Judges: GOEKE
Attorneys: Albert H. Turkus and Paul Oosterhuis , for petitioner. David P. Fuller and Roger L. Kave , for respondent.
Filed: Sep. 24, 2012
Latest Update: Nov. 21, 2020
Summary: HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDI- ARIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 21976–07, 10075–08. Filed September 24, 2012. The parties cross-moved for partial summary judgment on whether P was required, as asserted by R, to include nonsales income, including dividends, interest, rent, and other income, in its ‘‘average annual gross receipts’’ for purposes of calcu- lating its I.R.C. sec. 41 research credits for taxable years 1999 through 2001. H
Summary: HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDI- ARIES, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 21976–07, 10075–08. Filed September 24, 2012. The parties cross-moved for partial summary judgment on whether P was required, as asserted by R, to include nonsales income, including dividends, interest, rent, and other income, in its ‘‘average annual gross receipts’’ for purposes of calcu- lating its I.R.C. sec. 41 research credits for taxable years 1999 through 2001. He..
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HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDI-
ARIES, PETITIONER v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket Nos. 21976–07, 10075–08. Filed September 24, 2012.
The parties cross-moved for partial summary judgment on
whether P was required, as asserted by R, to include nonsales
income, including dividends, interest, rent, and other income,
in its ‘‘average annual gross receipts’’ for purposes of calcu-
lating its I.R.C. sec. 41 research credits for taxable years 1999
through 2001. Held: P was required to include such amounts
in its ‘‘average annual gross receipts’’ in determining available
research credits for the taxable years at issue. Accordingly, we
will grant R’s motion on this matter.
Albert H. Turkus and Paul Oosterhuis, for petitioner.
David P. Fuller and Roger L. Kave, for respondent.
OPINION
GOEKE, Judge: In two statutory notices of deficiency
respondent disallowed in part credits for increasing research
255
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256 139 UNITED STATES TAX COURT REPORTS (255)
activities pursuant to section 411 claimed by petitioner, Hew-
lett-Packard Co. & Consolidated Subsidiaries (HP), for tax-
able years 1999 through 2003. Following concessions and
stipulations, the parties cross-moved for partial summary
judgment on two issues:
(1) whether HP was required to include intercompany
gross receipts received from controlled foreign corporations
(CFCs), within the meaning of section 41(f)(5), in its ‘‘average
annual gross receipts’’ (AAGR) when calculating its section 41
credits for all of the taxable years in issue; and
(2) whether HP was required to include nonsales income,
including dividends, interest, rent, and other income in its
AAGR when calculating its section 41 credits for taxable years
1999 through 2001.
Concerning the first issue, respondent, in his response to
HP’s cross-motion, indicated that he had no objection to
granting HP’s motion to exclude such amounts in deter-
mining its AAGR. Accordingly, we will grant petitioner’s
motion, in part.
As to the second issue, we find that HP was required to
include such nonsales income when determining its AAGR.
Therefore, we will also grant respondent’s motion, in part.
Background
HP is a corporation organized under the laws of the State
of Delaware. At all relevant times HP maintained its prin-
cipal corporate offices in California.
During the taxable years at issue HP was a global tech-
nology and service company. HP, directly or through its for-
eign affiliates, 2 manufactured and distributed a broad range
of technology-based business products including printers,
scanners, ink and laser supplies, desktop personal com-
puters, notebooks, workstations, high-end servers, total disk
storage systems, and software technology, including system
management software. For all relevant years HP accrued
income from the sale of goods and services, dividends,
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code)
as amended and in effect for the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2 Among HP’s foreign affiliates were several CFCs within the meaning of sec. 951. These
CFCs, pursuant to sec. 41(f)(5), were also members of HP’s ‘‘controlled group of corporations’’.
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 257
interest, and gross royalties and other income from its CFCs
and from unrelated parties.
For each of the taxable years in issue, HP claimed section
41(a)(1) credits for increasing research activities, electing to
calculate such credits according to the alternative incre-
mental credit (AIRC) computation method prescribed in sec-
tion 41(c)(4). In determining its available credits under that
section, HP was required, in part, to compute its AAGR for the
four taxable years preceding the respective determination
year. HP used the amounts reported on line 1(c) of its Forms
1120, U.S. Corporation Income Tax Return, as the base for
its AAGR calculation for each year. Form 1120, for taxable
years 1995 to 2000, described the amounts reported on line
1(a) as ‘‘gross receipt or sales’’ and the amounts reported on
line 1(b) as ‘‘returns and allowances’’. Line 1(c) represented
the difference between line 1(a) and line 1(b). HP included
intercompany revenues from sales to its CFCs in line 1(a) for
each of the relevant years. 3
Form 1120, for taxable years 1995 to 2000, described
amounts reported on lines 4, 5, 6, 7, and 10 as ‘‘Dividends’’,
‘‘Interest’’, ‘‘Gross rents’’, ‘‘Gross royalties’’, and ‘‘Other
income’’, respectively. HP excluded amounts reported on
those lines in computing its AAGR for purposes of determining
its section 41(a)(1) credits for taxable years 1999 to 2001.
For each taxable year 1999 to 2002, pursuant to section
280C(c)(3), HP elected to reduce its section 41 credit by the
amount equal to the maximum rate of tax under section
11(b)(1) multiplied by the section 41 credit, rather than
reduce its section 174 expense deduction. For its 2003 tax
year, HP did not make such an election.
Following respondent’s issuance of two statutory notices of
deficiency, HP timely petitioned this Court to contest
respondent’s determinations. After subsequent stipulations
and concessions, the amounts attributable to HP’s lines 1(c),
4, 5, 6, 7, and 10 for each of the relevant tax years are as
follows:
3 On June 12, 2003, HP filed amended returns for its 1999 and 2000 tax years to reduce the
AAGR (included in line 1(c)) by gross receipts accrued from CFCs. The same day, HP filed a
claim for refund with respect to its 2001 tax year to similarly reduce the AAGR (included on
line 1(c)) by gross receipts accrued from CFCs.
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258 139 UNITED STATES TAX COURT REPORTS (255)
Line 1(c):
Gross
receipts or Line
sales less Line 6: Line 7: 10:
Taxable returns and Line 4: Line 5: Gross Gross Other
year allowances Dividends Interest rents royalties income
1995 1$15,689,432 -0- $172,816 $449,260 $144,057 $80,468
1996 17,905,779 -0- 276,553 527,781 243,233 49,625
1997 20,473,806 $335 494,017 633,342 273,959 63,355
1998 16,586,875 281 679,076 702,422 242,411 84,527
1999 16,401,655 1,005 676,384 666,093 22,278 30,286
2000 19,080,696 2,391 289,519 598,480 144,266 36,144
1Each figure represents amounts in thousand-dollar increments.
Discussion
I. Summary Judgment
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials of phantom factual
issues. Boyd Gaming Corp. v. Commissioner, 106 T.C. 343,
346–347 (1996); Kroh v. Commissioner, 98 T.C. 383, 390
(1992). Either party may move for summary judgment upon
all or any part of the legal issues in controversy. Rule 121(a);
FPL Group, Inc., & Subs. v. Commissioner, 116 T.C. 73, 74
(2001). We will render a decision on a motion for partial
summary judgment ‘‘if the pleadings, answers to interrog-
atories, depositions, admissions, and any other acceptable
materials, * * * show that there is no genuine dispute as to
any material fact and that a decision may be rendered as a
matter of law.’’ Rule 121(b); Sundstrand Corp. v. Commis-
sioner, 98 T.C. 518, 520 (1992), aff ’d,
17 F.3d 965 (7th Cir.
1994).
The parties filed cross-motions for partial summary judg-
ment, in part, on whether HP, for tax years ended October
31, 1999 through 2001, must include dividends, interest,
rent, and other income accrued from unrelated parties in its
calculation of AAGR for purposes of the AIRC computation
method prescribed in section 41(c)(4). The parties agree, and
we conclude, that there is no genuine issue of material fact
and that a decision may be rendered as a matter of law.
II. The Credit for Increasing Research Activities
Congress introduced the credit for increasing research
activities in the Economic Recovery Tax Act of 1981, Pub. L.
No. 97–34, sec. 221(a), 95 Stat. at 241. The credit was
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 259
intended to ‘‘stimulate a higher rate of capital formation and
to increase productivity’’, S. Rept. No. 97–144, at 76–77
(1981), 1981–2 C.B. 412, 438–439; H.R. Rept. No. 97–201, at
111 (1981), 1981–2 C.B. 352, 358, and ‘‘to encourage business
firms to perform the research necessary to increase the
innovative qualities and efficiency of the U.S. economy’’, S.
Rept. No. 99–313, at 694 (1986), 1986–3 C.B. (Vol. 3) 1, 694;
H.R. Rept. No. 99–426, at 177 (1985), 1986–3 C.B. (Vol. 2) 1,
177. 4
Before 1989 the research credit was calculated entirely on
the basis of research expenditures. Both former section
44F(a) and its later iteration under section 30(a) prescribed
an annual credit in an amount equal to 25% of the excess of
‘‘qualified research expenditures’’ (QRE) for the taxable year
over ‘‘base period research expenses’’. The former provisions,
in sections 44F(c) and 30(c), respectively, defined ‘‘base
period research expenses’’ as the average of QRE for the three
years preceding the taxable year at issue. When Congress
reenacted and redesignated the credit in 1986 as section 41,
then section 41(a)(1) retained the basic credit calculation
supra; however, the credit amount was altered from 25% to
20% of the excess of QRE over ‘‘base period research
expenses’’. 5
In the Omnibus Budget Reconciliation Act of 1989, Pub. L.
No. 101–239, sec. 7110(b), 103 Stat. at 2323, Congress
substantially altered the scheme for calculating the research
credit, effectively tying the credit computation to not only
research expenditures, but also ‘‘gross receipts’’. As amended
and in effect for the years in issue, section 41(a)(1) prescribes
a credit for an amount equal to 20% of the excess of any QRE
for the taxable year over the ‘‘base amount’’. A taxpayer’s
‘‘base amount’’ is the product of its (1) ‘‘fixed-base percent-
age’’ and (2) its AAGR for the four taxable years preceding the
taxable year at issue. Sec. 41(c)(1). Section 41(c)(3)(A) gen-
erally defines the ‘‘fixed-base percentage’’ as the percentage
of aggregate QRE of the taxpayer for the taxable years begin-
4 The credit was originally included in sec. 44F. In 1984 Congress redesignated sec. 44F as
sec. 30. Deficit Reduction Act of 1984, Pub. L. No. 98–369, sec. 471(c), 98 Stat. at 826. The credit
was subsequently reenacted and redesignated, again, by Congress in 1986 as sec. 41. Tax Re-
form Act of 1986, Pub. L. No. 99–514, sec. 231(d)(2), 100 Stat. at 2173.
5 In that year Congress also allowed for the first time in then sec. 41(a)(2) a credit for 20%
of the basic research payments determined under sec. 41(e)(1)(A).
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260 139 UNITED STATES TAX COURT REPORTS (255)
ning after December 31, 1983, and before January 1, 1989,
to AAGR of the taxpayer for the same taxable years. 6
Congress also promulgated then section 41(c)(5), providing
that ‘‘gross receipts’’, for purposes of the section 41 research
credit, ‘‘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 effectively connected with the conduct of a trade or busi-
ness within the United States’’. 7
In describing its reasoning for these changes, Congress
noted:
[T]he committee wished to respond to the criticism that the incentive effect
of the present-law research credit was diminished as a result of the
method of computing the taxpayer’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 therefore smaller credits) in the following three years. As a
consequence, the present-law credit’s marginal incentive effect provided in
the first year was largely offset in the following three years. The com-
mittee, therefore, modified the method of calculating a taxpayer’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 maxi-
mize the credit’s efficiency by not allowing (to the extent possible) credits
for research that would have been undertaken in any event.
* * * * * * *
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 tax-
payer’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 correspondingly
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.
[H.R. Rept. No. 101–247, at 1199–1200 (1989), 1989 U.S.C.C.A.N. 1906,
2669.]
6 The
1989 amendments retained the sec. 41(a)(2) 20% basic research payment credit, as well.
7 In
the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106–170,
sec. 502(c)(1), 113 Stat. at 1919, Congress expanded the definition of gross receipts of foreign
corporations, then set forth in sec. 41(c)(6), for purposes of the sec. 41 credit, to include those
effectively connected with the conduct of a trade or business in ‘‘the Commonwealth of Puerto
Rico, or any possession of the United States.’’
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 261
In 1996 Congress enacted new section 41(c)(4), effective for
taxable years beginning after June 30, 1996. Small Business
Job Protection Act of 1996, Pub. L. No. 104–188, sec. 1204(c),
(f)(2), 110 Stat. at 1774, 1775. 8 That section allows a tax-
payer to elect a separate AIRC method of computing the
research credit under section 41(a)(1) and establishes a
three-tiered formula for making such a computation. As
noted supra, HP made the AIRC election under section
41(c)(4) for all of the taxable years in issue.
As in effect for and applied to HP’s 1999 taxable year, sec-
tion 41(c)(4) prescribed a credit in an amount equal to the
sum of: (i) 1.65% of so much of the QRE from the taxable year
as exceeded 1% of HP’s AAGR, but did not exceed 1.5% of
those AAGR; (ii) 2.2% of so much of the QRE from the taxable
year as exceeded 1.5% of HP’s AAGR, but did not exceed 2%
of those AAGR; and (iii) 2.75% of so much of the QRE for the
taxable year as exceeded 2% of HP’s AAGR.
For the remaining taxable years in issue, section 41(c)(4)
prescribed a credit in an amount equal to the sum of: (i)
2.65% of so much of the QRE from the taxable year as
exceeded 1% of HP’s AAGR, but did not exceed 1.5% of those
AAGR; (ii) 3.2% of so much of the QRE from the taxable year
as exceeded 1.5% of HP’s AAGR, but did not exceed 2% of
those AAGR; and (iii) 3.75% of so much of the QRE from the
taxable year as exceeded 2% of HP’s AAGR.
In 1998 the Department of the Treasury published in the
Federal Register a notice of proposed rulemaking under sec-
tion 41, endeavoring, in part, to provide guidance on the
items of income included in the definition of ‘‘gross receipts’’.
Notice of Proposed Rulemaking, 63 Fed. Reg. 66503 (Dec. 2,
1998). Section 1.41–3(c)(1), Proposed Income Tax Regs., 63
Fed. Reg. 66507 (Dec. 2, 1998), 9 provided that ‘‘gross
receipts’’, for purposes of section 41 credit calculations,
included the ‘‘total amount, as determined under the tax-
payer’s method of accounting, derived by the taxpayer from
all its activities and from all sources (e.g., revenues derived
8 Congress also redesignated then sec. 41(c)(5), entitled ‘‘Gross receipts’’, as sec. 41(c)(6), later
redesignated as sec. 41(c)(7).
9 Generally, proposed regulations are afforded no more weight than a position advanced by
the Commissioner on brief. KTA-Tator, Inc. v. Commissioner, 108 T.C. 100, 102–103 (1997); F.W.
Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265–1266 (1970).
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262 139 UNITED STATES TAX COURT REPORTS (255)
from the sale of inventory before reduction for cost of goods
sold).’’ 10
In 2001 the Department of the Treasury promulgated final
regulations, adopting, in substantial part, the provisions of
the proposed regulations. T.D. 8930, 2001–1 C.B. 433. 11
However, the final regulations, by their own terms, explicitly
apply only to taxable years beginning after January 3, 2001.
Sec. 1.41–3(e), Income Tax Regs. Furthermore, in promul-
gating the final regulations, the Department of the Treasury
expressly limited their exegetic scope to credit computations
for the taxable years following the regulations’ effective date
(January 3, 2001). T.D. 8930, 2001–1 C.B. at 440 (‘‘No
inference should be drawn from the applicability date con-
cerning the application of section 41 to * * * the computa-
tion of the base amount before the applicability date.’’). Con-
sequently, the final regulations provide no guidance in our
present inquiry.
HP does suggest, however, that respondent’s position in
these cases represents an impermissible retroactive applica-
tion of the regulation. As discussed infra, we reject this
characterization. Nonetheless, we believe that the Depart-
ment of the Treasury’s logic in embracing a broad definition
of ‘‘gross receipts’’ for section 41 computation purposes,
articulated in its preamble to the final regulations, equally
applies to pre-effective-date taxable years:
When Congress revised the computation of the research credit to incor-
porate a taxpayer’s gross receipts, neither the statute nor the legislative his-
tory defined the term gross receipts, other than to provide that gross receipts
for any taxable year are reduced by returns and allowances made during
10 Sec. 1.41–3(c)(2), Proposed Income Tax Regs., 63 Fed. Reg. 66508 (Dec. 2, 1998), also ex-
cluded certain items from the definition, including:
(i) returns or allowances; (ii) receipts from the sale or exchange of capital assets, as defined in
section 1221; (iii) repayments of loans or similar instruments (e.g., a repayment of the principal
amount of a loan held by a commercial lender); (iv) receipts from a sale or exchange not in the
ordinary course of business, such as the sale of an entire trade or business or the sale of prop-
erty used in a trade or business as defined under section 1221(2); and (v) amounts received with
respect to sales tax or other similar state and local taxes, if under the applicable state or local
law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely
collects and remits the tax to the taxing authority.
11 The final regulations, under sec. 1.41–3(c)(2)(vi), Income Tax Regs., further excluded from
the definition of ‘‘gross receipts’’:
Amounts received by a taxpayer in a taxable year that precedes the first taxable year in which
the taxpayer derives more than $25,000 in gross receipts other than investment income. For
purposes of this paragraph (c)(2)(vi), investment income is interest or distributions with respect
to stock (other than the stock of a 20-percent owned corporation as defined in section 243(c)(2).
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 263
the tax year, and, in the case of a foreign corporation, that only gross
receipts effectively connected with the conduct of a trade or business
within the United States are taken into account. See section 41(c)(6).
The proposed regulations generally defined gross receipts as the total
amount derived by a taxpayer from all activities and sources. However, in
recognition of the fact that certain extraordinary gross receipts might not
be taken into account when a business determines its research budget, the
proposed regulations provided that certain extraordinary items (such as
receipts from the sale or exchange of capital assets) would be excluded
from the computation of gross receipts.
Several commentators objected to the definition of gross receipts in the
proposed regulations. Referring to the inclusion in a House Budget Report
of the term sales growth as an apparent short-hand reference to an increase
in gross receipts, some commentators argued that gross receipts should be
limited to income from sales. See H.R. Rep. No. 101–247, at 1200 (1989).
In determining its research budget, however, a business may take into
account any expected income stream, regardless of whether or not the
income is derived from sales or from other active business activities. More-
over, many businesses do not generate any income in the form of sales.
Accordingly, the final regulations do not adopt this suggestion.
The final regulations also do not adopt suggestions that the definition
of gross receipts be narrowed to exclude those items not directly related
to the conduct of the taxpayer’s trade or business. As noted above, any
expected income stream may be taken into account in determining a busi-
ness’ research budget, regardless of the source of the income. Moreover, IRS
and Treasury believe that a subjective narrowing of the term gross receipts,
as suggested by these commentators, could leave the definition of the term,
and thus the computation of the base amount, vulnerable to manipulation.
For example, a narrower definition allowing taxpayers to exclude items
not derived in the ordinary course of business might prompt a taxpayer to
assert that certain royalties received in the 1980s were derived in the ordi-
nary course of business and are includable as gross receipts (thus
decreasing the taxpayer’s fixed-base percentage), but that certain interest
income received in the years preceding the credit year was not derived in
the ordinary course of business and was not includable in gross receipts
(thus decreasing the base amount). Nor would a rule of consistency be
effective in preventing such manipulation. While the taxpayer described
above would be characterizing the nature of its income items as derived
or not derived in the ordinary course of a trade or business so as to maxi-
mize the amount of the credit, the taxpayer would not be taking incon-
sistent positions with respect to the same items of income. * * *
[T.D. 8930, 2001–1 C.B. at 434–435; emphasis added.]
III. Statutory Interpretation
A. Statutory Language
The Supreme Court has stated that ‘‘ ‘in any case of statu-
tory construction, * * * [its] analysis begins with the lan-
guage of the statute, * * * . And where the statutory lan-
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264 139 UNITED STATES TAX COURT REPORTS (255)
guage provides a clear answer, it ends there as well’.’’ Harris
Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S.
238, 254 (2000) (quoting Hughes Aircraft Co. v. Jacobson,
525
U.S. 432, 438 (1999)); United States v. Mo. Pac. R.R. Co.,
278
U.S. 269, 278 (1929) (‘‘[W]here the language of an enactment
is clear, and construction according to its terms does not lead
to absurd or impracticable consequences, the words employed
are to be taken as the final expression of the meaning
intended.’’). 12 When a word is undefined in a statute, it is a
fundamental canon of statutory construction that it will be
interpreted as taking its ordinary, contemporary, common
meaning. See Commissioner v. Soliman, 506 U.S. 168, 174
(1993).
For the taxable years at issue, then section 41(c)(6) pro-
vided in part that ‘‘gross receipts’’, for purposes of the section
41 research credit, ‘‘shall be reduced by returns and allow-
ances made during the taxable year.’’ The function of the
provision was to specify exclusions from ‘‘gross receipts’’; it
offered little clarification concerning the category or cat-
egories of receipts included within the definition of the term.
No other provision in section 41 filled this ostensible statu-
tory gap.
HP submits that by specifically excluding ‘‘returns and
allowances’’, a phrase connoting a merchant business associa-
tion, Congress evinced a clear intention to limit gross
receipts to solely sales receipts. Similarly, citing a Black’s
Law Dictionary entry, HP asserts that the generally accepted
definition of ‘‘gross receipts’’ focuses on sales or services
income. See Black’s Law Dictionary 772 (9th ed. 2009)
(defining ‘‘gross receipts’’ as ‘‘The total amount of money or
other consideration received by a business taxpayer for goods
sold or services performed in a taxable year, before deduc-
tions. * * * [Sec.] 448; * * * [sec.] 1.448–1T(f)(2)(iv) [Tem-
porary Income Tax Regs., 52 Fed. Reg. 22764 (June 16,
1987)].’’).
We are unpersuaded by HP’s contentions. Nowhere in the
Code has the isolated term ‘‘gross receipts’’ been construed as
12 Cf. Halpern v. Commissioner, 96 T.C. 895, 899 (1991) (‘‘[W]here a statute is clear on its face,
we require unequivocal evidence of legislative purpose before construing the statute so as to
override the plain meaning of the words used therein.’’) (citing Huntsberry v. Commissioner, 83
T.C. 742, 747–748 (1984)).
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 265
narrowly as HP suggests. 13 On the contrary, an examination
of the Federal income tax laws reveals that Congress widely
embraces the notion of a broad, inclusive definition for the
term. See, e.g., secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C).
Indeed, when adopting that term in a provision, Congress
often qualifies the term’s comprehensive definition through
specific exclusions or limitations to accommodate the rel-
evant statutory scheme. See, e.g., secs. 448(c)(3)(C),
509(a)(2)(A)(ii), 1362(d)(3)(B) and (C). 14 If, as proffered by
HP, Congress intended to further limit the definition of
‘‘gross receipts’’ in section 41, it undoubtedly recognized the
constructional convention by which it had traditionally done
so in numerous provisions.
Further, HP’s attempt to equate the common meaning of
‘‘gross receipts’’ with the narrow definition Black’s Law Dic-
tionary is unavailing. Specifically, the definition provided in
Black’s Law Dictionary is undermined by the cited authori-
ties, section 448 and section 1.448–1T(f)(2)(iv), Temporary
Income Tax Regs., supra, from which the definition was
purportedly derived. Coincidentally, section 448(c)(3)(C)
serves as the most analogous statutory provision to section
41(c)(6), offering nearly identical language. It prescribes that
‘‘gross receipts for any taxable year’’, for purposes of limita-
tions on the use of the cash method of accounting, ‘‘shall be
reduced by returns and allowances made during such year.’’
Section 1.448–1T(f)(2)(iv), Temporary Income Tax Regs.,
supra, promulgated before the statutory amendment incor-
porating ‘‘gross receipts’’ into the section 41 credit calculation
and effective for all of the taxable years in issue, 15 provides
13 It is a well-established canon of statutory interpretation that ‘‘ ‘identical words used in dif-
ferent parts of the same act are intended to have the same meaning.’ ’’ United States Nat’l Bank
of Or. v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 460 (1993) (quoting Commissioner v. Key-
stone Consol. Indus., Inc., 508 U.S. 152, 159 (1993)). Similarly, the meaning, or ambiguity, of
certain words or phrases may become evident only when they are placed in context. FDA v.
Brown & Williamson Tobacco Corp., 529 U.S. 120, 132–133 (2000) (citing Brown v. Gardner,
513 U.S. 115, 118 (1994)). ‘‘ ‘[W]ords of a statute must be read in their context and with a view
to their place in the overall statutory scheme.’ ’’ Id. at 133 (quoting Davis v. Mich. Dept. of
Treasury, 489 U.S. 803, 809 (1989)).
14 At the time sec. 41 was amended to include ‘‘gross receipts’’ in increasing research credit
calculations, current sec. 1362(d)(3)(B) and (C) was enacted, in similar form, as sec.
1362(d)(3)(C) and (D), respectively.
15 Sec. 1.448–1T(f)(2), Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16, 1987), was
promulgated in 1987. Sec. 7805(e)(2) currently prescribes that temporary regulations expire
within three years from the date of issuance; however, this provision applies only to temporary
regulations issued after November 20, 1988. Technical and Miscellaneous Revenue Act of 1988,
Continued
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266 139 UNITED STATES TAX COURT REPORTS (255)
that for purposes of section 448(c)(3)(C), ‘‘gross receipts’’
include:
total sales (net of returns and allowances) and all amounts received for
services. In addition, gross receipts include any income from investments,
and from incidental or outside sources. For example, gross receipts include
interest * * *, dividends, rents, royalties, and annuities, regardless of
whether such amounts are derived in the ordinary course of the taxpayer’s
trade or business. Gross receipts are not reduced by cost of goods sold or
by the cost of property sold if such property is described in section 1221
(1), (3), (4) or (5). With respect to sales of capital assets as defined in section
1221, or sales of property described in 1221(2) (relating to property used in
a trade or business), gross receipts shall be reduced by the taxpayer’s
adjusted basis in such property. Gross receipts do not include the repay-
ment of a loan or similar instrument (e.g., a repayment of the principal
amount of a loan held by a commercial lender). Finally, gross receipts do
not include amounts received by the taxpayer with respect to sales tax or
other similar state and local taxes if, under the applicable state or local
law, the tax is legally imposed on the purchaser of the good or service, and
the taxpayer merely collects and remits the tax to the taxing authority. If,
in contrast, the tax is imposed on the taxpayer under the applicable law,
then gross receipts shall include the amounts received that are allocable
to the payment of such tax. [Emphasis added.]
Clearly then, Black’s Law Dictionary’s definition of ‘‘gross
receipts’’ contradicts its referenced sources. Rather than
endorse a circumscribed interpretation of the term, the cited
temporary regulation explicitly sets forth several categories
of receipts making up a taxpayer’s annual ‘‘gross receipts’’.
Indeed, dissecting the definition proffered by HP concomi-
tantly with its corresponding sources only serves to
strengthen respondent’s position.
HP also refers the Court to line 1(a), ‘‘Gross receipts or
sales’’, on then-applicable versions of Form 1120 to dem-
onstrate that the Commissioner used those terms inter-
changeably to describe the same items of income. We are
skeptical that a form the Commissioner developed for the
effective administration of the Federal income tax laws pro-
vides this Court with any implication or guidance in the
matter at hand. 16 Moreover, neither the relevant statute nor
Pub. L. No. 100–647, sec. 6232(b), 102 Stat. at 3735. Accordingly, the temporary regulation re-
mained valid for all the taxable years in issue.
16 ‘‘[T]he authoritative sources of Federal tax law are in statutes, regulations, and judicial de-
cisions and not in such informal [IRS] publications.’’ Zimmerman v. Commissioner, 71 T.C. 367,
371 (1978), aff ’d without published opinion, 614 F.2d 1294 (2d Cir. 1979); see also Van Dusen
v. Commissioner, 136 T.C. 515, 531 n.29 (2011); Mohamed v. Commissioner, T.C. Memo. 2012–
152, 2012 Tax Ct. Memo LEXIS 152, at *29 (‘‘A taxpayer relies on his private interpretation
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 267
its attendant legislative history discussed further infra refers
to Form 1120. Accordingly, we find this assertion irrelevant.
B. Legislative History
HP further asserts that Congress’ somewhat inconsistent
and, at points, interchangeable use of the terms ‘‘sales’’ and
‘‘gross receipts’’ in describing the 1989 restructuring of the
section 41 credit calculation indicates that Congress viewed
the two words as coterminous. See, e.g., H.R. Rept. No. 101–
247, supra at 1199–1200 (‘‘Likewise, firms in sectors with
slower growth will still be able to earn credits as long as they
maintain research expenditures commensurate with their
own sales growth.’’). In essence, HP requests that the Court
construe any purported legislative ambiguity in its favor.
While the pertinent legislative history certainly lacks distinc-
tive clarity, it is not completely devoid of language
evidencing Congress’ true intent.
As noted supra, Congress determined that ‘‘indexing’’
research expenditures to average annual growth in gross
receipts would ‘‘better serve’’ the credits’ ‘‘intended purpose of
rewarding taxpayers for research expenses in excess of
amounts which would have been expended in any case.’’ Id.
However, if we were to accept HP’s assertion that ‘‘gross
receipts’’ included only ‘‘sales receipts’’, then we would
concomitantly accredit the correlative proposition that Con-
gress intended to extend preferential treatment to companies
that did not engage in sales activity. Under HP’s interpreta-
tion of the credit calculation, it is unlikely that businesses
which accrue mainly licensing or investment income would
generate substantial AAGR. As a result, such businesses
would likely never register a ‘‘base amount’’ exceeding the
minimum base amount prescribed by section 41(c)(2). 17 Simi-
larly, if such businesses elected to calculate their research
credits under the AIRC computation method prescribed in sec-
tion 41(c)(4), they would avoid the lower, more credit-limiting
tiers of the AIRC credit calculation structure. In both cir-
cumstances, taxpayers would enhance their annual research
credits and effectively subvert the legislative purpose of the
section 41 credit statutory scheme by indexing their allow-
of a tax form at his own risk.’’).
17 Sec. 41(c)(2) provides: ‘‘In no event shall the base amount be less than 50 percent of the
qualified research expenses for the credit year.’’
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268 139 UNITED STATES TAX COURT REPORTS (255)
able credit amount to certain research expenditures that they
would have made in any event. Indeed, this interpretation
would provide disparate treatment to businesses in the same
industry operating under different business models. For
instance, a company which merely licensed intellectual prop-
erty would benefit over a similar entity which, instead, incor-
porated such property into marketable products for subse-
quent sale. We find no hint of any congressional intent effec-
tively endorsing such divergent results. See H.R. Rept. No.
101–247, supra at 1199–1200 (‘‘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.’’ (Emphasis
added.)).
C. Respondent’s Position
Respondent maintains that HP should include receipts
reflected on Form 1120 lines 4 (dividends), 5 (interest), 6
(gross rents), 7 (gross royalty), and 10 (other income) in
‘‘gross receipts’’ for its section 41 calculations for each of the
taxable years at issue; however, respondent does not seek to
include receipts reflected on Form 1120 line 8 (capital gain
net income) or 9 (net gain from the sale of a business) for the
same purpose. As noted supra, HP counters that this asser-
tion effectively represents an invalid retroactive application
of section 1.448–1T(f)(2), Temporary Income Tax Regs.,
supra, to the tax years in issue. We do not construe respond-
ent’s position as such. While respondent’s nuanced definition
of ‘‘gross receipts’’ is not entirely congruent with our discern-
ment of a more comprehensive interpretation of the term, 18
we find that respondent’s position simply represents a
concession in these cases. Accordingly, we need not further
address HP’s contention.
D. ‘‘Expressio Unius Est Exclusio Alterius’’
We are cognizant of the venerable rule of statutory
construction, commonly referred to as the maxim ‘‘expressio
unius est exclusio alterius’’, which dictates: ‘‘ ‘Where Con-
gress explicitly enumerates certain exceptions * * * addi-
18 See Deere & Co. v. Commissioner, 133 T.C. 246, 253 (2009) (the taxpayer, in determining
its ‘‘gross receipts’’ for purposes of its sec. 41 credit, used the domestic income it reported on
its Form 1120 line 11, representing the total amount of income listed on lines 3 through 10).
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(255) HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R 269
tional exceptions are not to be implied, in the absence of evi-
dence of a contrary legislative intent.’ ’’ United States v.
Smith, 499 U.S. 160, 167 (1991) (quoting Andrus v. Glover
Constr. Co., 446 U.S. 608, 616–617 (1980)); see also Catterall
v. Commissioner, 68 T.C. 413, 421 (1977), aff ’d sub nom.
Vorbleski v. Commissioner, 589 F.2d 123 (3d Cir. 1978).
Given our understanding of the comprehensive definition of
‘‘gross receipts’’, the sole statutory exclusion from that defini-
tion (‘‘returns and allowances’’), and a lack of congressional
intent indicating otherwise, we do not read any further
limitations into the definition of ‘‘gross receipts’’ for purposes
of section 41.
E. Conclusion
HP repeatedly requests that the Court heed the oft-cited
admonition that ‘‘taxing acts ‘are not to be extended by
implication beyond the clear impact of the language used’ ’’
and that ‘‘doubts are to be resolved against the government
and in favor of the taxpayer.’’ Helvering v. Stockholms
Enskilda Bank, 293 U.S. 84, 93 (1934). Nonetheless, it is
clear that
[t]he intention of the lawmaker controls in the construction of taxing acts
as it does in the construction of other statutes, and that intention is to be
ascertained, not by taking the word or clause in question from its setting
and viewing it apart, but by considering it in connection with the context,
the general purposes of the statute in which it is found, the occasion and
circumstances of its use, and other appropriate tests for the ascertainment
of the legislative will. * * * [Id. at 93–94.]
We believe it evident, when considering the statutory lan-
guage at issue, comparable language in the Code, and the
purpose of the research credit statutory scheme, that Con-
gress intended a broad, inclusive definition of the term ‘‘gross
receipts’’ for purposes of section 41 credit calculations, not
one limited solely to ‘‘sales receipts’’.
IV. Conclusion
On the basis of respondent’s concession, we shall grant in
part HP’s motion for partial summary judgment thus
allowing HP to exclude intercompany gross receipts received
from CFCs, within the meaning of section 41(f)(5), from its
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270 139 UNITED STATES TAX COURT REPORTS (255)
AAGR when calculating its section 41 credits for all of the tax-
able years at issue.
We shall also grant in part respondent’s motion for partial
summary judgment affirming that HP was required to
include nonsales income, including dividends, interest, rent,
and other income, in its AAGR when calculating its section 41
credits for taxable years 1999 through 2001.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be issued
granting the parties’ cross-motions for partial
summary judgment in part.
f
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