                         133 T.C. No. 11



                  UNITED STATES TAX COURT



DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 20320-06.                Filed October 22, 2009.



       For each of the taxable years ended Oct. 31, 1997
  through 2001, the total income that P, a consolidated
  group of corporations, reported in its consolidated
  return included amounts from the operations during each
  of those taxable years that the parent of P (Parent)
  conducted through its foreign branches (Parent’s for-
  eign branch operations). In calculating the consoli-
  dated tax shown in the consolidated return for the
  taxable year at issue ended Oct. 31, 2001, P claimed a
  credit for increasing research activities under sec.
  41, I.R.C. In calculating that credit, P elected the
  alternative incremental research credit prescribed by
  sec. 41(c)(4), I.R.C. In determining that alternative
  credit for the taxable year at issue, P calculated
  under sec. 41(c)(1)(B), I.R.C., its average annual
  gross receipts for the 4 taxable years preceding that
  taxable year by using the total income that it reported
  in its consolidated return for each of those 4 years
  reduced by the amounts included therein for each of
  those years from Parent’s foreign branch operations.
                               - 2 -


          Held: In determining the alternative research
     credit under sec. 41(c)(4), I.R.C., and thus the credit
     to which P is entitled under sec. 41(a), I.R.C., P is
     required to include in the calculation under sec.
     41(c)(1)(B), I.R.C., of its average annual gross re-
     ceipts for the 4 taxable years preceding the taxable
     year at issue the amounts for each of those years from
     Parent’s foreign branch operations.



     Laurence M. Bambino, Michael B. Shulman, Richard John

Gagnon, Jr., and Douglas R. McFadyen, for petitioner.

     Reid Michael Huey, for respondent.



                              OPINION


     CHIECHI, Judge:   This case is before us on the motion for

summary judgment of respondent (respondent’s motion) and the

motion for summary judgment of Deere & Co. and Consolidated

Subsidiaries (petitioner’s motion).1     We shall grant respondent’s

motion, and we shall deny petitioner’s motion.

                            Background

     At the time of the filing of the petition, petitioner

maintained its principal office in Illinois.

     At all relevant times, petitioner manufactured, distributed,

and financed a full line of agricultural equipment, a variety of

commercial and consumer equipment, and a broad range of equipment


     1
      We shall refer to the consolidated group of Deere & Co. and
Consolidated Subsidiaries as petitioner.
                               - 3 -

for construction and forestry and other products and provided

various services to a worldwide market.

     During each of petitioner’s taxable years ended October 31,

1997 through 2001, petitioner’s operations were organized and

reported in the following four major business segments:

(1) Agricultural equipment (petitioner’s agricultural equipment

division), (2) commercial and consumer equipment (petitioner’s

commercial and consumer equipment division), (3) construction and

forestry, and (4) credit.   During each of those taxable years,

petitioner received income from operations conducted, inter alia,

through branches in Germany, Italy, and Switzerland that Deere &

Co. (Deere), the parent corporation of petitioner, owned.   (We

shall sometimes refer to the operations conducted through Deere’s

branches in Germany, Italy, and Switzerland as Deere’s foreign

branch operations.)

     Deere commenced Deere’s foreign branch operations in Germany

(Deere’s German branch operations) in 1967.   At all relevant

times, Deere’s German branch operations, which were the largest

of Deere’s foreign branch operations, were primarily part of

petitioner’s agricultural equipment division.   Deere’s German

branch operations included the following factories or offices

that Deere operated:   (1) A tractor factory in Mannheim, Germany,

(2) a combine factory in Zweibruken, Germany, (3) a cab factory

and a parts depot in Bruchsal, Germany, and (4) a German domestic
                               - 4 -

sales office and a European general office in Mannheim, Germany.

Deere’s German branch operations also included the following

entities:   (1) John Deere Intl. GmbH (JDIG) and

(2) Maschinenfabrik Kemper GmbH & Co. KG (Kemper).

     At all relevant times, JDIG, a corporation that Deere

incorporated in 1998 in Germany and wholly owned, had offices in

Mannheim, Germany.   JDIG operated initially as a marketing

organization for export sales outside of Germany and thereafter

as an office for administrative, billing, and central services

for the European operations of Deere.

     Deere filed Form 8832, Entity Classification Election (Form

8832), in which it elected to treat JDIG, effective as of October

14, 1998, as a “foreign eligible entity with a single owner to be

disregarded as a[n] * * * entity” separate from Deere.    Respon-

dent approved that election.   (We shall sometimes refer to a

foreign eligible entity with a single owner that is to be disre-

garded as a separate entity as a disregarded entity.)    Since

October 14, 1998, Deere and petitioner have (1) treated the

activities of the disregarded entity JDIG as a foreign branch of

Deere and (2) reported in the consolidated tax return, Form 1120,

U.S. Corporation Income Tax Return, that petitioner filed for

each taxable year (petitioner’s consolidated return) any income

and expenses of JDIG as Deere’s income and expenses.
                                 - 5 -

     At all relevant times, Kemper, a limited partnership formed

in 1997 in Germany,2 manufactured attachments for various farm

equipment at a factory and offices in Stadtlohn, Germany.     At

those times, Deere was a limited partner of Kemper and, as such,

owned directly more than 99 percent of Kemper.   Maschinenfabrik

Kemper-Verwaltungs and Beteiligungs GmbH (MKVB), a subsidiary of

Deere organized in Germany that Deere wholly owned directly, was

the general partner of Kemper.

     At all relevant times, Deere and petitioner have treated

(1) Kemper as a foreign branch and (2) MKVB as if it were a

disregarded entity.   Thus, petitioner has reported in peti-

tioner’s consolidated return any respective income and expenses

of Kemper and MKVB as Deere’s income and expenses.   (We shall

sometimes refer to all of Deere’s German branch operations,

including the operations of JDIG, Kemper, and MKVB, as Deere’s

German branch.)

     During petitioner’s taxable year ended October 31, 2001, the

year at issue, Deere’s German branch, excluding the respective

operations of JDIG and Kemper,3 (1) had approximately 4,500

employees, of whom approximately 1,500 were salaried employees,



     2
      Kemper was formed after Deere acquired a company in 1996
that was subsequently reorganized into Kemper.
     3
      JDIG and Kemper were very small operations within Deere’s
German branch when measured by gross receipts and other income
items.
                              - 6 -

and (2) incurred approximately $237 million of wage, salary, and

benefit expenses.

     During each of petitioner’s taxable years ended October 31,

1997 through 2001, the operations within Deere’s German branch

maintained separate books and records.    During each of those

taxable years, those German branch operations, other than the

respective operations of JDIG and Kemper, comprised one or more

permanent establishments as provided in article 5 of the Conven-

tion for the Avoidance of Double Taxation and the Prevention of

Fiscal Evasion with Respect to Taxes on Income and Capital and to

Certain Other Taxes, U.S.-F.R.G., Aug. 29, 1989, S. Treaty Doc.

No. 101-10 (1991) (U.S.-German Treaty).    (We shall refer to a

permanent establishment as provided in article 5 of the U.S.-

German Treaty as a U.S.-German Treaty permanent establishment.)4

     At all relevant times, Deere’s foreign branch operations in

Italy and Switzerland were significantly smaller than Deere’s


     4
      The parties stipulated that during each of the taxable
years ended Oct. 31, 1997 through 2001, the operations within
Deere’s German branch, other than the respective operations of
JDIG and Kemper, constituted one or more U.S.-German Treaty
permanent establishments. The parties were unable to agree as to
whether during each of those years Deere’s respective foreign
branch operations in Italy and Switzerland (discussed below)
constituted one or more permanent establishments under the
respective U.S. treaties with those countries. The parties agree
that that factual dispute is not material to our deciding the
issue presented in the parties’ respective motions for summary
judgment. The parties further agree that if we were to conclude,
which we do not, that that factual dispute is material to our
deciding that issue, we should deny those motions and hold a
trial to resolve that dispute.
                               - 7 -

German branch.   Deere’s foreign branch operations in Italy, which

Deere began in 1977, were part of Deere’s agricultural equipment

division.   Those operations consisted largely of a marketing and

sales office in Milan, Italy, that Deere operated for the sales

of agricultural equipment primarily in Italy.     (We shall some-

times refer to all of Deere’s operations in Italy as Deere’s

Italian branch.)

     Deere’s foreign branch operations in Switzerland consisted

of (1) a small branch office in Schaffhausen, Switzerland, and

(2) John Deere Intl. GmbH (JDIS).    Deere established the small

branch office in 2000 and has operated it as part of petitioner’s

commercial and consumer equipment division.     Deere established

JDIS, a limited liability company that Deere organized in 2000 in

Switzerland and wholly owned, in order to serve as the successor

to JDIG in conducting the export sales and marketing operations

for petitioner’s agricultural equipment division outside Germany.

     Deere filed Form 8832 in which it elected to treat JDIS,

effective as of June 22, 2000, as a disregarded entity (i.e., an

entity to be disregarded as an entity separate from Deere).

Respondent approved that election.     Since June 22, 2000, Deere

and petitioner have (1) treated the activities of the disregarded

entity JDIS as a foreign branch of Deere and (2) reported in

petitioner’s consolidated return any income and expenses of JDIS

as Deere’s income and expenses.   (We shall sometimes refer to all
                                - 8 -

of Deere’s operations in Switzerland, including the operations of

JDIS, as Deere’s Swiss branch.)

       During petitioner’s taxable year ended October 31, 2001,

Deere paid or accrued foreign income taxes of approximately $29

million with respect to its foreign branch operations in Germany,

Italy, and Switzerland, a substantial portion of which was paid

or accrued on account of German income taxes.

       Petitioner timely filed petitioner’s consolidated return for

the taxable year ended October 31, 2001.5    (We shall refer to

petitioner’s consolidated return for the taxable year ended

October 31, 2001, as the 10/31/01 return.)    In that return,

petitioner reported on page 1, line 1, the following:

       Line              Description                    Amount
        1a       Gross receipts or sales           $12,713,272,933
        1b       Less returns and allowances         1,223,782,471
        1c       Balance (i.e., gross receipts      11,489,490,462
                   or sales less returns and
                   allowances, or net gross
                   receipts)

       In the 10/31/01 return, petitioner also reported on page 1,

lines 2 and 3, the following:

  Line                  Description                    Amount
   2       Cost of goods sold (from Schedule A,    $9,308,674,331
             Cost of goods sold, line 8)
   3       Gross profit (i.e., net gross            2,180,816,131
             receipts from line 1c minus cost of
             goods sold from line 2)


       5
      The corporations that made up petitioner were at all rele-
vant times accrual basis taxpayers.
                                - 9 -

       In the 10/31/01 return, petitioner also reported on page 1,

lines 4 through 10, the following:

  Line                  Description                   Amount
    4      Dividends (from Schedule C, Dividends   $290,961,385
             and Special Deductions)
   5       Interest                                 935,023,701
   6       Gross rents                              398,492,890
   7       Gross royalties                           36,902,274
   8       Capital gain net income (from                 0
             Schedule D, Capital Gains and
             Losses)
   9       Net gain or (loss) (from Form 4797,       41,008,550
             Sales of Business Property, part
             II, line 18)
  10       Other income                             810,670,466

       In the 10/31/01 return, petitioner reported on page 1, line

11, as total income the total (i.e., $4,693,875,397) of the

amounts listed above that it reported on page 1, lines 3 through

10, of that return.    That total and those amounts included the

amounts, if any, from the operations during the taxable year

ended October 31, 2001, that Deere conducted through Deere’s

German branch, Deere’s Italian branch, and Deere’s Swiss branch.6




       6
      For each of the taxable years ended Oct. 31, 1997 through
2000, the total income that petitioner reported on page 1, line
11, of petitioner’s consolidated return, which was the total of
the amounts that petitioner reported on page 1, lines 3 through
10, of each of those returns, included the amounts, if any, from
the operations during each of those taxable years that Deere
conducted through Deere’s German branch, Deere’s Italian branch,
and Deere’s Swiss branch.
                              - 10 -

     Except with respect to the computation of the credit for

increasing research activities under section 41,7 in calculating

the consolidated tax shown in the 10/31/01 return, petitioner

included all of the income and all of the expenses from Deere’s

operations through Deere’s German branch, Deere’s Italian branch,

and Deere’s Swiss branch.8

     In calculating the consolidated tax shown in the 10/31/01

return, petitioner claimed as a foreign tax credit a substantial

portion of the $29 million of foreign income taxes that Deere

paid or accrued with respect to those foreign branch operations.

     In calculating the consolidated tax shown in the 10/31/01

return, petitioner also claimed a credit of $5,978,898 under

section 41.   In calculating that credit, petitioner elected the

alternative incremental research credit prescribed by section

41(c)(4).

     In determining the alternative incremental research credit

for the taxable year ended October 31, 2001, petitioner calcu-

lated under section 41(c)(1)(B) its average annual gross receipts


     7
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year at issue.
     8
      Except with respect to the computation of the credit under
sec. 41, for each of the taxable years ended on or before Oct.
31, 2001, during which Deere conducted operations through Deere’s
German branch, Deere’s Italian branch, and/or Deere’s Swiss
branch, petitioner included all of the income and all of the
expenses from any such operations in calculating the consolidated
tax reported in petitioner’s consolidated return for each such
year.
                                - 11 -

for the 4-year period preceding that year to be $11,737,809,783.

Petitioner calculated that amount of average annual gross re-

ceipts by averaging the following total annual gross receipts for

each of those years:

   Taxable Year Ended Oct. 31        Total Annual Gross Receipts
              1997                         $11,458,680,882
              1998                          11,871,525,477
              1999                          11,176,314,267
              2000                          12,444,718,504

     In determining the total annual gross receipts listed above

for each of the 4 taxable years preceding the taxable year ended

October 31, 2001, and the average annual gross receipts for those

4 years, petitioner (1) used the total income that it reported on

page 1, line 11, of petitioner’s consolidated return for each of

those years9 and (2) reduced that total income for each of those

years by the following total of (a) gross receipts less returns

and allowances and (b) other income items for each of those years

from the operations that Deere conducted though Deere’s German

branch, Deere’s Swiss branch, and Deere’s Italian branch (total

annual gross receipts of Deere’s foreign branches):




     9
      The total income that petitioner reported on page 1, line
11, of petitioner’s consolidated return for each of the 4 taxable
years preceding the taxable year ended Oct. 31, 2001, was equal
to the total of the amounts that it reported on page 1, lines 3
through 10, of each of those returns.
                                - 12 -

                                     Total Annual Gross Receipts
   Taxable Year Ended Oct. 31        of Deere’s Foreign Branches
              1997                          $2,165,774,284
              1998                           2,265,017,943
              1999                           2,289,516,068
              2000                           2,530,653,492

     Respondent issued a notice of deficiency to petitioner for

the taxable year ended October 31, 2001 (notice).10   In that

notice, respondent disallowed the credit under section 41 that

petitioner claimed in the 10/31/01 return.    That was because

respondent determined that in calculating that credit petitioner

had erroneously excluded from the computation of its average

annual gross receipts for the 4 taxable years preceding the

taxable year ended October 31, 2001, the following total annual

gross receipts of Deere’s foreign branches:

                                     Total Annual Gross Receipts
   Taxable Year Ended Oct. 31        of Deere’s Foreign Branches
              1997                          $2,165,774,284
              1998                           2,265,017,943
              1999                           2,289,516,068
              2000                           2,530,653,492

     In the notice, respondent determined that petitioner’s

average annual gross receipts for the 4 taxable years preceding

the taxable year ended October 31, 2001, was $13,373,420,885,11

     10
      The notice also pertained to other taxable years that are
not at issue here.
     11
      Respondent calculated the average annual gross receipts
for the 4-year period preceding the taxable year ended Oct. 31,
2001, by averaging the following total annual gross receipts of
                                                   (continued...)
                                - 13 -

and not the $11,737,809,783 that petitioner reported in the

10/31/01 return.

                             Discussion

     We must decide whether petitioner is required to include in

the calculation under section 41(c)(1)(B) of its average annual

gross receipts for the 4 taxable years preceding the taxable year

ended October 31, 2001, the total annual gross receipts of

Deere’s foreign branches for each of those 4 preceding taxable

years.12   Before considering that issue of first impression, we

shall set forth some background that will be helpful in under-


     11
      (...continued)
petitioner, which included total annual gross receipts of Deere’s
foreign branches:

   Taxable Year Ended Oct. 31        Total Annual Gross Receipts
              1997                         $12,906,688,685
              1998                          13,492,890,472
              1999                          12,747,793,061
              2000                          14,346,311,323

     Respondent’s computation of the total annual gross receipts
listed above for each of the 4 years preceding the taxable year
ended Oct. 31, 2001, and the average annual gross receipts for
those 4 years not only included total annual gross receipts of
Deere’s foreign branches for each of the taxable years ended Oct.
31, 1997 through 2000, but also reflected certain other adjust-
ments that respondent made in the notice and that are not in
dispute.
     12
      Petitioner is required to calculate under sec. 41(c)(1)(B)
its average annual gross receipts for the 4 taxable years preced-
ing the taxable year ended Oct. 31, 2001, in order to compute the
alternative incremental research credit under sec. 41(c)(4) and
thus the credit under sec. 41(a)(1) to which it is entitled for
the taxable year at issue ended Oct. 31, 2001.
                              - 14 -

standing the parties’ respective arguments and in deciding that

issue.

     As pertinent here, section 38(a)(2) allows as a credit

against the taxes imposed for a taxable year by subtitle A

(relating to income taxes), chapter 1, of the Code (chapter 1)

the amount of the current year business credit.13   Section 38(b)

defines the term “the amount of the current year business credit”

as the sum of certain credits listed in that section, including

the research credit (credit for increasing research activities)

determined under section 41(a).   See sec. 38(b)(4).

     Congress first allowed a credit for increasing research

activities in 1981 when it enacted section 44F into the Code.

Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 221(a), 95

Stat. 241.   In allowing that credit, Congress provided “incen-

tives for greater private activity in research” in order to

“stimulate a higher rate of capital formation and to increase

productivity”.   H. Rept. 97-201, at 111 (1981), 1981-2 C.B. 352,

358; S. Rept. 97-144, at 77 (1981), 1981-2 C.B. 412, 439.    The

credit for increasing research activities that Congress enacted

as section 44F was redesignated by Congress in 1984 as section 30

of the Code, Deficit Reduction Act of 1984, Pub. L. 98-369, sec.


     13
      As pertinent here and as discussed infra note 39, a credit
under sec. 38(a)(2) is not allowed against all of the taxes
imposed by chapter 1. See, e.g., sec. 1.882-1(d), Income Tax
Regs.
                              - 15 -

471(c), 98 Stat. 826, 831-832, and was reenacted and redesignated

by Congress in 1986 as section 41 of the Code, Tax Reform Act of

1986, Pub. L. 99-514, sec. 231(d)(2), 100 Stat. 2173-2180.     In

connection with the latter reenactment, Congress indicated that

the “purpose of enacting the credit [in 1981] was to encourage

business firms to perform the research necessary to increase the

innovative qualities and efficiency of the U.S. economy.”    H.

Rept. 99-426, at 177 (1985), 1986-3 C.B. (Vol. 2) 1, 177; S.

Rept. 99-313, at 694 (1986), 1986-3 C.B. (Vol. 3) 1, 694.

     When Congress first enacted the credit for increasing

research activities in 1981 as section 44F, the calculation of

the credit was based on expenditures with respect to qualified

research.   Specifically, then section 44F(a) allowed as a credit

for the taxable year an amount equal to 25 percent of the excess,

if any, of the qualified research expenses for the taxable year

over the base period research expenses.   Then section 44F(b)

defined the term “qualified research expenses” to mean the sum of

certain amounts with respect to qualified research as defined in

then section 44F(d) that were described in then section 44F(b)

and that were paid or incurred by the taxpayer during the taxable

year in carrying on any trade or business of the taxpayer.     For

this purpose, qualified research did not include research con-

ducted outside the United States.   See then sec. 44F(d)(1).    In

limiting the expenditures with respect to research on which the
                               - 16 -

credit under then section 44F was to be computed to expenditures

with respect to certain research in the United States, Congress

indicated that

     expenditures for research which is conducted outside
     the United States do not enter into the credit computa-
     tion, whether or not the taxpayer is located or does
     business in the United States; the test is whether the
     laboratory experiments, etc., actually take place in
     this country.

H. Rept. 97-201, supra at 116, 1981-2 C.B. at 361.

     When Congress first enacted the credit for increasing

research activities in 1981 as section 44F, Congress intended to

prevent artificial increases in research expenditures, in partic-

ular through the shifting of expenditures in the case of

intracompany transactions among a controlled group of corpora-

tions or otherwise related persons, including partnerships,

proprietorships, and any other trades or businesses, whether or

not incorporated, that were under common control of the taxpayer.

Specifically, Congress provided special rules in then section

44F(f) to ensure that the credit was allowed only where there

were actual increases in qualified research expenditures for the

taxable year.14   See id. at 123-124, 1981-2 C.B. at 364-365; S.

     14
      Then sec. 44F(f)(1) created a so-called aggregation-of-
expenditures rule (aggregation rule). Pursuant to that rule, in
determining the amount of the credit under then sec. 44F,
(1)(a) all members of the same controlled group of corporations
within the meaning of then sec. 44F(f)(5) were to be treated as a
single taxpayer and (b) under regulations prescribed by the
Secretary of the Treasury (Secretary), all trades or businesses,
                                                   (continued...)
                             - 17 -

Rept. 97-144, supra at 83-84, 1981-2 C.B. at 442-443.

     When Congress reenacted and redesignated the credit for

increasing research activities in 1986 as section 41, it re-

tained, inter alia, the approach of (1) calculating the credit on

the basis of expenditures with respect to qualified research, see

then sec. 41(a)(1),15 (2) excluding from qualified research

research conducted outside the United States, i.e., foreign

research, see then sec. 41(d)(4)(F), and (3) ensuring that the

credit was allowed only where there were actual increases in

qualified research expenditures, in particular in the case of

intracompany transactions among a controlled group of corpora-

tions or otherwise related persons, including partnerships,

proprietorships, and any other trades or businesses, whether or


     14
      (...continued)
whether or not incorporated, under common control within the
meaning of then sec. 44F(f)(1)(B) were to be treated as a single
taxpayer, and (2) the credit, if any, allowable by then sec. 44F
to each such member and to each such person was to be its propor-
tionate share, if any, of the qualified research expenses giving
rise to the credit.
     15
      Specifically, when Congress reenacted and redesignated the
credit for increasing research activities in 1986 as sec. 41,
then sec. 41(a)(1) included in the computation of that credit for
a taxable year 20 percent of the excess, if any, of (1) the
qualified research expenses for the taxable year over (2) the
base period research expenses. At that time, Congress also
allowed for the first time in then sec. 41(a)(2) 20 percent of
the basic research payments determined under sec. 41(e)(1)(A) to
be included in the computation of the credit. Petitioner does
not claim any credit under sec. 41 calculated by reference to
basic research payments determined under sec. 41(e)(1)(A). See
sec. 41(a)(2).
                                - 18 -

not incorporated, that were under common control of the taxpayer,

see then sec. 41(f).

     In 1989, Congress made a change to the computation of the

credit for increasing research activities under section 41 that

is material to the issue in the parties’ respective motions for

summary judgment.16    See Omnibus Budget Reconciliation Act of

1989, Pub. L. 101-239, sec. 7110(b), 103 Stat. 2323-2324.

Specifically, in 1989 Congress decided to base the calculation of

that credit on not only expenditures with respect to qualified

research but also gross receipts.17      Congress gave the following

explanation for that decision:

          In extending the research credit, the committee
     wished to respond to the criticism that the incentive
     effect of the present-law research credit was dimin-
     ished as a result of the method of computing the tax-
     payer’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 there-
     fore smaller credits) in the following three years. As
     a consequence, the present-law credit’s marginal incen-
     tive effect provided in the first year was largely
     offset in the following three years. The committee,
     therefore, modified the method of calculating a tax-

     16
      Other changes that Congress made to sec. 41 in 1989 are
not material to the issue that we must decide.
     17
      In 1989, Congress did not change then sec. 41(a)(2) that
Congress had enacted into the Code in 1986 and that allowed for
the first time 20 percent of the basic research payments deter-
mined under then sec. 41(e)(1)(A) to be included in the computa-
tion of the credit for increasing research activities. See supra
note 15. Nor did Congress change in 1989 the definition of
foreign research in then sec. 41(d)(4)(F) or the aggregation rule
in then sec. 41(f).
                              - 19 -

     payer’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
     maximize the credit’s efficiency by not allowing (to
     the extent possible) credits for research that would
     have been undertaken in any event.

          Although the committee believes it is important to
     readjust the base amount annually in a way which does
     not undercut the incentive effect of the credit (which
     occurs when a firm’s base is adjusted solely by refer-
     ence to its own prior levels of research spending), the
     committee also determined it was appropriate that the
     base adjustments reflect firm-specific factors. By
     adjusting each taxpayer’s base to its own experience,
     the committee wanted to make the credit widely avail-
     able at the lowest possible revenue cost.

          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 taxpayer’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 corre-
     spondingly 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.

          Adjusting a taxpayer’s base by reference to its
     gross receipts also has the advantage of effectively
     indexing the credit for inflation and preventing tax-
     payers from being rewarded for increases in research
     spending that are attributable solely to inflation.

H. Rept. 101-247, at 1199-1200 (1989).18

     18
      There was no provision relating to the credit under sec.
41 in the bill that the U.S. Senate passed. See H.R. 3299, 101st
Cong. (as passed by Senate, Oct. 13, 1989); see also H. Conf.
                                                   (continued...)
                                - 20 -

     As changed by Congress in 1989 and as in effect for the year

at issue, section 41(a) provides that for purposes of section 38

the research credit determined under section 41 for the taxable

year is an amount equal to the sum of (1) 20 percent of the

excess, if any, of (a) the taxpayer’s qualified research expenses

for the taxable year over (b) the base amount and (2) 20 percent

of the taxpayer’s basic research payments determined under

section 41(e)(1)(A).19

     As enacted by Congress in 1989 and as in effect for the year

at issue, section 41(c)(1) defines the term “base amount” to mean

the product of (1) the fixed-base percentage20 and (2) the aver-

age annual gross receipts of the taxpayer for the 4 taxable years

preceding the taxable year for which the credit is being deter-

mined (credit year).21




     18
      (...continued)
Rept. 101-386, at 543 (1989).
     19
          See supra note 15.
     20
      Sec. 41(c)(3)(A) defines the term “fixed-base percentage”
to mean generally the percentage that the aggregate qualified
research expenses of the taxpayer for taxable years beginning
after Dec. 31, 1983, and before Jan. 1, 1989, is of the aggregate
gross receipts of the taxpayer for those taxable years. Sec.
41(c)(3)(C) provides that in no event is the fixed-base percent-
age to exceed 16 percent.
     21
      Sec. 41(c)(2) provides that in no event is the base amount
to be less than 50 percent of the qualified research expenses for
the credit year.
                                 - 21 -

     When Congress decided in 1989 to base the computation of the

credit for increasing research activities on not only expendi-

tures with respect to qualified research but also gross receipts,

Congress enacted section 41(c)(5) into the Code.22     Then section

41(c)(5) provided:

          (5) Gross receipts.--For purposes of this subsec-
     tion [(c) of section 41 relating to base amount], gross
     receipts for any taxable year 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 effec-
     tively connected with the conduct of a trade or busi-
     ness within the United States.

     In changing in 1989 the computation of the credit for

increasing research activities, Congress generally followed, with

certain modifications, the provision relating to that credit in

the bill of the U.S. House of Representatives (House bill provi-

sion).23     See H. Conf. Rept. 101-386, at 543 (1989) (Conference

Report).     In describing the House bill provision, the Conference


     22
      In 1989, Congress also enacted sec. 41(c)(4), entitled
“Consistent treatment of expenses required”, into the Code.
Specifically, then sec. 41(c)(4)(A) required that qualified
research expenses be taken into account in computing the fixed-
base percentage on a basis consistent with the determination of
qualified research expenses for the credit year. Then sec.
41(c)(4)(B) authorized the Secretary to prescribe regulations in
order to prevent distortions in the calculation of the taxpayer’s
qualified research expenses or gross receipts caused by a change
in accounting methods that the taxpayer used between the current
year and a year taken into account in computing the taxpayer’s
fixed-base percentage. In 1996, Congress redesignated then sec.
41(c)(4) as sec. 41(c)(5). See infra note 25.
     23
          See supra note 18.
                               - 22 -

Report stated, inter alia:   “the [House] bill provides that a

foreign affiliate’s gross receipts which are not effectively

connected with the conduct of a trade or business in the United

States do not enter into the computation of the credit.”   Id. at

542.24

     In 1996, Congress enacted new section 41(c)(4) into the

Code, effective for taxable years that began after June 30,

1996.25   Small Business Job Protection Act of 1996, Pub. L. 104-

188, sec. 1204(c), (f)(2), 110 Stat. 1774, 1775.   That section

allows a taxpayer to elect an alternative method of computing the

credit under section 41 and establishes a three-tiered formula

for making that alternative computation.   Petitioner made the

election under section 41(c)(4) for the taxable year at issue

ended October 31, 2001.26

     As in effect for the year at issue, section 41(c)(4) pro-

vides that the credit for increasing research activities deter-


     24
      The report of the U.S. House of Representatives contained
language relating to its proposed change in 1989 to the computa-
tion of the credit under sec. 41 that is identical to the lan-
guage in the Conference Report quoted in the text. See H. Rept.
101-247, at 1202-1203 (1989).
     25
      When Congress enacted new sec. 41(c)(4) into the Code in
1996, it redesignated then sec. 41(c)(4), entitled “Consistent
treatment of expenses required”, and then sec. 41(c)(5), entitled
“Gross receipts”, as sec. 41(c)(5) and (6), respectively.
     26
      Pursuant to sec. 41(c)(4)(B), petitioner’s election ap-
plies to the taxable year at issue and all succeeding taxable
years unless revoked with the consent of the Secretary.
                              - 23 -

mined under section 41(a)(1) is equal to the sum of (1) 2.65

percent of so much of the qualifying research expenses for the

taxable year as exceeds 1 percent of the average described in

section 41(c)(1)(B) (i.e., the average annual gross receipts of

the taxpayer for the 4 taxable years preceding the credit year)

but does not exceed 1.5 percent of that average, (2) 3.2 percent

of so much of those expenses as exceeds 1.5 percent of that

average but does not exceed 2 percent of that average, and

(3) 3.75 percent of so much of those expenses as exceeds 2

percent of that average.   See sec. 41(c)(4)(A).

     In 1999, Congress changed the definition of foreign research

in section 41(d)(4)(F) to read:   “Any research conducted outside

the United States, the Commonwealth of Puerto Rico, or any

possession of the United States.”   Congress thereby expanded the

definition of qualified research in section 41(d) to include

certain research conducted in not only the United States but also

the Commonwealth of Puerto Rico and any possession of the United

States.   See Ticket to Work and Work Incentives Improvement Act

of 1999 (1999 Act), Pub. L. 106-170, sec. 502(c)(1), 113 Stat.

1919.

     When Congress expanded in 1999 the definition of qualified

research in section 41(d) to include certain research conducted

in not only the United States but also the Commonwealth of Puerto

Rico and any possession of the United States, Congress added the
                               - 24 -

following phrase at the end of section 41(c)(6), entitled “Gross

receipts”:   “the Commonwealth of Puerto Rico, or any possession

of the United States”.27   See 1999 Act sec. 502(c)(1).   Section

41(c)(6) as amended in 1999 and as in effect for the year at

issue provides:

          (6) Gross receipts.--For purposes of this subsec-
     tion [(c) of section 41 relating to base amount], gross
     receipts for any taxable year 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 effec-
     tively connected with the conduct of a trade or busi-
     ness within the United States, the Commonwealth of
     Puerto Rico, or any possession of the United States.

     The foregoing background gives context to the respective

positions and arguments of the parties on the sole issue that we

must decide.   Before considering those positions and arguments,

we note that our review of the filings that the parties made with

respect to their respective motions for summary judgment raised

certain questions that we gave the parties an opportunity to

address at a hearing (Court’s hearing).28   After that hearing,

     27
      The changes that Congress made in 1999 to sec. 41(d)(4)(F)
and (c)(6) were generally effective with respect to amounts paid
or incurred after June 30, 1999. See Ticket to Work and Work
Incentives Improvement Act of 1999, Pub. L. 106-170, sec.
502(c)(3), 113 Stat. 1920.
     28
      Before the Court’s hearing, respondent filed respondent’s
motion and a memorandum of law in support of that motion.
Petitioner then filed petitioner’s motion and a memorandum of law
in support of that motion and in opposition to respondent’s
motion. Thereafter, respondent filed a memorandum of law in
opposition to petitioner’s motion. Petitioner then filed a reply
                                                   (continued...)
                              - 25 -

petitioner filed a motion for leave to file a supplemental

memorandum of law.   We granted that motion and allowed petitioner

to file a supplemental memorandum of law (petitioner’s supplemen-

tal memorandum).   We also allowed respondent to file a supplemen-

tal memorandum of law (respondent’s supplemental memorandum).

     We consider now the respective positions and arguments of

the parties on the issue presented.    It is petitioner’s position

that, in calculating the alternative incremental credit under

section 41(c)(4) (alternative section 41 credit), petitioner is

not required to include in the computation of the average de-

scribed in section 41(c)(1)(B) (i.e., its average annual gross

receipts for the 4 taxable years preceding the taxable year ended

October 31, 2001) the total annual gross receipts of Deere’s

foreign branches for each of those 4 preceding taxable years.    It

is respondent’s position that petitioner is required to do so.

     Petitioner maintains in petitioner’s filings and peti-

tioner’s supplemental memorandum, and respondent no longer

disputes, that section 41 does not provide a definition of the




     28
      (...continued)
to respondent’s memorandum in opposition to petitioner’s motion.
We shall refer to the filings that petitioner made and the
filings that respondent made before the Court’s hearing took
place as petitioner’s filings and respondent’s filings, respec-
tively.
                              - 26 -

term “gross receipts” used in section 41(c).29   Petitioner fur-

ther maintains in petitioner’s filings and petitioner’s supple-

mental memorandum, and respondent continues to dispute, that we

should interpret the term “gross receipts” in section

41(c)(1)(B)30 to exclude the total annual gross receipts of

Deere’s foreign branches.   According to petitioner, “the struc-

ture of the statute” and its legislative history “demonstrate

* * * that Congress did not intend to include such receipts.”31

     29
      In respondent’s filings, respondent argued that sec. 41
“provides an expansive definition of the activities or sources of
income to be included” in gross receipts under sec. 41(c) and
that there are “Only two stated exceptions to the definition of
gross receipts [that] are identified in section 41(c)(6)”. In
respondent’s supplemental memorandum, respondent states: “Re-
spondent agrees that the scope of gross receipts * * * is not
entirely clear and unambiguous.”
     30
      As discussed previously, sec. 41(c)(1)(B) states: “the
average annual gross receipts of the taxpayer for the 4 taxable
years preceding the taxable year for which the credit is being
determined”. It is necessary for petitioner to calculate under
sec. 41(c)(1)(B) that average in order to compute under sec.
41(c)(4) the alternative section 41 credit. See supra note 12.
     31
      Petitioner advanced its arguments about “the structure of
the statute” and Congress’s intent in enacting that statute in
petitioner’s filings. Petitioner reaffirms those arguments in
petitioner’s supplemental memorandum, albeit in somewhat differ-
ent language than petitioner used in petitioner’s filings.
Respondent maintains, and petitioner disputes, that in peti-
tioner’s supplemental memorandum petitioner modified an argument
advanced in petitioner’s filings and thus advances a new argument
that it did not advance in petitioner’s filings. According to
petitioner,

     Petitioner does not take the position that amounts
     should be excluded from gross receipts for purposes of
     section 41 merely because they are foreign source
                                                   (continued...)
                             - 27 -

     We turn first to petitioner’s argument that “the structure

of the statute demonstrates that Congress did not intend [peti-

tioner] to include” the total annual gross receipts of Deere’s

foreign branches in calculating under section 41(c)(1)(B) peti-

tioner’s average annual gross receipts for the 4 taxable years

preceding the taxable year at issue.   In support of that argu-

ment, petitioner asserts:

     Because section 41 does not provide a comprehensive
     definition of “gross receipts,” no negative implication
     should be drawn from the absence of a similar express
     exclusion in the case of an unincorporated foreign
     branch [as appears in the second sentence of section
     41(c)(6) in the case of a foreign corporation].
     Rather, because the R&E credit is calculated for all
     commonly controlled corporations and unincorporated
     trades or businesses under section 41(f), it follows
     that foreign gross receipts from a foreign trade or
     business such as a foreign branch operation should be



     31
      (...continued)
     within the meaning of sections 861-865 (or, conversely,
     included in gross receipts merely because they are U.S.
     source). * * * While Petitioner concedes that the point
     was not adequately addressed in * * * [petitioner’s
     filings], and that Petitioner’s counsel who spoke at
     the [Court’s] Hearing at times erroneously represented
     Petitioner’s position, Petitioner does not believe that
     its position in this regard constitutes a change or
     modification from that set forth in Petitioner’s * * *
     [filings]. Throughout its filings, Petitioner made
     clear that the amounts it was seeking to exclude from
     gross receipts were, first and foremost, only those
     related to its foreign branches. * * *

We need not resolve the parties’ disagreement over whether
petitioner advances a new argument in petitioner’s supplemental
memorandum. We address herein the arguments that are the linch-
pins of petitioner’s position on the issue presented.
                                - 28 -

       excluded just as the [second sentence of] section
       41(c)(6) expressly does for a foreign corporation.[32]

       We reject petitioner’s argument that the structure of

section 41, in particular (1) the second sentence of section

41(c)(6) and (2) section 41(f), shows that Congress did not

intend to require it to include in the calculation under section

41(c)(1)(B) the total annual gross receipts of Deere’s foreign

branches.    When Congress first enacted the credit for increasing

research activities in 1981 as section 44F, Congress intended to

prevent artificial increases in research expenditures, in partic-

ular through the shifting of expenditures in the case of

intracompany transactions among a controlled group of corpora-

tions or otherwise related persons, including partnerships,

proprietorships, and any other trades or businesses, whether or

not incorporated, that were under common control of the taxpayer.

To do so, Congress provided the aggregation rule in then section

44F(f) to ensure that the credit was allowed only where there

were actual increases in qualified research expenditures for the

taxable year.    See H. Rept. 97-201, supra at 123-124, 1981-2 C.B.

at 364-365; S. Rept. 97-144, supra at 83-84, 1981-2 C.B. at 442-

443.    In 1981 when Congress enacted the credit for increasing


       32
      As pertinent here, the second sentence of sec. 41(c)(6)
states: “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 business within the
United States”. See infra note 38.
                                - 29 -

research activities as section 44F and in 1989 when it changed

the basis of calculating that credit and retained the aggregation

rule in section 41(f),33 Congress was familiar with the concepts

of “controlled group of corporations” and “all trades or busi-

nesses (whether or not incorporated) which are under common

control”.     See then sec. 44F(f)(1); sec. 41(f)(1).   As pertinent

here, Congress provided in then section 44F(f)(1)(B) and section

41(f)(1)(B) that, under regulations prescribed by the Secretary,

in determining the amount of the credit under section 41, all

trades or businesses, whether or not incorporated, which are

under common control are to be treated as a single taxpayer, and

the credit for increasing research activities, if any, allowable

to each such person is to be its proportionate share of the

qualified research expenses giving rise to the credit.     Congress

mandated in then section 44F(f)(1)(B) and section 41(f)(1)(B):

     The regulations prescribed under this subparagraph [(B)
     of then section 44F(f)(1) and (B) of section 41(f)(1)
     relating to all trades or businesses, whether or not
     incorporated, which are under common control] shall be
     based on principles similar to the principles which
     apply in the case of subparagraph (A) [of then section
     44F(f)(1) and section 41(f)(1) relating to a controlled
     group of corporations].

In other words, Congress directed in then section 44F(f)(1)(B)

and section 41(f)(1)(B) that principles similar to the principles

in then section 44F(f)(1)(A) and section 41(f)(1)(A) which apply


     33
          See supra note 17.
                               - 30 -

in determining the amount of the credit for increasing research

activities in the case of a controlled group of corporations are

to apply in determining the amount of the credit in the case of

all trades or businesses, whether or not incorporated, under

common control.

     When Congress wanted to apply to all trades or businesses,

whether or not incorporated, under common control principles that

are similar to the principles in then section 44F(f)(1)(A) and

section 41(f)(1)(A) relating to a controlled group of corpora-

tions, Congress knew how to, and did, so mandate.    If Congress

had wanted to exclude from or include in the calculation under

section 41(c)(1)(B) the gross receipts of all foreign unincorpo-

rated trades or businesses (e.g., Deere’s foreign branches) on

the basis of principles similar to the principles that Congress

prescribed in the second sentence of section 41(c)(6) in the case

of foreign corporations, it knew how to so mandate and would have

so mandated.   It did not.   The silence of Congress is strident.

     We turn next to petitioner’s argument that the legislative

history of section 41 demonstrates that Congress did not intend

to include in the calculation under section 41(c)(1)(B) the total

annual gross receipts of Deere’s foreign branches.    In support of

that argument, petitioner asserts:

     Although [the second sentence of] section 41(c)(6)
     expressly refers only to “foreign corporations,” the
     legislative history of * * * [the Omnibus Budget Recon-
     ciliation Act of 1989], in which Congress added the
                             - 31 -

     gross receipts component to the R&E credit, describes
     this provision differently, stating: “[T]he bill
     provides that a foreign affiliate’s gross receipts
     which are not effectively connected with the conduct of
     a trade or business in the United States do not enter
     into the computation of the credit.” * * * The term
     “affiliate” has a broader meaning than the term “corpo-
     ration.” * * *

          The likely explanation for the use of the broad
     term “affiliate,” rather than “corporation,” in the
     * * * [Omnibus Budget Reconciliation Act of 1989]
     legislative history is that the Budget Committee viewed
     the “taxpayer” under section 41(c) as being the con-
     trolled group of both foreign corporations and foreign
     unincorporated trades or businesses, consistent with
     section 41(f). As such, the Budget Committee used the
     broad term “affiliate” to encompass trades or busi-
     nesses as well as corporations, both of which may
     constitute members of the controlled group--i.e., “the
     taxpayer” under the statute. [Fn. ref. omitted.34]




     34
      In petitioner’s supplemental memorandum, petitioner re-
states the argument in petitioner’s filings that is discussed in
the text. In petitioner’s supplemental memorandum, petitioner
argues:

     Petitioner believes that there generally should be
     symmetry between the treatment of foreign and domestic
     taxpayers. This symmetry lies at the heart of Peti-
     tioner’s position. Specifically, it is Petitioner’s
     position that any receipt from a trade or business that
     would be expressly included in gross receipts by virtue
     of section 41(c)(6) if derived by a foreign corporation
     should similarly be included if derived by a foreign
     partnership, foreign sole proprietorship or foreign
     branch. Conversely, any receipt attributable to the
     activities of a foreign corporation that would not be
     included in gross receipts pursuant to section 41(c)(6)
     should not be required to be included in gross receipts
     where the activities are conducted by a foreign part-
     nership, foreign sole proprietorship or foreign branch.
     Petitioner believes * * * that Congress intended this
     equality in treatment * * *.
                               - 32 -

     We reject petitioner’s argument that the legislative history

of section 41 shows that Congress did not intend to include in

the calculation under section 41(c)(1)(B) the total annual gross

receipts of Deere’s foreign branches.   Petitioner’s reliance on

the legislative history of the second sentence of section

41(c)(6), which refers to a “foreign affiliate”, is improper and

misplaced.   The second sentence of section 41(c)(6) is clear and

unambiguous on its face and applies only in the case of a foreign

corporation.35   We generally may not resort to legislative his-

tory to give meaning to a clear and unambiguous statute.    See,

e.g., United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241

(1989); Montgomery v. Commissioner, 122 T.C. 1, 7 (2004).     We may

not resort here to the legislative history of the clear and

unambiguous second sentence of section 41(c)(6) on which peti-

tioner relies.   That history does not support, let alone unequiv-

ocally support, petitioner’s argument that Congress did not

intend to include in the calculation under section 41(c)(1)(B)

the total annual gross receipts of Deere’s foreign branches.

See, e.g., Huntsberry v. Commissioner, 83 T.C. 742, 747-748

(1984).   Even though the legislative history on which petitioner

relies used the term “foreign affiliate”, that term is itself

ambiguous, and Congress used the unambiguous term “foreign



     35
      The second sentence of sec. 41(c)(6) begins:   “In the case
of a foreign corporation”.
                                - 33 -

corporation” when it enacted the second sentence of section

41(c)(6).     Furthermore, the concept “effectively connected with

the conduct of a trade or business within the United States”,36

which Congress used in the second sentence of section 41(c)(6)

“In the case of a foreign corporation”, is a concept that Con-

gress enacted into the Code and that applies to a foreign corpo-

ration (as well as to a nonresident alien individual).      It is not

a concept that the Code applies to a foreign “affiliate” that is

not a foreign corporation.     See secs. 882, 872.   The clear and

unambiguous language of the second sentence of section 41(c)(6)

is controlling.

     We turn now to another argument that petitioner advances in

support of its position on the issue presented.      Petitioner

argues:

          Interpreting “gross receipts” under section 41(c)
     to exclude gross receipts from foreign branches such as
     those operated by Deere is consistent with the histori-
     cal focus of the R&E credit on domestic activities
     * * * [which] did not change when the gross receipts
     components of the R&E credit were originally introduced
     as part of * * * [the Omnibus Budget Reconciliation Act
     of 1989]. * * *

In support of that argument, petitioner asserts:

     the R&E credit has been focused on activities within
     the United States since its original enactment in 1981.
     * * * Interpreting “gross receipts” to include only
     domestic gross receipts maintains that domestic focus.
     * * *



     36
          See supra note 32.
                                 - 34 -

           *       *       *       *       *       *       *

          * * * In no way did Congress intend the gross
     receipts component of the base amount calculation to
     fundamentally alter the basic framework of the R&E
     credit by changing its historic domestic focus.

          Similarly, there is nothing about the addition of
     the * * * [alternative incremental research credit
     under sec. 41(c)(4)] to the R&E credit that alters the
     domestic orientation of the statute. * * * The legisla-
     tive history [of the alternative incremental research
     credit] provides no explanation as to the purpose of *
     * * [that credit], but there is no purpose apparent in
     that regime * * * to expand the scope of the credit in
     general, and the calculation of gross receipts in
     particular, beyond the taxpayer’s domestic activities.
     [Fn. ref. omitted.]

     As we understand it, petitioner is arguing that the “his-

toric domestic focus” of the credit for increasing research

activities was on both the making of research expenditures in the

United States and the conduct of a taxpayer’s trade or business

in the United States.     According to petitioner, its interpreta-

tion of the term “gross receipts” is consistent with the alleged

“historic domestic focus” of the credit for increasing research

activities on the conduct of a taxpayer’s trade or business in

the United States.37

     37
          In petitioner’s supplemental memorandum, petitioner ar-
gues:

     whether a particular receipt is required to be taken
     into account for purposes of section 41 should be
     determined primarily by whether or not the receipt has
     the requisite nexus with the United States. * * * In
     the case of a domestic taxpayer, Petitioner believes
     that the essential consideration is whether or not the
     receipt in question forms part of the taxpayer’s U.S.
                                                   (continued...)
                              - 35 -

     We reject petitioner’s argument regarding the alleged

“historic domestic focus” of the credit involved here.   In 1981

when Congress first enacted the credit for increasing research

activities into the Code and thereafter when Congress reenacted

that credit into the Code, it did so in order to provide “incen-

tives for greater private activity in research”, H. Rept. 97-201,

supra at 111, 1981-2 C.B. at 358; S. Rept. 97-144, supra at 77,

1981-2 C.B. at 439, which would thereby “encourage business firms

to perform the research necessary to increase the innovative

qualities and efficiency of the U.S. economy”, H. Rept. 99-426,

supra at 177, 1986-3 C.B. (Vol. 2) at 177; S. Rept. 99-313, supra

at 694, 1986-3 C.B. (Vol. 3) at 694.   Throughout the history of

the credit for increasing research activities, Congress excluded

from research qualifying for the credit research conducted

outside the United States.   See then sec. 44F(d)(1); sec.

41(d)(4)(F).   In doing so, Congress wanted to ensure that

     expenditures for research which is conducted outside
     the United States do not enter into the credit computa-
     tion, whether or not the taxpayer is located or does
     business in the United States; the test is whether the
     laboratory experiments, etc., actually take place in
     this country.[38]

     37
      (...continued)
     trade or business or is attributable to a trade or
     business being conducted outside of the United States.
     [Fn. ref. omitted.]
     38
      In 1999, Congress expanded the definition of qualified
research in sec. 41(d) to include certain research conducted in
not only the United States but also the Commonwealth of Puerto
                                                   (continued...)
                               - 36 -

H. Rept. 97-201, supra at 116, 1981-2 C.B. at 361.

     As made clear in the above-quoted legislative history of the

credit for increasing research activities, the “historic domestic

focus” of Congress in providing that credit was to promote

expenditures for research conducted in the United States; it was

not on “whether or not the taxpayer is located or does business

in the United States”.   Id.   We reject petitioner’s assertion

that in the case of a U.S. corporation “the essential consider-

ation is whether or not the receipt in question forms part of the

taxpayer’s U.S. trade or business or is attributable to a trade

or business being conducted outside the United States.”

     We conclude that neither the structure or the legislative

history of section 41 nor the so-called historic domestic focus

of the credit for increasing research activities establishes that

Congress intended to exclude the total annual gross receipts of

Deere’s foreign branch operations from the computation under

section 41(c)(1)(B) of petitioner’s average annual gross receipts

for the 4 taxable years preceding the taxable year at issue ended



     38
      (...continued)
Rico and any possession of the United States. See sec.
41(d)(4)(F). Petitioner does not claim that what it calls a
“marginal expansion” in 1999 of the definition of qualified
research is material to resolving the issue presented here. Nor
does petitioner maintain that the following phrase that Congress
added at the end of sec. 41(c)(6) in 1999 when Congress expanded
the definition of qualified research is material to resolving the
issue here: “the Commonwealth of Puerto Rico, or any possession
of the United States.”
                               - 37 -

October 31, 2001.39   During each of the taxable years ended

October 31, 1997 through 2000, the total income that petitioner

reported on page 1, line 11, of petitioner’s consolidated return

included the amounts, if any, from the operations during each of

those years that Deere conducted through Deere’s German branch,

Deere’s Italian branch, and Deere’s Swiss branch.   Petitioner has

failed to establish, and we have not found, any valid reason for

excluding those amounts from the calculation under section

41(c)(1)(B).

     Petitioner’s final argument in support of its position on

the issue presented is that “even if the gross receipts from

Deere’s foreign branch operations were construed to be within the

literal meaning of ‘gross receipts’ under section 41(c) * * *,

the Court should interpret the statute to exclude such receipts.”

In support of that argument, petitioner asserts:

     even if the term “gross receipts” under section
     41(c)(4) could be read literally to include * * * gross
     receipts from Deere’s foreign branch operations, this


     39
      Neither sec. 41 nor its legislative history sheds any
light on why Congress decided in the case of a foreign corpora-
tion to include in gross receipts under sec. 41(c) “only gross
receipts which are effectively connected with the conduct of a
trade or business within the United States”. The reason that
Congress did so might simply have been that the credits permitted
by, inter alia, sec. 38, which includes the credit for increasing
research activities under sec. 41, are not allowed against the
flat tax of 30 percent imposed by sec. 881(a) and sec. 1.882-
1(b)(1), Income Tax Regs., on the income of a foreign corporation
which is not effectively connected with the conduct of a trade or
business within the United States. See sec. 1.882-1(d), Income
Tax Regs.
                             - 38 -

     Court should reject that reading to avoid a result
     plainly at variance with the congressional intent
     behind the R&E credit.

     We reject for the reasons discussed above petitioner’s

assertion that the inclusion of the total annual gross receipts

of Deere’s foreign branches in the calculation under section

41(c)(1)(B) is “plainly at variance with the congressional intent

behind the R&E credit.”

     In further support of its argument that, even if we were to

hold that the “literal meaning” of the term “gross receipts” in

section 41(c)(1)(B) includes the total annual gross receipts of

Deere’s foreign branches, we should nonetheless interpret that

section to exclude those receipts, petitioner asserts:

     it would be odd for the statute to be interpreted to
     effectively discriminate in favor of foreign corpora-
     tions and against United States corporations. * * *
     Because foreign corporations do not have to include
     their gross receipts (except for those that are not
     [sic] effectively connected with a United States trade
     or business) under section 41(c)(6), requiring Deere to
     include receipts from its foreign branch operations
     would have the relative effect of penalizing Deere, and
     benefitting its foreign competitors, without any appar-
     ent justification under the statute or legislative
     history.

     We reject petitioner’s assertions.   Petitioner has failed to

persuade us that requiring it to include the total annual gross

receipts of Deere’s foreign branches in the calculation under

section 41(c)(1)(B) will have the discriminatory effect about
                                - 39 -

which petitioner complains.40   In any event, the second sentence

of section 41(c)(6) on which petitioner relies to support its

argument regarding the alleged discriminatory effect about which

it complains is, as discussed above, clear and unambiguous and

applies only in the case of a foreign corporation.   We have found

nothing in section 41, its legislative history, or petitioner’s

arguments that permits us to conclude that in the case of a

foreign unincorporated trade or business such as Deere’s foreign

branches we must apply principles similar to the principles in

the second sentence of section 41(c)(6) that apply in the case of

a foreign corporation.

     We hold that petitioner is required to include in the

calculation under section 41(c)(1)(B) of its average annual gross

receipts for the 4 taxable years preceding the taxable year ended

October 31, 2001, the total annual gross receipts of Deere’s

foreign branches for each of those 4 preceding taxable years.




     40
      A U.S. corporation might complain that Congress discrimi-
nated against it by requiring it to include worldwide income in
total income which, after any deductions allowed by the Code, is
subject to tax under sec. 11, whereas a foreign corporation
conducting business in the United States must include only income
which is effectively connected with the conduct of a trade or
business within the United States in total income which, after
any deductions allowed by the Code, is subject to tax under sec.
11. Nonetheless, Congress chose to do so for what it believed
were good reasons.
                             - 40 -

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing,


                                      An order denying petitioner’s

                                 motion and granting respondent’s

                                 motion and decision for respondent

                                 will be entered.
