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Sam Heldman


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Friday, December 06, 2002

No. 01-1209 Boeing Co. v. United States

No. 01-1382 United States v. Boeing Sales Co.

After reading the government’s brief opposing cert in 01-1209, I have one question. Scratch that, I have plenty of questions, but only one of them is important: How the heck did this get to the Court?

The case is about how Boeing may allocate research and development expenses under now-repealed sections of the tax code. Basically, Congress wanted to subsidize exports, so they allowed corporations to form subsidiaries that had tax advantages for sales of exports. The World Trade Organization kept finding that these provisions were export subsidies, which are prohibited under the WTO. Each time the WTO found a prohibited subsidy, Congress repealed the old act and passed a new, differently-named, more complex version of the exact same thing (basically).

The long and short of it is that for some period of time, corporations paid less corporate income tax on income from exports than on income from domestic sales.

Got that? OK The second part of this case is that research & development costs are deductible against income from sales. Naturally, Boeing wanted to apply its research & development costs to offset its income from the domestic sources, which were taxed at a higher rate than the exports. Boeing therefore figured out a way to do that. The company got caught. Boeing won in the district court, lost in the appeals court, and somehow managed to get certorari. I predict that the Court will AFFIRM the case in which Boeing is the petitioner.

In the second case, Boeing Sales Co. (“BSC”) is the foreign subsidiary where Boeing does not want its R&D expenses allocated. Because Boeing lost below, its taxes go up and BSC’s taxes go down. I pause here to note one reason that makes this case seem more important than it did at the start. The judgment of the District Court resulted in a refund to Boeing of $400 million, and an additional tax on BSC of $400 thousand. I also note a bit of irony: Congress, which is one part of the government, wanted to subsidize exports, while the IRS, another part of the government, wants to limit that subsidy as much as possible. The WTO, meanwhile, said the whole thing was improper in the first place. Furthermore, in the second case, the United States is appealing a ruling reversing an order that a party pay more tax. The government doesn’t want BSC’s $400K because that would mean it has to refund $400M to Boeing.

The point is, I think the government will win on the second case too. I keep thinking about the procedural posture and it's making my head hurt. The original case resulted in a judgment for the government and against BSC in the amount of $400K. The government appeals the Boeing case because it doesn't want to have to refund the $400M. BSC conditionally appeals too, saying, if we lose on appeal, then we don't want to have to pay that $400K. The government wins on appeal, so it doesn't have to refund the $400M. The government also loses on the BSC case, so it doesn't get the $400M. So the government then conditionally asks for cert, thinking that if it loses before the Court, it at least wants the $400K that was originally awarded. So I guess I'm actually predicting that the government "loses," which is what they want to do, and the Court will AFFIRM.