 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued April 26, 2018                  Decided July 27, 2018

                        No. 17-1160

                GOOD FORTUNE SHIPPING SA,
                       APPELLANT

                              v.

      COMMISSIONER OF INTERNAL REVENUE SERVICE,
                      APPELLEE


                On Appeal from the Decision
                of the United States Tax Court


     Stephen P. Flott argued the cause for appellant. With him
on the briefs were Joseph G. Siegmann and Brittany N. Oravec.

    Richard Caldarone, Attorney, U.S. Department of Justice,
argued the cause for appellee. With him on the brief were
David A. Hubbert, Deputy Assistant Attorney General, and
Thomas J. Clark, Attorney.

    Before: GARLAND, Chief Judge, and GRIFFITH and
SRINIVASAN, Circuit Judges.

    Opinion for the Court filed by Circuit Judge GRIFFITH.

    GRIFFITH, Circuit Judge: In 2007, the foreign shipping
corporation Good Fortune Shipping SA (“Good Fortune”)
                               2

attempted to exempt some of its U.S.-based income from
taxation. But in order to qualify for the exemption, a certain
percentage of Good Fortune’s stock needed to be owned by
residents of a country that provided a reciprocal tax exemption.
At that time, the Internal Revenue Service (IRS) categorically
prohibited any consideration of bearer shares—securities
owned by whoever holds physical certificates issued by the
company—when assessing whether a sufficient amount of a
foreign shipper’s stock was owned by qualifying shareholders.
The IRS refused to grant Good Fortune the exemption because
all of the company’s stock was made up of bearer shares. Good
Fortune challenged the IRS’s approach as inconsistent with the
Internal Revenue Code, and the Tax Court ruled in favor of the
IRS. Because the IRS’s regulation prohibiting consideration of
bearer shares unreasonably interpreted the Code, we reverse.

                               I

                               A

     Under the Internal Revenue Code (the “Code”), foreign
corporations generally must pay tax on any income derived
from operating ships that transport goods to or from the United
States (called “United States source gross transportation
income”). I.R.C. § 887(a). However, the Code also historically
exempted the income of certain foreign shippers from this tax.
Prior to 1986, federal law exempted a foreign corporation’s
shipping income so long as the corporation registered its ships
in a country that granted “equivalent tax exemptions to U.S.
citizens and U.S. corporations.” H.R. Rep. No. 99-841, at 597
(1986) (Conf. Rep.). This exemption applied “without regard
to the residence of persons receiving the exemption or whether
commerce is conducted in the country of registry.” S. Rep. No.
99-313, at 340 (1986).
                               3

     This exemption did not work as effectively as Congress
had anticipated. Members of Congress had hoped that the
registration-based exemption would encourage the
“international adoption of uniform tax laws” that eliminated the
prospect of double taxation from shippers’ home countries and
their countries of operation. S. Rep. No. 67-275, at 14 (1921).
Although U.S. shippers were required to pay U.S. tax on their
income, foreign shippers could avoid the U.S. tax by simply
registering (or “flagging out”) their ships in a country that
provided a reciprocal exemption, regardless of whether the
ships’ owners had any connection to that country. See S. Rep.
No. 99-313, at 340-41. Congress ultimately found that this
registration-based exemption “place[d] U.S. persons with U.S.-
based transportation . . . at a competitive disadvantage”
compared to foreign shippers who claimed the U.S. exemption
and were not taxed by either their countries of residence or
registration. Id. at 340.

     Congress therefore tightened the exemption in the Tax
Reform Act of 1986, Pub. L. No. 99-514, § 1212, 100 Stat.
2085, 2536-37. After the 1986 Act, the Code places a four-
percent tax on the U.S. source gross transportation income of
nonresident alien individuals and foreign corporations. See
I.R.C. § 887(a). Congress in 1986 replaced the registration-
based exemption with a new residency-based exemption for
foreign shippers. A foreign shipper can qualify for the new
exemption only if it is “organized in a foreign country” that
“grants an equivalent exemption to corporations organized in
the United States.” Id. § 883(a)(1). However, even a foreign
shipper organized in such a country is ineligible for the
exemption “if 50 percent or more of the value” of its stock “is
owned by individuals who are not residents” of a country
providing a reciprocal exemption. Id. § 883(c)(1).
                                4

     In 2003, the IRS promulgated a regulation elaborating on
the statutory requirement that residents of a country providing
a reciprocal exemption own more than half of the foreign
shipper’s stock. See Exclusions from Gross Income of Foreign
Corporations, 68 Fed. Reg. 51,394 (Aug. 26, 2003) (the “2003
Regulation”). To qualify as an exempted foreign corporation
under the 2003 Regulation, a shipper must satisfy the “qualified
shareholder test.” Under that test, an exempted corporation
must prove, among other things, that “more than 50 percent of
the value of its outstanding shares is owned” by qualified
shareholders, either directly or indirectly through application
of attribution rules, “for at least half of the number of days in
the foreign corporation’s taxable year.” 26 C.F.R. § 1.883-4(a)
(2007). An individual is a “qualified shareholder” only if,
among other things, he is a resident of a reciprocating country.
Id. § 1.883-4(b)(1)(i)(A). And a foreign-corporation
shareholder qualifies only if it is organized in a reciprocating
country. Id. § 1.883-4(b)(1)(i)(C).

     Generally, a foreign corporation claiming an exemption
under the qualified shareholder test “must establish all the facts
necessary to satisfy the [IRS] that more than 50 percent of the
value of its shares is owned . . . by qualified shareholders.” Id.
§ 1.883-4(d)(1). When it comes to establishing the facts
necessary to demonstrate corporate ownership, the 2003
Regulation treats differently “bearer shares” and “registered
shares” of corporate stock. Bearer shares are owned by the
“physical bearer of the stock certificate” and traditionally have
“no recorded ownership information.” Black’s Law Dictionary
(10th ed. 2014). On the other hand, “registered shares” are
securities “recorded in the issuer’s books.” Id. Under the 2003
Regulation, a corporation could prove it met § 883(c)(1)’s
ownership requirement by submitting company records
proving up registered shareholders’ identities and countries of
residence. See 26 C.F.R. § 1.883-4(d)(4). But a qualified
                               5

shareholder may not “own its interest in the foreign corporation
through bearer shares.” Id. § 1.883-4(b)(1)(ii); see also id.
§ 1.883-4(c)(1) (“No attribution will apply to an interest held
directly or indirectly through bearer shares.”); id. § 1.883-
4(d)(1) (“A foreign corporation cannot meet [the stock
ownership] requirement with respect to any stock that is issued
in bearer form. A shareholder that holds shares in the foreign
corporation either directly or indirectly in bearer form cannot
be a qualified shareholder.”). The IRS drew this distinction and
prohibited the use of bearer shares because of “the difficulty of
reliably demonstrating the true ownership of bearer shares.” 68
Fed. Reg. at 51,399. The 2003 Regulation provided no further
explanation for the categorical exclusion of bearer shares.

                               B

      Good Fortune is a corporation organized under the laws
of the Republic of the Marshall Islands. The Marshall Islands
offers a reciprocal exemption to U.S. shippers sufficient to
satisfy § 883(a)(1). See Rev. Rul. 2001-48, tbl. I.A, 2001-2
C.B. 324; Rev. Rul. 2008-17, tbl. I.A, 2008-1 C.B. 626. During
the 2007 tax year, all of Good Fortune’s outstanding stock was
composed of bearer shares, issued as physical certificates for
which neither Good Fortune nor any financial institution
maintained any formal records of ownership or transfer.

    For the 2007 tax year, Good Fortune reported slightly less
than $4.1 million in U.S. source gross transportation income.
That income would have been taxable under I.R.C. § 887,
unless it qualified for the exemption in § 883(a)(1). Good
Fortune claimed that the income qualified for that exemption
and provided documentation purporting to show that all of its
bearer shares were indirectly owned by individuals residing in
countries that provide a reciprocal exemption to U.S.
corporations. Good Fortune also argued that the 2003
                               6

Regulation prohibiting any consideration of bearer shares was
unlawful.

     The IRS sent Good Fortune a notice of deficiency for the
2007 tax year reflecting the IRS’s determination that Good
Fortune’s U.S. source gross transportation income for that year
was about $3.6 million, not $4.1 million. The IRS also
determined that none of that income could be exempted
presumably because all of Good Fortune’s stock had been
issued as bearer shares and the 2003 Regulation prohibited
their consideration. The IRS accordingly determined that Good
Fortune had an income tax deficiency of approximately
$143,500 for the 2007 tax year.

     Good Fortune then filed a petition in the Tax Court for a
redetermination of its 2007 deficiency. The company conceded
that it could not qualify for the § 883(a)(1) exemption under the
2003 Regulation but asserted that the regulation’s categorical
exclusion of bearer shares was an impermissible interpretation
of § 883. The Commissioner filed a motion for summary
judgment and Good Fortune filed a cross-motion for the same.

     The Tax Court granted the Commissioner’s motion and
ordered Good Fortune liable on its 2007 tax deficiency.
Applying the well-worn framework from Chevron U.S.A. Inc.
v. Natural Resources Defense Council, Inc., 467 U.S. 837
(1984), the Tax Court found that Congress had not “directly
spoken to the precise question at issue,” id. at 842, namely,
“how to establish ownership by individuals for the purposes of
section 883(c)(1)” or “how to establish ownership where the
shares of the foreign corporation are owned in bearer form,”
Good Fortune Shipping SA v. Comm’r, 148 T.C. No. 10, slip
op. at 32 (Mar. 28, 2017).
                               7

     Having found the statute silent or ambiguous on that
question, the Tax Court then considered whether the IRS’s
interpretation of § 883 was reasonable. Id. at 25. The Tax Court
found the 2003 Regulation reasonable because it “provide[d]
certainty and resolve[d] the difficult problems of proof
associated with establishing ownership of bearer shares.” Id. at
46. According to the Tax Court, the 2003 Regulation “set forth
a sensible approach to effecting the intent of Congress in
enacting section 883(c)(1) to ensure that abuse will not occur
which will result in certain types of shipping transportation
income described in section 883(a)(1) not being taxed.” Id.

     Good Fortune timely appealed the Tax Court’s order.

                               II

     The Tax Court had jurisdiction over Good Fortune’s
petition for a redetermination under I.R.C. §§ 6213(a), 6214(a),
and 7442. We have appellate jurisdiction under I.R.C.
§ 7482(a)(1).

     We review de novo the Tax Court’s legal conclusions. See,
e.g., Barnes v. Comm’r, 712 F.3d 581, 582 (D.C. Cir. 2013).

                              III

                               A

     The IRS does not argue that its interpretation of § 883 is
compelled by the statute; rather the agency only maintains that
“Congress has not directly spoken” to whether shippers may
use bearer shares to satisfy § 883(c)(1)’s ownership
requirement. IRS Br. 19. So for the IRS to prevail, it must
demonstrate that § 883 is silent or ambiguous as to the
treatment of bearer shares under § 883(c)(1) and that its
                                8

interpretation, as embodied in the 2003 Regulation, is
reasonable. See Chevron, 467 U.S. at 842-43.

     When we consider the lawfulness of an agency’s statutory
interpretation under Chevron, we usually ask first whether the
statute at issue “unambiguously forecloses the agency’s
interpretation.” Nat’l Cable & Telecomms. Ass’n v. FCC, 567
F.3d 659, 663 (D.C. Cir. 2009). However, we may also assume
arguendo that the statute is ambiguous and proceed to
Chevron’s second step. See, e.g., Lubow v. U.S. Dep’t of State,
783 F.3d 877, 884 (D.C. Cir. 2015); U.S. Postal Serv. v. Postal
Regulatory Comm’n, 599 F.3d 705, 710 (D.C. Cir. 2010); Aid
Ass’n for Lutherans v. U.S. Postal Serv., 321 F.3d 1166, 1178
(D.C. Cir. 2003); Hill v. Norton, 275 F.3d 98, 99 (D.C. Cir.
2001); Teicher v. SEC, 177 F.3d 1016, 1021 (D.C. Cir. 1999).

     We’ll give the IRS the benefit of the doubt and assume that
§ 883 does not unambiguously foreclose its interpretation. We
make this assumption because even proceeding to Chevron
Step Two, we conclude that the IRS’s interpretation of § 883
in the 2003 Regulation is unreasonable and cannot stand.

                                B

     At Chevron Step Two, we ask whether the IRS’s
interpretation is “reasonable.” AT&T Corp. v. FCC, 220 F.3d
607, 621 (D.C. Cir. 2000). That is, we consider whether the
interpretation is “arbitrary or capricious in substance, or
manifestly contrary to the statute.” Mayo Found. for Med.
Educ. & Research v. United States, 562 U.S. 44, 53 (2011)
(quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S.
232, 242 (2004)). Our focus is thus on “whether the [agency]
has reasonably explained how the permissible interpretation it
chose is ‘rationally related to the goals of’ the statute.” Village
of Barrington v. Surface Transp. Bd., 636 F.3d 650, 665 (D.C.
                                9

Cir. 2011) (quoting AT&T Corp. v. Iowa Utils. Bd., 525 U.S.
366, 388 (1999)).

     Whether an agency’s construction is reasonable depends,
in part, “on the construction’s ‘fit’ with the statutory language,
as well as its conformity to statutory purposes.” Goldstein v.
SEC, 451 F.3d 873, 881 (D.C. Cir. 2006) (quoting Abbott Labs.
v. Young, 920 F.2d 984, 988 (D.C. Cir. 1990)). Indeed, “[t]he
starting place for any Chevron Step Two inquiry is the text of
the statute.” Van Hollen v. FEC, 811 F.3d 486, 492 (D.C. Cir.
2016).

     Section 883(c)(1) states in relevant part that the exemption
for foreign shippers introduced in § 883(a)(1) “shall not apply
to any foreign corporation if 50 percent or more of the value of
the stock of such corporation is owned by individuals who are
not residents of” a country granting a reciprocal tax exemption.
Congress has therefore determined that the tax exemption shall
not be granted to foreign corporations if a certain percentage of
their stock “is owned by individuals who are not residents of”
a reciprocating country. I.R.C. § 883(c)(1) (emphasis added).
The flipside of this prohibition is a mandate: If 50 percent or
more of a shipper’s stock “is owned by individuals” who are
residents of reciprocating countries, then § 883(c)(1) poses no
obstacle to an exemption. And if § 883(c)(1) poses no obstacle,
then the relevant income “shall not be included in gross income
of a foreign [shipping] corporation” and “shall be exempt from
taxation.” Id. § 883(a).

     The IRS contends—and it is undisputed—that § 883(c)(1)
is silent as to “what type of proof suffices to show any
corporation’s entitlement to the exemption.” IRS Br. 19; see
also Good Fortune Br. 31 (conceding that Good Fortune “does
not contest” the IRS’s “authority to issue regulations
addressing attribution and proof of ownership”). That said,
                                10

§ 883 implies that if a sufficient portion of a foreign
corporation’s stock is “owned” by qualified shareholders, the
corporation will qualify for the exemption. Bearer shares are a
valid form of ownership, and the 2003 Regulation
acknowledged as much. See 26 C.F.R. § 1.883-4(b)(1)(ii)
(2007) (requiring that a qualified shareholder “not own its
interest in the foreign corporation through bearer shares”
(emphasis added)). Nevertheless, the IRS claims that its refusal
to consider bearer shares under the 2003 Regulation reasonably
“treat[s] the ownership of bearer shares at a prior time as a fact
not capable of sufficient proof.” IRS Br. 28.

     The IRS therefore attempts to characterize the 2003
Regulation as merely establishing modes of proving corporate
ownership. But when the agency goes so far as to set an
insurmountable burden of proof—in which no amount of
relevant evidence could possibly suffice—the line between
merely establishing a method of proving ownership and
defining what counts as ownership begins to dissolve. As Good
Fortune rightly notes, the IRS’s abject refusal to attribute
ownership for bearer shares risks “conflat[ing] proof of
ownership with the meaning of ownership.” Good Fortune Br.
28. Bearer shares are indisputably a legally valid form of
corporate ownership, and yet the IRS’s regulations
categorically deny those shares any role in establishing
ownership for the purposes of the § 883 exemption. This
approach risks undercutting § 883(c)(1)’s use of the term
“owned.”

     Even if § 883 grants the IRS significant discretion to
establish how to prove ownership, it hardly authorizes the
agency to categorically deny consideration of a recognized
form of ownership based on only a single, undeveloped
statement that it is “difficult[]” to reliably track the location of
a given owner. 68 Fed. Reg. at 51,399. If the IRS found that the
                               11

transferable nature of bearer shares made substantiation
impossible, we might conclude that the 2003 Regulation
reasonably implemented that finding. Indeed, a kind of stock
that is entirely impossible to track might not constitute a form
of ownership contemplated by § 883(c)(1). But the IRS has
never made (much less adequately supported) such an absolute
claim of impossibility with regard to bearer shares. The IRS’s
interpretation instead appears to rewrite § 883(c)(1) to require
not only valid ownership, but ownership that is not “difficult”
to track. Even if this regulatory amendment to § 883 is not
unambiguously foreclosed by the statute’s language, its
unsubstantiated treatment of ownership “comes close to
violating the plain language of the statute”—indicating that the
2003 Regulation is unreasonable at Chevron Step Two.
Goldstein, 451 F.3d at 881.

      Additionally, while the IRS’s interpretation of § 883 is
“entitled to no less deference . . . simply because it has changed
over time,” Nat’l Home Equity Mortg. Ass’n v. Office of Thrift
Supervision, 373 F.3d 1355, 1360 (D.C. Cir. 2004), the agency
must nevertheless engage in “‘reasoned analysis’ sufficient to
command our deference under Chevron,” Ala. Educ. Ass’n v.
Chao, 455 F.3d 386, 396 (D.C. Cir. 2006). A sufficiently
reasoned analysis requires the IRS to “display awareness that
it is changing position” and “show that there are good reasons
for the new policy.” FCC v. Fox Television Stations, Inc., 556
U.S. 502, 515 (2009); see also Northpoint Tech., Ltd. v. FCC,
412 F.3d 145, 156 (D.C. Cir. 2005) (“A statutory interpretation
. . . that results from an unexplained departure from prior
[agency] policy and practice is not a reasonable one.”).
Moreover, when assessing the reasonableness of the IRS’s
interpretation we look only to “what the agency said at the time
of the rulemaking—not to its lawyers’ post-hoc
rationalizations.” Council for Urological Interests v. Burwell,
790 F.3d 212, 222 (D.C. Cir. 2015).
                              12


     As early as 1991 the IRS presumed that bearer shares were
“owned by individual residents of a foreign country which does
not provide an equivalent exemption, for purposes of section
883(c).” Rev. Proc. 91-12, § 8.02(3), 1991-1 C.B. 473. But this
presumption was only triggered “[i]n the absence of . . .
documentation” demonstrating that more than 50 percent of the
corporation’s shares were owned by residents of a
reciprocating country. Id. Therefore, between 1991 and 2003,
the IRS apparently thought sufficient documentation regarding
the ownership of bearer shares could secure a tax exemption
under § 883. And yet in 2003 the agency concluded that the
“difficulty of reliably demonstrating the true ownership of
bearer shares” warranted the flat prohibition at issue here. 68
Fed. Reg. at 51,399. The IRS never explained how the pre-
existing opportunity to provide substantiating documentation
had somehow become unworkable since 1991. Nor did the
agency explain if or how “reliably demonstrating the true
ownership of bearer shares” was any more difficult in 2003
than in 1991.

     Indeed, given the IRS’s later recognition in 2010 that some
forms of bearer shares were becoming easier to track over time,
the agency’s decision to treat bearer shares less favorably in
2003 than in 1991 is all the more inexplicable. In 2010, the IRS
ultimately amended its treatment of bearer shares for purposes
of the exemption in § 883(a)(1). Rather than categorically
exclude bearer shares from consideration, the amended
regulation allows bearer shares to count toward the § 883
exemption if they satisfy one of two conditions. First, they
count toward the exemption if the shares are “dematerialized”
or “represented only by book entries” with “no physical
certificates . . . issued or transferred.” 26 C.F.R. § 1.883-
1(c)(3)(i)(G) (2010); see also id. § 1.883-4(b)(1)(ii). Second,
the bearer shares count toward the exemption if they are
                               13

“immobilized,” in which “evidence of ownership is maintained
on the books and records of the corporate issuer or by a broker
or financial institution.” Id. § 1.883-1(c)(3)(i)(G). While the
IRS continued to maintain that it has “been difficult to reliably
prove ownership of bearer shares,” it nevertheless recognized
in 2010 that dematerialized and immobilized bearer shares had
“become increasingly common” and “provide the ability to
reliably identify the beneficial owner of bearer shares.”
Exclusions from Gross Income of Foreign Corporations, 75
Fed. Reg. 56,858, 56,860 (Sept. 17, 2010).

     The IRS abandoned the 2003 Regulation’s categorical,
exclusionary rule in 2010 in response to the “recent increase in
the number of corporations switching to immobilized or
dematerialized bearer shares.” IRS Br. 34; see also 75 Fed.
Reg. at 56,860. While the IRS maintained that dematerialized
and immobilized bearer shares had become “increasingly
common” by 2010, 75 Fed. Reg. at 56,860, at no time has the
IRS ever argued that such bearer shares were nonexistent or
obscure between 2003 and 2010, nor that they were less
prevalent in 2003 than in 1991. Even if the IRS were correct
that “there is no guarantee” that foreign shippers kept such
records of bearer shares before 2010, IRS Br. 34, that
skepticism alone does not justify the 2003 Regulation’s
categorical ban. If certain foreign shippers did not keep
sufficient records, a substantiation requirement like those
embraced by the IRS in 1991 or 2010 would have readily
disposed of any such cases.

     The 2003 Regulation also appears unreasonable because it
treats bearer shares with disproportionate disfavor compared to
other forms of corporate ownership sharing similar alleged
problems. The IRS argues that § 883(c)(1) is an “anti-abuse
provision” that would be undermined if the IRS accepted
bearer shares as proof of ownership without any “reasonable
                                14

method of proving or disproving [a] statement of ownership.”
Id. at 21, 23. Even assuming that is true, there is a potential for
abuse with other types of corporate shares, many of which the
IRS accepts as proof of ownership under § 883(c)(1). For
example, the IRS concedes that other financial arrangements—
including the appointment of nominees and trustees—can “be
used to obscure the identity of the beneficial owners.” Id. at 37.
Nevertheless, rather than promulgating broad, categorical
prohibitions governing those financial instruments, the IRS
instead established “safeguards against the use of trusts and
nominees to obscure shareholders’ identities in the regulations
implementing § 883.” Id. While the IRS has made it difficult to
earn the exemption in § 883 with these financial instruments,
the agency will find qualifying ownership if “the nominee or
trustee submits to the IRS detailed statements substantiating the
identity of the beneficial owners.” Id. at 38 (citing 26 C.F.R.
§ 1.883-4(d)(4)(v)). Of course, the 2003 Regulation denies
bearer shareholders this same opportunity to submit detailed,
substantiating statements.

     We’ve previously recognized that when an agency
interprets a statute to afford disparate treatment between two
different objects of concern, “we cannot defer to the [agency’s]
interpretation premised on such a difference unless the
[agency] adequately supports it.” Northpoint Tech., 412 F.3d at
156. When the IRS promulgated the 2003 Regulation, it offered
no justification for treating bearer shares differently than
nominees and trustees under § 883. That’s enough to render the
distinction inadequate for purposes of Chevron Step Two. See
Envtl. Def. Fund, Inc. v. EPA, 898 F.2d 183, 189 (D.C. Cir.
1990) (“We cannot sustain an action merely on the basis of
interpretive theories that the agency might have adopted and
findings that (perhaps) it might have made.”).
                               15

     In any event, the IRS’s post-hoc attempt to distinguish
nominees and trustees does not adequately support the
agency’s disparate treatment of bearer shares. The IRS argues
that a “substantiation-based solution” is simply “inappropriate”
for bearer shares because of their “transferable nature,” a
problem that is not as acute with nominees and trustees. IRS
Br. 40-41. But while bearer shares’ transferable nature might
make it more difficult to substantiate the identity of their
owners at any given time, the IRS has never explained why that
difficulty alone makes a substantiation-based method of
proving bearer-share ownership “inappropriate” relative to
proving the ownership of nominees and trustees. Indeed, the
agency even now concedes that “corporations might have
formal records of the ownership of bearer shares even though
there is no requirement that they keep such records.” Id. at 34.
Quite simply, the IRS’s conclusory rejection in 2003 of any
substantiation-based method for proving bearer-share
ownership does not adequately reckon with analogous
problems of proof facing other forms of ownership.

      Finally, the categorical exclusion of bearer shares
endorsed in the 2003 Regulation was even out of step with the
IRS’s treatment of bearer shares in similar contexts. For
example, in another provision of the Code, some foreign
corporations can receive comparably favorable tax treatment if
their stock is regularly traded on an established securities
market in their countries of residence. See I.R.C.
§ 884(e)(4)(B). However, stock that is otherwise regularly
traded will not qualify for favorable treatment if the stock is
“closely held.” See Branch Profits Tax, 57 Fed. Reg. 41,644,
41,648 (Sept. 11, 1992). A foreign corporation is closely held
if at least 50 percent of its stock is owned by a certain type of
shareholder. See 26 C.F.R. § 1.884-5(d)(4)(iii) (2007). While
the foreign corporation bore the burden of proving that it is not
closely held, it can meet that burden “with either registered or
                                16

bearer shares . . . if it has no reason to know and no actual
knowledge of facts that would cause the corporation’s stock not
to be treated as regularly traded . . . .” Id. § 1.884-5(d)(5); see
also 57 Fed. Reg. at 41,648 (“[C]orporations with bearer shares
can meet the burden of proof . . . as long as they have no
knowledge and no reason to know their stock is closely held.”).
Therefore, the IRS recognizes that even if the owners of bearer
shares are difficult to identify, a categorical prohibition on
considering such shares is not necessary to cope with that
challenge.

     The IRS attempts to explain away these regulations
implementing § 884 by focusing on the “impetus” for the
restriction of bearer shares in § 883, explaining that “the
abusive use of bearer shares to hide ownership constitutes a
well-recognized problem in the shipping industry.” IRS Br. 43.
But that’s entirely beside the point. What matters is that the IRS
has recognized in the § 884 regulations that bearer shares are
capable of proving ownership. The presence or absence of a
risk of abuse has no effect on the ability of bearer shares to
“reliably demonstrat[e]” who owns the share. 68 Fed. Reg. at
51,399. If bearer shares were reliable enough under § 884, we
see no reason why they wouldn’t have been reliable enough to
justify their consideration under § 883. The IRS cannot
reasonably rely on the risk of abuse to treat bearer shares as a
form of second-class ownership in some contexts but not in
others, especially without any contemporaneous explanation
justifying the disparate treatment. The IRS’s inconsistent
approach to bearer shares is the last straw needed to break this
camel’s back.

                           *    *    *

    At the end of the day, the IRS here chose to “paint[] with
such a broad brush” that it “failed adequately to justify” its
                               17

categorical rule excluding the use of bearer shares in qualifying
for the tax exemption in § 883. Goldstein, 451 F.3d at 883.
Even if the IRS reasonably concluded that sometimes—maybe
oftentimes—bearer shares are incapable of proving the
residence of their owners, the 2003 Regulation’s categorical
bar on considering bearer shares does not follow from that
premise. The IRS has not justified treating all bearer shares as
incapable of proving ownership. If some corporations’ bearer
shares are not kept in record form, and thus are not capable of
proving the location of an owner, then the IRS “should have
identified those [corporations’ shares] and tailored its rule
accordingly.” Id. The 2003 Regulation is unreasonable and
therefore invalid under Chevron Step Two.

                               IV

    For the foregoing reasons, we reverse the Tax Court’s
order and direct the court to vacate the 2003 Regulation’s
provisions prohibiting the consideration of bearer shares.

                                                    So ordered.
