Microsoft Corporation, petitioner-appellant, v. Commissioner of Internal Revenue, respondent-appellee. On appeal from the United States tax court brief of Tax Executives Institute, Inc. as amicus curiae in support of reversal.

• Position: In The United States Court Of Appeals For The Ninth Circuit

On December 20, 2001, Tax Executives Institute filed brief amicus curiae with the U.S. Court of Appeals for the Ninth Circuit in Microsoft Corporation v. Commissioner (No. 01-71584). The brief was prepared under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is David L. Bernard of Kimberly-Clark Corporation.

Interest of Amicus Curiae

Pursuant to Rule 29 of the Rules of the United States Court of Appeals for the Ninth Circuit, Tax Executives Institute, Inc. (TEI) respectfully submits this brief as Amicus Curiae to urge the reversal of the decision of the United States Tax Court and limit the deference afforded the temporary regulation at issue here.

TEI is a voluntary, nonprofit association of corporate tax executives who are responsible for managing the tax affairs of their companies and who must contend daily with the provisions of the tax law relating to the operation of business enterprises. The Institute was organized in New York in 1944 and has more than 5,200 members who represent nearly 2,800 of the leading corporations in the United States, Canada, and Europe. TEI is dedicated to promoting the uniform and equitable enforcement of tax laws throughout the nation and to reducing the costs and burdens of compliance to the benefit of both the government and taxpayers.

This case raises a fundamental question of administrative law: To what extent should a court defer to a temporary tax regulation? In its decision below, the Tax Court held -- without discussion -- that "[g]enerally, temporary regulations have binding effect and are entitled to the same weight as final regulations." Slip Op. at 32 (citations omitted). The court's opinion was issued, however, before the Supreme Court of the United States issued its opinion in United States v. Mead Corporation, 121 S. Ct. 2164 (2001), relating to the deference to be afforded Customs classification rulings and other interpretative rules. Amicus TEI submits that under Mead temporary regulations are not entitled to the same weight as final regulations. Instead, temporary regulations should be scrutinized under the standard enunciated by the Supreme Court in Skidmore v. Swift & Co, 323 U.S. 134 (1944).

This case is clearly important to companies that export products from the United States. Moreover, it presents an opportunity for this Court to apply Mead's deference standard to temporary regulations. As the individuals who must contend daily with the interpretation and administration of the nation's tax laws, TEI's members have a vital interest in the deference to be accorded IRS interpretative rules by the courts. Meaningful, albeit measured, judicial review of agency interpretative rulings is critical in safeguarding the public from unreasonable agency actions. Because TEI members and the businesses by which they are employed will be materially affected by the Court's decision in this case, the Institute has a special interest in the outcome.

Summary of Argument

The substantive tax issue in this case is the definition of the term "export property" for purposes of the Internal Revenue Code's foreign sales corporation (FSC) provisions. Specifically, the U.S. Tax Court considered whether Microsoft Corporation's computer software "masters" constitute "export property" within the meaning of section 927(a) of the Code (26 U.S.C.) and Temp. Reg. [section] 1.927(a)-1T(f)(3) (26 C.F.R.). In reaching its decision that computer masters are not "export property," the court upheld the validity of the temporary regulation, concluding -- without discussion -- that "[g]enerally, temporary regulations have binding effect and are entitled to the same weight as final regulations." Slip. Op. at 32 (citations omitted). Amicus Tax Executives Institute submits that under United States v. Mead Corporation, 121 S. Ct. 2164 (2001), temporary regulations are not entitled to the same weight as final regulations.

1. Temp. Reg. [section] 1.927(a)-1T(f)(3) was issued under the Treasury Department's general grant of authority set forth in section 7805(a) of the Code to issue "all needful rules and regulations for the enforcement of this title." This Court has previously found such interpretative rules to require a "relatively less deferential standard of review" than regulations issued under a specific legislative mandate. Such interpretative regulations will be sustained if they represent a reasonable statutory interpretation. L&F International Sales Corp. v. United States, 912 F. 2d 377, 380 n.2 (9th Cir. 1990) (citations omitted). Although this Court has also extended substantial deference to temporary regulations, Redlark v. Commissioner, 141 F.3d 936, 939 (9th Cir. 1998), it has expressed reservations about the standard when the "temporary" rule is longstanding. See Tedori v. United States, 211 F. 3d 488, 491 n.9 (9th Cir. 2000). The Mead case suggests that the temporary nature of a regulation should affect the amount of deference it receives from this Court.

   In Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Supreme Court set forth a two-part test in determining the deference to be accorded agency rules by the courts. First, the court must review the intent of Congress. If it is clear, "that is the end of the matter." If it is not, the question becomes whether the agency's answer is based on a permissible construction of the statute. Id. at 842-43.

   In Mead, the Supreme Court confirmed that not all agency interpretations are entitled to Chevron deference. It held that administrative implementation of a particular statutory provision qualified for Chevron deference only when it appears that --

   * Congress delegated authority to the agency to make rules carrying the force of law, and

   * The agency interpretation was promulgated in the exercise of that authority.

   The delegation "may be shown in a variety of ways, as by an agency's power to engage in adjudication or notice-and-comment rulemaking, or by some other indication of a comparable congressional intent." Mead Corporation, 121 S. Ct. at 2171. The Court concluded that certain agency rulings are entitled to deference only to the extent they have the power to persuade. 121 S. Ct. at 2171, 2177.

   Thus, Mead sharply limits the class of interpretative rulings entitled to Chevron deference, generally reserving that high degree of deference to regulations promulgated through notice-and-comment rulemaking or a formal adjudication. Interpretations not meeting these requirements may qualify only in rare circumstances where it can be shown there was congressional intent to speak with the "force of law."

   This Court has also underscored the importance of notice-and-comment procedures. In Fior d'Italia, Inc. v. United States, 242 F. 3d 844 (9th Cir. 2001) [cert. granted, No. 01-463(1/11/02)], the Court found that the requirements of...