                                           HEWLETT-PACKARD COMPANY AND CONSOLIDATED SUBSIDI-
                                              ARIES, PETITIONER v. COMMISSIONER OF INTERNAL
                                                           REVENUE, RESPONDENT
                                               Docket Nos. 21976–07, 10075–08.                 Filed September 24, 2012.

                                                 The parties cross-moved for partial summary judgment on
                                               whether P was required, as asserted by R, to include nonsales
                                               income, including dividends, interest, rent, and other income,
                                               in its ‘‘average annual gross receipts’’ for purposes of calcu-
                                               lating its I.R.C. sec. 41 research credits for taxable years 1999
                                               through 2001. Held: P was required to include such amounts
                                               in its ‘‘average annual gross receipts’’ in determining available
                                               research credits for the taxable years at issue. Accordingly, we
                                               will grant R’s motion on this matter.

                                           Albert H. Turkus and Paul Oosterhuis, for petitioner.
                                           David P. Fuller and Roger L. Kave, for respondent.

                                                                                  OPINION

                                       GOEKE, Judge: In two statutory notices of deficiency
                                     respondent disallowed in part credits for increasing research

                                                                                                                                 255




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                                     256                 139 UNITED STATES TAX COURT REPORTS                                    (255)


                                     activities pursuant to section 411 claimed by petitioner, Hew-
                                     lett-Packard Co. & Consolidated Subsidiaries (HP), for tax-
                                     able years 1999 through 2003. Following concessions and
                                     stipulations, the parties cross-moved for partial summary
                                     judgment on two issues:
                                       (1) whether HP was required to include intercompany
                                     gross receipts received from controlled foreign corporations
                                     (CFCs), within the meaning of section 41(f)(5), in its ‘‘average
                                     annual gross receipts’’ (AAGR) when calculating its section 41
                                     credits for all of the taxable years in issue; and
                                       (2) whether HP was required to include nonsales income,
                                     including dividends, interest, rent, and other income in its
                                     AAGR when calculating its section 41 credits for taxable years
                                     1999 through 2001.
                                       Concerning the first issue, respondent, in his response to
                                     HP’s cross-motion, indicated that he had no objection to
                                     granting HP’s motion to exclude such amounts in deter-
                                     mining its AAGR. Accordingly, we will grant petitioner’s
                                     motion, in part.
                                       As to the second issue, we find that HP was required to
                                     include such nonsales income when determining its AAGR.
                                     Therefore, we will also grant respondent’s motion, in part.

                                                                               Background
                                       HP is a corporation organized under the laws of the State
                                     of Delaware. At all relevant times HP maintained its prin-
                                     cipal corporate offices in California.
                                       During the taxable years at issue HP was a global tech-
                                     nology and service company. HP, directly or through its for-
                                     eign affiliates, 2 manufactured and distributed a broad range
                                     of technology-based business products including printers,
                                     scanners, ink and laser supplies, desktop personal com-
                                     puters, notebooks, workstations, high-end servers, total disk
                                     storage systems, and software technology, including system
                                     management software. For all relevant years HP accrued
                                     income from the sale of goods and services, dividends,
                                       1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code)

                                     as amended and in effect for the years in issue, and all Rule references are to the Tax Court
                                     Rules of Practice and Procedure.
                                       2 Among HP’s foreign affiliates were several CFCs within the meaning of sec. 951. These

                                     CFCs, pursuant to sec. 41(f)(5), were also members of HP’s ‘‘controlled group of corporations’’.




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                    257


                                     interest, and gross royalties and other income from its CFCs
                                     and from unrelated parties.
                                        For each of the taxable years in issue, HP claimed section
                                     41(a)(1) credits for increasing research activities, electing to
                                     calculate such credits according to the alternative incre-
                                     mental credit (AIRC) computation method prescribed in sec-
                                     tion 41(c)(4). In determining its available credits under that
                                     section, HP was required, in part, to compute its AAGR for the
                                     four taxable years preceding the respective determination
                                     year. HP used the amounts reported on line 1(c) of its Forms
                                     1120, U.S. Corporation Income Tax Return, as the base for
                                     its AAGR calculation for each year. Form 1120, for taxable
                                     years 1995 to 2000, described the amounts reported on line
                                     1(a) as ‘‘gross receipt or sales’’ and the amounts reported on
                                     line 1(b) as ‘‘returns and allowances’’. Line 1(c) represented
                                     the difference between line 1(a) and line 1(b). HP included
                                     intercompany revenues from sales to its CFCs in line 1(a) for
                                     each of the relevant years. 3
                                        Form 1120, for taxable years 1995 to 2000, described
                                     amounts reported on lines 4, 5, 6, 7, and 10 as ‘‘Dividends’’,
                                     ‘‘Interest’’, ‘‘Gross rents’’, ‘‘Gross royalties’’, and ‘‘Other
                                     income’’, respectively. HP excluded amounts reported on
                                     those lines in computing its AAGR for purposes of determining
                                     its section 41(a)(1) credits for taxable years 1999 to 2001.
                                        For each taxable year 1999 to 2002, pursuant to section
                                     280C(c)(3), HP elected to reduce its section 41 credit by the
                                     amount equal to the maximum rate of tax under section
                                     11(b)(1) multiplied by the section 41 credit, rather than
                                     reduce its section 174 expense deduction. For its 2003 tax
                                     year, HP did not make such an election.
                                        Following respondent’s issuance of two statutory notices of
                                     deficiency, HP timely petitioned this Court to contest
                                     respondent’s determinations. After subsequent stipulations
                                     and concessions, the amounts attributable to HP’s lines 1(c),
                                     4, 5, 6, 7, and 10 for each of the relevant tax years are as
                                     follows:

                                        3 On June 12, 2003, HP filed amended returns for its 1999 and 2000 tax years to reduce the

                                     AAGR (included in line 1(c)) by gross receipts accrued from CFCs. The same day, HP filed a
                                     claim for refund with respect to its 2001 tax year to similarly reduce the AAGR (included on
                                     line 1(c)) by gross receipts accrued from CFCs.




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                                     258                    139 UNITED STATES TAX COURT REPORTS                                    (255)


                                                           Line 1(c):
                                                             Gross
                                                          receipts or                                                            Line
                                                           sales less                                    Line 6:     Line 7:      10:
                                           Taxable       returns and      Line 4:           Line 5:      Gross       Gross       Other
                                            year          allowances     Dividends          Interest      rents     royalties   income

                                            1995         1$15,689,432        -0-        $172,816         $449,260   $144,057    $80,468
                                            1996          17,905,779         -0-         276,553          527,781    243,233     49,625
                                            1997          20,473,806        $335         494,017          633,342    273,959     63,355
                                            1998          16,586,875          281        679,076          702,422    242,411     84,527
                                            1999          16,401,655        1,005        676,384          666,093     22,278     30,286
                                            2000          19,080,696        2,391        289,519          598,480    144,266     36,144
                                            1Each    figure represents amounts in thousand-dollar increments.

                                                                                  Discussion
                                     I. Summary Judgment
                                       Summary judgment is intended to expedite litigation and
                                     avoid unnecessary and expensive trials of phantom factual
                                     issues. Boyd Gaming Corp. v. Commissioner, 106 T.C. 343,
                                     346–347 (1996); Kroh v. Commissioner, 98 T.C. 383, 390
                                     (1992). Either party may move for summary judgment upon
                                     all or any part of the legal issues in controversy. Rule 121(a);
                                     FPL Group, Inc., & Subs. v. Commissioner, 116 T.C. 73, 74
                                     (2001). We will render a decision on a motion for partial
                                     summary judgment ‘‘if the pleadings, answers to interrog-
                                     atories, depositions, admissions, and any other acceptable
                                     materials, * * * show that there is no genuine dispute as to
                                     any material fact and that a decision may be rendered as a
                                     matter of law.’’ Rule 121(b); Sundstrand Corp. v. Commis-
                                     sioner, 98 T.C. 518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir.
                                     1994).
                                       The parties filed cross-motions for partial summary judg-
                                     ment, in part, on whether HP, for tax years ended October
                                     31, 1999 through 2001, must include dividends, interest,
                                     rent, and other income accrued from unrelated parties in its
                                     calculation of AAGR for purposes of the AIRC computation
                                     method prescribed in section 41(c)(4). The parties agree, and
                                     we conclude, that there is no genuine issue of material fact
                                     and that a decision may be rendered as a matter of law.
                                     II. The Credit for Increasing Research Activities
                                       Congress introduced the credit for increasing research
                                     activities in the Economic Recovery Tax Act of 1981, Pub. L.
                                     No. 97–34, sec. 221(a), 95 Stat. at 241. The credit was




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                       259


                                     intended to ‘‘stimulate a higher rate of capital formation and
                                     to increase productivity’’, S. Rept. No. 97–144, at 76–77
                                     (1981), 1981–2 C.B. 412, 438–439; H.R. Rept. No. 97–201, at
                                     111 (1981), 1981–2 C.B. 352, 358, and ‘‘to encourage business
                                     firms to perform the research necessary to increase the
                                     innovative qualities and efficiency of the U.S. economy’’, S.
                                     Rept. No. 99–313, at 694 (1986), 1986–3 C.B. (Vol. 3) 1, 694;
                                     H.R. Rept. No. 99–426, at 177 (1985), 1986–3 C.B. (Vol. 2) 1,
                                     177. 4
                                        Before 1989 the research credit was calculated entirely on
                                     the basis of research expenditures. Both former section
                                     44F(a) and its later iteration under section 30(a) prescribed
                                     an annual credit in an amount equal to 25% of the excess of
                                     ‘‘qualified research expenditures’’ (QRE) for the taxable year
                                     over ‘‘base period research expenses’’. The former provisions,
                                     in sections 44F(c) and 30(c), respectively, defined ‘‘base
                                     period research expenses’’ as the average of QRE for the three
                                     years preceding the taxable year at issue. When Congress
                                     reenacted and redesignated the credit in 1986 as section 41,
                                     then section 41(a)(1) retained the basic credit calculation
                                     supra; however, the credit amount was altered from 25% to
                                     20% of the excess of QRE over ‘‘base period research
                                     expenses’’. 5
                                        In the Omnibus Budget Reconciliation Act of 1989, Pub. L.
                                     No. 101–239, sec. 7110(b), 103 Stat. at 2323, Congress
                                     substantially altered the scheme for calculating the research
                                     credit, effectively tying the credit computation to not only
                                     research expenditures, but also ‘‘gross receipts’’. As amended
                                     and in effect for the years in issue, section 41(a)(1) prescribes
                                     a credit for an amount equal to 20% of the excess of any QRE
                                     for the taxable year over the ‘‘base amount’’. A taxpayer’s
                                     ‘‘base amount’’ is the product of its (1) ‘‘fixed-base percent-
                                     age’’ and (2) its AAGR for the four taxable years preceding the
                                     taxable year at issue. Sec. 41(c)(1). Section 41(c)(3)(A) gen-
                                     erally defines the ‘‘fixed-base percentage’’ as the percentage
                                     of aggregate QRE of the taxpayer for the taxable years begin-
                                        4 The credit was originally included in sec. 44F. In 1984 Congress redesignated sec. 44F as

                                     sec. 30. Deficit Reduction Act of 1984, Pub. L. No. 98–369, sec. 471(c), 98 Stat. at 826. The credit
                                     was subsequently reenacted and redesignated, again, by Congress in 1986 as sec. 41. Tax Re-
                                     form Act of 1986, Pub. L. No. 99–514, sec. 231(d)(2), 100 Stat. at 2173.
                                        5 In that year Congress also allowed for the first time in then sec. 41(a)(2) a credit for 20%

                                     of the basic research payments determined under sec. 41(e)(1)(A).




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                                     260                   139 UNITED STATES TAX COURT REPORTS                                    (255)


                                     ning after December 31, 1983, and before January 1, 1989,
                                     to AAGR of the taxpayer for the same taxable years. 6
                                       Congress also promulgated then section 41(c)(5), providing
                                     that ‘‘gross receipts’’, for purposes of the section 41 research
                                     credit, ‘‘shall be reduced by returns and allowances made
                                     during the taxable year. In the case of a foreign corporation,
                                     there shall be taken into account only gross receipts which
                                     are effectively connected with the conduct of a trade or busi-
                                     ness within the United States’’. 7
                                       In describing its reasoning for these changes, Congress
                                     noted:
                                     [T]he committee wished to respond to the criticism that the incentive effect
                                     of the present-law research credit was diminished as a result of the
                                     method of computing the taxpayer’s base amount. Critics have noted that
                                     although an increase in research expenditures resulted in a taxpayer
                                     receiving a larger credit for that year, it also resulted in higher base period
                                     amounts (and therefore smaller credits) in the following three years. As a
                                     consequence, the present-law credit’s marginal incentive effect provided in
                                     the first year was largely offset in the following three years. The com-
                                     mittee, therefore, modified the method of calculating a taxpayer’s base
                                     amount in order to enhance the credit’s incentive effect. The committee did
                                     wish, however, to retain an incremental credit structure in order to maxi-
                                     mize the credit’s efficiency by not allowing (to the extent possible) credits
                                     for research that would have been undertaken in any event.

                                                              *   *     *   *   *    *    *
                                       Because businesses often determine their research budgets as a fixed
                                     percentage of gross receipts, it is appropriate to index each taxpayer’s base
                                     amount to average growth in its gross receipts. By so adjusting each tax-
                                     payer’s base amount, the committee believes the credit will be better able
                                     to achieve its intended purpose of rewarding taxpayers for research
                                     expenses in excess of amounts which would have been expended in any
                                     case. Using gross receipts as an index, firms in fast-growing sectors will
                                     not be unduly rewarded if their research intensity, as measured by their
                                     ratio of qualified research to gross receipts, does not correspondingly
                                     increase. Likewise, firms in sectors with slower growth will still be able
                                     to earn credits as long as they maintain research expenditures commensu-
                                     rate with their own sales growth.
                                       [H.R. Rept. No. 101–247, at 1199–1200 (1989), 1989 U.S.C.C.A.N. 1906,
                                     2669.]

                                           6 The
                                              1989 amendments retained the sec. 41(a)(2) 20% basic research payment credit, as well.
                                           7 In
                                            the Ticket to Work and Work Incentives Improvement Act of 1999, Pub. L. No. 106–170,
                                     sec. 502(c)(1), 113 Stat. at 1919, Congress expanded the definition of gross receipts of foreign
                                     corporations, then set forth in sec. 41(c)(6), for purposes of the sec. 41 credit, to include those
                                     effectively connected with the conduct of a trade or business in ‘‘the Commonwealth of Puerto
                                     Rico, or any possession of the United States.’’




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                          261


                                        In 1996 Congress enacted new section 41(c)(4), effective for
                                     taxable years beginning after June 30, 1996. Small Business
                                     Job Protection Act of 1996, Pub. L. No. 104–188, sec. 1204(c),
                                     (f)(2), 110 Stat. at 1774, 1775. 8 That section allows a tax-
                                     payer to elect a separate AIRC method of computing the
                                     research credit under section 41(a)(1) and establishes a
                                     three-tiered formula for making such a computation. As
                                     noted supra, HP made the AIRC election under section
                                     41(c)(4) for all of the taxable years in issue.
                                        As in effect for and applied to HP’s 1999 taxable year, sec-
                                     tion 41(c)(4) prescribed a credit in an amount equal to the
                                     sum of: (i) 1.65% of so much of the QRE from the taxable year
                                     as exceeded 1% of HP’s AAGR, but did not exceed 1.5% of
                                     those AAGR; (ii) 2.2% of so much of the QRE from the taxable
                                     year as exceeded 1.5% of HP’s AAGR, but did not exceed 2%
                                     of those AAGR; and (iii) 2.75% of so much of the QRE for the
                                     taxable year as exceeded 2% of HP’s AAGR.
                                        For the remaining taxable years in issue, section 41(c)(4)
                                     prescribed a credit in an amount equal to the sum of: (i)
                                     2.65% of so much of the QRE from the taxable year as
                                     exceeded 1% of HP’s AAGR, but did not exceed 1.5% of those
                                     AAGR; (ii) 3.2% of so much of the QRE from the taxable year
                                     as exceeded 1.5% of HP’s AAGR, but did not exceed 2% of
                                     those AAGR; and (iii) 3.75% of so much of the QRE from the
                                     taxable year as exceeded 2% of HP’s AAGR.
                                        In 1998 the Department of the Treasury published in the
                                     Federal Register a notice of proposed rulemaking under sec-
                                     tion 41, endeavoring, in part, to provide guidance on the
                                     items of income included in the definition of ‘‘gross receipts’’.
                                     Notice of Proposed Rulemaking, 63 Fed. Reg. 66503 (Dec. 2,
                                     1998). Section 1.41–3(c)(1), Proposed Income Tax Regs., 63
                                     Fed. Reg. 66507 (Dec. 2, 1998), 9 provided that ‘‘gross
                                     receipts’’, for purposes of section 41 credit calculations,
                                     included the ‘‘total amount, as determined under the tax-
                                     payer’s method of accounting, derived by the taxpayer from
                                     all its activities and from all sources (e.g., revenues derived
                                       8 Congress also redesignated then sec. 41(c)(5), entitled ‘‘Gross receipts’’, as sec. 41(c)(6), later

                                     redesignated as sec. 41(c)(7).
                                       9 Generally, proposed regulations are afforded no more weight than a position advanced by

                                     the Commissioner on brief. KTA-Tator, Inc. v. Commissioner, 108 T.C. 100, 102–103 (1997); F.W.
                                     Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265–1266 (1970).




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                                     262                 139 UNITED STATES TAX COURT REPORTS                                     (255)


                                     from the sale of inventory before reduction for cost of goods
                                     sold).’’ 10
                                        In 2001 the Department of the Treasury promulgated final
                                     regulations, adopting, in substantial part, the provisions of
                                     the proposed regulations. T.D. 8930, 2001–1 C.B. 433. 11
                                     However, the final regulations, by their own terms, explicitly
                                     apply only to taxable years beginning after January 3, 2001.
                                     Sec. 1.41–3(e), Income Tax Regs. Furthermore, in promul-
                                     gating the final regulations, the Department of the Treasury
                                     expressly limited their exegetic scope to credit computations
                                     for the taxable years following the regulations’ effective date
                                     (January 3, 2001). T.D. 8930, 2001–1 C.B. at 440 (‘‘No
                                     inference should be drawn from the applicability date con-
                                     cerning the application of section 41 to * * * the computa-
                                     tion of the base amount before the applicability date.’’). Con-
                                     sequently, the final regulations provide no guidance in our
                                     present inquiry.
                                        HP does suggest, however, that respondent’s position in
                                     these cases represents an impermissible retroactive applica-
                                     tion of the regulation. As discussed infra, we reject this
                                     characterization. Nonetheless, we believe that the Depart-
                                     ment of the Treasury’s logic in embracing a broad definition
                                     of ‘‘gross receipts’’ for section 41 computation purposes,
                                     articulated in its preamble to the final regulations, equally
                                     applies to pre-effective-date taxable years:
                                       When Congress revised the computation of the research credit to incor-
                                     porate a taxpayer’s gross receipts, neither the statute nor the legislative his-
                                     tory defined the term gross receipts, other than to provide that gross receipts
                                     for any taxable year are reduced by returns and allowances made during

                                       10 Sec. 1.41–3(c)(2), Proposed Income Tax Regs., 63 Fed. Reg. 66508 (Dec. 2, 1998), also ex-

                                     cluded certain items from the definition, including:
                                     (i) returns or allowances; (ii) receipts from the sale or exchange of capital assets, as defined in
                                     section 1221; (iii) repayments of loans or similar instruments (e.g., a repayment of the principal
                                     amount of a loan held by a commercial lender); (iv) receipts from a sale or exchange not in the
                                     ordinary course of business, such as the sale of an entire trade or business or the sale of prop-
                                     erty used in a trade or business as defined under section 1221(2); and (v) amounts received with
                                     respect to sales tax or other similar state and local taxes, if under the applicable state or local
                                     law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely
                                     collects and remits the tax to the taxing authority.
                                        11 The final regulations, under sec. 1.41–3(c)(2)(vi), Income Tax Regs., further excluded from

                                     the definition of ‘‘gross receipts’’:
                                     Amounts received by a taxpayer in a taxable year that precedes the first taxable year in which
                                     the taxpayer derives more than $25,000 in gross receipts other than investment income. For
                                     purposes of this paragraph (c)(2)(vi), investment income is interest or distributions with respect
                                     to stock (other than the stock of a 20-percent owned corporation as defined in section 243(c)(2).




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                    263


                                     the tax year, and, in the case of a foreign corporation, that only gross
                                     receipts effectively connected with the conduct of a trade or business
                                     within the United States are taken into account. See section 41(c)(6).
                                        The proposed regulations generally defined gross receipts as the total
                                     amount derived by a taxpayer from all activities and sources. However, in
                                     recognition of the fact that certain extraordinary gross receipts might not
                                     be taken into account when a business determines its research budget, the
                                     proposed regulations provided that certain extraordinary items (such as
                                     receipts from the sale or exchange of capital assets) would be excluded
                                     from the computation of gross receipts.
                                        Several commentators objected to the definition of gross receipts in the
                                     proposed regulations. Referring to the inclusion in a House Budget Report
                                     of the term sales growth as an apparent short-hand reference to an increase
                                     in gross receipts, some commentators argued that gross receipts should be
                                     limited to income from sales. See H.R. Rep. No. 101–247, at 1200 (1989).
                                     In determining its research budget, however, a business may take into
                                     account any expected income stream, regardless of whether or not the
                                     income is derived from sales or from other active business activities. More-
                                     over, many businesses do not generate any income in the form of sales.
                                     Accordingly, the final regulations do not adopt this suggestion.
                                        The final regulations also do not adopt suggestions that the definition
                                     of gross receipts be narrowed to exclude those items not directly related
                                     to the conduct of the taxpayer’s trade or business. As noted above, any
                                     expected income stream may be taken into account in determining a busi-
                                     ness’ research budget, regardless of the source of the income. Moreover, IRS
                                     and Treasury believe that a subjective narrowing of the term gross receipts,
                                     as suggested by these commentators, could leave the definition of the term,
                                     and thus the computation of the base amount, vulnerable to manipulation.
                                        For example, a narrower definition allowing taxpayers to exclude items
                                     not derived in the ordinary course of business might prompt a taxpayer to
                                     assert that certain royalties received in the 1980s were derived in the ordi-
                                     nary course of business and are includable as gross receipts (thus
                                     decreasing the taxpayer’s fixed-base percentage), but that certain interest
                                     income received in the years preceding the credit year was not derived in
                                     the ordinary course of business and was not includable in gross receipts
                                     (thus decreasing the base amount). Nor would a rule of consistency be
                                     effective in preventing such manipulation. While the taxpayer described
                                     above would be characterizing the nature of its income items as derived
                                     or not derived in the ordinary course of a trade or business so as to maxi-
                                     mize the amount of the credit, the taxpayer would not be taking incon-
                                     sistent positions with respect to the same items of income. * * *
                                        [T.D. 8930, 2001–1 C.B. at 434–435; emphasis added.]

                                     III. Statutory Interpretation
                                           A. Statutory Language
                                       The Supreme Court has stated that ‘‘ ‘in any case of statu-
                                     tory construction, * * * [its] analysis begins with the lan-
                                     guage of the statute, * * * . And where the statutory lan-




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                                     264                 139 UNITED STATES TAX COURT REPORTS                                      (255)


                                     guage provides a clear answer, it ends there as well’.’’ Harris
                                     Trust & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S.
                                     238, 254 (2000) (quoting Hughes Aircraft Co. v. Jacobson, 525
                                     U.S. 432, 438 (1999)); United States v. Mo. Pac. R.R. Co., 278
                                     U.S. 269, 278 (1929) (‘‘[W]here the language of an enactment
                                     is clear, and construction according to its terms does not lead
                                     to absurd or impracticable consequences, the words employed
                                     are to be taken as the final expression of the meaning
                                     intended.’’). 12 When a word is undefined in a statute, it is a
                                     fundamental canon of statutory construction that it will be
                                     interpreted as taking its ordinary, contemporary, common
                                     meaning. See Commissioner v. Soliman, 506 U.S. 168, 174
                                     (1993).
                                        For the taxable years at issue, then section 41(c)(6) pro-
                                     vided in part that ‘‘gross receipts’’, for purposes of the section
                                     41 research credit, ‘‘shall be reduced by returns and allow-
                                     ances made during the taxable year.’’ The function of the
                                     provision was to specify exclusions from ‘‘gross receipts’’; it
                                     offered little clarification concerning the category or cat-
                                     egories of receipts included within the definition of the term.
                                     No other provision in section 41 filled this ostensible statu-
                                     tory gap.
                                        HP submits that by specifically excluding ‘‘returns and
                                     allowances’’, a phrase connoting a merchant business associa-
                                     tion, Congress evinced a clear intention to limit gross
                                     receipts to solely sales receipts. Similarly, citing a Black’s
                                     Law Dictionary entry, HP asserts that the generally accepted
                                     definition of ‘‘gross receipts’’ focuses on sales or services
                                     income. See Black’s Law Dictionary 772 (9th ed. 2009)
                                     (defining ‘‘gross receipts’’ as ‘‘The total amount of money or
                                     other consideration received by a business taxpayer for goods
                                     sold or services performed in a taxable year, before deduc-
                                     tions. * * * [Sec.] 448; * * * [sec.] 1.448–1T(f)(2)(iv) [Tem-
                                     porary Income Tax Regs., 52 Fed. Reg. 22764 (June 16,
                                     1987)].’’).
                                        We are unpersuaded by HP’s contentions. Nowhere in the
                                     Code has the isolated term ‘‘gross receipts’’ been construed as
                                       12 Cf. Halpern v. Commissioner, 96 T.C. 895, 899 (1991) (‘‘[W]here a statute is clear on its face,

                                     we require unequivocal evidence of legislative purpose before construing the statute so as to
                                     override the plain meaning of the words used therein.’’) (citing Huntsberry v. Commissioner, 83
                                     T.C. 742, 747–748 (1984)).




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                        265


                                     narrowly as HP suggests. 13 On the contrary, an examination
                                     of the Federal income tax laws reveals that Congress widely
                                     embraces the notion of a broad, inclusive definition for the
                                     term. See, e.g., secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C).
                                     Indeed, when adopting that term in a provision, Congress
                                     often qualifies the term’s comprehensive definition through
                                     specific exclusions or limitations to accommodate the rel-
                                     evant statutory scheme. See, e.g., secs. 448(c)(3)(C),
                                     509(a)(2)(A)(ii), 1362(d)(3)(B) and (C). 14 If, as proffered by
                                     HP, Congress intended to further limit the definition of
                                     ‘‘gross receipts’’ in section 41, it undoubtedly recognized the
                                     constructional convention by which it had traditionally done
                                     so in numerous provisions.
                                        Further, HP’s attempt to equate the common meaning of
                                     ‘‘gross receipts’’ with the narrow definition Black’s Law Dic-
                                     tionary is unavailing. Specifically, the definition provided in
                                     Black’s Law Dictionary is undermined by the cited authori-
                                     ties, section 448 and section 1.448–1T(f)(2)(iv), Temporary
                                     Income Tax Regs., supra, from which the definition was
                                     purportedly derived. Coincidentally, section 448(c)(3)(C)
                                     serves as the most analogous statutory provision to section
                                     41(c)(6), offering nearly identical language. It prescribes that
                                     ‘‘gross receipts for any taxable year’’, for purposes of limita-
                                     tions on the use of the cash method of accounting, ‘‘shall be
                                     reduced by returns and allowances made during such year.’’
                                     Section 1.448–1T(f)(2)(iv), Temporary Income Tax Regs.,
                                     supra, promulgated before the statutory amendment incor-
                                     porating ‘‘gross receipts’’ into the section 41 credit calculation
                                     and effective for all of the taxable years in issue, 15 provides
                                       13 It is a well-established canon of statutory interpretation that ‘‘ ‘identical words used in dif-

                                     ferent parts of the same act are intended to have the same meaning.’ ’’ United States Nat’l Bank
                                     of Or. v. Indep. Ins. Agents of Am., Inc., 508 U.S. 439, 460 (1993) (quoting Commissioner v. Key-
                                     stone Consol. Indus., Inc., 508 U.S. 152, 159 (1993)). Similarly, the meaning, or ambiguity, of
                                     certain words or phrases may become evident only when they are placed in context. FDA v.
                                     Brown & Williamson Tobacco Corp., 529 U.S. 120, 132–133 (2000) (citing Brown v. Gardner,
                                     513 U.S. 115, 118 (1994)). ‘‘ ‘[W]ords of a statute must be read in their context and with a view
                                     to their place in the overall statutory scheme.’ ’’ Id. at 133 (quoting Davis v. Mich. Dept. of
                                     Treasury, 489 U.S. 803, 809 (1989)).
                                       14 At the time sec. 41 was amended to include ‘‘gross receipts’’ in increasing research credit

                                     calculations, current sec. 1362(d)(3)(B) and (C) was enacted, in similar form, as sec.
                                     1362(d)(3)(C) and (D), respectively.
                                       15 Sec. 1.448–1T(f)(2), Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16, 1987), was

                                     promulgated in 1987. Sec. 7805(e)(2) currently prescribes that temporary regulations expire
                                     within three years from the date of issuance; however, this provision applies only to temporary
                                     regulations issued after November 20, 1988. Technical and Miscellaneous Revenue Act of 1988,
                                                                                                    Continued




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                                     266                 139 UNITED STATES TAX COURT REPORTS                                       (255)


                                     that for purposes of section 448(c)(3)(C), ‘‘gross receipts’’
                                     include:
                                     total sales (net of returns and allowances) and all amounts received for
                                     services. In addition, gross receipts include any income from investments,
                                     and from incidental or outside sources. For example, gross receipts include
                                     interest * * *, dividends, rents, royalties, and annuities, regardless of
                                     whether such amounts are derived in the ordinary course of the taxpayer’s
                                     trade or business. Gross receipts are not reduced by cost of goods sold or
                                     by the cost of property sold if such property is described in section 1221
                                     (1), (3), (4) or (5). With respect to sales of capital assets as defined in section
                                     1221, or sales of property described in 1221(2) (relating to property used in
                                     a trade or business), gross receipts shall be reduced by the taxpayer’s
                                     adjusted basis in such property. Gross receipts do not include the repay-
                                     ment of a loan or similar instrument (e.g., a repayment of the principal
                                     amount of a loan held by a commercial lender). Finally, gross receipts do
                                     not include amounts received by the taxpayer with respect to sales tax or
                                     other similar state and local taxes if, under the applicable state or local
                                     law, the tax is legally imposed on the purchaser of the good or service, and
                                     the taxpayer merely collects and remits the tax to the taxing authority. If,
                                     in contrast, the tax is imposed on the taxpayer under the applicable law,
                                     then gross receipts shall include the amounts received that are allocable
                                     to the payment of such tax. [Emphasis added.]

                                     Clearly then, Black’s Law Dictionary’s definition of ‘‘gross
                                     receipts’’ contradicts its referenced sources. Rather than
                                     endorse a circumscribed interpretation of the term, the cited
                                     temporary regulation explicitly sets forth several categories
                                     of receipts making up a taxpayer’s annual ‘‘gross receipts’’.
                                     Indeed, dissecting the definition proffered by HP concomi-
                                     tantly with its corresponding sources only serves to
                                     strengthen respondent’s position.
                                        HP also refers the Court to line 1(a), ‘‘Gross receipts or
                                     sales’’, on then-applicable versions of Form 1120 to dem-
                                     onstrate that the Commissioner used those terms inter-
                                     changeably to describe the same items of income. We are
                                     skeptical that a form the Commissioner developed for the
                                     effective administration of the Federal income tax laws pro-
                                     vides this Court with any implication or guidance in the
                                     matter at hand. 16 Moreover, neither the relevant statute nor
                                     Pub. L. No. 100–647, sec. 6232(b), 102 Stat. at 3735. Accordingly, the temporary regulation re-
                                     mained valid for all the taxable years in issue.
                                        16 ‘‘[T]he authoritative sources of Federal tax law are in statutes, regulations, and judicial de-

                                     cisions and not in such informal [IRS] publications.’’ Zimmerman v. Commissioner, 71 T.C. 367,
                                     371 (1978), aff ’d without published opinion, 614 F.2d 1294 (2d Cir. 1979); see also Van Dusen
                                     v. Commissioner, 136 T.C. 515, 531 n.29 (2011); Mohamed v. Commissioner, T.C. Memo. 2012–
                                     152, 2012 Tax Ct. Memo LEXIS 152, at *29 (‘‘A taxpayer relies on his private interpretation




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                    267


                                     its attendant legislative history discussed further infra refers
                                     to Form 1120. Accordingly, we find this assertion irrelevant.
                                           B. Legislative History
                                        HP further asserts that Congress’ somewhat inconsistent
                                     and, at points, interchangeable use of the terms ‘‘sales’’ and
                                     ‘‘gross receipts’’ in describing the 1989 restructuring of the
                                     section 41 credit calculation indicates that Congress viewed
                                     the two words as coterminous. See, e.g., H.R. Rept. No. 101–
                                     247, supra at 1199–1200 (‘‘Likewise, firms in sectors with
                                     slower growth will still be able to earn credits as long as they
                                     maintain research expenditures commensurate with their
                                     own sales growth.’’). In essence, HP requests that the Court
                                     construe any purported legislative ambiguity in its favor.
                                     While the pertinent legislative history certainly lacks distinc-
                                     tive clarity, it is not completely devoid of language
                                     evidencing Congress’ true intent.
                                        As noted supra, Congress determined that ‘‘indexing’’
                                     research expenditures to average annual growth in gross
                                     receipts would ‘‘better serve’’ the credits’ ‘‘intended purpose of
                                     rewarding taxpayers for research expenses in excess of
                                     amounts which would have been expended in any case.’’ Id.
                                     However, if we were to accept HP’s assertion that ‘‘gross
                                     receipts’’ included only ‘‘sales receipts’’, then we would
                                     concomitantly accredit the correlative proposition that Con-
                                     gress intended to extend preferential treatment to companies
                                     that did not engage in sales activity. Under HP’s interpreta-
                                     tion of the credit calculation, it is unlikely that businesses
                                     which accrue mainly licensing or investment income would
                                     generate substantial AAGR. As a result, such businesses
                                     would likely never register a ‘‘base amount’’ exceeding the
                                     minimum base amount prescribed by section 41(c)(2). 17 Simi-
                                     larly, if such businesses elected to calculate their research
                                     credits under the AIRC computation method prescribed in sec-
                                     tion 41(c)(4), they would avoid the lower, more credit-limiting
                                     tiers of the AIRC credit calculation structure. In both cir-
                                     cumstances, taxpayers would enhance their annual research
                                     credits and effectively subvert the legislative purpose of the
                                     section 41 credit statutory scheme by indexing their allow-
                                     of a tax form at his own risk.’’).
                                        17 Sec. 41(c)(2) provides: ‘‘In no event shall the base amount be less than 50 percent of the

                                     qualified research expenses for the credit year.’’




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                                     268                 139 UNITED STATES TAX COURT REPORTS                                    (255)


                                     able credit amount to certain research expenditures that they
                                     would have made in any event. Indeed, this interpretation
                                     would provide disparate treatment to businesses in the same
                                     industry operating under different business models. For
                                     instance, a company which merely licensed intellectual prop-
                                     erty would benefit over a similar entity which, instead, incor-
                                     porated such property into marketable products for subse-
                                     quent sale. We find no hint of any congressional intent effec-
                                     tively endorsing such divergent results. See H.R. Rept. No.
                                     101–247, supra at 1199–1200 (‘‘Because businesses often
                                     determine their research budgets as a fixed percentage of
                                     gross receipts, it is appropriate to index each taxpayer’s base
                                     amount to average growth in its gross receipts.’’ (Emphasis
                                     added.)).
                                           C. Respondent’s Position
                                        Respondent maintains that HP should include receipts
                                     reflected on Form 1120 lines 4 (dividends), 5 (interest), 6
                                     (gross rents), 7 (gross royalty), and 10 (other income) in
                                     ‘‘gross receipts’’ for its section 41 calculations for each of the
                                     taxable years at issue; however, respondent does not seek to
                                     include receipts reflected on Form 1120 line 8 (capital gain
                                     net income) or 9 (net gain from the sale of a business) for the
                                     same purpose. As noted supra, HP counters that this asser-
                                     tion effectively represents an invalid retroactive application
                                     of section 1.448–1T(f)(2), Temporary Income Tax Regs.,
                                     supra, to the tax years in issue. We do not construe respond-
                                     ent’s position as such. While respondent’s nuanced definition
                                     of ‘‘gross receipts’’ is not entirely congruent with our discern-
                                     ment of a more comprehensive interpretation of the term, 18
                                     we find that respondent’s position simply represents a
                                     concession in these cases. Accordingly, we need not further
                                     address HP’s contention.
                                           D. ‘‘Expressio Unius Est Exclusio Alterius’’
                                       We are cognizant of the venerable rule of statutory
                                     construction, commonly referred to as the maxim ‘‘expressio
                                     unius est exclusio alterius’’, which dictates: ‘‘ ‘Where Con-
                                     gress explicitly enumerates certain exceptions * * * addi-
                                        18 See Deere & Co. v. Commissioner, 133 T.C. 246, 253 (2009) (the taxpayer, in determining

                                     its ‘‘gross receipts’’ for purposes of its sec. 41 credit, used the domestic income it reported on
                                     its Form 1120 line 11, representing the total amount of income listed on lines 3 through 10).




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                                     (255)      HEWLETT-PACKARD CO. & CONSOL. SUBS. v. COMM’R                                    269


                                     tional exceptions are not to be implied, in the absence of evi-
                                     dence of a contrary legislative intent.’ ’’ United States v.
                                     Smith, 499 U.S. 160, 167 (1991) (quoting Andrus v. Glover
                                     Constr. Co., 446 U.S. 608, 616–617 (1980)); see also Catterall
                                     v. Commissioner, 68 T.C. 413, 421 (1977), aff ’d sub nom.
                                     Vorbleski v. Commissioner, 589 F.2d 123 (3d Cir. 1978).
                                     Given our understanding of the comprehensive definition of
                                     ‘‘gross receipts’’, the sole statutory exclusion from that defini-
                                     tion (‘‘returns and allowances’’), and a lack of congressional
                                     intent indicating otherwise, we do not read any further
                                     limitations into the definition of ‘‘gross receipts’’ for purposes
                                     of section 41.
                                           E. Conclusion
                                       HP repeatedly requests that the Court heed the oft-cited
                                     admonition that ‘‘taxing acts ‘are not to be extended by
                                     implication beyond the clear impact of the language used’ ’’
                                     and that ‘‘doubts are to be resolved against the government
                                     and in favor of the taxpayer.’’ Helvering v. Stockholms
                                     Enskilda Bank, 293 U.S. 84, 93 (1934). Nonetheless, it is
                                     clear that
                                     [t]he intention of the lawmaker controls in the construction of taxing acts
                                     as it does in the construction of other statutes, and that intention is to be
                                     ascertained, not by taking the word or clause in question from its setting
                                     and viewing it apart, but by considering it in connection with the context,
                                     the general purposes of the statute in which it is found, the occasion and
                                     circumstances of its use, and other appropriate tests for the ascertainment
                                     of the legislative will. * * * [Id. at 93–94.]

                                       We believe it evident, when considering the statutory lan-
                                     guage at issue, comparable language in the Code, and the
                                     purpose of the research credit statutory scheme, that Con-
                                     gress intended a broad, inclusive definition of the term ‘‘gross
                                     receipts’’ for purposes of section 41 credit calculations, not
                                     one limited solely to ‘‘sales receipts’’.
                                     IV. Conclusion
                                       On the basis of respondent’s concession, we shall grant in
                                     part HP’s motion for partial summary judgment thus
                                     allowing HP to exclude intercompany gross receipts received
                                     from CFCs, within the meaning of section 41(f)(5), from its




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                                     270                 139 UNITED STATES TAX COURT REPORTS                                     (255)


                                     AAGR when calculating its section 41 credits for all of the tax-
                                     able years at issue.
                                       We shall also grant in part respondent’s motion for partial
                                     summary judgment affirming that HP was required to
                                     include nonsales income, including dividends, interest, rent,
                                     and other income, in its AAGR when calculating its section 41
                                     credits for taxable years 1999 through 2001.
                                       In reaching our holdings herein, we have considered all
                                     arguments made, and, to the extent not mentioned above, we
                                     conclude they are moot, irrelevant, or without merit.
                                       To reflect the foregoing,
                                                                     An appropriate order will be issued
                                                                   granting the parties’ cross-motions for partial
                                                                   summary judgment in part.

                                                                                f




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