
41, I.R.C. In calculating that credit, P elected the
alternative incremental research credit prescribed by
sec. 41(c)(4), I.R.C. In determining that alternative
credit for the taxable year at issue, P calculated
under sec. 41(c)(1)(B), I.R.C., its average annual
gross receipts for the 4 taxable years preceding that
taxable year by using the total income that it reported
in its consolidated return for each of those 4 years
reduced by the amounts included therein for each of
those years from Parent’s foreign branch operations.
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Held: In determining the alternative research
credit under sec. 41(c)(4), I.R.C., and thus the credit
to which P is entitled under sec. 41(a), I.R.C., P is
required to include in the calculation under sec.
41(c)(1)(B), I.R.C., of its average annual gross re-
ceipts for the 4 taxable years preceding the taxable
year at issue the amounts for each of those years from
Parent’s foreign branch operations.
Laurence M. Bambino, Michael B. Shulman, Richard John
Gagnon, Jr., and Douglas R. McFadyen, for petitioner.
Reid Michael Huey, for respondent.
OPINION
CHIECHI, Judge: This case is before us on the motion for
summary judgment of respondent (respondent’s motion) and the
motion for summary judgment of Deere & Co. and Consolidated
Subsidiaries (petitioner’s motion).1 We shall grant respondent’s
motion, and we shall deny petitioner’s motion.
Background
At the time of the filing of the petition, petitioner
maintained its principal office in Illinois.
At all relevant times, petitioner manufactured, distributed,
and financed a full line of agricultural equipment, a variety of
commercial and consumer equipment, and a broad range of equipment
1
We shall refer to the consolidated group of Deere & Co. and
Consolidated Subsidiaries as petitioner.
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for construction and forestry and other products and provided
various services to a worldwide market.
During each of petitioner’s taxable years ended October 31,
1997 through 2001, petitioner’s operations were organized and
reported in the following four major business segments:
(1) Agricultural equipment (petitioner’s agricultural equipment
division), (2) commercial and consumer equipment (petitioner’s
commercial and consumer equipment division), (3) construction and
forestry, and (4) credit. During each of those taxable years,
petitioner received income from operations conducted, inter alia,
through branches in Germany, Italy, and Switzerland that Deere &
Co. (Deere), the parent corporation of petitioner, owned. (We
shall sometimes refer to the operations conducted through Deere’s
branches in Germany, Italy, and Switzerland as Deere’s foreign
branch operations.)
Deere commenced Deere’s foreign branch operations in Germany
(Deere’s German branch operations) in 1967. At all relevant
times, Deere’s German branch operations, which were the largest
of Deere’s foreign branch operations, were primarily part of
petitioner’s agricultural equipment division. Deere’s German
branch operations included the following factories or offices
that Deere operated: (1) A tractor factory in Mannheim, Germany,
(2) a combine factory in Zweibruken, Germany, (3) a cab factory
and a parts depot in Bruchsal, Germany, and (4) a German domestic
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sales office and a European general office in Mannheim, Germany.
Deere’s German branch operations also included the following
entities: (1) John Deere Intl. GmbH (JDIG) and
(2) Maschinenfabrik Kemper GmbH & Co. KG (Kemper).
At all relevant times, JDIG, a corporation that Deere
incorporated in 1998 in Germany and wholly owned, had offices in
Mannheim, Germany. JDIG operated initially as a marketing
organization for export sales outside of Germany and thereafter
as an office for administrative, billing, and central services
for the European operations of Deere.
Deere filed Form 8832, Entity Classification Election (Form
8832), in which it elected to treat JDIG, effective as of October
14, 1998, as a “foreign eligible entity with a single owner to be
disregarded as a[n] * * * entity” separate from Deere. Respon-
dent approved that election. (We shall sometimes refer to a
foreign eligible entity with a single owner that is to be disre-
garded as a separate entity as a disregarded entity.) Since
October 14, 1998, Deere and petitioner have (1) treated the
activities of the disregarded entity JDIG as a foreign branch of
Deere and (2) reported in the consolidated tax return, Form 1120,
U.S. Corporation Income Tax Return, that petitioner filed for
each taxable year (petitioner’s consolidated return) any income
and expenses of JDIG as Deere’s income and expenses.
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At all relevant times, Kemper, a limited partnership formed
in 1997 in Germany,2 manufactured attachments for various farm
equipment at a factory and offices in Stadtlohn, Germany. At
those times, Deere was a limited partner of Kemper and, as such,
owned directly more than 99 percent of Kemper. Maschinenfabrik
Kemper-Verwaltungs and Beteiligungs GmbH (MKVB), a subsidiary of
Deere organized in Germany that Deere wholly owned directly, was
the general partner of Kemper.
At all relevant times, Deere and petitioner have treated
(1) Kemper as a foreign branch and (2) MKVB as if it were a
disregarded entity. Thus, petitioner has reported in peti-
tioner’s consolidated return any respective income and expenses
of Kemper and MKVB as Deere’s income and expenses. (We shall
sometimes refer to all of Deere’s German branch operations,
including the operations of JDIG, Kemper, and MKVB, as Deere’s
German branch.)
During petitioner’s taxable year ended October 31, 2001, the
year at issue, Deere’s German branch, excluding the respective
operations of JDIG and Kemper,3 (1) had approximately 4,500
employees, of whom approximately 1,500 were salaried employees,
2
Kemper was formed after Deere acquired a company in 1996
that was subsequently reorganized into Kemper.
3
JDIG and Kemper were very small operations within Deere’s
German branch when measured by gross receipts and other income
items.
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and (2) incurred approximately $237 million of wage, salary, and
benefit expenses.
During each of petitioner’s taxable years ended October 31,
1997 through 2001, the operations within Deere’s German branch
maintained separate books and records. During each of those
taxable years, those German branch operations, other than the
respective operations of JDIG and Kemper, comprised one or more
permanent establishments as provided in article 5 of the Conven-
tion for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and Capital and to
Certain Other Taxes, U.S.-F.R.G., Aug. 29, 1989, S. Treaty Doc.
No. 101-10 (1991) (U.S.-German Treaty). (We shall refer to a
permanent establishment as provided in article 5 of the U.S.-
German Treaty as a U.S.-German Treaty permanent establishment.)4
At all relevant times, Deere’s foreign branch operations in
Italy and Switzerland were significantly smaller than Deere’s
4
The parties stipulated that during each of the taxable
years ended Oct. 31, 1997 through 2001, the operations within
Deere’s German branch, other than the respective operations of
JDIG and Kemper, constituted one or more U.S.-German Treaty
permanent establishments. The parties were unable to agree as to
whether during each of those years Deere’s respective foreign
branch operations in Italy and Switzerland (discussed below)
constituted one or more permanent establishments under the
respective U.S. treaties with those countries. The parties agree
that that factual dispute is not material to our deciding the
issue presented in the parties’ respective motions for summary
judgment. The parties further agree that if we were to conclude,
which we do not, that that factual dispute is material to our
deciding that issue, we should deny those motions and hold a
trial to resolve that dispute.
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German branch. Deere’s foreign branch operations in Italy, which
Deere began in 1977, were part of Deere’s agricultural equipment
division. Those operations consisted largely of a marketing and
sales office in Milan, Italy, that Deere operated for the sales
of agricultural equipment primarily in Italy. (We shall some-
times refer to all of Deere’s operations in Italy as Deere’s
Italian branch.)
Deere’s foreign branch operations in Switzerland consisted
of (1) a small branch office in Schaffhausen, Switzerland, and
(2) John Deere Intl. GmbH (JDIS). Deere established the small
branch office in 2000 and has operated it as part of petitioner’s
commercial and consumer equipment division. Deere established
JDIS, a limited liability company that Deere organized in 2000 in
Switzerland and wholly owned, in order to serve as the successor
to JDIG in conducting the export sales and marketing operations
for petitioner’s agricultural equipment division outside Germany.
Deere filed Form 8832 in which it elected to treat JDIS,
effective as of June 22, 2000, as a disregarded entity (i.e., an
entity to be disregarded as an entity separate from Deere).
Respondent approved that election. Since June 22, 2000, Deere
and petitioner have (1) treated the activities of the disregarded
entity JDIS as a foreign branch of Deere and (2) reported in
petitioner’s consolidated return any income and expenses of JDIS
as Deere’s income and expenses. (We shall sometimes refer to all
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of Deere’s operations in Switzerland, including the operations of
JDIS, as Deere’s Swiss branch.)
During petitioner’s taxable year ended October 31, 2001,
Deere paid or accrued foreign income taxes of approximately $29
million with respect to its foreign branch operations in Germany,
Italy, and Switzerland, a substantial portion of which was paid
or accrued on account of German income taxes.
Petitioner timely filed petitioner’s consolidated return for
the taxable year ended October 31, 2001.5 (We shall refer to
petitioner’s consolidated return for the taxable year ended
October 31, 2001, as the 10/31/01 return.) In that return,
petitioner reported on page 1, line 1, the following:
Line Description Amount
1a Gross receipts or sales $12,713,272,933
1b Less returns and allowances 1,223,782,471
1c Balance (i.e., gross receipts 11,489,490,462
or sales less returns and
allowances, or net gross
receipts)
In the 10/31/01 return, petitioner also reported on page 1,
lines 2 and 3, the following:
Line Description Amount
2 Cost of goods sold (from Schedule A, $9,308,674,331
Cost of goods sold, line 8)
3 Gross profit (i.e., net gross 2,180,816,131
receipts from line 1c minus cost of
goods sold from line 2)
5
The corporations that made up petitioner were at all rele-
vant times accrual basis taxpayers.
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In the 10/31/01 return, petitioner also reported on page 1,
lines 4 through 10, the following:
Line Description Amount
4 Dividends (from Schedule C, Dividends $290,961,385
and Special Deductions)
5 Interest 935,023,701
6 Gross rents 398,492,890
7 Gross royalties 36,902,274
8 Capital gain net income (from 0
Schedule D, Capital Gains and
Losses)
9 Net gain or (loss) (from Form 4797, 41,008,550
Sales of Business Property, part
II, line 18)
10 Other income 810,670,466
In the 10/31/01 return, petitioner reported on page 1, line
11, as total income the total (i.e., $4,693,875,397) of the
amounts listed above that it reported on page 1, lines 3 through
10, of that return. That total and those amounts included the
amounts, if any, from the operations during the taxable year
ended October 31, 2001, that Deere conducted through Deere’s
German branch, Deere’s Italian branch, and Deere’s Swiss branch.6
6
For each of the taxable years ended Oct. 31, 1997 through
2000, the total income that petitioner reported on page 1, line
11, of petitioner’s consolidated return, which was the total of
the amounts that petitioner reported on page 1, lines 3 through
10, of each of those returns, included the amounts, if any, from
the operations during each of those taxable years that Deere
conducted through Deere’s German branch, Deere’s Italian branch,
and Deere’s Swiss branch.
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Except with respect to the computation of the credit for
increasing research activities under section 41,7 in calculating
the consolidated tax shown in the 10/31/01 return, petitioner
included all of the income and all of the expenses from Deere’s
operations through Deere’s German branch, Deere’s Italian branch,
and Deere’s Swiss branch.8
In calculating the consolidated tax shown in the 10/31/01
return, petitioner claimed as a foreign tax credit a substantial
portion of the $29 million of foreign income taxes that Deere
paid or accrued with respect to those foreign branch operations.
In calculating the consolidated tax shown in the 10/31/01
return, petitioner also claimed a credit of $5,978,898 under
section 41. In calculating that credit, petitioner elected the
alternative incremental research credit prescribed by section
41(c)(4).
In determining the alternative incremental research credit
for the taxable year ended October 31, 2001, petitioner calcu-
lated under section 41(c)(1)(B) its average annual gross receipts
7
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year at issue.
8
Except with respect to the computation of the credit under
sec. 41, for each of the taxable years ended on or before Oct.
31, 2001, during which Deere conducted operations through Deere’s
German branch, Deere’s Italian branch, and/or Deere’s Swiss
branch, petitioner included all of the income and all of the
expenses from any such operations in calculating the consolidated
tax reported in petitioner’s consolidated return for each such
year.
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for the 4-year period preceding that year to be $11,737,809,783.
Petitioner calculated that amount of average annual gross re-
ceipts by averaging the following total annual gross receipts for
each of those years:
Taxable Year Ended Oct. 31 Total Annual Gross Receipts
1997 $11,458,680,882
1998 11,871,525,477
1999 11,176,314,267
2000 12,444,718,504
In determining the total annual gross receipts listed above
for each of the 4 taxable years preceding the taxable year ended
October 31, 2001, and the average annual gross receipts for those
4 years, petitioner (1) used the total income that it reported on
page 1, line 11, of petitioner’s consolidated return for each of
those years9 and (2) reduced that total income for each of those
years by the following total of (a) gross receipts less returns
and allowances and (b) other income items for each of those years
from the operations that Deere conducted though Deere’s German
branch, Deere’s Swiss branch, and Deere’s Italian branch (total
annual gross receipts of Deere’s foreign branches):
9
The total income that petitioner reported on page 1, line
11, of petitioner’s consolidated return for each of the 4 taxable
years preceding the taxable year ended Oct. 31, 2001, was equal
to the total of the amounts that it reported on page 1, lines 3
through 10, of each of those returns.
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Total Annual Gross Receipts
Taxable Year Ended Oct. 31 of Deere’s Foreign Branches
1997 $2,165,774,284
1998 2,265,017,943
1999 2,289,516,068
2000 2,530,653,492
Respondent issued a notice of deficiency to petitioner for
the taxable year ended October 31, 2001 (notice).10 In that
notice, respondent disallowed the credit under section 41 that
petitioner claimed in the 10/31/01 return. That was because
respondent determined that in calculating that credit petitioner
had erroneously excluded from the computation of its average
annual gross receipts for the 4 taxable years preceding the
taxable year ended October 31, 2001, the following total annual
gross receipts of Deere’s foreign branches:
Total Annual Gross Receipts
Taxable Year Ended Oct. 31 of Deere’s Foreign Branches
1997 $2,165,774,284
1998 2,265,017,943
1999 2,289,516,068
2000 2,530,653,492
In the notice, respondent determined that petitioner’s
average annual gross receipts for the 4 taxable years preceding
the taxable year ended October 31, 2001, was $13,373,420,885,11
10
The notice also pertained to other taxable years that are
not at issue here.
11
Respondent calculated the average annual gross receipts
for the 4-year period preceding the taxable year ended Oct. 31,
2001, by averaging the following total annual gross receipts of
(continued...)
- 13 -
and not the $11,737,809,783 that petitioner reported in the
10/31/01 return.
Discussion
We must decide whether petitioner is required to include in
the calculation under section 41(c)(1)(B) of its average annual
gross receipts for the 4 taxable years preceding the taxable year
ended October 31, 2001, the total annual gross receipts of
Deere’s foreign branches for each of those 4 preceding taxable
years.12 Before considering that issue of first impression, we
shall set forth some background that will be helpful in under-
11
(...continued)
petitioner, which included total annual gross receipts of Deere’s
foreign branches:
Taxable Year Ended Oct. 31 Total Annual Gross Receipts
1997 $12,906,688,685
1998 13,492,890,472
1999 12,747,793,061
2000 14,346,311,323
Respondent’s computation of the total annual gross receipts
listed above for each of the 4 years preceding the taxable year
ended Oct. 31, 2001, and the average annual gross receipts for
those 4 years not only included total annual gross receipts of
Deere’s foreign branches for each of the taxable years ended Oct.
31, 1997 through 2000, but also reflected certain other adjust-
ments that respondent made in the notice and that are not in
dispute.
12
Petitioner is required to calculate under sec. 41(c)(1)(B)
its average annual gross receipts for the 4 taxable years preced-
ing the taxable year ended Oct. 31, 2001, in order to compute the
alternative incremental research credit under sec. 41(c)(4) and
thus the credit under sec. 41(a)(1) to which it is entitled for
the taxable year at issue ended Oct. 31, 2001.
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standing the parties’ respective arguments and in deciding that
issue.
As pertinent here, section 38(a)(2) allows as a credit
against the taxes imposed for a taxable year by subtitle A
(relating to income taxes), chapter 1, of the Code (chapter 1)
the amount of the current year business credit.13 Section 38(b)
defines the term “the amount of the current year business credit”
as the sum of certain credits listed in that section, including
the research credit (credit for increasing research activities)
determined under section 41(a). See sec. 38(b)(4).
Congress first allowed a credit for increasing research
activities in 1981 when it enacted section 44F into the Code.
Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 221(a), 95
Stat. 241. In allowing that credit, Congress provided “incen-
tives for greater private activity in research” in order to
“stimulate a higher rate of capital formation and to increase
productivity”. H. Rept. 97-201, at 111 (1981), 1981-2 C.B. 352,
358; S. Rept. 97-144, at 77 (1981), 1981-2 C.B. 412, 439. The
credit for increasing research activities that Congress enacted
as section 44F was redesignated by Congress in 1984 as section 30
of the Code, Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
13
As pertinent here and as discussed infra note 39, a credit
under sec. 38(a)(2) is not allowed against all of the taxes
imposed by chapter 1. See, e.g., sec. 1.882-1(d), Income Tax
Regs.
- 15 -
471(c), 98 Stat. 826, 831-832, and was reenacted and redesignated
by Congress in 1986 as section 41 of the Code, Tax Reform Act of
1986, Pub. L. 99-514, sec. 231(d)(2), 100 Stat. 2173-2180. In
connection with the latter reenactment, Congress indicated that
the “purpose of enacting the credit [in 1981] was to encourage
business firms to perform the research necessary to increase the
innovative qualities and efficiency of the U.S. economy.” H.
Rept. 99-426, at 177 (1985), 1986-3 C.B. (Vol. 2) 1, 177; S.
Rept. 99-313, at 694 (1986), 1986-3 C.B. (Vol. 3) 1, 694.
When Congress first enacted the credit for increasing
research activities in 1981 as section 44F, the calculation of
the credit was based on expenditures with respect to qualified
research. Specifically, then section 44F(a) allowed as a credit
for the taxable year an amount equal to 25 percent of the excess,
if any, of the qualified research expenses for the taxable year
over the base period research expenses. Then section 44F(b)
defined the term “qualified research expenses” to mean the sum of
certain amounts with respect to qualified research as defined in
then section 44F(d) that were described in then section 44F(b)
and that were paid or incurred by the taxpayer during the taxable
year in carrying on any trade or business of the taxpayer. For
this purpose, qualified research did not include research con-
ducted outside the United States. See then sec. 44F(d)(1). In
limiting the expenditures with respect to research on which the
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credit under then section 44F was to be computed to expenditures
with respect to certain research in the United States, Congress
indicated that
expenditures for research which is conducted outside
the United States do not enter into the credit computa-
tion, whether or not the taxpayer is located or does
business in the United States; the test is whether the
laboratory experiments, etc., actually take place in
this country.
H. Rept. 97-201, supra at 116, 1981-2 C.B. at 361.
When Congress first enacted the credit for increasing
research activities in 1981 as section 44F, Congress intended to
prevent artificial increases in research expenditures, in partic-
ular through the shifting of expenditures in the case of
intracompany transactions among a controlled group of corpora-
tions or otherwise related persons, including partnerships,
proprietorships, and any other trades or businesses, whether or
not incorporated, that were under common control of the taxpayer.
Specifically, Congress provided special rules in then section
44F(f) to ensure that the credit was allowed only where there
were actual increases in qualified research expenditures for the
taxable year.14 See id. at 123-124, 1981-2 C.B. at 364-365; S.
14
Then sec. 44F(f)(1) created a so-called aggregation-of-
expenditures rule (aggregation rule). Pursuant to that rule, in
determining the amount of the credit under then sec. 44F,
(1)(a) all members of the same controlled group of corporations
within the meaning of then sec. 44F(f)(5) were to be treated as a
single taxpayer and (b) under regulations prescribed by the
Secretary of the Treasury (Secretary), all trades or businesses,
(continued...)
- 17 -
Rept. 97-144, supra at 83-84, 1981-2 C.B. at 442-443.
When Congress reenacted and redesignated the credit for
increasing research activities in 1986 as section 41, it re-
tained, inter alia, the approach of (1) calculating the credit on
the basis of expenditures with respect to qualified research, see
then sec. 41(a)(1),15 (2) excluding from qualified research
research conducted outside the United States, i.e., foreign
research, see then sec. 41(d)(4)(F), and (3) ensuring that the
credit was allowed only where there were actual increases in
qualified research expenditures, in particular in the case of
intracompany transactions among a controlled group of corpora-
tions or otherwise related persons, including partnerships,
proprietorships, and any other trades or businesses, whether or
14
(...continued)
whether or not incorporated, under common control within the
meaning of then sec. 44F(f)(1)(B) were to be treated as a single
taxpayer, and (2) the credit, if any, allowable by then sec. 44F
to each such member and to each such person was to be its propor-
tionate share, if any, of the qualified research expenses giving
rise to the credit.
15
Specifically, when Congress reenacted and redesignated the
credit for increasing research activities in 1986 as sec. 41,
then sec. 41(a)(1) included in the computation of that credit for
a taxable year 20 percent of the excess, if any, of (1) the
qualified research expenses for the taxable year over (2) the
base period research expenses. At that time, Congress also
allowed for the first time in then sec. 41(a)(2) 20 percent of
the basic research payments determined under sec. 41(e)(1)(A) to
be included in the computation of the credit. Petitioner does
not claim any credit under sec. 41 calculated by reference to
basic research payments determined under sec. 41(e)(1)(A). See
sec. 41(a)(2).
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not incorporated, that were under common control of the taxpayer,
see then sec. 41(f).
In 1989, Congress made a change to the computation of the
credit for increasing research activities under section 41 that
is material to the issue in the parties’ respective motions for
summary judgment.16 See Omnibus Budget Reconciliation Act of
1989, Pub. L. 101-239, sec. 7110(b), 103 Stat. 2323-2324.
Specifically, in 1989 Congress decided to base the calculation of
that credit on not only expenditures with respect to qualified
research but also gross receipts.17 Congress gave the following
explanation for that decision:
In extending the research credit, the committee
wished to respond to the criticism that the incentive
effect of the present-law research credit was dimin-
ished as a result of the method of computing the tax-
payer’s base amount. Critics have noted that although
an increase in research expenditures resulted in a
taxpayer receiving a larger credit for that year, it
also resulted in higher base period amounts (and there-
fore smaller credits) in the following three years. As
a consequence, the present-law credit’s marginal incen-
tive effect provided in the first year was largely
offset in the following three years. The committee,
therefore, modified the method of calculating a tax-
16
Other changes that Congress made to sec. 41 in 1989 are
not material to the issue that we must decide.
17
In 1989, Congress did not change then sec. 41(a)(2) that
Congress had enacted into the Code in 1986 and that allowed for
the first time 20 percent of the basic research payments deter-
mined under then sec. 41(e)(1)(A) to be included in the computa-
tion of the credit for increasing research activities. See supra
note 15. Nor did Congress change in 1989 the definition of
foreign research in then sec. 41(d)(4)(F) or the aggregation rule
in then sec. 41(f).
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payer’s base amount in order to enhance the credit’s
incentive effect. The committee did wish, however, to
retain an incremental credit structure in order to
maximize the credit’s efficiency by not allowing (to
the extent possible) credits for research that would
have been undertaken in any event.
Although the committee believes it is important to
readjust the base amount annually in a way which does
not undercut the incentive effect of the credit (which
occurs when a firm’s base is adjusted solely by refer-
ence to its own prior levels of research spending), the
committee also determined it was appropriate that the
base adjustments reflect firm-specific factors. By
adjusting each taxpayer’s base to its own experience,
the committee wanted to make the credit widely avail-
able at the lowest possible revenue cost.
Because businesses often determine their research
budgets as a fixed percentage of gross receipts, it is
appropriate to index each taxpayer’s base amount to
average growth in its gross receipts. By so adjusting
each taxpayer’s base amount, the committee believes the
credit will be better able to achieve its intended
purpose of rewarding taxpayers for research expenses in
excess of amounts which would have been expended in any
case. Using gross receipts as an index, firms in fast-
growing sectors will not be unduly rewarded if their
research intensity, as measured by their ratio of
qualified research to gross receipts, does not corre-
spondingly increase. Likewise, firms in sectors with
slower growth will still be able to earn credits as
long as they maintain research expenditures commensu-
rate with their own sales growth.
Adjusting a taxpayer’s base by reference to its
gross receipts also has the advantage of effectively
indexing the credit for inflation and preventing tax-
payers from being rewarded for increases in research
spending that are attributable solely to inflation.
H. Rept. 101-247, at 1199-1200 (1989).18
18
There was no provision relating to the credit under sec.
41 in the bill that the U.S. Senate passed. See H.R. 3299, 101st
Cong. (as passed by Senate, Oct. 13, 1989); see also H. Conf.
(continued...)
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As changed by Congress in 1989 and as in effect for the year
at issue, section 41(a) provides that for purposes of section 38
the research credit determined under section 41 for the taxable
year is an amount equal to the sum of (1) 20 percent of the
excess, if any, of (a) the taxpayer’s qualified research expenses
for the taxable year over (b) the base amount and (2) 20 percent
of the taxpayer’s basic research payments determined under
section 41(e)(1)(A).19
As enacted by Congress in 1989 and as in effect for the year
at issue, section 41(c)(1) defines the term “base amount” to mean
the product of (1) the fixed-base percentage20 and (2) the aver-
age annual gross receipts of the taxpayer for the 4 taxable years
preceding the taxable year for which the credit is being deter-
mined (credit year).21
18
(...continued)
Rept. 101-386, at 543 (1989).
19
See supra note 15.
20
Sec. 41(c)(3)(A) defines the term “fixed-base percentage”
to mean generally the percentage that the aggregate qualified
research expenses of the taxpayer for taxable years beginning
after Dec. 31, 1983, and before Jan. 1, 1989, is of the aggregate
gross receipts of the taxpayer for those taxable years. Sec.
41(c)(3)(C) provides that in no event is the fixed-base percent-
age to exceed 16 percent.
21
Sec. 41(c)(2) provides that in no event is the base amount
to be less than 50 percent of the qualified research expenses for
the credit year.
- 21 -
When Congress decided in 1989 to base the computation of the
credit for increasing research activities on not only expendi-
tures with respect to qualified research but also gross receipts,
Congress enacted section 41(c)(5) into the Code.22 Then section
41(c)(5) provided:
(5) Gross receipts.--For purposes of this subsec-
tion [(c) of section 41 relating to base amount], gross
receipts for any taxable year shall be reduced by
returns and allowances made during the taxable year.
In the case of a foreign corporation, there shall be
taken into account only gross receipts which are effec-
tively connected with the conduct of a trade or busi-
ness within the United States.
In changing in 1989 the computation of the credit for
increasing research activities, Congress generally followed, with
certain modifications, the provision relating to that credit in
the bill of the U.S. House of Representatives (House bill provi-
sion).23 See H. Conf. Rept. 101-386, at 543 (1989) (Conference
Report). In describing the House bill provision, the Conference
22
In 1989, Congress also enacted sec. 41(c)(4), entitled
“Consistent treatment of expenses required”, into the Code.
Specifically, then sec. 41(c)(4)(A) required that qualified
research expenses be taken into account in computing the fixed-
base percentage on a basis consistent with the determination of
qualified research expenses for the credit year. Then sec.
41(c)(4)(B) authorized the Secretary to prescribe regulations in
order to prevent distortions in the calculation of the taxpayer’s
qualified research expenses or gross receipts caused by a change
in accounting methods that the taxpayer used between the current
year and a year taken into account in computing the taxpayer’s
fixed-base percentage. In 1996, Congress redesignated then sec.
41(c)(4) as sec. 41(c)(5). See infra note 25.
23
See supra note 18.
- 22 -
Report stated, inter alia: “the [House] bill provides that a
foreign affiliate’s gross receipts which are not effectively
connected with the conduct of a trade or business in the United
States do not enter into the computation of the credit.” Id. at
542.24
In 1996, Congress enacted new section 41(c)(4) into the
Code, effective for taxable years that began after June 30,
1996.25 Small Business Job Protection Act of 1996, Pub. L. 104-
188, sec. 1204(c), (f)(2), 110 Stat. 1774, 1775. That section
allows a taxpayer to elect an alternative method of computing the
credit under section 41 and establishes a three-tiered formula
for making that alternative computation. Petitioner made the
election under section 41(c)(4) for the taxable year at issue
ended October 31, 2001.26
As in effect for the year at issue, section 41(c)(4) pro-
vides that the credit for increasing research activities deter-
24
The report of the U.S. House of Representatives contained
language relating to its proposed change in 1989 to the computa-
tion of the credit under sec. 41 that is identical to the lan-
guage in the Conference Report quoted in the text. See H. Rept.
101-247, at 1202-1203 (1989).
25
When Congress enacted new sec. 41(c)(4) into the Code in
1996, it redesignated then sec. 41(c)(4), entitled “Consistent
treatment of expenses required”, and then sec. 41(c)(5), entitled
“Gross receipts”, as sec. 41(c)(5) and (6), respectively.
26
Pursuant to sec. 41(c)(4)(B), petitioner’s election ap-
plies to the taxable year at issue and all succeeding taxable
years unless revoked with the consent of the Secretary.
- 23 -
mined under section 41(a)(1) is equal to the sum of (1) 2.65
percent of so much of the qualifying research expenses for the
taxable year as exceeds 1 percent of the average described in
section 41(c)(1)(B) (i.e., the average annual gross receipts of
the taxpayer for the 4 taxable years preceding the credit year)
but does not exceed 1.5 percent of that average, (2) 3.2 percent
of so much of those expenses as exceeds 1.5 percent of that
average but does not exceed 2 percent of that average, and
(3) 3.75 percent of so much of those expenses as exceeds 2
percent of that average. See sec. 41(c)(4)(A).
In 1999, Congress changed the definition of foreign research
in section 41(d)(4)(F) to read: “Any research conducted outside
the United States, the Commonwealth of Puerto Rico, or any
possession of the United States.” Congress thereby expanded the
definition of qualified research in section 41(d) to include
certain research conducted in not only the United States but also
the Commonwealth of Puerto Rico and any possession of the United
States. See Ticket to Work and Work Incentives Improvement Act
of 1999 (1999 Act), Pub. L. 106-170, sec. 502(c)(1), 113 Stat.
1919.
When Congress expanded in 1999 the definition of qualified
research in section 41(d) to include certain research conducted
in not only the United States but also the Commonwealth of Puerto
Rico and any possession of the United States, Congress added the
- 24 -
following phrase at the end of section 41(c)(6), entitled “Gross
receipts”: “the Commonwealth of Puerto Rico, or any possession
of the United States”.27 See 1999 Act sec. 502(c)(1). Section
41(c)(6) as amended in 1999 and as in effect for the year at
issue provides:
(6) Gross receipts.--For purposes of this subsec-
tion [(c) of section 41 relating to base amount], gross
receipts for any taxable year shall be reduced by
returns and allowances made during the taxable year.
In the case of a foreign corporation, there shall be
taken into account only gross receipts which are effec-
tively connected with the conduct of a trade or busi-
ness within the United States, the Commonwealth of
Puerto Rico, or any possession of the United States.
The foregoing background gives context to the respective
positions and arguments of the parties on the sole issue that we
must decide. Before considering those positions and arguments,
we note that our review of the filings that the parties made with
respect to their respective motions for summary judgment raised
certain questions that we gave the parties an opportunity to
address at a hearing (Court’s hearing).28 After that hearing,
27
The changes that Congress made in 1999 to sec. 41(d)(4)(F)
and (c)(6) were generally effective with respect to amounts paid
or incurred after June 30, 1999. See Ticket to Work and Work
Incentives Improvement Act of 1999, Pub. L. 106-170, sec.
502(c)(3), 113 Stat. 1920.
28
Before the Court’s hearing, respondent filed respondent’s
motion and a memorandum of law in support of that motion.
Petitioner then filed petitioner’s motion and a memorandum of law
in support of that motion and in opposition to respondent’s
motion. Thereafter, respondent filed a memorandum of law in
opposition to petitioner’s motion. Petitioner then filed a reply
(continued...)
- 25 -
petitioner filed a motion for leave to file a supplemental
memorandum of law. We granted that motion and allowed petitioner
to file a supplemental memorandum of law (petitioner’s supplemen-
tal memorandum). We also allowed respondent to file a supplemen-
tal memorandum of law (respondent’s supplemental memorandum).
We consider now the respective positions and arguments of
the parties on the issue presented. It is petitioner’s position
that, in calculating the alternative incremental credit under
section 41(c)(4) (alternative section 41 credit), petitioner is
not required to include in the computation of the average de-
scribed in section 41(c)(1)(B) (i.e., its average annual gross
receipts for the 4 taxable years preceding the taxable year ended
October 31, 2001) the total annual gross receipts of Deere’s
foreign branches for each of those 4 preceding taxable years. It
is respondent’s position that petitioner is required to do so.
Petitioner maintains in petitioner’s filings and peti-
tioner’s supplemental memorandum, and respondent no longer
disputes, that section 41 does not provide a definition of the
28
(...continued)
to respondent’s memorandum in opposition to petitioner’s motion.
We shall refer to the filings that petitioner made and the
filings that respondent made before the Court’s hearing took
place as petitioner’s filings and respondent’s filings, respec-
tively.
- 26 -
term “gross receipts” used in section 41(c).29 Petitioner fur-
ther maintains in petitioner’s filings and petitioner’s supple-
mental memorandum, and respondent continues to dispute, that we
should interpret the term “gross receipts” in section
41(c)(1)(B)30 to exclude the total annual gross receipts of
Deere’s foreign branches. According to petitioner, “the struc-
ture of the statute” and its legislative history “demonstrate
* * * that Congress did not intend to include such receipts.”31
29
In respondent’s filings, respondent argued that sec. 41
“provides an expansive definition of the activities or sources of
income to be included” in gross receipts under sec. 41(c) and
that there are “Only two stated exceptions to the definition of
gross receipts [that] are identified in section 41(c)(6)”. In
respondent’s supplemental memorandum, respondent states: “Re-
spondent agrees that the scope of gross receipts * * * is not
entirely clear and unambiguous.”
30
As discussed previously, sec. 41(c)(1)(B) states: “the
average annual gross receipts of the taxpayer for the 4 taxable
years preceding the taxable year for which the credit is being
determined”. It is necessary for petitioner to calculate under
sec. 41(c)(1)(B) that average in order to compute under sec.
41(c)(4) the alternative section 41 credit. See supra note 12.
31
Petitioner advanced its arguments about “the structure of
the statute” and Congress’s intent in enacting that statute in
petitioner’s filings. Petitioner reaffirms those arguments in
petitioner’s supplemental memorandum, albeit in somewhat differ-
ent language than petitioner used in petitioner’s filings.
Respondent maintains, and petitioner disputes, that in peti-
tioner’s supplemental memorandum petitioner modified an argument
advanced in petitioner’s filings and thus advances a new argument
that it did not advance in petitioner’s filings. According to
petitioner,
Petitioner does not take the position that amounts
should be excluded from gross receipts for purposes of
section 41 merely because they are foreign source
(continued...)
- 27 -
We turn first to petitioner’s argument that “the structure
of the statute demonstrates that Congress did not intend [peti-
tioner] to include” the total annual gross receipts of Deere’s
foreign branches in calculating under section 41(c)(1)(B) peti-
tioner’s average annual gross receipts for the 4 taxable years
preceding the taxable year at issue. In support of that argu-
ment, petitioner asserts:
Because section 41 does not provide a comprehensive
definition of “gross receipts,” no negative implication
should be drawn from the absence of a similar express
exclusion in the case of an unincorporated foreign
branch [as appears in the second sentence of section
41(c)(6) in the case of a foreign corporation].
Rather, because the R&E credit is calculated for all
commonly controlled corporations and unincorporated
trades or businesses under section 41(f), it follows
that foreign gross receipts from a foreign trade or
business such as a foreign branch operation should be
31
(...continued)
within the meaning of sections 861-865 (or, conversely,
included in gross receipts merely because they are U.S.
source). * * * While Petitioner concedes that the point
was not adequately addressed in * * * [petitioner’s
filings], and that Petitioner’s counsel who spoke at
the [Court’s] Hearing at times erroneously represented
Petitioner’s position, Petitioner does not believe that
its position in this regard constitutes a change or
modification from that set forth in Petitioner’s * * *
[filings]. Throughout its filings, Petitioner made
clear that the amounts it was seeking to exclude from
gross receipts were, first and foremost, only those
related to its foreign branches. * * *
We need not resolve the parties’ disagreement over whether
petitioner advances a new argument in petitioner’s supplemental
memorandum. We address herein the arguments that are the linch-
pins of petitioner’s position on the issue presented.
- 28 -
excluded just as the [second sentence of] section
41(c)(6) expressly does for a foreign corporation.[32]
We reject petitioner’s argument that the structure of
section 41, in particular (1) the second sentence of section
41(c)(6) and (2) section 41(f), shows that Congress did not
intend to require it to include in the calculation under section
41(c)(1)(B) the total annual gross receipts of Deere’s foreign
branches. When Congress first enacted the credit for increasing
research activities in 1981 as section 44F, Congress intended to
prevent artificial increases in research expenditures, in partic-
ular through the shifting of expenditures in the case of
intracompany transactions among a controlled group of corpora-
tions or otherwise related persons, including partnerships,
proprietorships, and any other trades or businesses, whether or
not incorporated, that were under common control of the taxpayer.
To do so, Congress provided the aggregation rule in then section
44F(f) to ensure that the credit was allowed only where there
were actual increases in qualified research expenditures for the
taxable year. See H. Rept. 97-201, supra at 123-124, 1981-2 C.B.
at 364-365; S. Rept. 97-144, supra at 83-84, 1981-2 C.B. at 442-
443. In 1981 when Congress enacted the credit for increasing
32
As pertinent here, the second sentence of sec. 41(c)(6)
states: “In the case of a foreign corporation, there shall be
taken into account only gross receipts which are effectively
connected with the conduct of a trade or business within the
United States”. See infra note 38.
- 29 -
research activities as section 44F and in 1989 when it changed
the basis of calculating that credit and retained the aggregation
rule in section 41(f),33 Congress was familiar with the concepts
of “controlled group of corporations” and “all trades or busi-
nesses (whether or not incorporated) which are under common
control”. See then sec. 44F(f)(1); sec. 41(f)(1). As pertinent
here, Congress provided in then section 44F(f)(1)(B) and section
41(f)(1)(B) that, under regulations prescribed by the Secretary,
in determining the amount of the credit under section 41, all
trades or businesses, whether or not incorporated, which are
under common control are to be treated as a single taxpayer, and
the credit for increasing research activities, if any, allowable
to each such person is to be its proportionate share of the
qualified research expenses giving rise to the credit. Congress
mandated in then section 44F(f)(1)(B) and section 41(f)(1)(B):
The regulations prescribed under this subparagraph [(B)
of then section 44F(f)(1) and (B) of section 41(f)(1)
relating to all trades or businesses, whether or not
incorporated, which are under common control] shall be
based on principles similar to the principles which
apply in the case of subparagraph (A) [of then section
44F(f)(1) and section 41(f)(1) relating to a controlled
group of corporations].
In other words, Congress directed in then section 44F(f)(1)(B)
and section 41(f)(1)(B) that principles similar to the principles
in then section 44F(f)(1)(A) and section 41(f)(1)(A) which apply
33
See supra note 17.
- 30 -
in determining the amount of the credit for increasing research
activities in the case of a controlled group of corporations are
to apply in determining the amount of the credit in the case of
all trades or businesses, whether or not incorporated, under
common control.
When Congress wanted to apply to all trades or businesses,
whether or not incorporated, under common control principles that
are similar to the principles in then section 44F(f)(1)(A) and
section 41(f)(1)(A) relating to a controlled group of corpora-
tions, Congress knew how to, and did, so mandate. If Congress
had wanted to exclude from or include in the calculation under
section 41(c)(1)(B) the gross receipts of all foreign unincorpo-
rated trades or businesses (e.g., Deere’s foreign branches) on
the basis of principles similar to the principles that Congress
prescribed in the second sentence of section 41(c)(6) in the case
of foreign corporations, it knew how to so mandate and would have
so mandated. It did not. The silence of Congress is strident.
We turn next to petitioner’s argument that the legislative
history of section 41 demonstrates that Congress did not intend
to include in the calculation under section 41(c)(1)(B) the total
annual gross receipts of Deere’s foreign branches. In support of
that argument, petitioner asserts:
Although [the second sentence of] section 41(c)(6)
expressly refers only to “foreign corporations,” the
legislative history of * * * [the Omnibus Budget Recon-
ciliation Act of 1989], in which Congress added the
- 31 -
gross receipts component to the R&E credit, describes
this provision differently, stating: “[T]he bill
provides that a foreign affiliate’s gross receipts
which are not effectively connected with the conduct of
a trade or business in the United States do not enter
into the computation of the credit.” * * * The term
“affiliate” has a broader meaning than the term “corpo-
ration.” * * *
The likely explanation for the use of the broad
term “affiliate,” rather than “corporation,” in the
* * * [Omnibus Budget Reconciliation Act of 1989]
legislative history is that the Budget Committee viewed
the “taxpayer” under section 41(c) as being the con-
trolled group of both foreign corporations and foreign
unincorporated trades or businesses, consistent with
section 41(f). As such, the Budget Committee used the
broad term “affiliate” to encompass trades or busi-
nesses as well as corporations, both of which may
constitute members of the controlled group--i.e., “the
taxpayer” under the statute. [Fn. ref. omitted.34]
34
In petitioner’s supplemental memorandum, petitioner re-
states the argument in petitioner’s filings that is discussed in
the text. In petitioner’s supplemental memorandum, petitioner
argues:
Petitioner believes that there generally should be
symmetry between the treatment of foreign and domestic
taxpayers. This symmetry lies at the heart of Peti-
tioner’s position. Specifically, it is Petitioner’s
position that any receipt from a trade or business that
would be expressly included in gross receipts by virtue
of section 41(c)(6) if derived by a foreign corporation
should similarly be included if derived by a foreign
partnership, foreign sole proprietorship or foreign
branch. Conversely, any receipt attributable to the
activities of a foreign corporation that would not be
included in gross receipts pursuant to section 41(c)(6)
should not be required to be included in gross receipts
where the activities are conducted by a foreign part-
nership, foreign sole proprietorship or foreign branch.
Petitioner believes * * * that Congress intended this
equality in treatment * * *.
- 32 -
We reject petitioner’s argument that the legislative history
of section 41 shows that Congress did not intend to include in
the calculation under section 41(c)(1)(B) the total annual gross
receipts of Deere’s foreign branches. Petitioner’s reliance on
the legislative history of the second sentence of section
41(c)(6), which refers to a “foreign affiliate”, is improper and
misplaced. The second sentence of section 41(c)(6) is clear and
unambiguous on its face and applies only in the case of a foreign
corporation.35 We generally may not resort to legislative his-
tory to give meaning to a clear and unambiguous statute. See,
e.g., United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241
(1989); Montgomery v. Commissioner,
122 T.C. 1, 7 (2004). We may
not resort here to the legislative history of the clear and
unambiguous second sentence of section 41(c)(6) on which peti-
tioner relies. That history does not support, let alone unequiv-
ocally support, petitioner’s argument that Congress did not
intend to include in the calculation under section 41(c)(1)(B)
the total annual gross receipts of Deere’s foreign branches.
See, e.g., Huntsberry v. Commissioner,
83 T.C. 742, 747-748
(1984). Even though the legislative history on which petitioner
relies used the term “foreign affiliate”, that term is itself
ambiguous, and Congress used the unambiguous term “foreign
35
The second sentence of sec. 41(c)(6) begins: “In the case
of a foreign corporation”.
- 33 -
corporation” when it enacted the second sentence of section
41(c)(6). Furthermore, the concept “effectively connected with
the conduct of a trade or business within the United States”,36
which Congress used in the second sentence of section 41(c)(6)
“In the case of a foreign corporation”, is a concept that Con-
gress enacted into the Code and that applies to a foreign corpo-
ration (as well as to a nonresident alien individual). It is not
a concept that the Code applies to a foreign “affiliate” that is
not a foreign corporation. See secs. 882, 872. The clear and
unambiguous language of the second sentence of section 41(c)(6)
is controlling.
We turn now to another argument that petitioner advances in
support of its position on the issue presented. Petitioner
argues:
Interpreting “gross receipts” under section 41(c)
to exclude gross receipts from foreign branches such as
those operated by Deere is consistent with the histori-
cal focus of the R&E credit on domestic activities
* * * [which] did not change when the gross receipts
components of the R&E credit were originally introduced
as part of * * * [the Omnibus Budget Reconciliation Act
of 1989]. * * *
In support of that argument, petitioner asserts:
the R&E credit has been focused on activities within
the United States since its original enactment in 1981.
* * * Interpreting “gross receipts” to include only
domestic gross receipts maintains that domestic focus.
* * *
36
See supra note 32.
- 34 -
* * * * * * *
* * * In no way did Congress intend the gross
receipts component of the base amount calculation to
fundamentally alter the basic framework of the R&E
credit by changing its historic domestic focus.
Similarly, there is nothing about the addition of
the * * * [alternative incremental research credit
under sec. 41(c)(4)] to the R&E credit that alters the
domestic orientation of the statute. * * * The legisla-
tive history [of the alternative incremental research
credit] provides no explanation as to the purpose of *
* * [that credit], but there is no purpose apparent in
that regime * * * to expand the scope of the credit in
general, and the calculation of gross receipts in
particular, beyond the taxpayer’s domestic activities.
[Fn. ref. omitted.]
As we understand it, petitioner is arguing that the “his-
toric domestic focus” of the credit for increasing research
activities was on both the making of research expenditures in the
United States and the conduct of a taxpayer’s trade or business
in the United States. According to petitioner, its interpreta-
tion of the term “gross receipts” is consistent with the alleged
“historic domestic focus” of the credit for increasing research
activities on the conduct of a taxpayer’s trade or business in
the United States.37
37
In petitioner’s supplemental memorandum, petitioner ar-
gues:
whether a particular receipt is required to be taken
into account for purposes of section 41 should be
determined primarily by whether or not the receipt has
the requisite nexus with the United States. * * * In
the case of a domestic taxpayer, Petitioner believes
that the essential consideration is whether or not the
receipt in question forms part of the taxpayer’s U.S.
(continued...)
- 35 -
We reject petitioner’s argument regarding the alleged
“historic domestic focus” of the credit involved here. In 1981
when Congress first enacted the credit for increasing research
activities into the Code and thereafter when Congress reenacted
that credit into the Code, it did so in order to provide “incen-
tives for greater private activity in research”, H. Rept. 97-201,
supra at 111, 1981-2 C.B. at 358; S. Rept. 97-144, supra at 77,
1981-2 C.B. at 439, which would thereby “encourage business firms
to perform the research necessary to increase the innovative
qualities and efficiency of the U.S. economy”, H. Rept. 99-426,
supra at 177, 1986-3 C.B. (Vol. 2) at 177; S. Rept. 99-313, supra
at 694, 1986-3 C.B. (Vol. 3) at 694. Throughout the history of
the credit for increasing research activities, Congress excluded
from research qualifying for the credit research conducted
outside the United States. See then sec. 44F(d)(1); sec.
41(d)(4)(F). In doing so, Congress wanted to ensure that
expenditures for research which is conducted outside
the United States do not enter into the credit computa-
tion, whether or not the taxpayer is located or does
business in the United States; the test is whether the
laboratory experiments, etc., actually take place in
this country.[38]
37
(...continued)
trade or business or is attributable to a trade or
business being conducted outside of the United States.
[Fn. ref. omitted.]
38
In 1999, Congress expanded the definition of qualified
research in sec. 41(d) to include certain research conducted in
not only the United States but also the Commonwealth of Puerto
(continued...)
- 36 -
H. Rept. 97-201, supra at 116, 1981-2 C.B. at 361.
As made clear in the above-quoted legislative history of the
credit for increasing research activities, the “historic domestic
focus” of Congress in providing that credit was to promote
expenditures for research conducted in the United States; it was
not on “whether or not the taxpayer is located or does business
in the United States”. Id. We reject petitioner’s assertion
that in the case of a U.S. corporation “the essential consider-
ation is whether or not the receipt in question forms part of the
taxpayer’s U.S. trade or business or is attributable to a trade
or business being conducted outside the United States.”
We conclude that neither the structure or the legislative
history of section 41 nor the so-called historic domestic focus
of the credit for increasing research activities establishes that
Congress intended to exclude the total annual gross receipts of
Deere’s foreign branch operations from the computation under
section 41(c)(1)(B) of petitioner’s average annual gross receipts
for the 4 taxable years preceding the taxable year at issue ended
38
(...continued)
Rico and any possession of the United States. See sec.
41(d)(4)(F). Petitioner does not claim that what it calls a
“marginal expansion” in 1999 of the definition of qualified
research is material to resolving the issue presented here. Nor
does petitioner maintain that the following phrase that Congress
added at the end of sec. 41(c)(6) in 1999 when Congress expanded
the definition of qualified research is material to resolving the
issue here: “the Commonwealth of Puerto Rico, or any possession
of the United States.”
- 37 -
October 31, 2001.39 During each of the taxable years ended
October 31, 1997 through 2000, the total income that petitioner
reported on page 1, line 11, of petitioner’s consolidated return
included the amounts, if any, from the operations during each of
those years that Deere conducted through Deere’s German branch,
Deere’s Italian branch, and Deere’s Swiss branch. Petitioner has
failed to establish, and we have not found, any valid reason for
excluding those amounts from the calculation under section
41(c)(1)(B).
Petitioner’s final argument in support of its position on
the issue presented is that “even if the gross receipts from
Deere’s foreign branch operations were construed to be within the
literal meaning of ‘gross receipts’ under section 41(c) * * *,
the Court should interpret the statute to exclude such receipts.”
In support of that argument, petitioner asserts:
even if the term “gross receipts” under section
41(c)(4) could be read literally to include * * * gross
receipts from Deere’s foreign branch operations, this
39
Neither sec. 41 nor its legislative history sheds any
light on why Congress decided in the case of a foreign corpora-
tion to include in gross receipts under sec. 41(c) “only gross
receipts which are effectively connected with the conduct of a
trade or business within the United States”. The reason that
Congress did so might simply have been that the credits permitted
by, inter alia, sec. 38, which includes the credit for increasing
research activities under sec. 41, are not allowed against the
flat tax of 30 percent imposed by sec. 881(a) and sec. 1.882-
1(b)(1), Income Tax Regs., on the income of a foreign corporation
which is not effectively connected with the conduct of a trade or
business within the United States. See sec. 1.882-1(d), Income
Tax Regs.
- 38 -
Court should reject that reading to avoid a result
plainly at variance with the congressional intent
behind the R&E credit.
We reject for the reasons discussed above petitioner’s
assertion that the inclusion of the total annual gross receipts
of Deere’s foreign branches in the calculation under section
41(c)(1)(B) is “plainly at variance with the congressional intent
behind the R&E credit.”
In further support of its argument that, even if we were to
hold that the “literal meaning” of the term “gross receipts” in
section 41(c)(1)(B) includes the total annual gross receipts of
Deere’s foreign branches, we should nonetheless interpret that
section to exclude those receipts, petitioner asserts:
it would be odd for the statute to be interpreted to
effectively discriminate in favor of foreign corpora-
tions and against United States corporations. * * *
Because foreign corporations do not have to include
their gross receipts (except for those that are not
[sic] effectively connected with a United States trade
or business) under section 41(c)(6), requiring Deere to
include receipts from its foreign branch operations
would have the relative effect of penalizing Deere, and
benefitting its foreign competitors, without any appar-
ent justification under the statute or legislative
history.
We reject petitioner’s assertions. Petitioner has failed to
persuade us that requiring it to include the total annual gross
receipts of Deere’s foreign branches in the calculation under
section 41(c)(1)(B) will have the discriminatory effect about
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which petitioner complains.40 In any event, the second sentence
of section 41(c)(6) on which petitioner relies to support its
argument regarding the alleged discriminatory effect about which
it complains is, as discussed above, clear and unambiguous and
applies only in the case of a foreign corporation. We have found
nothing in section 41, its legislative history, or petitioner’s
arguments that permits us to conclude that in the case of a
foreign unincorporated trade or business such as Deere’s foreign
branches we must apply principles similar to the principles in
the second sentence of section 41(c)(6) that apply in the case of
a foreign corporation.
We hold that petitioner is required to include in the
calculation under section 41(c)(1)(B) of its average annual gross
receipts for the 4 taxable years preceding the taxable year ended
October 31, 2001, the total annual gross receipts of Deere’s
foreign branches for each of those 4 preceding taxable years.
40
A U.S. corporation might complain that Congress discrimi-
nated against it by requiring it to include worldwide income in
total income which, after any deductions allowed by the Code, is
subject to tax under sec. 11, whereas a foreign corporation
conducting business in the United States must include only income
which is effectively connected with the conduct of a trade or
business within the United States in total income which, after
any deductions allowed by the Code, is subject to tax under sec.
11. Nonetheless, Congress chose to do so for what it believed
were good reasons.
- 40 -
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing,
An order denying petitioner’s
motion and granting respondent’s
motion and decision for respondent
will be entered.
