concurring: I agree with the result reached by the majority; however, I would reach that result by applying the literal terms of section 1.993-6(e)(2), Income Tax Regs.
It is clear that HISC erroneously received commissions on some of Hughes’ domestic sales even though, under the commission agreement between HISC and Hughes, HISC was only entitled to commissions on export sales. This situation and its effect on the 95-percent gross receipts requirement of section 992(a)(1)(A) is explicitly addressed by section 1.993-6(e)(2), Income Tax Regs., which provides:
If the commission arrangement provides that the commission agent will receive a commission only with respect to sales or leases of export property, or the furnishing of services, which result in qualified export receipts, the commission agent will not take into account the gross receipts or gross income, as the case may be, derived by the principal from any transaction for which the commission agent would not be entitled to a commission under the commission arrangement.
The majority holds that the regulation “does not apply where a commission was paid”. Majority op. p. 301. The regulation itself contains no such exception. The only reason given for the majority’s interpretation is its fear that a literal application of section 1.993-6(e)(2), Income Tax Regs., would make it “unlikely that any commission DISC would fail the gross receipts test so long as it was under an exclusively foreign sales contract, whether it complied with the contract or not.” Majority op. pp. 301-302. While this may be true where the Disc’s income is exclusively from commissions received from its principal, the commission arrangement provides for commissions only with respect to sales of export property, and the principal erroneously pays commissions in excess of those provided in the commission agreement, I see no particular reason why Congress would have intended a DISC to fail under these circumstances. Congress did not intend to create traps for the unwary. Majority op. note 4. The organizational requirements for a DISC allow it to qualify even though it is no more than a bookkeeping device to measure the amount of export earnings that are subject to tax deferral. Rocky Mountain Associates v. Commissioner, 90 T.C. 1231, 1235 (1988). A regulation that salvages DISC status, despite an inadvertent and unwarranted payment of a commission on unqualified receipts, seems perfectly consistent with the statutory scheme so long as the regulation is part of an overall system that can prevent unintended tax benefits.
A literal reading of the regulation need not result in any unintended tax benefits. For example, in order to determine if a Disc meets the 95-percent gross receipts test, it would be necessary to determine whether the commissions paid to the DISC were for export sales pursuant to the commission agreement. It seems evident that any examination of these transactions that uncovered unqualified domestic sales commissions which were not payable pursuant to the commission agreement should result in the disallowance of deductions taken by the principal.1 Erroneously paid domestic sales commissions would not qualify as an ordinary and necessary business expense.2 The disallowance of deductions taken by the principal for domestic sales commissions would prevent the principal from shielding income that did not qualify for DISC benefits. Literal application of section 1.993-6(e)(2), Income Tax Regs., would then salvage the Disc’s qualification for purposes of export sales, allowing the DISC to serve the congressional purpose of assisting domestic companies engaged in exporting goods by temporarily shielding them from tax on a portion of their export activities. See Gehl Co. v. Commissioner, 795 F.2d 1324, 1330 (7th Cir. 1986), affg. T.C. Memo. 1984-667.3
The majority states that a literal application of section 1.993-6(e)(2), Income Tax Regs., would result in unequal treatment between buy-sell Disc’s and commission Disc’s and give commission Disc’s an unfair advantage. See majority op. note 10. I disagree. A buy-sell DISC purchases and sells property. Thus, the 95-percent gross receipts test for a buy-sell DISC depends on actual gross sales receipts of the DISC and no attribution of gross sales receipts is required. This, no doubt, is why there is no regulation comparable to section 1.993-6(e)(2), Income Tax Regs., dealing with buy-sell Disc’s. A commission DISC, on the other hand, is entitled to commissions from its principal only pursuant to the terms of its contractual arrangement with the principal. For purposes of the 95-percent gross receipts test, gross sales receipts of the seller-principal are attributed to the commission Disc but only insofar as those sales entitled the Disc to commissions. There is no reason to attribute gross sales receipts to a commission DISC where the DISC was not entitled to commissions on such sales.
For the foregoing reasons, I disagree with the majority’s holding that section 1.993-6(e)(2), Income Tax Regs., does not apply to the facts in this case.
Swift and Wells, JJ., agree with this concurring opinion.We do not have Hughes’ tax liability before us, and we apparently do not know whether respondent has disallowed deductions for the commissions on domestic sales. In any event, whether respondent has made proper adjustments to Hughes’ tax liability should have no bearing on our application of the regulation.
HISC had no employees, and the only predicate for its receipt and retention of sales commissions was the agreement that provided for commissions on export sales.
The regulation was proposed in 1972 and adopted in 1977 when the congressional purpose was fresh in the minds of those who wrote the regulation.