Appeal from the United States Tax Court.
Cummings, Chief Judge, Coffey, Circuit Judge, and Will, Senior District Judge.*fn*
This case comes to us on appeal from the United States Tax Court, which found in favor of the respondent Commissioner of Internal Revenue ("Commissioner") against the petitioner Gehl Company ("Gehl"). The first issue raised is whether Treasury Regulation § 1.993-2(d)(2), which sets down rules limiting the classification of commissions owed to a domestic international sales corporation ("DISC") as "qualified export assets" as that term is defined by Section 993(b) of the Internal Revenue Code,*fn1 is a valid regulation. A second related issue is, assuming that the cited Treasury regulation is valid, whether that regulation can be applied retroactively. For the reasons set forth below, we agree with the Tax Court that Treasury Regulation § 1.993-2(d)(2) is valid but disagree that it can be applied retroactively.
Since the facts have been fully stipulated, only a brief summary is necessary. Gehl and Gehl International, Inc. ("International") are both corporations organized under the laws of Wisconsin, and at all relevant times International was wholly owned by Gehl. During the relevant time period, Gehl was engaged in the manufacture, domestic sale and export of agricultural machinery and equipment. In 1972 International elected to be treated as a DISC under the Internal Revenue Code. International's sole function was to act as a commission agent for items it exported on Gehl's behalf; i.e., a so-called "commission agent DISC." See, e.g., Rendell, Use of a Domestic International Sales Corporation to Reduce Federal Income Tax on Export Earnings, 11 San Diego L. Rev. 138, 145-146 (1973). Gehl is a related supplier with respect to International. Commissions were to be paid each month from Gehl to International on all qualified export sales made during the month at the rate of four and one-half percent. Gehl and International utilized the accrual method of accounting. Gehl operates on a calendar year, while International's fiscal year ends on January 31.
At issue is International's qualification as a DISC under Section 992 for its taxable years ended January 31 of 1976, 1977, 1978 and 1979. The adjusted basis of International's total assets on the dates listed below was as follows:
January 31, 1976 $814,378
January 31, 1979 1,031,016
The accrued commissions owed to International by Gehl on the dates listed below were as follows:
January 31, 1976 $674,855
Gehl paid the commissions as follows:
Year Date of Payment Amount Year
1976 February 12, 1976 $3,000