Term: 2002
Docket: 01-1209
The Boeing Company And Consolidated Subsidiaries v. United States
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01-1209 BOEING CO. v. UNITED STATES Ruling below: CA 9, 258 F.3d 958. QUESTION PRESENTED Whether the Ninth Circuit, in direct conflict with the Eighth Circuit, correctly concluded that Treas. Reg. § 1.861-8(e)(3), which governs the allocation of research and development costs between foreign and domestic income, may be applied to the computation of taxable income for export subsidiaries entitled to special tax treatment under the Internal Revenue Code. 01-1382 UNITED STATES v. BOEING SALES CORP. QUESTION PRESENTED Boeing Sales Corporation (cross-respondent) is a "foreign sales corporation" within the meaning of the provisions of the Internal Revenue Code that formerly pertained to the taxation of such entities, 26 U.S.C. 921-927 (1988). Cross-respondent joined with its parent, The Boeing Corporation, and the latter's consolidated subsidiaries (petitioners in No.01-1209), in bringing this tax refund suit. This suit challenges the validity of the Treasury regulation (26 C.F.R. 1.861- 8(e)(3) (1979)) that governs the application of research and development expenses in the computation of the "combined taxable income" of cross-respondent and its parent (and affiliates) under the foreign sales corporation provisions of the Code. After the district court ruled that research and development expenditures need not be taken into account in the manner specified by that regulation, the parties agreed that the court's ruling, if valid, would (as a computational matter) result in an increase in cross-respondent's tax liabilities for the period in issue as well as a decrease in the tax liabilities of Boeing and its consolidated subsidiaries. Subject to the retained right to appeal, the parties therefore stipulated to entry of a judgment against the former and in favor of the latter. On cross-appeals, the court of appeals concluded that the regulation properly governed the treatment of research and development expenses and therefore reversed the district court judgment in favor of petitioners in No.01-1209 and against Boeing Sales Corp. Petitioners in No.01-1209 seek certiorari on that issue. The question presented by this conditional cross-petition is whether, if certiorari is granted and the judgment is reversed in No.01-1209, the judgment of the court of appeals in favor of cross-respondent should then also be reversed. CERT. GRANTED: 5/28/02 Consolidated for one hour oral argument.
In the case of The Boeing Company and Consolidated Subsidiaries v. United States, 2002, the U.S Supreme Court was tasked with deciding whether or not Boeing could deduct from its taxable income certain costs related to its production activities. These costs were incurred during periods when no actual production took place but were necessary for future manufacturing processes (referred to as "standby costs"). The Internal Revenue Service (IRS) argued that these expenses should be capitalized rather than deducted because they are indirectly tied to inventory property. However, Boeing contended that since these standby costs do not directly benefit any particular unit of produced goods, they should be deductible as business expenses under section 162(a) of the Tax Code. The court ruled in favor of the IRS stating that even though there is no direct relationship between standby cost and a specific product item does not mean it's unrelated to inventory property; hence such cost must be capitalized instead of being treated as current deductions. This decision clarified tax law regarding capitalization versus deduction for businesses nationwide.
In the dissenting opinion for The Boeing Company and Consolidated Subsidiaries v. United States, 2002, it was argued that the majority had misinterpreted tax law in a way that unfairly penalized Boeing. The dissenters believed that the company's method of accounting for its long-term contracts was not only legal but also more accurately reflected their income than the method preferred by the IRS. They contended that under applicable regulations and precedent, taxpayers have significant discretion to choose among permissible methods of accounting as long as they clearly reflect income. In this case, they felt Boeing’s chosen approach did so better than alternatives because it matched costs with related revenues within each contract year rather than spreading costs over multiple years irrespective of when revenue is recognized. Furthermore, they disagreed with how majority treated certain advance payments received by Boeing from customers before work began on their orders; according to them these should be considered loans rather than taxable income until actual performance begins under relevant contracts.
