HOLMES, J., agrees with this dissenting opinion.

HALPERN, J., dissenting:

I. Introduction

This case involves the deference (if any) that we must show the Secretary of the Treasury's (Secretary's) construction of the Internal Revenue Code. The majority holds that we need show no deference to the Secretary's construction found in section 1.882-4(a)(2) and (3)(i), Income Tax Regs., imposing a timely filing requirement on foreign corporations. It holds the regulation to be invalid. I disagree.

In Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-843 (1984), the Supreme Court set forth a sequential approach for determining whether an agency's construction of a statute it administers should be given def

erence:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. *** [I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute. [Fn. ref. omitted.]

That approach was reaffirmed by the Supreme Court in Atl. Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 389 (1998) (a case involving the validity of an income tax regulation), in which, with respect to the second question, the Court added the admonition: "[T]he task that confronts us is to decide, not whether the Treasury Regulation represents the best interpretation of the statute, but whether it represents a reasonable one. See Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561 (1991)."

Accordingly, the questions in the instant case are: (1) Whether, in denying a foreign corporation an allowance for deductions and credits (without distinction, deductions) unless the foreign corporation files a true and accurate income tax return within the time limits set forth in section 1.882-4(a)(2) and (3)(i), Income Tax Regs., the Secretary has contradicted the unambiguously expressed intent of Con

gress; and, if that cannot be said, (2) whether the time limits imposed by the Secretary constitute a permissible construction of section 882(c)(2).

Before proceeding, it may be helpful to establish some terminology regarding the time for filing returns. I find the majority's use of the term "timely" confusing. For example, on page 98 of its report, the majority uses the term "timely" to mean both a return filed on or before the due date established by section 6072 (see majority op. note 3) and a return filed after the due date but before the "arbitrary 18-month deadline * * * devised by the Secretary." I use the term “ontime" to describe a return filed on or before the date established by the relevant provision of a statute and the term "timely" to describe a return filed after that date but before some date after which the filing would be considered untimely (e.g., the "terminal date" described by the Court of Appeals for the Fourth Circuit in Blenheim Co. v. Commissioner, 125 F.2d 906, 910 (4th Cir. 1942), affg. 42 B.T.A. 1248 (1940)).

II. First Question: Has Congress Directly Spoken to the
Precise Question at Issue?

If a foreign corporation files its income tax return on or before the due date prescribed in section 6072(c), the return is on time. Moreover, no provision of subtitle F deprives a foreign corporation of the benefit of deductions claimed on a return simply because the return was not on time. Indeed, in Anglo-Am. Direct Tea Trading Co. v. Commissioner, 38 B.T.A. 711 (1938), our predecessor, the Board of Tax Appeals (the Board), held that section 233 of the Revenue Act of 1928, ch. 852, 45 Stat. 849 (a precursor to section 882(c)(2)), could not be read to make an on-time return a prerequisite to a foreign corporation's having the benefit of deductions to which it was otherwise entitled: "[I]f Congress had intended to deprive a foreign corporation of its right to *** [a deduction] if it did not file its return within the time prescribed, we think it would have said so." Id. at 715 (emphasis added). Thereafter, however, both the Board and the Court of Appeals for the Fourth Circuit acknowledged that the allowance of deductions to a foreign corporation was a privilege, which should be terminated at some point to assure the

proper administration of the income tax. Georday Enters. v. Commissioner, 126 F.2d 384, 388 (4th Cir. 1942), affg. a Memorandum Opinion of the Board of Tax Appeals; Blenheim Co. v. Commissioner, supra at 909-910; Ardbern Co. v. Commissioner, 120 F.2d 424 (4th Cir. 1941), modifying and remanding 41 B.T.A. 910 (1940); Taylor Sec., Inc. v. Commissioner, 40 B.T.A. 696, 703 (1939).

In Blenheim Co. v. Commissioner, supra at 908, the Court of Appeals did state that section 233 of the Revenue Act of 1934, ch. 277, 48 Stat. 737, "contains no reference to a time element." It found, however, that the return filed by the taxpayer was "[n]evertheless * * * not a sufficient or timely compliance with Section 233 to entitle the petitioner to the deductions claimed therein." Id. (emphasis added). It held that, in subjecting foreign corporations to section 233 of the 1934 Act, "Congress conditioned its grant of deductions upon the timely filing of true, proper and complete returns." Id. at 909 (emphasis added).

In Taylor Sec., Inc. v. Commissioner, supra, the Board concluded that, once the Commissioner determined a deficiency in tax, a taxpayer could not avoid the effect of section 233 by thereafter filing a return. The Board stated:

[W]e are unable to conclude that in enacting section 233 *** it was the intention of Congress that delinquent returns filed by a foreign corporation after the respondent's determination should constitute the returns required as a prerequisite to the allowance of the credits and deductions ordinarily allowable to the corporations. * * * In view of such a specific prerequisite it is inconceivable that Congress contemplated by that section that taxpayers could wait indefinitely to file returns and eventually when the respondent determined deficiencies against them they could then by filing returns obtain all the benefits to which they would have been entitled if their returns had been timely filed. Such a construction would put a premium on evasion, since a taxpayer would have nothing to lose by not filing a return as required by statute. [Id. at 703-704.]

More recently, in Espinosa v. Commissioner, 107 T.C. 146 (1996), the issue was whether untimely returns filed by a nonresident alien individual were sufficient to avoid the disallowance of deductions under section 874(a) (which contains language virtually identical to the language in question in section 882(c)(2)). We upheld the disallowance of deductions under section 874(a), concluding:

[W]hile sections 874(a) and 882(c)(2) contain no explicit time limit, the policy behind these provisions, as applied by the case law, dictates that there is a cut-off point or terminal date after which it is too late to submit a tax return and claim the benefit of deductions. If no cut-off point existed, taxpayers would have an indefinite time to file a return, and these provisions would be rendered meaningless. *** [Id. at 157; emphasis added.]

As the above discussion suggests, no case has said that section 822(c)(2) does not (or its precursors did not) make timely filing a prerequisite to receiving the benefit of deductions. Nor does the body of cases discussing section 822(c)(2) and its precursors provide guidance of general applicability concerning timeliness; it merely resolves issues created by unique fact patterns on a case-by-case basis. Although those cases do not unambiguously establish the limits of timeliness, they clearly establish that timely filing is required. Those cases treat section 882(c)(2) as if it were incomplete: Timeliness is required, but timeliness is not defined. Timeliness is anchored by section 6072 to the date required for filing the return, but neither section 882(c)(2) nor any other provision of the Code tells us when the line runs out. This case does not involve the question of whether a line can be drawn to enforce section 882(c)(2); that has already been decided in the affirmative. This case involves the question of who gets to draw the line: the courts or the Secretary? The clearly expressed intent of Congress to the contrary not being apparent, the Secretary is not deprived of his authority under section 7805(a) to draw that line (i.e., to establish needful rules and regulations for the enforcement of section 882(c)(2)).

III. Second Question: Is the Secretary's Regulation Based on a Permissible Construction of the Statute?

Having reached the second step in our sequential analysis, the question that we must answer is whether the timely filing rule found in section 1.882-4(a)(2) and (3)(i), Income Tax Regs., is based on a permissible construction of the statute. In Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 843-844, the Supreme Court said:

If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly con

trary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency. [Fn. refs. omitted.]

Section 882(c)(2) does not specifically make the allowance of deductions to a foreign corporation contingent on a timely filed return, nor does it grant the Secretary express authority to prescribe regulations defining timeliness for purposes of section 882(c). In promulgating section 1.882-4(a)(2) and (3)(i), Income Tax Regs., the Secretary exercised his rulemaking authority under section 7805(a), which gives the Secretary general authority to "prescribe all needful rules and regulations for the enforcement" of the Internal Revenue Code. See T.D. 8322, 1990-2 C.B. 172.1 The appropriate standard for determining whether section 1.882-4(a)(2) and (3)(i), Income Tax Regs., is based on a permissible construction of section 882(c)(2) is whether it represents a "reasonable" interpretation of that section. See Atl. Mut. Ins. Co. v. Commissioner, 523 U.S. at 389.2

To be more specific, we must determine whether the 18month limitation found in section 1.882-4(a)(3), Income Tax Regs., is reasonable, since the otherwise applicable filing limitation found in section 1.882-4(a)(2) and (3)(i), Income Tax Regs., construes the statute in a similar (indeed, in a more generous) manner than the courts have construed it. See Judge Swift's dissent p. 151. I have already quoted our report in Espinosa v. Commissioner, supra, to the effect that the policy behind section 882(c)(2) implies a cutoff point or terminal date after which it is too late to submit a tax return and claim the benefit of deductions. The question is thus one of line drawing, and the majority has failed to convince me that the line drawn by the Secretary is unreasonable. Judges Holmes and Swift have adequately dealt with the majority's

1 In Boeing Co. v. United States, 537 U.S. 437, 448 (2003), the Supreme Court said of another Treasury regulation issued under the authority of sec. 7805(a): "Even if we regard the challenged regulation [sec. 1.861-8(e)(3) (1979), Income Tax Regs.] as interpretive because it was promulgated under § 7805(a)'s general rulemaking grant rather than pursuant to a specific grant of authority, we must still treat the regulation with deference. See Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561 (1991)."

2I am not ready to join Judge Holmes in concluding that, in United States v. Mead Corp., 533 U.S. 218 (2001), the Supreme Court "clarified the law, by conflating the standard of 'reasonableness' with the standard of 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."'" Judge Holmes's dissent p. 181.