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In a ruling that will affect scores of companies, the Supreme Court ruled against the Boeing Company's method of allocating research and development costs among corporate units. Boeing wanted to shift R&D costs--and the accompanying deductions--away from its export units that benefit from special tax treatment to other units that do not get the tax breaks. At stake in the case was $400 million in tax refunds that Boeing wanted to recover.
KEY ISSUE * The High Court's 7-to-2 vote in favor of the government dealt with some of the most complex provisions in the tax law. However, the key issue centered on the validity of a regulation [Treas. Reg. Section 1.861-8(e)(3)] that addresses the allocation of R&D costs when a company chooses the "combined taxable income" (CTI) method of transfer pricing and elects to currently deduct the expenses, instead of capitalizing the costs and writing them off over time.
In its ruling, the Court said that although Boeing had many arguments in favor of interpreting the regulation as it did, it had to defer to the interpretation by the Treasury Department. Justices Clarence Thomas and Antonin Scalia dissented.
Special Tax Break at Issue
U.S. exporters currently save billions each year thanks to a special export tax break enacted in 1971 that allows companies to defer …