BOEING CO. et al. v. UNITED STATES

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437 OCTOBER TERM, 2002
Syllabus
BOEING CO. et al. v. UNITED STATES
certiorari to the united states court of appeals for
the ninth circuit
No. 01–1209. Argued December 9, 2002—Decided March 4, 2003*
Under a 1971 statute providing special tax treatment for export sales
made by an American manufacturer through a subsidiary that qualified
as a “domestic international sales corporation” (DISC), no tax is payable
on the DISC’s retained income until it is distributed. See 26 U. S. C.
§§ 991–997. The statute thus provides an incentive to maximize the
DISC’s share—and to minimize the parent’s share—of the parties’ ag-
gregate income from export sales. The statute provides three alterna-
tive ways for a parent to divert a limited portion of its income to the
DISC. See §§ 994(a)(1)–(3). The alternative that The Boeing Com-
pany chose limited the DISC’s taxable income to a little over half of the
parties “combined taxable income” (CTI). In 1984, the “foreign sales
corporation” (FSC) provisions replaced the DISC provisions. As under
the DISC regime, it is in the parent’s interest to maximize the FSC’s
share of the taxable income generated by export sales. Because most
of the differences between these regimes are immaterial to this suit, the
Court’s analysis focuses mainly on the DISC provisions. The Treasury
Regulation at issue, 26 CFR § 1.861–8(e)(3) (1979), governs the account-
ing for research and development (R&D) expenses when a taxpayer
elects to take a current deduction, telling the taxpaying parent and its
DISC “what” must be treated as a cost when calculating CTI, and “how”
those costs should be (a) allocated among different products and
(b) apportioned between the DISC and its parent. With respect to the
“what” question, the regulation includes a list of Standard Industrial
Classification (SIC) categories (e. g., transportation equipment) and
requires that R&D for any product within the same category as the
exported product be taken into account. The regulations use gross
receipts from sales as the basis for both “how” questions. Boeing orga-
nized its internal operations along product lines (e. g., aircraft model
767) for management and accounting purposes, each of which constituted
a separate “program” within the organization; and $3.6 billion of its
R&D expenses were spent on “Company Sponsored Product Develop-
ment,” i. e., product-specific research. Boeing’s accountants treated all
*Together with No. 01–1382, United States v. Boeing Sales Corp. et al.,
also on certiorari to the same court.

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438 BOEING CO. v. UNITED STATES
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Company Sponsored costs as directly related to a single program and
unrelated to any other program. Because nearly half of the Company
Sponsored R&D at issue was allocated to programs that had no sales in
the year in which the research was conducted, that amount was de-
ducted by Boeing currently in calculating its taxable income for the
years at issue, but never affected the calculation of the CTI derived by
Boeing and its DISC from export sales. The Internal Revenue Service
reallocated Boeing’s Company Sponsored R&D costs for 1979 to 1987,
thereby decreasing the untaxed profits of its export subsidiaries and
increasing its taxable profits on export sales. After paying the addi-
tional taxes, Boeing filed this refund suit. In granting Boeing summary
judgment, the District Court found § 1.861–8(e)(3) invalid, reasoning
that its categorical treatment of R&D conflicted with congressional in-
tent that there be a direct relationship between items of gross income
and expenses related thereto, and with a specific DISC regulation giving
the taxpayer the right to group and allocate income and costs by product
or product line. The Ninth Circuit reversed.
Held: Section 1.861–8(e)(3) is a proper exercise of the Secretary of the
Treasury’s rulemaking authority. Pp. 446–457.
(a) The relevant statutory text does not support Boeing’s argument
that the statute and certain regulations give it an unqualified right to
allocate its Company Sponsored R&D expenses to the specific products
to which they are factually related and to exclude such R&D from treat-
ment as a cost of any other product. The method that Boeing chose to
determine an export sale’s transfer price allowed the DISC “to derive
taxable income attributable to [an export sale] in an amount which does
not exceed . . . 50 percent of the combined taxable income of [the DISC
and the parent] which is attributable to the qualified export receipts on
such property derived as the result of a sale by the DISC plus 10 per-
cent of the export promotion expenses of such DISC attributable to such
receipts . . . .” 26 U. S. C. § 994(a)(2) (emphasis added). The statute
does not define “combined taxable income” or specifically mention R&D
expenditures. The Secretary’s regulation must be treated with defer-
ence, see Cottage Savings Assn. v. Commissioner, 499 U. S. 554, 560–
561, but the statute places some limits on the Secretary’s interpretive
authority. First, “does not exceed” places an upper limit on the share
of the export profits that can be assigned to a DISC and gives three
methods of setting the transfer price. Second, “combined taxable in-
come” makes it clear that the domestic parent’s taxable income is a part
of the CTI equation. Third, “attributable” limits the portion of the do-
mestic parent’s taxable income that can be treated as a part of the CTI.
The Secretary’s classification of all R&D as an indirect cost of all export

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439 Cite as: 537 U. S. 437 (2003)
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sales of products in a broadly defined SIC category is not arbitrary.
It provides consistent treatment for cost items used in computing the
taxpayer’s domestic taxable income and CTI; and its allocation of R&D
expenditures to all products in a category even when specifically in-
tended to improve only one or a few of those products is no more tenu-
ous than the allocation of a chief executive officer’s salary to every prod-
uct that a company sells even when he devotes virtually all of his time
to the development of the Edsel. Reading § 994 in light of § 861, the
more general provision dealing with the distinction between domestic
and foreign source income, does not support Boeing’s contrary view. If
the Secretary reasonably determines that Company Sponsored R&D can
be properly apportioned on a categorical basis, the portion of § 861(b)
that deducts from gross income “a ratable part of any expenses . . .
which cannot definitely be allocated to some item or class of gross in-
come” is inapplicable. Pp. 446–451.
(b) Boeing’s arguments based on specific DISC regulations are also
unavailing. Language in 26 CFR § 1.994–1(c)(6)(iii), part of the rule
describing CTI computation, does not prohibit a ratable allocation of
R&D expenditures that can be “definitely related” to particular export
sales. Whether such an expense can be “definitely related” is deter-
mined by the rules set forth in the very rule that Boeing challenges,
§ 1.861–8. Moreover, the Secretary could reasonably determine that
expenditures on model 767 research conducted in years before any 767’s
were sold were not “definitely related” to any sales, but should be
treated as an indirect cost of producing the gross income derived from
the sale of all planes in the transportation equipment category. Nor do
§§ 1.994–1(c)(7)(i) and (ii)(a), which control grouping of transactions for
determining the transfer price of sales of export property, and § 1.994–
1(c)(6)(iv), which governs the grouping of receipts when the CTI method
is used, speak to the questions whether or how research costs should be
allocated and apportioned. Pp. 451–455.
(c) What little relevant legislative history there is in this suit weighs
in the Government’s favor. Pp. 455–457.
258 F. 3d 958, affirmed.
Stevens, J., delivered the opinion of the Court, in which Rehnquist,
C. J., and O’Connor, Kennedy, Souter, Ginsburg, and Breyer, JJ.,
joined. Thomas, J., filed a dissenting opinion, in which Scalia, J., joined,
post, p. 457.
Kenneth S. Geller argued the cause for petitioners in
No. 01–1209 and respondents in No. 01–1382. With him on

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440 BOEING CO. v. UNITED STATES
Opinion of the Court
the briefs were Charles Rothfeld, David M. Gossett, Alan I.
Horowitz, Joel V. Williamson, Wayne S. Kaplan, Roger J.
Jones, Patricia Anne Yurchak, Marjorie M. Margolies, and
John B. Magee.
Kent L. Jones argued the cause for the United States in
both cases. With him on the brief were Solicitor General
Olson, Assistant Attorney General O’Connor, Deputy Solic-
itor General Wallace, David English Carmack, and Frank
P. Cihlar.†
Justice Stevens delivered the opinion of the Court.
This suit concerns tax provisions enacted by Congress in
1971 to provide incentives for domestic manufacturers to in-
crease their exports and in 1984 to limit and modify those
incentives. The specific question presented involves the
interpretation of a Treasury Regulation (26 CFR § 1.861–
8(e)(3) (1979)) promulgated in 1977 that governs the account-
ing for research and development (R&D) expenses under
both statutory schemes.1 We shall explain the general out-
lines of the two statutes before we focus on that regulation.
The 1971 statute provided special tax treatment for export
sales made by an American manufacturer through a subsid-
iary that qualified as a “domestic international sales corpora-
tion” (DISC).2 The DISC itself is not a taxpayer; a portion
of its income is deemed to have been distributed to its share-
holders, and the shareholders must pay taxes on that portion,
†Briefs of amici curiae urging reversal were filed for Caterpillar, Inc.,
et al. by C. David Swenson; for the National Foreign Trade Council, Inc.,
by Stephen D. Gardner; and for the Tax Executives Institute, Inc., by Fred
F. Murray and Mary L. Fahey.
1 In 1996, the provisions of 26 CFR § 1.861–8 were amended, renum-
bered, and republished as 26 CFR § 1.861–17. See 26 CFR § 1.861–17
(2002); see also 60 Fed. Reg. 66503 (1995).
2 To qualify as a DISC, at least 95 percent of a corporation’s gross
receipts must arise from qualified export receipts. See 26 U. S. C.
§ 992(a)(1)(A). In addition, at least 95 percent of the corporation’s assets
must be export related. See § 992(a)(1)(B).

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Opinion of the Court
but no tax is payable on the DISC’s retained income until it
is actually distributed. See 26 U. S. C. §§ 991–997. Typi-
cally, “a DISC is a wholly owned subsidiary of a U. S. corpo-
ration.” 1 Senate Finance Committee, Deficit Reduction
Act of 1984, 98th Cong., p. 630, n. 1 (Comm. Print 1984) (here-
inafter Committee Print). The statute thus provides an
incentive to maximize the DISC’s share—and to minimize
the parent’s share—of the parties’ aggregate income from
export sales.
The DISC statute does not, however, allow the parent sim-
ply to assign all of the profits on its export sales to the DISC.
Rather, “to avoid granting undue tax advantages,” 3 the stat-
ute provides three alternative ways in which the parties may
divert a limited portion of taxable income from the parent
to the DISC. See 26 U. S. C. §§ 994(a)(1)–(3). Each of the
alternatives assumes that the parent has sold the product to
the DISC at a hypothetical “transfer price” that produced a
profit for both seller and buyer when the product was resold
to the foreign customer. The alternative used by Boeing in
this suit limited the DISC’s taxable income to a little over
half of the parties’ “combined taxable income” (CTI).4
3 S. Rep. No. 92–437, p. 13 (1971) (hereinafter S. Rep.).
4 To be more precise, it allowed the DISC “to derive taxable income
attributable to [an export sale] in an amount which does not exceed . . . 50
percent of the combined taxable income of [the DISC and the parent] plus
10 percent of the export promotion expenses of such DISC attributable to
such receipts . . . .” 26 U. S. C. § 994(a)(2).
A hypothetical example in both the House and Senate Committee Re-
ports illustrated the computation of a transfer price of $816 based on a
DISC’s selling price of $1,000 and the parent’s cost of goods sold of $650.
The gross margin of $350 was reduced by $180 (including the DISC’s pro-
motion expenses of $90, the parent’s directly related selling and adminis-
trative expenses of $60, and the parent’s prorated indirect expenses of
$30), to produce a CTI of $170. Half of that amount ($85) plus 10 percent
of the DISC’s promotion expenses ($9) gave the DISC its allowable taxable
income of $94, leaving only $76 of income immediately taxable to the par-
ent. The $184 aggregate of the two amounts attributed to the DISC (pro-
motion expenses of $90 plus its $94 share of CTI) subtracted from the

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442 BOEING CO. v. UNITED STATES
Opinion of the Court
Soon after its enactment, the DISC statute became “the
subject of an ongoing dispute between the United States and
certain other signatories of the General Agreement on Tar-
iffs and Trade (GATT)” regarding whether the DISC provi-
sions were impermissible subsidies that violated our treaty
obligations. Committee Print 634. “To remove the DISC
as a contentious issue and to avoid further disputes over re-
taliation, the United States made a commitment to the GATT
Council on October 1, 1982, to propose legislation that would
address the concerns of other GATT members.” Id., at 634–
635. This ultimately resulted in the replacement of the
DISC provisions in 1984 with the “foreign sales corporation”
(FSC) provisions of the Code. See Deficit Reduction Act of
1984, Pub. L. 98–369, §§ 801–805, 98 Stat. 985.5
Unlike a DISC, an FSC is a foreign corporation, and a
portion of its income is taxable by the United States. See
ibid.; see also B. Bittker & J. Eustice, Federal Income Taxa-
tion of Corporations and Shareholders ¶ 17.14 (5th ed. 1987).
Whereas a portion of a DISC’s income was tax deferred, a
portion of an FSC’s income is exempted from taxation.
Compare 26 U. S. C. §§ 991–997 with 26 U. S. C. §§ 921, 923
(1988 ed.). Hence, under the FSC regime, as under the
DISC regime, it is in the parent’s interest to maximize the
FSC’s share of the taxable income generated by export sales.
Because the differences between the DISC and FSC regimes
for the most part are immaterial to this suit, the analysis in
this opinion will focus mainly on the DISC provisions.6
The Internal Revenue Code gives the taxpayer an election
either to capitalize and amortize the costs of R&D over a
period of years or to deduct such expenses currently. See
$1,000 gross receipt produced the “transfer price” of $816. See S. Rep., at
108, n. 7; H. R. Rep. No. 92–533, p. 74, n. 7 (1971) (hereinafter H. R. Rep.).
5 In 2000, Congress repealed and replaced the FSC provisions with the
“extraterritorial income” exclusion of 26 U. S. C. § 114.
6 Two aspects of the 1984 statute that do have special significance to this
suit are discussed in Part IV, infra.

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26 U. S. C. § 174. The regulation at issue here, 26 CFR
§ 1.861–8(e)(3) (1979), deals with R&D expenditures for
which the taxpayer has taken a current deduction. It tells
the taxpaying parent and its DISC “what” must be treated
as a cost when calculating CTI, and “how” those costs should
be (a) allocated among different products and (b) apportioned
between the DISC and its parent.7
With respect to the “what” question, the Treasury might
have adopted a broad approach defining the relevant R&D as
including all of the parent’s products, or a narrow approach
defining the relevant R&D as all R&D directly related to a
particular product being exported. Instead, the regulation
includes a list of two-digit Standard Industrial Classification
(SIC) categories (examples are “chemicals and allied prod-
ucts” and “transportation equipment”), and it requires that
R&D for any product within the same category as the ex-
ported product be taken into account.8 See ibid. The reg-
ulation explains that R&D on any product “is an inherently
speculative activity” that sometimes contributes unexpected
benefits on other products, and “that the gross income de-
rived from successful research and development must bear
the cost of unsuccessful research and development.” Ibid.
With respect to the two “how” questions, the regulations
use gross receipts from sales as the basis both for allocating
the costs among the products within the broad R&D catego-
ries and also for apportioning those costs between the parent
and the DISC. Thus, if the exported product constitutes 20
percent of the parties’ total sales of all products within an
7 Treasury Regulation § 1.861–8 (1979) also specifies how other specific
items of expense should be treated. See, e. g., 26 CFR § 1.861–8(e)(2)
(1979) (interest fees); § 1.861–8(e)(5) (legal and accounting fees); § 1.861–
8(e)(6) (income taxes).
8 The original regulation used two-digit SIC categories. See § 1.861–
8(e)(3). The current regulation uses narrower three-digit SIC categories,
see 26 CFR § 1.861–17(a)(2)(ii) (2002), but the change is not relevant to
this suit.

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R&D category, 20 percent of the R&D cost is allocated to
that product. And if export sales represent 70 percent of
the total sales of that product, 70 percent of that amount, or
14 percent of the R&D, is apportioned to the DISC.
I
Petitioners (and cross-respondents) are The Boeing Com-
pany and subsidiaries that include a DISC and an FSC. For
over 40 years Boeing has been a world leader in commercial
aircraft development and a major exporter of commercial air-
craft. During the period at issue in this litigation, the dollar
volume of its sales amounted to about $64 billion, 67 percent
of which were DISC-eligible export sales. The amount that
Boeing spent on R&D during that period amounted to ap-
proximately $4.6 billion.
During the tax years at issue here, Boeing organized its
internal operations along product lines (e. g., aircraft models
727, 737, 747, 757, 767) for management and accounting pur-
poses, each of which constituted a separate “program” within
the Boeing organization. For those purposes, it divided its
R&D expenses into two broad categories: “Blue Sky” and
“Company Sponsored Product Development.” The former
includes the cost of broad-based research aimed at generally
advancing the state of aviation technology and developing
alternative designs of new commercial planes. The latter
includes product-specific research pertaining to a specific
program after the board of directors has given its approval
for the production of a new model. With respect to its $1
billion of “Blue Sky” R&D, Boeing’s accounting was essen-
tially consistent with 26 CFR § 1.861–8(e)(3) (1979).9 Its
9 Because all of Boeing’s commercial aircraft were “transportation
equipment” within the meaning of the Treasury Regulation, it properly
allocated all of its Blue Sky research among all of its programs, and then
apportioned those costs between the parent and the DISC. However, ac-
cording to the Government, it erroneously did so on the basis of hours of
direct labor rather than sales. See Brief for United States 10.

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method of accounting for $3.6 billion of “Company Spon-
sored” R&D gave rise to this litigation.
Boeing’s accountants treated all of the Company Spon-
sored research costs as directly related to a single program,
and as totally unrelated to any other program. Thus, for
DISC purposes, the cost of Company Sponsored R&D di-
rectly related to the 767 model, for example, had no effect on
the calculation of the “combined taxable income” produced
by export sales of any other models. Moreover, because im-
mense Company Sponsored research costs were routinely in-
curred while a particular model was being completed and
before any sales of that model occurred, those costs effec-
tively “disappeared” in the calculation of the CTI even for
the model to which the R&D was most directly related.10
Almost half of the $3.6 billion of Company Sponsored R&D
at issue in this suit was allocated to programs that had no
sales in the year in which the research was conducted. That
amount (approximately $1.75 billion) was deducted by Boe-
ing currently in the calculation of its taxable income for the
years at issue, but never affected the calculation of the CTI
derived by Boeing and its DISC from export sales.
Pursuant to an audit, the Internal Revenue Service reallo-
cated Boeing’s Company Sponsored R&D costs for the years
1979 to 1987, thereby decreasing the untaxed profits of
its export subsidiaries and increasing the parent’s taxable
profits from export sales. Boeing paid the additional tax
obligation of $419 million and filed this suit seeking a refund.
Relying on the decision of the Eighth Circuit in St. Jude
Medical, Inc. v. Commissioner, 34 F. 3d 1394 (1994), the Dis-
trict Court entered summary judgment in favor of Boeing.
It held that 26 CFR § 1.861–8(e)(3) (1979) is invalid as applied
to DISC and FSC transactions because the regulation’s cate-
10 When Boeing charged R&D costs to programs that had no sales in the
year the research was conducted, the R&D costs effectively “disappeared”
in the sense that they were not accounted for by Boeing in computing
its CTI.

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446 BOEING CO. v. UNITED STATES
Opinion of the Court
gorical treatment of R&D conflicted with congressional in-
tent that there be a “direct” relationship between items of
gross income and expenses “related thereto,” and with a spe-
cific DISC regulation giving the taxpayer the right to group
and allocate income and costs by product or product line.
The Court of Appeals for the Ninth Circuit reversed, 258 F.
3d 958 (2001), and we granted certiorari to resolve the con-
flict between the Circuits, 535 U. S. 1094 (2002). We now
affirm.
II
Section 861 of the Internal Revenue Code distinguishes
between United States and foreign source income for several
different purposes. See 26 U. S. C. § 861. The regulation
at issue in this suit, 26 CFR § 1.861–8(e)(3) (1979), was pro-
mulgated pursuant to that general statute. Separate regu-
lations promulgated under the DISC statute, 26 U. S. C.
§§ 991–997, incorporate 26 CFR § 1.861–8(e)(3) (1979) by spe-
cific reference. See § 1.994–1(c)(6)(iii) (citing and incorporat-
ing the cost allocation rules of § 1.861–8). Boeing does not
claim that its method of accounting for Company Sponsored
R&D complied with § 1.861–8(e)(3). Rather, it argues that
§ 1.861–8(e)(3) is so plainly inconsistent with congressional
intent and with other provisions of the DISC regulations
that it cannot be validly applied to its computation of CTI
for DISC purposes.
Boeing argues, in essence, that the statute and certain spe-
cific regulations promulgated pursuant to 26 U. S. C. § 994
give it an unqualified right to allocate its Company Spon-
sored R&D expenses to the specific products to which they
are “factually related” and to exclude any allocated R&D
from being treated as a cost of any other product. The rele-
vant statutory text does not support its argument.
As we have already mentioned, the DISC statute gives
the taxpayer a choice of three methods of determining the
transfer price for an exported good. Boeing elected to use
only the second method described in the following text:

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“Inter-company pricing rules
“(a) In general
“In the case of a sale of export property to a DISC by a
person described in section 482, the taxable income of
such DISC and such person shall be based upon a trans-
fer price which would allow such DISC to derive taxable
income attributable to such sale (regardless of the sales
price actually charged) in an amount which does not
exceed the greatest of—
“(1) 4 percent of the qualified export receipts on the
sale of such property by the DISC plus 10 percent of the
export promotion expenses of such DISC attributable to
such receipts,
“(2) 50 percent of the combined taxable income of
such DISC and such person which is attributable to the
qualified export receipts on such property derived as the
result of a sale by the DISC plus 10 percent of the ex-
port promotion expenses of such DISC attributable to
such receipts, or
“(3) taxable income based upon the sale price actually
charged (but subject to the rules provided in section
482).
“(b) Rules for commissions, rentals, and marg inal
costing
“The Secretary shall prescribe regulations setting forth
. . . . .
“(2) rules for the allocation of expenditures in
computing combined taxable income under subsection
(a)(2) in those cases where a DISC is seeking to estab-
lish or maintain a market for export property.” 26
U. S. C. §§ 994(a)(1)–(3), (b)(2) (emphasis added).
The statute does not define the term “combined taxable
income,” nor does it specifically mention expenditures for
R&D. Congress did grant the Secretary express authority
to prescribe regulations for determining the proper alloca-

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448 BOEING CO. v. UNITED STATES
Opinion of the Court
tion of expenditures in computing CTI in certain specific con-
texts. See, e. g., §§ 994(b)(1)–(2). Yet in promulgating 26
CFR § 1.861–8 (1979), the Secretary of the Treasury exer-
cised his rulemaking authority under 26 U. S. C. § 7805(a),
which gives the Secretary general authority to “prescribe all
needful rules and regulations for the enforcement” of the
Internal Revenue Code. See 41 Fed. Reg. 49160 (1976)
(“The proposed regulations are to be issued under the au-
thority contained in section 7805 of the Internal Revenue
Code”). Even if we regard the challenged regulation as in-
terpretive because it was promulgated under § 7805(a)’s gen-
eral rulemaking grant rather than pursuant to a specific
grant of authority, we must still treat the regulation with
deference. See Cottage Savings Assn. v. Commissioner, 499
U. S. 554, 560–561 (1991).
The words that we have emphasized in the statutory text
do place some limits on the Secretary’s interpretive author-
ity. First, the “does not exceed” phrase places an upper
limit on the share of the export profits that can be assigned
to a DISC and also gives the taxpayer an unfettered right to
select any of the three methods of setting a “transfer price.”
Second, the use of the term “combined taxable income” in
subsection (a)(2) makes it clear that the taxable income of
the domestic parent is a part of the equation that should
produce the CTI. As Boeing recognizes, even a charitable
contribution to the Seattle Symphony that reduces its do-
mestic earnings from sales of 767’s must be treated as a cost
that is not definitely related to any particular category of
income and thus must be apportioned among all categories
of income, including income from export sales. See Brief
for Petitioners in No. 01–1209, p. 8, n. 7. Third, the word
“attributable” places a limit on the portion of the domestic
parent’s taxable income that can be treated as a part of the
CTI. It is this word that provides the statutory basis for
Boeing’s position.

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Opinion of the Court
Under Boeing’s reading of the statute, a calculation of the
domestic income “attributable” to the export sale of a 767
may include both the direct and indirect costs of manufac-
turing and selling 767’s, but it may not include the direct
costs of selling anything else. Moreover, if Boeing’s ac-
countants classify a particular cost as directly related to the
767, that classification is conclusive. Thus, while the Secre-
tary asserts that Boeing’s R&D expenses are definitely re-
lated to all income in the relevant SIC category, Boeing
claims the right to divide its R&D in a way that effectively
creates three segments: (1) Blue Sky; (2) Company Spon-
sored R&D on products that have no sales in the current
year; and (3) Company Sponsored R&D on products that are
being sold currently. Boeing, like the Secretary, essentially
treats Blue Sky R&D as an indirect cost in computing both
its domestic taxable income and its CTI. With respect to
the second segment, Boeing uses the R&D to reduce its do-
mestic taxable earnings on every product it sells, but elimi-
nates it entirely from the calculation of CTI on any product
by charging the R&D costs to programs without any sales.
The third segment is used for both domestic and CTI pur-
poses, but with respect to CTI only for the export sales to
which it is “factually related.”
The Secretary’s classification of all R&D as an indirect cost
of all export sales of products in a broadly defined SIC cate-
gory—in other words, as “attributable” to such sales—is
surely not arbitrary. It has the virtue of providing consist-
ent treatment for cost items used in computing the taxpay-
er’s domestic taxable income and its CTI. Moreover, its al-
location of R&D expenditures to all products in a category
even when specifically intended to improve only one or a few
of those products is no more tenuous than the allocation of a
chief executive officer’s salary to every product that a com-
pany sells even when he devotes virtually all of his time to
the development of an Edsel.

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450 BOEING CO. v. UNITED STATES
Opinion of the Court
On the other hand, even if Boeing’s method of accounting
for R&D is fully justified for management purposes, it cer-
tainly produces anomalies for tax purposes. Most obvious
is the fact that it enabled Boeing to deduct some $1.75 billion
of expenditures from its domestic taxable earnings under 26
U. S. C. § 174 and never deduct a penny of those expenditures
from its “combined taxable earnings” under the DISC stat-
ute. See Brief for Petitioners in No. 01–1209, at 11. Less
obvious, but nevertheless significant, is that Boeing’s method
assumed that Blue Sky research produces benefits for air-
plane models that are producing current income and—at the
same time—assumed that Company Sponsored research re-
lated to a specific product, such as the 727, is not likely to
produce benefits for other airplane models, such as the 737
or 767.11
In all events, the mere use of the word “attributable” in
the text of § 994 surely does not qualify the Secretary’s au-
thority to decide whether a particular tax deductible expend-
iture made by the parent of a DISC is sufficiently related to
its export sales to qualify as an indirect cost in the computa-
tion of the parties’ CTI. Boeing argues, however, that the
text of § 994 should be read in light of § 861, the more general
provision dealing with the distinction between domestic and
foreign source income.
Title 26 U. S. C. § 861(b) contains the following two
sentences:
“Taxable income from sources within United States
“From the items of gross income specified in subsection
(a) as being income from sources within the United
States there shall be deducted the expenses, losses,
and other deductions properly apportioned or allocated
11 This assumption, of course, runs contrary to the Secretary’s determi-
nation that R&D “is an inherently speculative activity” that sometimes
contributes unexpected benefits on other products. 26 CFR § 1.861–
8(e)(3)(i)(A) (1979).

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thereto and a ratable part of any expenses, losses, or
other deductions which cannot definitely be allocated to
some item or class of gross income. The remainder, if
any, shall be included in full as taxable income from
sources within the United States.” (Emphasis added.)
Focusing on the emphasized words, Boeing interprets this
section as having created a background rule dividing all ex-
penses into two categories: those that can be allocated to
specific income and those that cannot. “Ratable” allocation
is permissible for the second category, but not for the first,
according to Boeing. Moreover, in Boeing’s view, any ex-
pense in the first category cannot be ratably apportioned
across all classes of income.
There are at least two flaws in this argument. First, al-
though the emphasized words authorize ratable apportion-
ment of costs that cannot definitely be allocated to some item
or class of income, the sentence as a whole does not prohibit
ratable apportionment of expenses that could be, but perhaps
in fairness should not be, treated as direct costs. Second,
the Secretary has the authority to prescribe regulations de-
termining whether an expense can be properly apportioned
to an item of gross income in the calculation of CTI. See
26 U. S. C. § 7805(a). Thus, as in this suit, if the Secretary
reasonably determines that Company Sponsored R&D can
be properly apportioned on a categorical basis, the italicized
portion of § 861 is simply inapplicable.
In sum, Boeing’s arguments based on statutory text are
plainly insufficient to overcome the deference to which the
Secretary’s interpretation is entitled.
III
Boeing also advances two arguments based on the text of
specific DISC regulations. The first resembles its argument
based on the text of § 861, and the second relies on regula-
tions providing that certain accounting decisions made by
the taxpayer shall be controlling.

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452 BOEING CO. v. UNITED STATES
Opinion of the Court
The regulations included in 26 CFR § 1.994–1 (1979) set
forth intercompany pricing rules for DISCs. They gener-
ally describe the three methods of determining a transfer
price, noting that the taxpayer may choose the most favor-
able method, and may group transactions to use one method
for some export sales and another method for others. See
ibid. With respect to the CTI method used by Boeing, there
is a rule, § 1.994–1(c)(6), that describes the computation of
CTI. The rule broadly defines the CTI of a DISC and its
related supplier from a sale of export property as the excess
of gross receipts over their total costs “which relate to such
gross receipts.” 12 Subdivision (iii) of that rule, on which
Boeing relies, provides:
“Costs (other than cost of goods sold) which shall be
treated as relating to gross receipts from sales of export
property are (a) the expenses, losses, and other deduc-
tions definitely related, and therefore allocated and ap-
12 Treasury Regulation § 1.994–1(c)(6), 26 CFR § 1.994–1(c)(6) (1979), pro-
vides in part:
“Combined taxable income. For purposes of this section, the combined
taxable income of a DISC and its related supplier from a sale of export
property is the excess of the gross receipts (as defined in section 993(f))
of the DISC from such sale over the total costs of the DISC and related
supplier which relate to such gross receipts. Gross receipts from a sale
do not include interest with respect to the sale. Combined taxable in-
come under this paragraph shall be determined after taking into account
under paragraph (e)(2) of this section all adjustments required by section
482 with respect to transactions to which such section is applicable. In
determining the gross receipts of the DISC and the total costs of the DISC
and related supplier which relate to such gross receipts, the following
rules shall be applied:
“(i) Subject to subdivisions (ii) through (v) of this subparagraph, the tax-
payer’s method of accounting used in computing taxable income will be
accepted for purposes of determining amounts and the taxable year for
which items of income and expense (including depreciation) are taken into
account. See § 1.991–1(b)(2) with respect to the method of accounting
which may be used by a DISC.”

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portioned, thereto, and (b) a ratable part of any other
expenses, losses, or other deductions which are not
definitely related to a class of gross income, determined
in a manner consistent with the rules set forth in
§ 1.861–8.” § 1.994–1(c)(6)(iii) (emphasis added).
Boeing interprets the emphasized words as prohibiting a
ratable allocation of R&D expenditures that can be “defi-
nitely related” to particular export sales. The obvious re-
sponse to this argument is provided by the final words in
the paragraph. Whether such an expense can be “definitely
related” is determined by the rules set forth in the very
regulation that Boeing challenges, § 1.861–8. Moreover, it
seems quite clear that the Secretary could reasonably deter-
mine that expenditures on 767 research conducted in years
before any 767’s were sold were not “definitely related” to
any sales, but should be treated as an indirect cost of produc-
ing the gross income derived from the sale of all planes in
the transportation equipment category.
Boeing also argues that the regulations expressly allow it
to allocate and apportion R&D expenses to groups of export
sales that are based on industry usage rather than SIC cate-
gories. The regulations providing the strongest support for
this argument are §§ 1.994–1(c)(7)(i) and (ii)(a), which control
the grouping of transactions for the purpose of determining
the transfer price of sales of export property, and § 1.994–
1(c)(6)(iv), which governs the grouping of receipts when the
CTI method of transfer pricing is used.13 Treasury Regula-
tion § 1.994–1(c)(7) reads, in part, as follows:
13 In support of its argument that §§ 1.994–1(c) and 1.861–8(e)(3) conflict,
Boeing also points to various proposed regulations, including example 1 of
proposed regulation § 1.861–8(g). See Brief for Petitioners in No. 01–
1209, pp. 22–26. Unlike Boeing and the dissent, see post, at 458–459 (opin-
ion of Thomas, J.), we find these proposed regulations to be of little conse-
quence given that they were nothing more than mere proposals. In
1972—when regulations governing DISCs were first proposed—the Secre-

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454 BOEING CO. v. UNITED STATES
Opinion of the Court
“Grouping transactions. (i) Generally, the determina-
tions under this section are to be made on a transaction-
by-transaction basis. However, at the annual choice of
the taxpayer some or all of these determinations may
be made on the basis of groups consisting of products or
product lines.
“(ii) A determination by a taxpayer as to a product or
a product line will be accepted by a district director if
such determination conforms to any one of the following
standards: (a) A recognized industry or trade usage, or
(b) the 2-digit major groups . . . of the Standard Indus-
trial Classification . . . .”
As we understand the statutory and regulatory scheme,
it gives controlling effect to three important choices by the
taxpayer. First, the taxpayer may elect to deduct R&D ex-
penses on an annual basis instead of capitalizing and amortiz-
ing those costs. See 26 U. S. C. § 174(a)(1). Second, when
engaging in export transactions with a DISC, the taxpayer
may choose any one of the three methods of determining
the transfer price. See § 994(a). Third, the taxpayer may
decide how best to group those transactions for purposes of
applying the transfer pricing methods. See 26 CFR § 1.994–
1(c)(7) (1979). Conceivably, the taxpayer could account for
each sale separately, by product lines, or by grouping all of
its export sales together. These regulations confirm the fi-
nality of the third type of choice (i. e., which groups of sales
will be evaluated under one of the three alternative transfer
pricing methods), but do not speak to the questions answered
by the regulation at issue in this suit—namely, whether or
tary made clear that the proposed regulations were suggestions only and
that whatever final regulations were ultimately adopted would govern.
See Technical Memorandum accompanying Notice of Proposed Rule-
making, 1972 T. M. Lexis 14, pp. *8–*9 (June 29, 1972) (providing that in
determining deductible expenses, “the rules of section 861(b) and § 1.861–8
are to be applied in whatever form they ultimately take in a new notice
to be prepared”).

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how a particular research cost should be allocated and
apportioned.
Nor does § 1.994–1(c)(6)(iv) support Boeing’s argument.
It provides that a “taxpayer’s choice in accordance with
subparagraph (7) of this paragraph as to the grouping of
transactions shall be controlling, and costs deductible in
a taxable year shall be allocated and apportioned to the
items or classes of gross income of such taxable year result-
ing from such grouping.” The regulation makes clear that
if the taxpayer selects the CTI method of transfer pricing (as
Boeing did), then the taxpayer may choose to group export
receipts according to product lines, two-digit SIC codes, or
on a transaction-by-transaction basis. Ibid. The regula-
tion also establishes that there shall be an allocation and
apportionment of all relevant costs deducted in the taxable
year. Ibid. Notably, however, the regulation simply does
not speak to how costs should be allocated among different
items or classes of gross income and apportioned between
the DISC and its parent once the taxpayer (pursuant to
§ 1.994–1(c)(6)) groups its gross receipts. Treasury Regula-
tion § 1.861–8(e)(3) fills this gap by providing that R&D ex-
penditures that are related to all income reasonably con-
nected with the taxpayer’s relevant two-digit SIC category
or categories are “allocable to all items of gross income as
a class . . . related to such product category (or categories).”
26 CFR § 1.861–8(e)(3) (1979) (emphasis added).
IV
Boeing also relies heavily on legislative history, particu-
larly on statements in Reports prepared by the tax-writing
committees of the House and the Senate on the DISC statute.
Those Reports are virtually identical in terms of their dis-
cussion of the DISC provisions. See H. R. Rep., at 58–95;
S. Rep., at 90–129. Neither says anything about R&D costs.
They both contain statements supporting the proposition
that in determining how to calculate income that qualifies

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456 BOEING CO. v. UNITED STATES
Opinion of the Court
for a tax benefit, the expenses to be deducted from gross
income are those expenses that are “directly related” to the
income. See H. R. Rep., at 74; S. Rep., at 107. Those state-
ments are not, however, inconsistent with the proposition
that particular R&D expenses may be factually related to
more than one item of income, or with the proposition that
the Secretary has broad authority to promulgate regulations
determining which expenses are directly or indirectly re-
lated to particular items of income.
If anything, what little relevant legislative history there is
in this suit weighs in favor of the Government’s position in
two important respects. First, whereas the DISC transfer
price could be set at a level that attributed over half of the
CTI to the DISC, when Congress enacted the FSC provi-
sions in 1984, it lowered the maximum allowable share of
CTI attributable to an FSC to 23 percent. Compare 26
U. S. C. § 994(a)(2) with 26 U. S. C. § 925(a)(2) (1988 ed.).
This dramatizes the point that even though the purpose of
the DISC and FSC statutes was to provide American firms
with a tax incentive to increase their exports, Congress did
not intend to grant “undue tax advantages” to firms.
S. Rep., at 13. Rather, the statutory formulas were de-
signed to place ceilings on the amount of those special tax
benefits. See Committee Print 636 (“[T]he income of the
foreign sales corporation must be determined according to
transfer prices specified in the bill: either actual prices for
sales between unrelated, independent parties or, if the sales
are between related parties, formula prices which are in-
tended to comply with GATT’s requirement of arm’s-length
prices”).
Second, the 1977 R&D regulation at issue in this suit had
been in effect for seven years when Congress enacted the
FSC provisions. Yet Congress did not legislatively override
26 CFR § 1.861–8(e)(3) (1979) in enacting the FSC provisions.
In fact, although a moratorium was placed on the application
of § 1.861–8(e)(3) for purposes of the sourcing of income in

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Thomas, J., dissenting
1981,14 a 1984 conference agreement specified that the mora-
torium would “not apply for other purposes, such as the com-
putation of combined taxable income of a DISC (or FSC) and
its related supplier.” H. R. Conf. Rep. No. 98–861, p. 1263
(1984). The fact that Congress did not legislatively override
26 CFR § 1.861–8(e)(3) (1979) in enacting the FSC provisions
in 1984 serves as persuasive evidence that Congress re-
garded that regulation as a correct implementation of its in-
tent. See Lorillard v. Pons, 434 U. S. 575, 580–581 (1978).
The judgment of the Court of Appeals is affirmed.
It is so ordered.
Justice Thomas, with whom Justice Scalia joins,
dissenting.
Before placing its hand in the taxpayer’s pocket, the Gov-
ernment must place its finger on the law authorizing its ac-
tion. United Dominion Industries, Inc. v. United States,
532 U. S. 822, 839 (2001) (Thomas, J., concurring) (citing
Leavell v. Blades, 237 Mo. 695, 700–701, 141 S. W. 893, 894
(1911)). Despite the Government’s failure to do so here, the
Court holds in its favor; I respectfully dissent.
To read the majority opinion, one would think that the
Court has before it a perfectly clear statutory and regulatory
scheme and that the position of petitioners/cross-respondents
(hereinafter Boeing) is utterly without support. Nothing
could be further from the facts of this suit. Indeed, the In-
ternal Revenue Service (IRS) itself initially read the statu-
14 In 1981, Congress imposed a temporary moratorium on the application
of the cost allocation rules of 26 CFR § 1.861–8(e)(3) (1979) solely for the
geographic sourcing of income. See Economic Recovery Tax Act of 1981,
Pub. L. 97–34, § 223, 95 Stat. 249. As a result, research expenditures
made for research conducted in the United States were allocated against
United States source gross income only—not between United States
source income and foreign source income. See H. R. Conf. Rep. No.
98–861, p. 1262 (1984).

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458 BOEING CO. v. UNITED STATES
Thomas, J., dissenting
tory and regulatory provisions at issue here to permit pre-
cisely what Boeing asserts it is allowed to do.1
When regulations governing DISCs were first proposed in
1972, the IRS received public comments recommending that
the regulations be amplified to include rules and examples
on how expenses should be treated for purposes of determin-
ing the combined taxable income of the DISC and a related
supplier. The IRS, however, declined to incorporate the
recommendations in the final regulations, explaining that
proposed regulation § 1.861–8, which had been published in
1973, provided ample guidance on the subject. Technical
Memorandum accompanying T. D. 7364, 1974 T. M. Lexis 30,
pp. *20–*21 (Oct. 29, 1974).
Proposed regulation § 1.861–8(e)(3), in turn, explained that
where “research and development . . . is intended or is rea-
sonably expected to result in the improvement of specific
properties or processes, deductions in connection with such
research and development shall be considered definitely re-
lated and therefore allocable to the class of gross income to
which the properties or processes give rise or are reasonably
expected to give rise.” 38 Fed. Reg. 15843 (1973). The reg-
ulations went on to note that in “other cases, as in the case
of most basic research, research and development shall gen-
erally be considered definitely related and therefore allocable
to all gross income of the current taxable year which is likely
to benefit from the research and development.” Ibid. Ex-
ample 1 in § 1.861–8(g) illustrated this principle by consider-
ing the research and development (R&D) expenditures of a
corporation manufacturing four-, six-, and eight-cylinder gas-
oline engines. The corporation conducted both general and
engine-specific research. The example made clear that,
1 Because, as the Court notes, ante, at 442, differences in the rules gov-
erning domestic international sales corporations (DISCs) and foreign sales
corporations do not affect the outcome of this suit, I too focus only on the
relevant DISC provisions.

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Thomas, J., dissenting
while general R&D expenses were “definitely related” to
gross income resulting from sales of all three types of en-
gines, R&D expenses in connection with a specific type of
engine were to be allocated only to gross income arising from
sales of that type of engine. Id., at 15846 (“X’s deductions
for its research and development expenses in connection with
the 4 cylinder engine are definitely related to the gross in-
come to which the 4 cylinder engine gives rise, i. e., gross
income from the sales of 4 cylinder engines . . .”).
Indeed, the IRS’ 1974 position on the proper allocation of
R&D expenses incurred in connection with separate lines of
products is the only one that makes sense under the relevant
DISC regulations. See, e. g., 26 CFR §§ 1.994–1(c)(6), (7)
(1979). As the Court explains, ante, at 440, 26 U. S. C. § 994
was designed to provide special tax treatment for American
companies engaged in export activities. To that end, § 994
permits a DISC and its related supplier to compute their
relevant transfer price (and, relatedly, their income tax liabil-
ity) based on one of three methods. See § 994 (providing
that the transfer price for sales between a DISC and a re-
lated supplier can be computed based on (1) the gross income
method, (2) the combined taxable income method, and (3) the
usual transfer-pricing rules set forth in § 482).
The Treasury Department has promulgated regulations
explaining how the statutory framework must be applied.
Section 1.994–1(c)(7) of those regulations explains that, as a
general rule, a determination of the transfer price under
§ 994 is to be made on a transaction-by-transaction basis.
Section 1.994–1(c)(7), however, provides that, instead of fol-
lowing the transaction-by-transaction rule, taxpayers may
make § 994 transfer price determinations based on groups
consisting of products or product lines. § 1.994–1(c)(7)(i).
Specifically, the regulation states:
“A determination by a taxpayer as to a product or a
product line will be accepted by a district director if

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460 BOEING CO. v. UNITED STATES
Thomas, J., dissenting
such determination conforms to any one of the follow-
ing standards: (a) A recognized industry or trade usage,
or (b) the 2-digit major groups (or any inferior classifi-
cations or combinations thereof, within a major group)
of the Standard Industrial Classification [SIC] as pre-
pared by the [Office of Management and Budget].”
§ 1.994–1(c)(7)(ii).
Section 1.994–1(c)(6)(iv), in turn, provides that, in connection
with the computation of combined taxable income, “[t]he tax-
payer’s choice in accordance with [§ 1.994–1(c)(7)] as to the
grouping of transactions shall be controlling, and costs de-
ductible in a taxable year shall be allocated and apportioned
to the items or classes of gross income of such taxable year
resulting from such grouping.” (Emphasis added.) Thus,
in tandem, §§ 1.994–1(c)(6)(iv) and 1.994–1(c)(7) give a tax-
payer the choice of allocating and apportioning costs to items
or classes of gross income resulting from (1) case-by-case
transactions, (2) products or product lines grouped together
based on industry or trade usage, and (3) products or product
lines grouped together based on 2-digit SIC codes or lesser
included subgroups.
Although under § 1.991–1(c)(7) taxpayers are given three
choices with respect to the proper grouping of export income
(and the related allocation of expenses), and although
§ 1.994–1(c)(6)(iv) provides that the taxpayer’s selection
under § 1.991–1(c)(7) shall be “controlling,” § 1.861–8(e)(3)
takes away the very choices § 1.991–1 provides. Under
§ 1.861–8(e)(3), the taxpayer is told that R&D expenses may
be allocated solely to items or classes of gross income result-
ing from products that are within the same 2-digit SIC
group—which happens to be only one of the three options
given under § 1.991–1(c)(7). In my view, the rule set forth
in § 1.861–8(e)(3) entirely eviscerates the options given in
§ 1.991–1. Thus, despite the Court’s efforts to show that the
two regulations complement, rather than contradict, each

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other, ante, at 453–455, the conflict is irreconcilable.2 On
these facts, a taxpayer should be permitted to compute its
tax liability under § 1.991–1, rather than under § 1.861–
8(e)(3), based on the principle that a specific rule governs a
general one.3 See Morales v. Trans World Airlines, Inc.,
504 U. S. 374, 384 (1992); Crawford Fitting Co. v. J. T. Gib-
bons, Inc., 482 U. S. 437, 445 (1987); see also St. Jude Medi-
cal, Inc. v. Commissioner, 34 F. 3d 1394 (CA8 1994).
The Court disapproves of Boeing’s method of allocating
R&D because, as the Court sees it, Boeing’s approach results
in the “disappear[ance]” of relevant costs, ante, at 445, in
“the sense that [R&D costs] were not accounted for by Boe-
ing in computing its [combined taxable income],” ante, at 445,
n. 10. The Court is troubled by the fact that this computa-
tion method has enabled Boeing “to deduct some $1.75 billion
of expenditures from its domestic taxable earnings under 26
U. S. C. § 174 and never deduct a penny of those expenditures
from its ‘combined taxable earnings’ under the DISC stat-
ute.” Ante, at 450. But the “disappearance” of Boeing’s
R&D expenses is the direct result of Congress’ decision to
encourage such expenditures by making them immediately
deductible under 26 U. S. C. § 174(a)(1). Moreover, the ap-
proach adopted in the regulations, and approved by the
Court, does not remedy the alleged problem of disappearing
2 A taxpayer wishing to (1) group its sales based on an accepted industry
practice, for example, based on different models, and (2) allocate its R&D
expenses with respect to a specific model to the items or classes of gross
income resulting from that model is not, on the Government’s view, per-
mitted to do so. Rather, the taxpayer must first allocate R&D expenses
incurred in connection with the relevant model to items or classes of gross
income resulting from all models falling within the same 2-digit SIC group
and only after doing so can the taxpayer deduct a portion of that model’s
R&D expenses from the income earned by sales of that model.
3 With respect to a DISC, § 1.991–1 provides the more specific rules be-
cause it applies only to DISCs, while § 1.861–8(e)(3) sets forth more gen-
eral rules because it applies to all taxpayers that have foreign source
income.

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462 BOEING CO. v. UNITED STATES
Thomas, J., dissenting
R&D expenses. A company that decides to enter the export
market with a product unrelated to its existing business re-
mains free to deduct in the current tax period all R&D ex-
penses incurred in connection with the new product, even
though those expenses would not be used to offset DISC in-
come resulting from the sale of existing products.4 Finally,
neither the Court nor the Government provides a satisfac-
tory explanation for why § 861 can be read to permit the
“disappearance” of most expenses, see, e. g., 26 CFR § 1.861–
8(d)(1) (1979) (“Each deduction which bears a definite rela-
tionship to a class of gross income shall be allocated to that
class . . . even though, for the taxable year, no gross income
in such class is received or accrued . . . . In apportioning
deductions, it may be that, for the taxable year, there is no
gross income in the statutory grouping (or residual group-
ing), or that deductions exceed the amount of gross income
in the statutory grouping (or residual grouping)”); see also 1
J. Isenbergh, International Taxation: U. S. Taxation of For-
eign Persons and Foreign Income ¶ 21.10 (3d ed. 2003) (“[I]f
an expense incurred in one year is properly allocable to in-
come arising in another, the expense will be allocated to the
class to which the income belongs and may therefore produce
a loss in that class for the year”), but to disallow the “disap-
pearance” of R&D expenses.
4 Boeing illustrates this point with the following example: Suppose a
company that produces and exports athletic clothing (SIC Code 23) decides
to invest the proceeds of its clothing sales in research to develop a line of
athletic equipment (SIC Code 39). The company has current DISC sales
of $1 million from the athletic clothing, no current sales of athletic equip-
ment, and $500,000 in athletic equipment R&D expenses. Under the reg-
ulations, the $500,000 of equipment-related R&D will be allocated to the
athletic equipment SIC Code, which has no income. It will not be allo-
cated to the athletic clothing SIC Code to reduce the income eligible for
the DISC benefit related to the clothing. Thus, in the words of the Court,
the expense will simply “disappear.” Brief for Petitioners in No. 01–1209,
p. 37, n. 17.

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463 Cite as: 537 U. S. 437 (2003)
Thomas, J., dissenting
Because I believe that § 1.861–8(e)(3) does not apply to a
DISC, I need not decide here whether § 1.861–8(e)(3) is con-
sistent with the text of § 861(b) and may be properly applied
in other contexts. I am puzzled, however, by the Court’s
assertion that the Secretary is free to determine that certain
expenses “can be properly apportioned on a categorical
basis,” ante, at 451, and the implication that the Secretary
has authority to require “ratable apportionment of expenses
that could be, but perhaps in fairness should not be, treated
as direct costs.” Ibid. By its terms, § 861(b) appears to
contemplate two types of expenses: (1) those that can defi-
nitely be allocated to some item or class of gross income and
(2) those that cannot. 26 U. S. C. § 861(b) (providing for the
deduction of “the expenses, losses, and other deductions
properly apportioned or allocated thereto and a ratable part
of any expenses, losses, or other deductions which cannot
definitely be allocated to some item or class of gross income”
(emphasis added)). Moreover, on its face, the statute does
not appear to permit expenses to be “deemed” related to an
item or class of gross income, even though in actual fact they
are not so related. Yet, § 1.861–8(e)(3) relies on the notion
of “deemed relationships.” The regulation states that the
methods of allocation and apportionment established there
“recognize that research and development is an inherently
speculative activity, that findings may contribute unexpected
benefits, and that the gross income derived from successful
research and development must bear the cost of unsuccessful
research and development.” 26 CFR § 1.861–8(e)(3)(i)(A)
(1979). The regulation then proceeds to require the alloca-
tion of R&D expenses based on 2-digit SIC groups. But nei-
ther the regulation nor the Court attempt to reconcile the
statutory text with the regulation’s determination to allocate
certain R&D expenses to items or classes of gross income
that admittedly did not benefit from that research.

537US2 Unit: $U23 [04-14-04 21:29:11] PAGES PGT: OPIN
464 BOEING CO. v. UNITED STATES
Thomas, J., dissenting
* * *
In short, I conclude that Boeing properly computed its tax
liability for the years at issue here. I would therefore re-
verse the judgment of the Court of Appeals. Because the
Court concludes otherwise, I respectfully dissent.