Boeing Co. v. United States

Background

A major airplane manufacturer and its export subsidiaries used special tax rules that let part of export profits be taxed at the subsidiary instead of the parent. The company grouped its research-and-development (R&D) costs by individual product programs so much of that spending never reduced the export subsidiaries’ taxable income. The IRS audited, reallocated the company’s R&D for 1979–1987, assessed about $419 million, and the company sued for a refund after paying the tax.

Reasoning

The core question was whether a 1977 Treasury regulation (26 C.F.R. §1.861-8(e)(3)) validly requires R&D costs to be allocated across broad industry categories (two-digit SIC groups) and apportioned to export sales by sales shares. The Court held the regulation valid. It explained that the Secretary of the Treasury had authority to issue reasonable rules under the tax code, that the categorical allocation produced consistent tax treatment, and that Congress did not override the rule when it later changed the export statutes. The Court therefore rejected the company’s claim that it could insist on product-by-product R&D allocation that left large amounts “disappearing” from export-tax calculations.

Real world impact

The decision means companies must often spread R&D deductions across all products in an industry group and then apportion the export share by sales. Exporting firms can no longer routinely isolate large product-specific R&D costs to avoid inclusion in combined export taxable income. The ruling applies to the Treasury regulation as incorporated into the export-tax rules and was affirmed over a dissent that would have allowed the company’s product-specific accounting.

Dissents or concurrances

Justice Thomas (joined by Justice Scalia) dissented, arguing the company’s reading of the DISC regulations and earlier IRS practice supported product-specific allocation and that the general regulation should not override the more specific DISC rules.