## Facts

- Good Fortune Shipping SA, a foreign shipping corporation organized in the Republic of the Marshall Islands, earned U.S.-source gross transportation income in 2007.
- Foreign corporations are generally taxed on U.S.-source gross transportation income under I.R.C. § 887(a).
- Good Fortune claimed the foreign shipping exemption under I.R.C. § 883(a)(1), which exempts certain U.S.-source shipping income if specified ownership-by-qualifying-foreign-residents requirements are met.
- In 2007, 100% of Good Fortune’s stock was issued as bearer shares (owned by whoever possesses the physical certificates).
- IRS regulations issued in 2003 categorically treated bearer shares as having no owners for § 883 purposes, based on concerns about verifying true ownership.
- Relying solely on that categorical rule, the IRS denied Good Fortune’s § 883 exemption and issued a deficiency notice.

## Issues

1. Whether an IRS regulation that categorically forbids consideration of bearer shares in applying § 883’s ownership requirements is a reasonable interpretation of the statute under Chevron step two.

## Decision

- The D.C. Circuit reversed the Tax Court’s grant of summary judgment for the Commissioner.
- The court held the regulation invalid to the extent it categorically excluded bearer shares from the § 883 ownership calculation.
- The case was remanded for further proceedings consistent with the court’s holding.

## Legal Principles

- Under Chevron step two, an agency interpretation is invalid if it is unreasonable in light of the statute’s text, structure, and operation.
- When a statute requires testing ownership of “stock” without distinguishing forms of stock, an agency generally may not treat a legally valid form of stock as if it has no owners and thus cannot count toward statutory ownership thresholds.
- Administrative difficulty in verifying ownership may justify evidentiary or recordkeeping requirements, but not a blanket rule that effectively rewrites the statutory ownership inquiry.

## Conclusion

The D.C. Circuit held that the IRS’s categorical exclusion of bearer shares from § 883’s ownership test was an unreasonable interpretation of the Internal Revenue Code because it effectively erased a recognized form of stock ownership from the statutory scheme; the Tax Court’s judgment for the Commissioner was reversed and the matter remanded.


Good Fortune Shipping SA v. Comm'r of Internal Revenue, 897 F.3d 256 (D.C. Cir. 2018)