148 T.C. No. 10



                   UNITED STATES TAX COURT



       GOOD FORTUNE SHIPPING SA, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 25327-12.                           Filed March 28, 2017.



        P, a foreign corporation organized under the laws of the Repub-
lic of the Marshall Islands, issued its stock shares in bearer form. In
Form 1120-F, U.S. Income Tax Return for a Foreign Corporation, that
it filed for its taxable year 2007, P claimed that it is not described in
I.R.C. sec. 883(c)(1) and that therefore it is entitled under I.R.C. sec.
883(a)(1) to exclude from gross income and exempt from U.S. taxa-
tion certain income. P made that claim even though certain regula-
tions under I.R.C. sec. 883 that were applicable for P’s taxable year
2007 (bearer share regulations) precluded a foreign corporation the
shares of which were issued in bearer form from taking such shares
into account in establishing the ownership of the stock of the foreign
corporation for purposes of determining whether the foreign corpora-
tion is described in I.R.C. sec. 883(c)(1) and thus whether it is enti-
tled to the benefits of I.R.C. sec. 883(a)(1). It is P’s position that the
bearer share regulations are invalid. The parties agree that we are
required to follow the bearer share regulations unless we hold that
those regulations are invalid under the two-step analysis that the
Supreme Court of the United States prescribed in Chevron U.S.A.,
                                         -2-

      Inc. v. Nat. Res. Def. Council, Inc. (Chevron), 

 (1984).
      P concedes that if we were to hold that the bearer share regulations
      are valid, it is not entitled under I.R.C. sec. 883(a)(1) for its taxable
      year 2007 to exclude from gross income or exempt from U.S. taxation
      certain income.

             Held: I.R.C. sec. 883(c)(1) as well as its legislative history is
      silent--there is a gap in that section as well as its legislative history--
      as to how ownership by individuals of a foreign corporation may be
      established for purposes of determining whether the foreign corpora-
      tion is described in I.R.C. sec. 883(c)(1) and thus whether it is enti-
      tled to the benefits of I.R.C. sec. 883(a)(1). Consequently, the Secre-
      tary of the Treasury (Treasury Secretary) was authorized under
      Chevron to fill that gap by promulgating regulations. See Chevron,
      467 U.S. at 842-843.

             Held, further, the Treasury Secretary did not act unreasonably,
      arbitrarily, or capriciously or in violation of I.R.C. sec. 883(c)(1) or
      its legislative history when the Treasury Secretary interpreted that
      section in the bearer share regulations in a way that precluded a
      foreign corporation the shares of which were issued in bearer form
      from taking such shares into account in establishing the ownership of
      the stock of the foreign corporation for purposes of determining
      whether the foreign corporation is described in I.R.C. sec. 883(c)(1)
      and thus whether it is entitled to the benefits of I.R.C. sec. 883(a)(1).
      See Chevron, 467 U.S. at 844.

            Held, further, the bearer share regulations are valid under the
      two-step analysis under Chevron.



      Stephen P. Flott and Joseph G. Siegmann, for petitioner.

      Lisa M. Rodriguez, Carmen N. Presinal-Roberts, and Patricia Young Taylor,

for respondent.
                                        -3-

                                     OPINION


      CHIECHI, Judge: This case is before us on respondent’s motion for

summary judgment (respondent’s motion) and petitioner’s motion for partial

summary judgment (petitioner’s motion). We will grant respondent’s motion and

will deny petitioner’s motion.

      The parties stipulated all of the facts for purposes of their respective

motions.1 We conclude that there is no genuine dispute as to any fact that is

material to our resolving the ultimate issue and the underlying questions in those

motions.

      The ultimate issue for petitioner’s taxable year 2007 in petitioner’s motion

is whether, as petitioner maintains, certain regulations under section 8832 are

invalid. The ultimate issue for petitioner’s taxable year 2007 in respondent’s

motion is whether, as respondent maintains, petitioner is not entitled under section



      1
        We will not set forth a separate statement of background facts but will state
throughout our Opinion those background facts that are material, relevant, and/or
helpful to understanding and resolving the ultimate issue and questions presented
in the parties’ respective motions.
      2
        All section references are to the Internal Revenue Code (Code) in effect for
petitioner’s taxable year 2007, the year at issue. Unless otherwise indicated, all
references to the regulations under sec. 883 are to the Income Tax Regulations
applicable for that taxable year of petitioner.
                                          -4-

883(a)(1) for that year to an exclusion from gross income and an exemption from

taxation by the United States (U.S. taxation) of certain gross income described in

that section. In advancing respondent’s position in respondent’s motion, respon-

dent assumes that certain regulations under section 883, the validity of which

petitioner challenges in petitioner’s motion, are valid. Petitioner concedes that if

we were to hold that those regulations are valid, it will not be entitled for its

taxable year 2007 to the benefits of section 883(a)(1). Thus, the ultimate issue

that we must decide in considering whether to grant petitioner’s motion or to grant

respondent’s motion is whether certain regulations under section 883 are invalid,

as petitioner maintains, or valid, as respondent maintains.

      The regulations under section 883 the validity of which petitioner places at

issue prescribe certain rules for petitioner’s taxable year 2007 for determining how

to establish the ownership of the stock of a foreign corporation, like petitioner, the

stock shares of which were issued in bearer form for purposes of ascertaining

whether the foreign corporation is described in section 883(c)(1) and thus whether

it is entitled under section 883(a)(1) to an exclusion from gross income and an

exemption from U.S. taxation of certain gross income described in that section.

      Before addressing the issue of the validity of those regulations and the

underlying questions relating to that issue, we first summarize the pertinent
                                          -5-

statutory and regulatory framework in which that issue and those questions arise.3

We next describe the factual framework in which the issue of the validity of the

regulations under section 883 and the underlying questions relating to that issue

arise.

         We turn initially to the pertinent statutory framework. In the case of a

foreign corporation, section 887(a) imposes for each taxable year a tax equal to

4% of the foreign corporation’s U.S. source gross transportation income

(USSGTI) for each such year. Section 883(a)(1) excludes from the gross income

of a foreign corporation and exempts from U.S. taxation gross income from the

international operation of ships derived by the foreign corporation if the foreign

country in which the corporation is organized grants an equivalent exemption to

corporations organized in the United States (U.S. corporations). Section 883(c)(1)

provides that the exclusion from gross income and the exemption from U.S.

taxation that section 883(a)(1) allows will not apply to a foreign corporation that

derives gross income from the international operation of ships if 50% or more of

the value of its stock is owned, directly or indirectly through the application of


         3
       Unless helpful in understanding the statutory and regulatory provisions that
are pertinent and/or applicable here, we do not summarize any statutory or
regulatory provisions that the parties agree, and we conclude, are not pertinent or
applicable here.
                                        -6-

certain attribution rules in section 883(c)(4), by individuals who are not residents

of a foreign country that grants an equivalent exemption to U.S. corporations.

      The pertinent statutory provisions in sections 887 and 883(a) and (c) that we

just summarized became law when Congress added section 887 to the Code and

amended section 883 in the Tax Reform Act of 1986 (1986 Act), Pub. L. No. 99-

514, sec. 1212(b) and (c)(3)-(5), 100 Stat. at 2537-2539.4 Before the addition to

the Code of section 887, the United States did not, in contrast to a number of other

countries, impose a gross basis tax on domestic source shipping income of foreign

persons. See H.R. Conf. Rept. No. 99-841 (Vol. II), at II-597, 1986-3 C.B. (Vol.

4) 1, 597.

      Before the amendments to section 883 that Congress made in the 1986 Act,

which was and is still known as the reciprocal exemption provision, the United

States did not tax the earnings of foreign persons from the operation of ships and

aircraft registered in foreign countries that granted equivalent exemptions to U.S.

      4
        The Tax Reform Act of 1986 (1986 Act), Pub. L. No. 99-514, sec. 1212,
100 Stat. at 2536, as applicable here, was thereafter amended by Congress in the
Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, sec.
1012(e)(1), (2)(A), and (5), 102 Stat. at 3499-3500, and in the Omnibus Budget
Reconciliation Act of 1989, Pub. L. No. 101-239, sec. 7811(i)(8)(D), and (10), 103
Stat. at 2411. Those amendments do not affect our resolution of the issue of the
validity of certain regulations under sec. 883 that petitioner is challenging in
petitioner’s motion. (For convenience, we refer only to the 1986 Act changes that
Congress made to sec. 883.)
                                        -7-

citizens and U.S. corporations. The reasons for those amendments in the 1986

Act, as set forth in the report of the Committee on Finance of the U.S. Senate,

included the following:

             Currently, the reciprocal exemption provisions eliminate U.S.
      tax on foreign persons (even U.S.-controlled foreign corporations) by
      allowing exemptions based on country of documentation or registry,
      without regard to the residence of persons receiving the exemption or
      whether commerce is conducted in that country. This places U.S.
      persons with U.S.-based transportation operations and subject to U.S.
      tax at a competitive disadvantage vis-a-vis their foreign counterparts
      who claim exemption from U.S. tax and who are not taxed in their
      countries of residence or where the ships are registered. * * *

S. Rept. No. 99-313 (1986), 1986-3 C.B. (Vol. 3) 1, 340.

      The pertinent provisions of section 883 after the amendments to that section

that Congress made in the 1986 Act

      provide[] that a foreign corporation organized in a country that
      exempts U.S. citizens and domestic corporations from tax on shipping
      income will be exempt from U.S. tax on shipping income, notwith-
      standing that third country residents have interests in the corporation,
      provided at least 50 percent of its value is beneficially owned by
      individuals that reside in countries which have reciprocal tax exemp-
      tions with the United States. * * *

H.R. Conf. Rept. No. 99-841, supra at II-599, 1986-3 C.B. (Vol. 4) at 599.
                                         -8-

      We turn next to the pertinent regulatory framework.5 The regulations under

section 883 refer to a foreign corporation certain income of which qualifies for the

exclusion from gross income and the exemption from U.S. taxation under section

883(a)(1) as a qualified foreign corporation. The term “qualified foreign corpora-

tion” is defined in section 1.883-1(c), Income Tax Regs. That definition requires,

inter alia, that the foreign corporation meet the stock ownership test set forth in

section 1.883-4, Income Tax Regs., which the regulations under section 883 refer

to as the qualified shareholder stock ownership test. See sec. 1.883-1(c)(2),

Income Tax Regs. Section 1.883-4(a), Income Tax Regs., provides that a foreign

corporation satisfies the qualified shareholder stock ownership test if for at least

one-half of the number of days during the tax year 50% or more of the value of its

outstanding stock is owned, directly or indirectly through the application of the

attribution rules in section 1.883-4(c), Income Tax Regs., by one or more qualified

shareholders, as defined in section 1.883-4(b), Income Tax Regs. Section 1.883-

4(a), Income Tax Regs., provides that a foreign corporation will not be treated as

satisfying the stock ownership test set forth in section 1.883-1(c)(2), Income Tax


      5
       Our summary of the pertinent regulatory framework does not include a
summary of the regulations under sec. 883 the validity of which petitioner
disputes. We summarize those disputed regulations after we have appropriately
framed the ultimate issue that we must resolve.
                                         -9-

Regs., by meeting the qualified shareholder stock ownership test set forth in

section 1.883-4, Income Tax Regs., unless the foreign corporation meets the

substantiation and reporting requirements set forth in section 1.883-4(d) and (e),

Income Tax Regs.

      We turn next to the factual framework. Petitioner is a corporation organized

in 2002 under the laws of the Republic of the Marshall Islands (Marshall Islands).

From its incorporation through December 31, 2007, petitioner had outstanding 500

authorized shares of stock that, pursuant to the applicable laws of the Marshall

Islands, see 52 Marshall Islands Revised Code (MIRC), Associations Law, pt. 1,

div. 5, sec. 42(2) (2004), it chose to issue in bearer form, and not in registered

form.6 During 2007, petitioner did not maintain a stock register, a ledger showing

      6
        Tit. 52 Marshall Islands Revised Code (MIRC), Associations Law, pt. 1,
div. 5, sec. 42(2) (2004), provides:

      (2) Registered or bearer shares. Shares may be issued either in
      registered form or in bearer form provided that the articles of
      incorporation prescribe the manner in which any required notice is to
      be given to shareholders of bearer shares in conformity with section
      11 of this Act; provided, however, that resident domestic corporations
      shall not be allowed to issues shares in bearer form. The transfer of
      bearer shares shall be by delivery of the certificates. The articles of
      incorporation may provide that on request of a shareholder his bearer
      shares shall be exchanged for registered shares or his registered
      shares exchanged for bearer shares.

                                                                         (continued...)
                                        - 10 -

the name(s) of its owner(s), or a stock transfer book. Nor did petitioner maintain

during 2007 an immobilized book-entry system in which evidence of the owner-

ship of its shares was maintained (1) in its books and records or (2) by a broker or

financial institution.

      Petitioner filed Form 1120-F, U.S. Income Tax Return of a Foreign Corpo-

ration, for its taxable year 2007 (2007 Form 1120-F). In that form, petitioner

reported USSGTI of $4,093,375 and claimed under section 883(a)(1) an exclusion

from gross income and an exemption from U.S. taxation of that reported amount

of USSGTI.7 In support of that claimed exclusion and exemption, petitioner

included a schedule with its 2007 Form 1120-F. In that schedule, petitioner

indicated, inter alia, that during its taxable year 2007 “[t]he total number of

qualified shareholders as defined in Treasury Regulations §1.883-4(b)(1)” was



      6
       (...continued)
Petitioner is not a resident domestic corporation for purposes of the Marshall
Islands Association Law.
      7
         In the notice of deficiency that respondent issued to petitioner for its
taxable year 2007, respondent determined that the USSGTI of $4,093,375 that
petitioner reported and the exclusion from income and the exemption from U.S.
taxation of the same amount that it claimed in its 2007 Form 1120-F should be
reduced to $3,587,375. Petitioner does not dispute that the amount of its USSGTI
for its taxable year 2007 is the amount that respondent determined in the notice.
Moreover, the parties agree that for petitioner’s taxable year 2007 its USSGTI of
$3,587,375 is the amount of its gross income described in sec. 883(a)(1).
                                        - 11 -

two, that those two qualified shareholders’ country of residence was Greece, and

that “[t]he total percentage of the value of the outstanding shares in the corpora-

tion [that they] owned, applying the attribution rules of Treasury Regulation §

1.883-4(c),” was 100%.

      Petitioner also included with its 2007 Form 1120-F Form 8275-R, Regula-

tion Disclosure Statement (Form 8275-R), in which it challenged the validity of

certain regulations under section 883 that disregard ownership through bearer

shares of a foreign corporation seeking to qualify for the exclusion from gross

income and the exemption from U.S. taxation under section 883(a)(1). In support

of that challenge, petitioner asserted in pertinent part in Form 8275-R: “The per se

disqualification, the denial of attribution, and the requirement to affirm whether or

not ownership is held through bearer shares all fail the test of enforceability under

the doctrine enunciated in Chevron USA, Inc. v. Natural Resources Defense

Council, Inc., 

 (1984). * * * As a result, none of these provisions are

[sic] valid or enforceable.”

      Good Fortune Holding SA (Good Fortune Holding) is a corporation orga-

nized under the laws of the Marshall Islands. From January 1 through December

31, 2007, 100% of the outstanding authorized stock shares that Good Fortune

Holding had issued were in bearer form.
                                        - 12 -

      Good Luck Shipping SA (Good Luck Shipping) is a corporation organized

under the laws of the Marshall Islands. From January 1 through December 31,

2007, 100% of the outstanding authorized stock shares that Good Luck Shipping

had issued were in bearer form.

      During respondent’s examination of petitioner’s 2007 Form 1120-F,

petitioner provided respondent with copies of two documents titled “Intermediary

Ownership Statement pursuant to US Treasury Regulation §1.883-4(d)(4)(i)”.8


      8
        Pursuant to sec. 1.883-4(d)(2)(i)(A) and (B), Income Tax Regs., an
intermediary ownership statement, like the two that petitioner provided to
respondent, and a qualified shareholder ownership statement, like the two that
petitioner also provided to respondent, are required to be completed in order for a
shareholder of a foreign corporation to be treated as a qualified shareholder of that
corporation. A qualified shareholder ownership statement must be completed by
any person claiming to be a qualified shareholder. An intermediary ownership
statement must be completed by any intermediary in the chain of ownership
between any such claimed qualified shareholder and the foreign corporation
seeking qualified foreign corporation status. See id. In order for any such claimed
qualified shareholder to be treated as a qualified shareholder, inter alia, the foreign
corporation seeking qualified foreign corporation status must obtain the qualified
shareholder ownership statement and the intermediate ownership statement
required by sec. 1.883-4(d)(2)(i)(A) and (B), Income Tax Regs. See sec. 1.883-
4(d)(2)(i)(C), Income Tax Regs. Pursuant to sec. 1.883-4(d)(2)(ii), Income Tax
Regs., the qualified shareholder ownership statement and the intermediate
ownership statement are valid until the earlier of the last day of the third calendar
year following the year in which each of those statements is signed or the day on
which a change of circumstance occurs that makes the information in any such
ownership statement incorrect. All of the ownership statements that petitioner
provided to respondent were signed in February 2005, and there was no change of
circumstance as described in sec. 1.883-4(d)(2)(ii), Income Tax Regs.
                                       - 13 -

One of those documents had been completed on behalf of Good Fortune Holding

(Good Fortune Holding’s intermediate ownership statement). It was dated

February 26, 2008, signed under penalties of perjury by Maria Meseti on behalf of

and as the sole director of Good Fortune Holding, and indicated that the “first tax

year to which this statement applies * * * [is] 2005”.9 Good Fortune Holding’s

intermediate ownership statement stated in pertinent part as follows:

      Good Fortune Holding SA owned 100% of the capital stock of Good
      Fortune Shipping SA that was issued and outstanding as of the end of
      the tax year or years to which this statement applies. Good Fortune
      Shipping SA had only one class of authorized stock, called ordinary
      shares, during the tax year or years to which this statement applies.
      Good Fortune Holding SA owned the shares referenced above for
      more than half of the days of the tax year or years to which this
      statement applies.

      The other document titled “Intermediary Ownership Statement pursuant to

US Treasury Regulation §1.883-4(d)(4)(i)” that petitioner provided to respondent

during respondent’s examination of its 2007 Form 1120-F had been completed on

behalf of Good Luck Shipping SA (Good Luck Shipping’s intermediate ownership

statement). It was dated February 26, 2008, signed under penalties of perjury by

Irene Georgiou on behalf of and as the sole director of Good Luck Shipping, and




      9
          See supra note 8.
                                         - 14 -

indicated that the “first tax year to which this statement applies * * * [is] 2005”.10

Good Luck Shipping’s intermediate ownership statement stated in pertinent part as

follows:

      Good Luck Shipping SA owned 100% of the capital stock of Good
      Fortune Holding SA that was issued and outstanding as of the end of
      the tax year or years to which this statement applies. Good Fortune
      Holding SA had only one class of authorized stock, called ordinary
      shares, during the tax year or years to which this statement applies.
      Good Luck Shipping SA owned the shares referenced above for more
      than half of the days of the tax year or years to which this statement
      applies.

      During respondent’s examination of petitioner’s 2007 Form 1120-F,

petitioner also provided respondent with copies of two documents titled “Qualified

Shareholder Ownership Statement Pursuant to US Treasury Regulation”. One of

those documents was dated February 26, 2008, and signed under penalties of

perjury by Andreas Stengos (Mr. Stengos’ qualified shareholder ownership

statement). In that statement, Andreas Stengos (Mr. Stengos) indicated that the

“first tax year to which this statement applies * * * [is] 2005”.11 Mr. Stengos

further stated in pertinent part as follows in Mr. Stengos’ qualified shareholder

ownership statement:



      10
           See supra note 8.
      11
           See supra note 8.
                                - 15 -

4.    Qualified Shareholder’s Name: Andreas Stengos

*         *           *          *          *           *          *

7.    Country in which Qualified Shareholder is fully liable to tax:
      Greece

8.    I was resident in Greece for more than half of the days of the
      tax year or years to which this statement applies.

9.    I owned an interest in Good Fortune Shipping SA, which is
      seeking qualified foreign corporation status, indirectly through
      the ownership of stock in Good Luck Shipping SA as described
      below.

10.   I owned 40% of the common shares of the capital stock of
      Good Luck Shipping SA that were issued and outstanding
      as of the end of the tax year or years to which this statement
      applies. Good Luck Shipping SA has only one class of stock.

11.   Good Luck Shipping SA owned all of the common shares of
      the capital stock of Good Fortune Holding SA that were issued
      and outstanding as of the end of the tax year or years to which
      this statement applies. Good Fortune Holding SA has only one
      class of stock.

12.   Good Fortune Holding SA owned 100% of the common shares
      of the capital stock of Good Fortune Shipping SA that were
      issued and outstanding as of the end of the tax year or years to
      which this Ownership Statement applies. Good Fortune
      Shipping SA has only one class of stock.

13.   The chain of ownership through which I owned an interest in
      Good Fortune Shipping SA during the tax year or years to
      which this statement applies is described above.
                                         - 16 -

      14.      Good Luck Shipping SA, and Good Fortune Holding SA
               owned the shares referenced above for more than half of
               the days of the tax year or years to which this statement applies.
               ***

      The other document titled “Qualified Shareholder Ownership Statement

Pursuant to US Treasury Regulation” that petitioner provided to respondent during

respondent’s examination of its 2007 Form 1120-F was dated February 26, 2008,

and signed under penalties of perjury by George Giouroukos (Mr. Giouroukos’

qualified shareholder ownership statement ). In that statement, George

Giouroukos (Mr. Giouroukos) indicated that the “first tax year to which this

statement applies * * * [is] 2005”.12 Mr. Giouroukos further stated in pertinent

part as follows in Mr. Giouroukos’ qualified shareholder ownership statement:

      4.       Qualified Shareholder’s Name: George Giouroukos

      *             *          *          *           *           *          *

      7.       Country in which Qualified Shareholder is fully liable to tax:
               Greece

      8.       I was resident in Greece for more than half of the days of the
               tax year or years to which this statement applies.

      9.       I owned an interest in Good Fortune Shipping SA, which is
               seeking qualified foreign corporation status, indirectly through
               the ownership of stock in Good Luck Shipping SA as described
               below.

      12
           See supra note 8.
                                        - 17 -

      10.    I owned 40% of the common shares of the capital stock of
             Good Luck Shipping SA that were issued and outstanding
             as of the end of the tax year or years to which this statement
             applies. Good Luck Shipping SA has only one class of stock.

      11.    Good Luck Shipping SA owned all of the common shares of
             the capital stock of Good Fortune Holding SA that were issued
             and outstanding as of the end of the tax year or years to which
             this statement applies. Good Fortune Holding SA has only one
             class of stock.

      12.    Good Fortune Holding SA owned 100% of the common shares
             of the capital stock of Good Fortune Shipping SA that were
             issued and outstanding as of the end of the tax year or years to
             which this Ownership Statement applies. Good Fortune
             Shipping SA has only one class of stock.

      13.    The chain of ownership through which I owned an interest in
             Good Fortune Shipping SA during the tax year or years to
             which this statement applies is described above.

      14.    I, Good Luck Shipping SA, and Good Fortune Holding SA
             owned the shares referenced above for more than half of the
             days of the tax year or years to which this statement applies.
             ***

      We consider now the ultimate issue and the underlying questions in the

parties’ respective motions. We note initially that both respondent and petitioner

assert that the following regulations under section 883, the validity of which

petitioner challenges, are applicable for petitioner’s taxable year 2007: section

1.883-1T(c)(3)(i)(G), Temporary Income Tax Regs., 72 Fed. Reg. 34605 (June 25,

2007); section 1.883-4(b)(1)(ii), (c)(1), (d)(1), and (4)(i)(E), Income Tax Regs.;
                                        - 18 -

and section 1.883-4T(d)(4)(i)(C) and (D), Temporary Income Tax Regs., 72 Fed.

Reg. 34608 (June 25, 2007).

      Although the final regulations that the parties cite and that petitioner argues

are invalid do apply for petitioner’s taxable year 2007, the temporary regulations

that the parties cite and that petitioner argues are invalid do not. Those temporary

regulations generally were effective as of June 25, 2007, but were applicable for

any taxable year of a foreign corporation that began after that date.13 See sec.

1.883-5T(d) and (e), Temporary Income Tax Regs., 72 Fed. Reg. 34609 (June 25,

2007). Petitioner’s taxable year 2007, the year at issue, began on January 1, 2007,

not after June 25, 2007.

      The regulations that are applicable for petitioner’s taxable year 2007 and

that prescribe certain rules for purposes of section 883 with respect to ownership

of a foreign corporation through bearer shares are section 1.883-4(b)(1)(ii), (c)(1),

(d)(1), and (4)(i)(E), Income Tax Regs. (We shall refer to the regulations under

section 883 that prescribe certain rules with respect to ownership of a foreign


      13
        Pursuant to sec. 1.883-5T(d) and (e), Temporary Income Tax Regs., 72
Fed. Reg. 34609 (June 25, 2007), a taxpayer could have elected to apply only sec.
1.883-3T, Temporary Income Tax Regs., 72 Fed. Reg. 34607 (June 25, 2007),
relating to the treatment of any controlled foreign corporation (CFC) for any open
taxable years of the foreign corporation that began on or after December 31, 2004.
Petitioner does not claim to be, and is not, a CFC.
                                        - 19 -

corporation through bearer shares and that are applicable for petitioner’s taxable

year 2007 as the bearer share regulations.14) We set forth below what those bearer

share regulations, the validity of which petitioner challenges, provide.

      Section 1.883-4(b)(1)(ii), Income Tax Regs., provides that a shareholder is a

qualified shareholder only if, inter alia, the shareholder does not own, directly or

indirectly by applying the attribution rules of section 1.883-4 (c), Income Tax

Regs., the shareholder’s interest in the foreign corporation through bearer shares.




      14
        The Department of the Treasury (Treasury Department) amended the
bearer share regulations effective for taxable years that began after September 17,
2010 (2010 amended bearer share regulations). The parties agree that the 2010
amended bearer share regulations do not apply for petitioner’s taxable year 2007
and that in any event petitioner’s bearer shares outstanding during its taxable year
2007 did not satisfy those amended regulations. Pursuant to the 2010 amended
bearer share regulations, a foreign corporation may take into account in
determining whether it is described in sec. 883(c)(1) bearer shares that it issued
which are maintained (1) in a dematerialized book-entry system in which the
bearer shares are represented only by book entries and no physical certificates are
issued or transferred or (2) in an immobilized book-entry system in which
evidence of ownership is maintained on the books and records of the corporate
issuer of the bearer shares or by a broker or other financial institution. See, e.g.,
secs. 1.883-1(c)(3)(i)(G), 1.883-4(b)(1)(ii), (c), Income Tax Regs. In amending
the bearer share regulations in 2010, the Treasury Department explained that it did
so because it understood that “it has become increasingly common for
corporations (both publicly traded and privately held) to use a dematerialized or
immobilized book-entry system for maintaining their registered and bearer shares.
* * * [and] “[b]ecause these systems provide the ability to reliably identify the
beneficial owner of [the] bearer shares”. 75 Fed. Reg. 56860 (Sept. 17, 2010).
                                        - 20 -

      Section 1.883-4(c)(1), Income Tax Regs., provides that for purposes of the

attribution rules of section 1.883-4(c), Income Tax Regs., “[n]o attribution will

apply to an interest held directly or indirectly through bearer shares.”

      Section 1.883-4(d)(1), Income Tax Regs., provides that a corporation that

relies on the stock ownership test of sections 1.883-1(c)(2) and 1.883-4, Income

Tax Regs., must establish all the facts necessary to satisfy the Commissioner of

Internal Revenue (Commissioner) that 50% or more of the value of its shares is

owned, or treated as owned under the attribution rules of section 1.883-4(c),

Income Tax Regs., by qualified shareholders. However, section 1.883-4(d)(1),

Income Tax Regs., further provides: “A foreign corporation cannot meet this

requirement with respect to any stock that is issued in bearer form. A shareholder

that holds shares in the foreign corporation either directly or indirectly in bearer

form cannot be a qualified shareholder.”

      Section 1.883-4(d)(4)(i)(E), Income Tax Regs., sets forth, inter alia, certain

information that must appear in the required so-called ownership statement of any

person claiming to be a qualified shareholder of a foreign corporation that seeks

qualified foreign corporation status for purposes of section 883.15 That regulation

requires the person claiming to be a qualified shareholder of such a foreign

      15
           See supra note 8.
                                         - 21 -

corporation to indicate in the ownership statement whether that person’s owner-

ship interest in that foreign corporation “is owned directly or indirectly through

bearer shares”.

      As is apparent from our discussion of pertinent regulations under section

883, including the bearer share regulations, and as petitioner correctly points out,

the effect of the bearer share regulations is that petitioner, a foreign corporation, is

precluded from even attempting to establish, let alone establishing, to the satisfac-

tion of respondent that for its taxable year 2007 its shareholders meet the qualified

shareholder stock ownership test in section 883(c)(1)16 and the regulations

thereunder. Consequently, as is also apparent from our discussion of pertinent

regulations under section 883, including the bearer share regulations, and as

petitioner also correctly points out, petitioner is unable to establish to respondent’s

satisfaction (1) that it is a qualified foreign corporation as defined in section

1.883-1(c), Income Tax Regs., and (2) that its USSGTI for its taxable year 2007 is

excludible from gross income and exempt from U.S. taxation under section 883(a).


      16
       Petitioner claims that during its taxable year 2007 certain individuals
owned its stock through certain entities, thereby implicating sec. 883(c)(4). For
convenience, we shall generally refer only to the ownership rules under sec.
883(c)(1), which necessarily implicates sec. 883(c)(4) where stock of a foreign
corporation is owned, as petitioner claims is the case with petitioner, indirectly
through other entities.
                                        - 22 -

The parties agree that those unfavorable results for petitioner occur only because

all of its shares are owned directly and indirectly through bearer shares and the

bearer share regulations interpret section 883(c)(1) in a way that precludes a

foreign corporation the shares of which were issued in bearer form from taking

such shares into account in establishing the ownership of the stock of the foreign

corporation for purposes of determining whether the foreign corporation is

described in section 883(c)(1) and thus whether it is entitled to the benefits of

section 883(a)(1).

      We address now whether the bearer share regulations are valid regulations.

The parties agree that we are required to follow the bearer share regulations unless

we hold that those regulations are invalid under the two-step analysis that the

Supreme Court of the United States (Supreme Court) prescribed in Chevron

U.S.A., Inc. v. Natural Resources Defense Council, Inc. (Chevron), 

(1984). See Mayo Found. for Med. Educ. & Research v. United States (Mayo
                                         - 23 -

Found.), 

, 54-58. (2011).17 They disagree over the application of that

two-step analysis to the undisputed facts here.

       The first step of the two-step analysis under Chevron (sometimes, step one

analysis) is to inquire “whether Congress has directly spoken to the precise

question at issue.” Chevron, 467 U.S. at 842. If it has and “[i]f the intent of

Congress is clear, that is the end of the matter; for the court, as well as the agency,

must give effect to the unambiguously expressed intent of Congress.” Id. at 842-

843.

       A court must begin the step one analysis with the text of the statute in

question. The U.S. Court of Appeals for the District of Columbia Circuit, the

court to which an appeal in this case would normally lie, clarified in Am. Bankers

Ass’n v. Nat’l Credit Union Admin., 

, 267 (D.C. Cir. 2001), that


       17
        Congress gave the Secretary of the Treasury (Treasury Secretary) in sec.
7805(a) the authority to prescribe “all needful rules and regulations for the
enforcement of” the Internal Revenue Code. In Mayo Found. for Med. Educ. &
Research v. United States (Mayo Found.), 

, 55-58 (2011), the Supreme
Court clarified that it is necessary to subject to the two-step analysis of Chevron
U.S.A., Inc. v. Natural Resources Defense Council, Inc. (Chevron), 

(1984), regulations, like the bearer share regulations at issue here, which the
Treasury Secretary promulgated under the authority of sec. 7805(a) pursuant to so-
called notice-and-comment procedures--a “‘significant’ sign”, according to the
Supreme Court, that those regulations are entitled to deference under Chevron.
See Mayo Found., 562 U.S. at 57-59. (For convenience, we sometimes use
interchangeably the terms “Treasury Secretary” and “Treasury Department”.)
                                       - 24 -

      [a]lthough Chevron step one analysis begins with the statute’s text,
      we must not “confine [ourselves] to examining a particular statutory
      provision in isolation. The meaning—or ambiguity—of certain words
      or phrases may only become evident when placed in context.” FDA v.
      Brown & Williamson Tobacco Corp., 

, 132, 

, 

 (2000). We must also “exhaust the traditional
      tools of statutory construction,” Natural Res. Def. Council, Inc. v.
      Browner, 

, 1125 (D.C. Cir.1995) (internal quotation
      marks and citation omitted), including examining the statute’s legisla-
      tive history to “shed new light on congressional intent, notwithstand-
      ing statutory language that appears superficially clear,” id. at 1127
      (internal quotation marks and citation omitted). And, of course, “we
      must be guided to a degree by common sense as to the manner in
      which Congress is likely to delegate a policy decision . . . to an
      administrative agency.” Brown & Williamson, 529 U.S. at 121, 

. If, applying these principles, we find that “Congress has
      directly spoken to the precise question at issue . . . that is the end of
      the matter; for the court, as well as the agency, must give effect to the
      unambiguously expressed intent of Congress.” Chevron, 467 U.S. at
      842-43, 

.

See Sierra Club v. EPA, 

, 1027 (D.C. Cir. 2008).

      Only if Congress did not directly address in the statute in question the

precise question presented to a court may the court proceed to step two of the two-

step analysis under Chevron (sometimes, step two analysis). See Chevron, 467

U.S. at 842-843. In other words, only if the statute in question is silent or ambigu-

ous with respect to the precise question presented may a court proceed to the step

two analysis. See id. at 843.
                                         - 25 -

      If a court is permitted under the step one analysis to proceed to the step two

analysis, the court must decide whether the answer of the agency to the precise

question with respect to which the statute in question is silent or ambiguous is

based upon a permissible interpretation of that statute. See id. In deciding that

issue, a court “need not conclude that the agency construction was the only one it

permissibly could have adopted to uphold the construction, or even the reading the

court would have reached if the question had initially arisen in a judicial proceed-

ing.” Id. n.11. Under the step two analysis, a court may not substitute its own

interpretation of the statute in question if the agency’s construction of the statute is

reasonable. See id. at 844. That is to say, under the step two analysis, a court may

not conclude that a regulation is invalid, and instead must defer to the regulation,

“unless * * * [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id.

at 844; see Mayo Found., 562 U.S. at 53 (quoting Household Credit Servs., Inc. v.

Pfennig, 

, 242 (2004)).

      We turn now to the parties’ disagreement over the application of the two-

step analysis of Chevron to the undisputed facts here. With respect to the step one

analysis, it is respondent’s position that the inquiry under that analysis with

respect to petitioner, a foreign corporation which sought the benefits of section

883(a)(1) for its taxable year 2007 and the shares of which were issued in bearer
                                         - 26 -

form, is “whether the text of the statute and its legislative history speaks with the

precision necessary to say definitively whether ownership [by individuals] of

[such] a foreign corporation can be established for purposes of section 883(c)(1)

through bearer shares.”18 The answer to that inquiry, respondent maintains, is that

neither the text of the statute nor its legislative history speaks with the precision

necessary to say definitively whether ownership by individuals of such a foreign

corporation may be established for purposes of section 883(c)(1) through bearer

shares. Consequently, according to respondent, it is necessary to proceed to the

step two analysis under Chevron.

      Petitioner agrees with respondent that “the first question [under Chevron]

* * * is ‘whether Congress has directly spoken to the precise question at issue,’

because, ‘[i]f the intent of Congress is clear, that is the end of the matter’.”

Petitioner also agrees with respondent that section 883(c)(1) “is silent with respect

to how a foreign corporation can establish ownership.” According to petitioner,

“[s]ection 883(c)(1) is silent on substantiation of ownership presumably because

Congress expected the Respondent to address the subject in regulations.” None-

theless, petitioner disagrees with respondent that, because section 883(c)(1) is

      18
         Sec. 883(c)(4), titled “Stock Ownership Through Entities”, provides
certain rules for purposes of sec. 883(c)(1) where stock is owned directly or
indirectly by or for a corporation, partnership, trust, or estate. See supra note 16.
                                        - 27 -

silent with respect to how to establish or substantiate ownership under that section,

there is a gap in section 883(c)(1) that the Treasury Secretary may address.

According to petitioner,

      [r]espondent conflates substantiation of ownership and ownership.
      “Owned” [in section 883(c)(1)] is commonly understood to include
      all types of ownership. Proof of ownership is not synonymous with
      the existence of ownership itself.

      * * * It would be Orwellian to interpret the word[] “owned” [in
      section 883(c)(1)] to deny ownership of bearer shares because ‘own-
      ed’ [in section 883(c)(1)] is silent as to how ownership of such shares
      can be proved.

      * * * The plain language Congress employed [in section 883(c)(1)]--
      “owned”--identifies the key issue--“ownership” that can only reason-
      ably be interpreted to mean any form of ownership.

      The reality is that the Challenged Provisions [bearer share regula-
      tions] prohibit proof of ownership of bearer shares even though they
      concede that such shares are owned by individuals. The Challenged
      Provisions fail Chevron Step 1.

      Petitioner further elaborates in pertinent part on its position regarding the

step one analysis as follows:

             According to the Supreme Court, absent an express indication
      to the contrary, Congress intends the words it uses in its enactments
      to carry “‘their ordinary, contemporaneous, common meaning.’”
      * * * In this case, Congress gave no indication that it intended the
      words of Section 883[(c)(1)] to have anything other than their ordi-
      nary common meaning.
                                 - 28 -

       * * * The 1982 edition of American Heritage Dictionary de-
fined “own” as, “to have or possess . . . to obtain possession of what
belongs to one.” Similarly, the 1986 edition of Webster’s New
International Dictionary defined “own” as, “to have or hold property
or appurtenance; have a rightful title to, whether legal or natural;
possess . . .

*          *           *          *           *          *           *

       The language of Section 883(c)(1) leaves little, if any, room for
interpretation at least with respect to the use of the words, [“]is owned
by individuals[”]. However, to the extent the Treasury Department
interprets “is owned by individuals” in the Section 883 Regulations, it
is bound by the ordinary, common meaning of the words used in the
statute.

       With respect to the meaning of the words, “is owned by individ-
uals” in Section 883, the Challenged Provisions adopt a meaning that
contradicts the unambiguous language used by Congress. * * *

       The fatal flaw in the Challenged Provisions is that they write
the words “is owned by individuals” out of Section 883[(c)(1)], at
least with respect to bearer shares, thereby denying the Petitioner and
its controlling shareholders the opportunity to prove that they own
these shares. * * * [T]he Challenged Provisions deny the exclusion
[under section 883(a)(1)] based solely on the kind of shares issued by
Petitioner and owned by its shareholders. According to the Chal-
lenged Provisions, bearer shares cannot be “owned” by anyone for
purposes of qualifying under Section 883. This narrow interpretation
of “owned” is counter-intuitive and squarely conflicts with the plain
meaning and common usage of the words used in the statute.

*          *           *          *           *          *           *

       The Challenged Provisions fail the first and most basic test
required of an agency’s rules: they conflict with the plain language of
the statute that they are intended to interpret. Instead of promulgating
                                       - 29 -

      rules to provide guidance on how owners may prove ownership of
      bearer shares, the Challenged Provisions prohibit their use for Section
      883 purposes by denying the benefit of “ownership” of such shares to
      their owners. [Citations and fn. refs. omitted.]

      Petitioner’s position under the step one analysis under Chevron and its

arguments in support of its position are similar to the taxpayers’ position under

that analysis and their arguments in support of their position in Mayo Found.,

. In Mayo Found., the Supreme Court addressed the validity of

certain regulations issued under section 3121(b)(10) (student FICA tax exemp-

tion) which exempts the service of “students” from tax on their wages under the

Federal Insurance Contributions Act (FICA). In that case, Mayo Foundation for

Medical Education and Research, Mayo Clinic, and the Regents of the Univer-

sity of Minnesota (collectively, Mayo organizations or the taxpayers) claimed

that certain physicians, who had served during the tax period in question as

medical residents in their respective medical residency programs and who had

spent in that capacity between 50 and 80 hours a week on patient-related matters,

should be viewed as students for purposes of the student FICA tax exemption.

See id. at 47-48.

      Certain longstanding regulations that were not at issue in Mayo Found.

allowed the student FICA tax exemption under section 3121(b)(10) to students
                                       - 30 -

who worked for their schools “as an incident to and for purposes of pursuing a

course of study.” Sec. 31.3121(b)(10)-2(d), Employment Tax Regs; see Mayo

Found., 562 U.S. at 49. A determination of whether an individual’s work was

“incident” to the individual’s studies had been made under those regulations on a

case-by-case analysis. That case-by-case analysis was no longer required under

certain regulations that the Treasury Secretary promulgated, effective for 2005,

and that were at issue in Mayo Found. See Mayo Found., 562 U.S. at 49-50.

      The regulations that were at issue in Mayo Found. provide that “[t]he

services of a full-time employee”, as defined by the employer’s policies, but in

any event including any employee who is normally scheduled to work 40 hours

or more each week, “are not incident to and for the purpose of pursuing a course

of study.” Sec. 31.3121(b)(10)-2(d)(3)(iii), Employment Tax Regs.; see Mayo

Found., 562 U.S. at 50-51. (We shall refer to the regulations at issue in Mayo

Found. as the full-time employee regulations.)

      The Mayo organizations commenced an action for refunds of the FICA

taxes that they had withheld on the so-called stipends that they had paid to their

respective residents during the second quarter of 2005. In support of their

entitlement to the refund that they sought, it was the position of the Mayo

organizations that their respective residents qualified for the student FICA tax
                                       - 31 -

exemption and that the full-time employee regulations were invalid. See Mayo

Found., 562 U.S. at 51. In support of that position, the Mayo organizations

argued that under the step one analysis of Chevron the text of the statute in-

volved is unambiguous and that “the dictionary definition of ‘student’ * * *

plainly encompasses residents.” Id. at 51-52.

      In Mayo Found., the Supreme Court specifically rejected the Mayo organi-

zations’ argument under the step one analysis of Chevron that the statute in

question there was unambiguous, at least insofar as it applied to working profes-

sionals. The Supreme Court held that that statute did not “‘speak[ ] with the

precision necessary to say definitively whether * * * [it] applies to’ medical

residents.” Id. at 52-53.

      For reasons that are essentially the same as the reasons for which the

Supreme Court rejected the taxpayers’ position and their arguments in support of

their position in Mayo Found. with respect to the application of the step one

analysis under Chevron, 467 U.S. at 842-843, we reject petitioner’s position and

its arguments in support of its position with respect to the application of that step

one analysis here. We must decide under the step one analysis “whether Congress

has directly spoken to the precise question at issue”, Chevron, 467 U.S. at 842, of

how ownership by individuals may be established for purposes of section
                                        - 32 -

883(c)(1) by a foreign corporation seeking the benefits of section 883(a)(1). The

words “owned by individuals” in section 883(c)(1) do not, as petitioner appears to

acknowledge, explain or otherwise address how to establish ownership by individ-

uals for purposes of section 883(c)(1), let alone how to establish ownership where

the shares of the foreign corporation are owned in bearer form. The dictionary

definitions of the word “own” on which petitioner relies,19 which petitioner claims

are unambiguous definitions, do not address the problem under section 883(c) of

determining how to establish ownership by individuals for purposes of section

883(c)(1) that the Internal Revenue Service (IRS) confronts when it examines a

return of a foreign corporation seeking the benefits of section 883(a)(1) for a prior

taxable year. In any such examination, the IRS must determine after the fact

whether during at least one-half of the total number of days in that prior taxable

year 50% or more of the value of the stock of that corporation was owned by

individuals who were not residents of a foreign country that granted an equivalent

exemption to U.S. corporations. In that event, section 883(c)(1) would preclude

that foreign corporation for that prior taxable year from excluding from gross


      19
         As noted above, according to petitioner, the dictionary definitions of the
word “own” are “to have or possess . . . to obtain possession of what belongs to
one” and to have or hold property or appurtenance; have a rightful title to, whether
legal or natural; possess”.
                                           - 33 -

income and exempting from U.S. taxation under section 883(a)(1) the income

described in section 883(a)(1).

       We conclude that “Congress has [not] directly spoken to the precise ques-

tion at issue”, Chevron, 467 U.S. at 842, of how ownership by individuals may be

established for purposes of section 883(c)(1) by a foreign corporation seeking the

benefits of section 883(a)(1), including such a foreign corporation the shares of

which were issued in bearer form. We also conclude that section 883(c)(1) as well

as its legislative history is silent--there is a gap in that section as well as its

legislative history--as to how ownership by individuals may be established for

purposes of section 883(c)(1) by a foreign corporation seeking the benefits of

section 883(a)(1), including such a foreign corporation the shares of which were

issued in bearer form. We hold that the Treasury Secretary was authorized under

Chevron to fill that gap by promulgating regulations. See Chevron, 467 U.S. at

842-843.

       We consider now the step two analysis under Chevron. It is respondent’s

position under that analysis that the bearer share regulations are a reasonable

construction of section 883(c)(1). It is petitioner’s position under the step two

analysis that the bearer share regulations are contrary to the plain language of

section 883(c)(1) and its legislative history. Consequently, petitioner maintains,
                                        - 34 -

those regulations are not a reasonable interpretation of section 883(c)(1) but are

arbitrary and capricious and were promulgated “for the administrative conve-

nience” of the Treasury Department. In support of its position, petitioner argues

(1) that the IRS should allow all foreign corporations the shares of which were

issued in bearer form to establish the ownership of their respective shares, includ-

ing ownership for prior taxable years, on a case-by-case basis and (2) that the

Treasury Secretary unreasonably, arbitrarily, and capriciously distinguished in the

bearer share regulations between ownership through bearer shares and ownership

through shares issued to named persons and “denied attribution of ownership to

holders of bearer shares,” thereby “effectively redefin[ing] ‘is owned’ [in section

883(c)(1)] to exclude ownership of such shares.”

      As was true of its position and arguments under the step one analysis,

petitioner’s position under the step two analysis under Chevron and its arguments

in support of its position are similar to the taxpayers’ position under the step two

analysis20 and their arguments in support of their position in Mayo Found., 562

      20
        The Mayo organizations initially took the position in Mayo Found. that the
step two analysis of Chevron was not the appropriate framework within which to
analyze what the Supreme Court held in that case was an ambiguous statute.
According to those organizations, the multifactor analysis of Nat’l Muffler Dealers
Ass’n, Inc. v. United States, 

 (1979), was the proper analysis to use in
reviewing an ambiguous Federal tax statute. See Mayo Found. 562 U.S. at 53-54.
                                                                      (continued...)
                                        - 35 -

U.S. 44. In Mayo Found., the Mayo organizations argued under the step two

analysis of Chevron (1) that the Commissioner “should be required to engage in a

case-by-case inquiry into” specifically what each medical resident does and why

each such resident does it and (2) that the Treasury Secretary arbitrarily distin-

guished in the full-time employee regulations between so-called hands-on training

and classroom instruction. See id. at 58-59. The Supreme Court rejected those

arguments in Mayo Found. In doing so, the Supreme Court concluded:

       Regulation, like legislation, often requires drawing lines. * * * Focus-
       ing on the hours an individual works and the hours he spends in
       studies is a perfectly sensible way of accomplishing that goal [of
       distinguishing between workers who study and students who work].
       The [Treasury] Department explained that an individual’s service and
       his “course of study are separate and distinct activities” in “the vast
       majority of cases,” and reasoned that “[e]mployees who are working
       enough hours to be considered full-time employees . . . have filled the
       conventional measure of available time with work, and not study.”
       * * * The Department thus did not distinguish classroom education
       from clinical training but rather education from service. The Depart-
       ment reasonably concluded that its full-time employee rule would
       “improve administrability,” * * * and it thereby “has avoided the
       wasteful litigation and continuing uncertainty that would inevitably
       accompany any purely case-by-case approach” like the one [the]
       Mayo [organizations] advocate[]. * * *

Id. at 59.


       20
        (...continued)
In rejecting that position, the Supreme Court held: “The principles underlying our
decision in Chevron apply with full force in the tax context.” Id. at 55.
                                       - 36 -

      Petitioner does not appear to dispute that its position and its arguments

under the step two analysis of Chevron with respect to the bearer share regulations

are similar to the position and the arguments under that analysis that the taxpayers

advanced in Mayo Found., 

, with respect to the full-time employee

regulations at issue there and that the Supreme Court rejected. Petitioner main-

tains, however, that we should not reject its position and its arguments under the

step two analysis with respect to the bearer share regulations. That is because,

according to petitioner, it is relying on the “same logic” upon which it claims the

Supreme Court relied in upholding the full-time employee regulations at issue in

Mayo Found. Petitioner asserts:

             The logic the Supreme Court used to uphold * * * [the full-time
      employee regulations] in Mayo is the same logic the Petitioner relies
      on to invalidate the * * * [bearer share regulations]. In Mayo, the
      Supreme Court reasoned that the medical residents [involved in that
      case] shared all of the basic characteristics of full-time employees
      (benefits, duties, etc.). The fact that there was an element of school-
      ing involved in the medical residencies did not transform full-time
      employees into students for FICA purposes.

            In Mayo, the Supreme Court ruled that it was logical and
      reasonable for the Treasury Department to look at the educational
      aspects of the medical residents’ routines, compare it [sic] to their
      other duties, and conclude that they were workers much more than
      they were students for purposes of FICA taxes.
                                         - 37 -

      According to petitioner, in contrast to the full-time employee regulations at

issue in Mayo Found., the bearer share regulations at issue here

      treat two like things, bearer shares and shares issued to named per-
      sons, as opposites even though they share the same characteristics of
      ownership * * *. There is no analysis or evaluation [in the bearer
      share regulations] of the differences between the types of shares, just
      a blanket denial of ownership or at least attribution of ownership for
      “qualified shareholder” purposes to owners of bearer shares.

      * * * It is true that ownership of shares issued in the name of the
      holder and recorded on the books and records of a corporation are
      easier to track, but there is no difference between them in terms of
      “being owned.”

      We reject petitioner’s position and its arguments in support of its position

with respect to the step two analysis under Chevron. The bearer share regulations

are not, as petitioner asserts, “just a blanket denial of ownership or at least attribu-

tion of ownership for ‘qualified shareholder’ purposes to owners of bearer shares.”

Those regulations acknowledge that the shareholder(s) of a foreign corporation

seeking the benefits of section 883(a)(1) the shares of which were issued to the

stockholder(s) in bearer form owns, directly or indirectly, stock in that corpora-

tion. See, e.g., sec. 1.883-4(b)(1)(ii), (c)(1), Income Tax Regs. However, the

bearer share regulations provide that the bearer shares of that foreign corporation

which the stockholder(s) owns may not be taken into account in establishing the

ownership of the stock of the foreign corporation for purposes of determining
                                         - 38 -

whether the foreign corporation is described in section 883(c)(1) and thus whether

it is entitled to the benefits of section 883(a)(1). The Treasury Department took

that position when it first proposed regulations under section 883 in 2000 pursuant

to notice-and-comment procedures21 after Congress added section 887 to the Code

and amended section 883 in the 1986 Act, when it reproposed regulations under

section 883 in 2002 pursuant to notice-and-comment procedures, and when it

finalized regulations under section 883 in 2003 that apply for petitioner’s taxable

year 2007. See 65 Fed. Reg. 6065 (Feb. 8, 2000) (2000 proposed section 883

regulations); 67 Fed. Reg. 50510 (Aug. 2, 2002) (2002 reproposed section 883

regulations); T.D. 9087, 2003-2 C.B. 781 (applicable final section 883 regula-

tions). The Treasury Department did so because of “the difficulty of reliably

demonstrating the true ownership of such [bearer] shares”. See 67 Fed. Reg.

50518.

      In issuing the 2000 proposed section 883 regulations and the 2002 repro-

posed section 883 regulations and in promulgating the applicable final section 883

regulations, the Treasury Secretary had in mind and was concerned with imple-


      21
        As discussed above, the Supreme Court concluded in Mayo Found., 562
U.S. at 58-59, that if regulations or rules are issued after notice-and-comment
procedures, that fact is a “‘significant’ sign” that those regulations or rules merit
deference under Chevron.
                                        - 39 -

menting the intent of Congress when it amended section 883 in the 1986 Act. In

this regard, the Treasury Secretary had in mind and was concerned with establish-

ing or identifying the ultimate beneficial owners of a foreign corporation seeking

the benefits of section 883(a)(1) and preventing such a corporation whose individ-

ual owners are described in section 883(c)(1) from securing those benefits, as

Congress intended when it amended section 883 in the 1986 Act.

      As discussed above, when Congress amended section 883 in the 1986 Act,

it required that any foreign corporation seeking to obtain the benefits of section

883(a) satisfy a stricter standard than section 883 had required before that amend-

ment. A foreign corporation’s entitlement under section 883(a)(1) to exclude

certain income from gross income and exempt that income from U.S. tax no longer

was based solely upon the country in which the foreign corporation’s vessel was

registered or documented. Instead, Congress added in its amendment of section

883 in the 1986 Act a second hurdle to that favorable treatment by enacting

section 883(c) in order to curb abuse by residents of certain foreign countries who

owned stock in a foreign corporation that was seeking the benefits of section

883(a)(1) where those foreign countries did not provide an equivalent exemption

to U.S. corporations.
                                         - 40 -

      In order to apply section 883(c)(1), the provision applicable here that

Congress added to the Code in the 1986 Act, it is necessary to know the country of

residence of the shareholders of the foreign corporation seeking the benefits under

section 883(a)(1). When the Treasury Department proposed in 2000 and repro-

posed in 2002 regulations under section 883 and when it promulgated the applica-

ble final section 883 regulations, that knowledge in the case of a foreign corpora-

tion the shares of which were issued in bearer form was virtually impossible to

obtain because it was difficult to establish the ownership of those bearer shares,

especially after the fact for prior taxable years.

      Bearer shares are an unregistered form of stock certificates that do not

identify the owner, but that confer ownership on whoever possesses the bearer

stock certificates. See, e.g., 52 MIRC, pt. 1, div. 5, sec. 42(2);22 see also Anderson

v. Commissioner, T.C. Memo. 2009-44, 

, at *2, aff’d, 

 (3d Cir. 2012). A foreign corporation the shares of which are in bearer form

may be conveyed simply by transferring physical possession of the shares. E.g.,

52 MIRC, pt. 1, div. 5, sec. 42(2) (“The transfer of bearer shares shall be by

delivery of the certificates.”). Thus, a principal advantage of ownership of a


      22
        As noted above, petitioner was organized as a corporation under the laws
of the Marshall Islands.
                                        - 41 -

foreign corporation through bearer shares is the ability to transfer quickly and

anonymously the ownership of those shares. Bearer shares make it virtually

impossible to know who the actual shareholders or owners of a corporation are

because the only proof of ownership is physical possession at a particular point in

time of the paper bearer share certificate. See id. Bearer shares generally are not

registered with any central authority, regulatory agency, or tax office. See, e.g.,

id.; see also Anderson v. Commissioner, 

, at *2. Indeed, we

believe that petitioner acknowledges that it was frequently not able to track the

transfer of bearer shares from one person to another person. That is because the

parties stipulated that during petitioner’s taxable year 2007, petitioners did not

maintain (1) a stock register, a ledger listing the name(s) of the owner(s) of the

bearer share certificate(s), or a stock transfer book; (2) an immobilized book-entry

system in which evidence of ownership of its bearer shares was maintained in its

books and records; or (3) an immobilized book-entry system in which evidence of

ownership of its bearer shares was maintained by a broker or financial institution.

      In contrast to registered shares, no name is shown on a bearer share certifi-

cate that a company issues. Rather, any person who has physical possession of the

bearer share certificate is recognized as a shareholder or owner of the company.

See, e.g., 52 MIRC, pt. 1, div. 5, sec. 42(2); see also Anderson v. Commissioner,
                                        - 42 -

, at *2. It is extremely easy to convey or transfer the ownership

of a company that is incorporated with the authority to, and that does, issue its

stock in bearer form. The mere delivery, or transfer of possession, of the com-

pany’s stock certificate issued in bearer form to another person effects a change of

ownership. No additional actions are necessary. See, e.g., 52 MIRC, pt. 1, div. 5,

sec. 42(2). Consequently, if a person possessing bearer share certificates intends,

or purports, to transfer those bearer shares to another person, all that the person

possessing the bearer shares certificates must do to effect any such transfer is to

give those certificates to the other person. See, e.g., id. There is no need for any

paperwork or changes to the registry of the company because only the number of

bearer shares that was issued to create the company and the numeration of those

shares are shown on the physical bearer share certificate, without making any

reference to or identifying the owners.23 See, e.g., id. Because of the manner in

which ownership of the stock of a company the shares of which were issued in

bearer form is conveyed or transferred, the shareholder(s) of the company remain




      23
        As discussed above and as the parties stipulated, petitioner maintained no
shareholders register, ledger showing the name(s) of the owner(s) of the bearer
shares, or stock transfer book.
                                        - 43 -

in almost complete anonymity. Any change in the identity of such a company is,

and remains, a completely confidential act.24

      When the Treasury Department issued the 2000 proposed section 883

regulations and the 2002 reproposed section 883 regulations and when it promul-

gated the applicable final section 883 regulations, it included rules in those

respective regulations with respect to the treatment of stock owned through bearer

shares in a foreign corporation seeking the benefits of section 883(a)(1). At those

respective times and at other relevant times, the confidentiality or anonymity with

which bearer shares could have been conveyed or transferred had been and

continued to be a problem in the international community, and specifically in the

shipping industry. For example, in 1998, the Organisation for Economic Co-oper-

ation and Development (OECD) Committee on Fiscal Affairs issued a report

identifying bearer shares as one of the most harmful tax characteristics globally of

certain tax systems. See OECD, Committee on Fiscal Affairs, Harmful Tax

Competition: An Emerging Global Issue 33 (April 1998), http://www.oecd.org/

      24
        Moreover, we agree with respondent that the act of improperly depositing
bearer share certificates with a custodian would raise additional concerns and
evidentiary issues requiring determinations by a court or other authority, possibly
a foreign court or another foreign authority, relating to the intent behind certain
custodial deposits that may construed as transfers of bearer shares. See Goldsmith
v. Commissioner, 

, 1142-1144 (1986); Goldsmith v. Commissioner,
T.C. Memo. 1986-227, 

.
                                        - 44 -

tax/transparency/44430243.pdf. As a further example, in 2001, the OECD

Steering Group on Corporate Governance issued a report in which it identified

bearer shares as one of the most common and effective mechanisms of providing

total anonymity regarding beneficial ownership of the company issuing the bearer

shares. See OECD, Steering Group on Corporate Governance, Behind the Corpo-

rate Veil: Using Corporate Entities for Illicit Purposes 29-30 (November 2001),

http://www.oecd.org/daf/ca/43703185.pdf. As a final example, in 2003, the

OECD Maritime Transport Committee issued a report in which it identified bearer

shares as one of the most common and effective mechanisms of providing total

anonymity regarding beneficial ownership of a company in the shipping industry

issuing the bearer shares. See OECD, Maritime Transport Committee, Ownership

and Control of Ships 8 (March 2003), http://ntl.bts.gov/lib/24000/24400/24410/

17846120.pdf.

      Because of the problems of establishing for purposes of section 883(c)(1)

the ownership by individuals of bearer shares, the Treasury Department proposed

regulations in 2000 and reproposed regulations in 2002 under section 883 which

did not take bearer shares into account in establishing the ownership of the stock

of a foreign corporation for purposes of determining whether the foreign corpora-

tion is described in section 883(c)(1) and thus whether it is entitled to the benefits
                                       - 45 -

of section 883(a)(1). Those proposed and reproposed bearer share rules in those

proposed and reproposed section 883 regulations were virtually identical to the

bearer share regulations in the final regulations under section 883 that the Trea-

sury Department promulgated in 2003 and that are at issue here. The Treasury

Department explained that although it had received public comments recommend-

ing that it modify the bearer share rules in the 2000 proposed section 883 regula-

tions, it did not do so. The Treasury Department gave the following explanation

for its decision not to change those bearer share rules when it issued the 2002

reproposed section 883 regulations:

      Bearer Shares. Section 1.883-4(b)(1)(ii) of the 2000 proposed regula-
      tions provides that a shareholder is a qualified shareholder only if the
      shareholder does not own its interest in the foreign corporation
      through bearer shares, either directly or by applying the attribution
      rules of § 1.883-4(c).

      Several commentators criticized this rule. They contended that the
      restriction on the use of bearer shares raises concerns of fundamental
      fairness and that the IRS should not attempt to regulate the personal
      property rights of nonresident alien individuals. These commentators
      suggested that the rule should be deleted or substantially modified to
      allow the use of bearer shares whose ownership can be substantiated
      to the satisfaction of the Commissioner.

      Due to the difficulty of reliably demonstrating the true ownership of
      such shares, the [2002] reproposed [section 883] regulations do not
      adopt this suggestion, in the interest of sound tax administration.

67 Fed. Reg. 50518 (Aug. 2, 2002).
                                        - 46 -

       When the Treasury Department promulgated the applicable final section 883

regulations, which included the bearer share regulations at issue, it pointed out the

inherent difficulty that arises in attempting to establish ultimate ownership of

bearer shares for purposes of section 883(c)(1). See T.D. 9087, 2003-2 C.B. at

786.

       We conclude that the bearer share regulations do not contravene section

883(c)(1) but are a reasonable construction of that section which provides the IRS

with the appropriate tools needed to enforce section 883. The bearer share

regulations provide certainty and resolve the difficult problems of proof associated

with establishing ownership of bearer shares, especially for prior taxable years. In

not allowing bearer shares to be taken into account in establishing the ownership

of the stock of a foreign corporation for purposes of determining whether the

foreign corporation is described in section 883(c)(1) and thus whether it is entitled

to the benefits of section 883(a)(1), the bearer share regulations set forth a sensible

approach to effecting the intent of Congress in enacting section 883(c)(1) to

ensure that abuse will not occur which will result in certain types of shipping

transportation income described in section 883(a)(1) not being taxed. We believe

that the rigid framework that the Treasury Department adopted in the bearer share

regulations in the applicable final section 883 regulations, as well as in other
                                        - 47 -

portions of those final regulations, for determining whether a foreign corporation

seeking the benefits of section 883(a)(1) is described in section 883(c)(1) is

consistent with section 883(c)(1) and with the intent of Congress in amending

section 883 in the 1986 Act. We also conclude that the bearer share regulations

are consistent with the admonition of the Supreme Court that “exemptions from

taxation are to be construed narrowly.” Bingler v. Johnson, 

, 752

(1969).

      We hold that the Treasury Department did not act unreasonably, arbitrarily,

or capriciously or in violation of section 883(c)(1) or its legislative history when it

interpreted that section in the bearer share regulations in a way that precluded a

foreign corporation the shares of which were issued in bearer form from taking

such shares into account in establishing the ownership of the stock of the foreign

corporation for purposes of determining whether the foreign corporation is

described in section 883(c)(1) and thus whether it is entitled to the benefits of

section 883(a)(1).

      We hold that the bearer share regulations satisfy the step one analysis and

the step two analysis under Chevron. We hold that those regulations are valid.

Petitioner acknowledges that if we were to hold that the bearer share regulations
                                        - 48 -

are valid, which we have, it is not entitled for its taxable year 2007 to exclude

from its gross income or exempt from U.S. taxation its USSGTI of $3,587,375.

        We have considered all of the contentions and arguments of petitioner that

are not discussed herein, and we find them to be without merit, irrelevant, and/or

moot.

        To reflect the foregoing,


                                                 An order granting respondent’s

                                       motion and denying petitioner’s motion and

                                       decision for respondent will be entered.