author:
Justice Stevens
      Justice Kennedy,

text:
    MOSELEY et al., dba VICTOR’S LITTLE SECRET v. V SECRET CATALOGUE, INC., et al.
    No. 01-1015.
    Argued November 12, 2002
    Decided March 4, 2003

      Stevens, J., delivered the opinion for a unanimous Court with respect to Parts I, II, and IV, and the opinion of the Court with respect to Part III, in which Rehnquist, C. J., and O’Connor, Kennedy, Souter, Thomas, Ginsburg, and Breyer, JJ., joined. Kennedy, X, filed a concurring opinion, post, p. 485.

      James R. Higgins, Jr., argued the cause for petitioners. With him on the briefs was Scot A. Duvall.

      Walter Dellinger argued the cause for respondents. With him on the brief was Jonathan D. Hacker.

      Deputy Solicitor General Wallace argued the cause for the United States as amicus curiae. With him on the brief were Solicitor General Olson, Assistant Attorney General McCollum, Irving L. Gornstein, Anthony J. Steinmeyer, Mark S. Davies, John M. Whealan, Nancy C. Slutter, Cynthia C. Lynch, and James R. Hughes.

        Peter Jaszi filed a brief for Public Knowledge et al. as amici curiae urging reversal.
      Briefs of amici curiae urging affirmance were filed for the American Bar Association by Robert E. Hirshon, Robert W. Sacoff, and Uli Wid,-maier; for the American Intellectual Property Law Association by Jonathan Hudis, Amy C. Sullivan, and Roger W. Parkhurst; for Best Western International, Inc., et al. by Avraham Azrieli, Joel W. Nomkin, Charles A. Blanchard, and Suzanne R. Scheiner; for Intel Corp. by Jerrold J. Ganzfried, Mark I. Levy, and Thomas L. Casagrande; for Andrew Beckerman-Rodau et al. by Mark A Lemley, pro se; for the Intellectual Property Owners Association by Laurence R. Hefter, Elizabeth McGoo-gan, and Ronald E. Myrick; for the International Trademark Association by Theodore H. Davis, Jr., and Marie V. Driscoll; and for Ringling Bros.Barnum & Bailey Combined Shows, Inc., et al. by Robert A Long, Jr.

        Malla Pollack, pro se, filed a brief as amicus curiae.

   Justice Stevens

delivered the opinion of the Court.

In 1995 Congress amended §43 of the Trademark Act of 1946, 15 U. S. C. § 1125, to provide a remedy for the “dilution of famous marks.” 109 Stat. 985-986. That amendment, known as the Federal Trademark Dilution Act (FTDA), describes the factors that determine whether a mark is “distinctive and famous,” and defines the term “dilution” as “the lessening of the capacity of a famous mark to identify and distinguish goods or services.” The question we granted certiorari to decide is whether objective proof of actual injury to the economic value of a famous mark (as opposed to a presumption of harm arising from a subjective “likelihood of dilution” standard) is a requisite for relief under the

I

Petitioners, Victor and Cathy Moseley, own and operate a retail store named “Victor’s Little Secret” in a strip mall in Elizabethtown, Kentucky. They have no employees.

Respondents are affiliated corporations that own the VICTORIA’S SECRET trademark and operate over 750 Victoria’s Secret stores, two of which are in Louisville, Kentucky, a short drive from Elizabethtown. In 1998 they spent over $55 million advertising “the VICTORIA’S SECRET brand-one of moderately priced, high quality, attractively designed lingerie sold in a store setting designed to look like a worn-[a]n’s bedroom.” App. 167, 170. They distribute 400 million copies of the Victoria’s Secret catalog each year, including 39,000 in Elizabethtown. In 1998 their sales exceeded $1.5 billion.

In the February 12, 1998, edition of a weekly publication distributed to residents of the military installation at Fort Knox, Kentucky, petitioners advertised the “GRAND OPENING Just in time for Valentine’s Day!” of their store “VICTOR’S SECRET” in nearby Elizabethtown. The ad featured “Intimate Lingerie for every woman”; “Romantic Lighting”; “Lycra Dresses”; “Pagers”; and “Adult Novelties/ Gifts.” Id., at 209. An army colonel, who saw the ad and was offended by what he perceived to be an attempt to use a reputable company’s trademark to promote the sale of “unwholesome, tawdry merchandise,” sent a copy to respondents. Id., at 210. Their counsel then wrote to petitioners stating that their choice of the name “Victor’s Secret” for a store selling lingerie was likely to cause confusion with the well-known VICTORIA’S SECRET mark and, in addition, was likely to “dilute the distinctiveness” of the mark. Id., at 190-191. They requested the immediate discontinuance of the use of the name “and any variations thereof.” Ibid. In response, petitioners changed the name of their store to “Victor’s Little Secret.” Because that change did not satisfy respondents, they promptly filed this action in Federal District Court.

The complaint contained four separate claims: (1) for trademark infringement alleging that petitioners’ use of their trade name was “likely to cause confusion and/or mistake in violation of 15 U. S. C. § 1114(1)”; (2) for unfair competition alleging misrepresentation in violation of § 1125(a); (3) for “federal dilution” in violation of the FTDA; and (4) for trademark infringement and unfair competition in violation of the common law of Kentucky. Id., at 15, 20-23. In the dilution count, the complaint alleged that petitioners’ conduct was “likely to blur and erode the distinctiveness” and “tarnish the reputation” of the VICTORIA’S SECRET trademark. Ibid.

After discovery the parties filed cross-motions for summary judgment. The record contained uncontradicted affidavits and deposition testimony describing the vast size of respondents’ business, the value of the VICTORIA’S SECRET name, and descriptions of the items sold in the respective parties’ stores. Respondents sell a “complete line of lingerie” and related items, each of which bears a VICTORIA’S SECRET label or tag. Petitioners sell a wide variety of items, including adult videos, “adult novelties,” and lingerie. Victor Moseley stated in an affidavit that women’s lingerie represented only about five percent of their sales. Id., at 131. In support of their motion for summary judgment, respondents submitted an affidavit by an expert in marketing who explained “the enormous value” of respondents’ mark. Id., at 195-205. Neither he, nor any other witness, expressed any opinion concerning the impact, if any, of petitioners’ use of the name “Victor’s Little Secret” on that value.

Finding that the record contained no evidence of actual confusion between the parties’ marks, the District Court concluded that “no likelihood of confusion exists as a matter of law” and entered summary judgment for petitioners on the infringement and unfair competition claims. Civ. Action No. 3:98CV-395-S (WD Ky., Feb. 9, 2000), App. to Pet. for Cert. 28a, 37a. With respect to the FTDA claim, however, the court ruled for respondents.

Noting that petitioners did not challenge Victoria’s Secret’s claim that its mark is “famous,” the only question it had to decide was whether petitioners’ use of their mark diluted the quality of respondents’ mark. Reasoning from the premise that dilution “corrodes” a trademark either by “ ‘blurring its product identification or by damaging positive associations that have attached to it,’ ” the court first found the two marks to be sufficiently similar to cause dilution, and then found “that Defendants’ mark dilutes Plaintiffs’ mark because of its tarnishing effect upon the Victoria’s Secret mark.” Id., at 38a-39a (quoting Ameritech, Inc. v. American Info. Technologies Corp., 811 F. 2d 960, 965 (CA6 1987)). It therefore enjoined petitioners “from using the mark ‘Victor’s Little Secret’ on the basis that it causes dilution of the distinctive quality of the Victoria’s Secret mark.” App. to Pet. for Cert. 38a-39a. The court did not, however, find that any “blurring” had occurred. Ibid.

The Court of Appeals for the Sixth Circuit affirmed. 259 F. 3d 464 (2001). In a case decided shortly after the entry of the District Court’s judgment in this case, the Sixth Circuit had adopted the standards for determining dilution under the FTDA that were enunciated by the Second Circuit in Nabisco, Inc. v. PF Brands, Inc., 191 F. 3d 208 (1999). See Kellogg Co. v. Exxon Corp., 209 F. 3d 562 (CA6 2000). In order to apply those standards, it was necessary to discuss two issues that the District Court had not specifically addressed — whether respondents’ mark is “distinctive,” and whether relief could be granted before dilution has actually occurred. With respect to the first issue, the court rejected the argument that Victoria’s Secret could not be distinctive because “secret” is an ordinary word used by hundreds of lingerie concerns. The court concluded that the entire mark was “arbitrary and fanciful” and therefore deserving of a high level of trademark protection. 259 F. 3d, at 470. On the second issue, the court relied on a distinction suggested by this sentence in the House Report: “Confusion leads to immediate injury, while dilution is an infection, which if allowed to spread, will inevitably destroy the advertising value of the mark.” H. R. Rep. No. 104-374, p. 3 (1995). This statement, coupled with the difficulty of proving actual harm, lent support to the court’s ultimate conclusion that the evidence in this case sufficiently established “dilution.” 259 P. 3d, at 475-477. In sum, the Court of Appeals held:

“While no consumer is likely to go to the Moseleys’ store expecting to find Victoria’s Secret’s famed Miracle Bra, consumers who hear the name ‘Victor’s Little Secret’ are likely automatically to think of the more famous store and link it to the Moseleys’ adult-toy, gag gift, and lingerie shop. This, then, is a classic instance of dilution by tarnishing (associating the Victoria’s Secret name with sex toys and lewd coffee mugs) and by blurring (linking the chain with a single, unauthorized establishment). Given this conclusion, it follows that Victoria’s Secret would prevail in a dilution analysis, even without an exhaustive consideration of all ten of the Nabisco factors.” Id., at 477.

In reaching that conclusion the Court of Appeals expressly rejected the holding of the Fourth Circuit in Ringling Bros.Barnum & Bailey Combined Shows, Inc. v. Utah Div. of Travel Development, 170 F. 3d 449 (1999). In that case, which involved a claim that Utah’s use on its license plates of the phrase “greatest snow on earth” was causing dilution of the “greatest show on earth,” the court had concluded “that to establish dilution of a famous mark under the federal Act requires proof that (1) a defendant has made use of a junior mark sufficiently similar to the famous mark to evoke in a relevant universe of consumers a mental association of the two that (2) has caused (3) actual economic harm to the famous mark’s economic value by lessening its former selling power as an advertising agent for its goods or services.” Id., at 461 (emphasis added). Because other Circuits have also expressed differing views about the “actual harm” issue, we granted certiorari to resolve the conflict. 535 U. S. 985 (2002).

II

Traditional trademark infringement law is a part of the broader law of unfair competition, see Hanover Star Milling Co. v. Metcalf, 240 U. S. 403, 413 (1916), that has its sources in English common law, and was largely codified in the Trademark Act of 1946 (Lanham Act). See B. Pattishall, D. Hilliard, & J. Welch, Trademarks and Unfair Competition 2 (4th ed. 2000) (“The United States took the [trademark and unfair competition] law of England as its own”). That law broadly prohibits uses of trademarks, trade names, and trade dress that are likely to cause confusion about the source of a product or service. See 15 U. S. C. §§1114, 1125(a)(1)(A). Infringement law protects consumers from being misled by the use of infringing marks and also protects producers from unfair practices by an “imitating competitor.” Qualitex Co. v. Jacobson Products Co., 514 U. S. 159, 163-164 (1995).

Because respondents did not appeal the District Court’s adverse judgment on counts 1, 2, and 4 of their complaint, we decide the case on the assumption that the Moseleys’ use of the name “Victor’s Little Secret” neither confused any consumers or potential consumers, nor was likely to do so. Moreover, the disposition of those counts also makes it appropriate to decide the case on the assumption that there was no significant competition between the adversaries in this case. Neither the absence of any likelihood of confusion nor the absence of competition, however, provides a defense to the statutory dilution claim alleged in count 3 of the complaint.

Unlike traditional infringement law, the prohibitions against trademark dilution are not the product of common-law development, and are not motivated by an interest in protecting consumers. The seminal discussion of dilution is found in Frank Schechter’s 1927 law review article concluding “that the preservation of the uniqueness of a trademark should constitute the only rational basis for its protection.” Rational Basis of Trademark Protection, 40 Harv. L. Rev. 813, 831. Schechter supported his conclusion by referring to a German case protecting the owner of the well-known trademark “Odol” for mouthwash from use on various noncompeting steel products. That case, and indeed the principal focus of the Schechter article, involved an established arbitrary mark that had been “added to rather than withdrawn from the human vocabulary” and an infringement that made use of the identical mark. Id., at 829.

Some 20 years later Massachusetts enacted the first state statute protecting trademarks from dilution. It provided:

“Likelihood of injury to business reputation or of dilution of the distinctive quality of a trade name or trademark shall be a ground for injunctive relief in cases of trade-mark infringement or unfair competition notwithstanding the absence of competition between the parties or of confusion as to the source of goods or services.” 1947 Mass. Acts p. 800, ch. 307.

Notably, that statute, unlike the “Odd” case, prohibited both the likelihood of “injury to business reputation” and “dilution.” It thus expressly applied to both “tarnishment” and “blurring.” At least 25 States passed similar laws in the decades before the FTDA was enacted in 1995. See Restatement (Third) of Unfair Competition §25, Statutory Note (1995).

III

In 1988, when Congress adopted amendments to the Lanham Act, it gave consideration to an antidilution provision. During the hearings on the 1988 amendments, objections to that provision based on a concern that it might have applied to expression protected by the First Amendment were voiced and the provision was deleted from the amendments. H. R. Rep. No. 100-1028 (1988). The bill, H. R. 1295, 104th Cong., 1st Sess., that was introduced in the House in 1995, and ultimately enacted as the FTDA, included two exceptions designed to avoid those concerns: a provision allowing “fair use” of a registered mark in comparative advertising or promotion, and the provision that noncommercial use of a mark shall not constitute dilution. See 15 U. S. C. § 1125(c)(4).

On July 19, 1995, the Subcommittee on Courts and Intellectual Property of the House Judiciary Committee held a 1-day hearing on H. R. 1295. No opposition to the bill was voiced at the hearing and, with one minor amendment that extended protection to unregistered as well as registered marks, the subcommittee endorsed the bill and it passed the House unanimously. The committee’s report stated that the “purpose of H. R. 1295 is to protect famous trademarks from subsequent uses that blur the distinctiveness of the mark or tarnish or disparage it, even in the absence of a likelihood of confusion.” H. R. Rep. No. 104-374, p. 2 (1995). As examples of dilution, it stated that “the use of DUPONT shoes, BUICK aspirin, and KODAK pianos would be actionable under this legislation.” Id., at 3. In the Senate an identical bill, S. 1513, 104th Cong., 1st Sess., was introduced on December 29, 1995, and passed on the same day by voice vote without any hearings. In his explanation of the bill, Senator Hatch also stated that it was intended “to protect famous trademarks from subsequent uses that blur the distinctiveness of the mark or tarnish or disparage it,” and referred to the Dupont Shoes, Buick aspirin, and Kodak piano examples, as well as to the Schechter law review article. 141 Cong. Rec. 38559-38561 (1995).

IV

The VICTORIA’S SECRET mark is unquestionably valuable and petitioners have not challenged the conclusion that it qualifies as a “famous mark” within the meaning of the statute. Moreover, as we understand their submission, petitioners do not contend that the statutory protection is confined to identical uses of famous marks, or that the statute should be construed more narrowly in a case such as this. Even if the legislative history might lend some support to such a contention, it surely is not compelled by the statutory text.

The District Court’s decision in this case rested on the conclusion that the name of petitioners’ store “tarnished” the reputation of respondents’ mark, and the Court of Appeals relied on both “tarnishment” and “blurring” to support its affirmance. Petitioners have not disputed the relevance of tarnishment, Tr. of Oral Arg. 5-7, presumably because that concept was prominent in litigation brought under state anti-dilution statutes and because it was mentioned in the legislative history. Whether it is actually embraced by the statutory text, however, is another matter. Indeed, the contrast between the state statutes, which expressly refer to both “injury to business reputation” and to “dilution of the distinctive quality of a trade name or trademark,” and the federal statute which refers only to the latter, arguably supports a narrower reading of the FTDA. See Klieger, Trademark Dilution: The Whittling Away of the Rational Basis for Trademark Protection, 58 U. Pitt. L. Rev. 789, 812-813, and n. 132 (1997).

The contrast between the state statutes and the federal statute, however, sheds light on the precise question that»we must decide. For those state statutes, like several provisions in the federal Lanham Act, repeatedly refer to a “likelihood” of harm, rather than to a completed harm. The relevant text of the FTDA, quoted in full in n. 1, supra, provides that “the owner of a famous mark” is entitled to injunctive relief against another person’s commercial use of a mark or trade name if that use “causes dilution of the distinctive quality” of the famous mark. 15 U. S. C. § 1125(c)(1) (emphasis added). This text unambiguously requires a showing of actual dilution, rather than a likelihood of dilution.

This conclusion is fortified by the definition of the term “dilution” itself. That definition provides:

“The term ‘dilution’ means the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of—
“(1) competition between the owner of the famous mark and other parties, or
“(2) likelihood of confusion, mistake, or deception.” § 1127.

The contrast between the initial reference to an actual “lessening of the capacity” of the mark, and the later reference to a “likelihood of confusion, mistake, or deception” in the second caveat confirms the conclusion that actual dilution must be established.

Of course, that does not mean that the consequences of dilution, such as an actual loss of sales or profits, must also be proved. To the extent that language in the Fourth Circuit’s opinion in the Ringling Bros. case suggests otherwise, see 170 F. 3d, at 460-465, we disagree. We do agree, however, with that court’s conclusion that, at least where the marks at issue are not identical, the mere fact that consumers mentally associate the junior user’s mark with a famous mark is not sufficient to establish actionable dilution. As the facts of that case demonstrate, such mental association will not necessarily reduce the capacity of the famous mark to identify the goods of its owner, the statutory requirement for dilution under the FTDA. For even though Utah drivers may be reminded of the circus when they see a license plate referring to the “greatest snow on earth,” it by no means follows that they will associate “the greatest show on earth” with skiing or snow sports, or associate it less strongly or exclusively with the circus. “Blurring” is not a necessary consequence of mental association. (Nor, for that matter, is “tarnishing.”)

The record in this case establishes that an army officer who saw the advertisement of the opening of a store named “Victor’s Secret” did make the mental association with “Victoria’s Secret,” but it also shows that he did not therefore form any different impression of the store that his wife and daughter had patronized. There is a complete absence of evidence of any lessening of the capacity of the VICTORIA’S SECRET mark to identify and distinguish goods or services sold in Victoria’s Secret stores or advertised in its catalogs. The officer was offended by the ad, but it did not change his conception of Victoria’s Secret. His offense was directed entirely at petitioners, not at respondents. Moreover, the expert retained by respondents had nothing to say about the impact of petitioners’ name on the strength of respondents’ mark.

Noting that consumer surveys and other means of demonstrating actual dilution are expensive and often unreliable, respondents and their amici argue that evidence of an actual “lessening of the capacity of a famous mark to identify and distinguish goods or services,” § 1127, may be difficult to obtain. It may well be, however, that direct evidence of dilution such as consumer surveys will not be necessary if actual dilution can reliably be proved through circumstantial evidence — the obvious case is one where the junior and senior marks are identical. Whatever difficulties of proof may be entailed, they are not an acceptable reason for dispensing with proof of an essential element of a statutory violation. The evidence in the present record is not sufficient to support the summary judgment on the dilution count. The judgment is therefore reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Justice Kennedy,

concurring.

As of this date, few courts have reviewed the statute we are considering, the Federal Trademark Dilution Act, 15 U. S. C. § 1125(c), and I agree with the Court that the eviden-tiary showing required by the statute can be clarified on remand. The conclusion that the VICTORIA’S SECRET mark is a famous mark has not been challenged throughout the litigation, ante, at 425, 432, and seems not to be in question. The remaining issue is what factors are to be considered to establish dilution.

For this inquiry, considerable attention should be given, in my view, to the word “capacity” in the statutory phrase that defines dilution as “the lessening of the capacity of a famous mark to identify and distinguish goods or services.” 15 U. S. C. §1127. When a competing mark is first adopted, there will be circumstances when the case can turn on the probable consequences its commercial use will have for the famous mark. In this respect, the word “capacity” imports into the dilution inquiry both the present and the potential power of the famous mark to identify and distinguish goods, and in some cases the fact that this power will be diminished could suffice to show dilution. Capacity is defined as “the power or ability to hold, receive, or accommodate.” Webster’s Third New International Dictionary 330 (1961); see also Webster’s New International Dictionary 396 (2d ed. 1949) (“Power of receiving, containing, or absorbing”); 2 Oxford English Dictionary 857 (2d ed. 1989) (“Ability to receive or contain; holding power”); American Heritage Dictionary 275 (4th ed. 2000) (“The ability to receive, hold, or absorb”). If a mark will erode or lessen the power of the famous mark to give customers the assurance of quality and the full satisfaction they have in knowing they have purchased goods bearing the famous mark, the elements of dilution may be established.

Diminishment of the famous mark’s capacity can be shown by the probable consequences flowing from use or adoption of the competing mark. This analysis is confirmed by the statutory authorization to obtain injunctive relief. 15 U. S. C. § 1125(c)(2). The essential role of injunctive relief is to “prevent future wrong, although no right has yet been violated.” Swift & Co. v. United States, 276 U. S. 311, 326 (1928). Equity principles encourage those who are injured to assert their rights promptly. A holder of a famous mark threatened with diminishment of the mark’s capacity to serve its purpose should not be forced to wait until the damage is done and the distinctiveness of the mark has been eroded.

In this case, the District Court found that petitioners’ trademark had tarnished the VICTORIA’S SECRET mark. App. to Pet. for Cert. 38a-39a. The Court of Appeals affirmed this conclusion and also found dilution by blurring. 259 F. 3d 464, 477 (CA6 2001). The Court’s opinion does not foreclose injunctive relief if respondents on remand present sufficient evidence of either blurring or tarnishment.

With these observations, I join the opinion of the Court.

      Justice Scalia joins all but Part III of this opinion.

       The FTDA provides: “SEC. 3. REMEDIES FOR DILUTION OF FAMOUS MARKS.
      “(a) Remedies. — Section 43 of the Trademark Act of 1946 (15 U. S. C. 1125) is amended by adding at the end the following new subsection:
      ‘“(c)(1) The owner of a famous mark shall be entitled, subject to the principles of equity and upon such terms as the court deems reasonable, to an injunction against another person’s commercial use in commerce of a mark or trade name, if such use begins after the mark has become famous and causes dilution of the distinctive quality of the mark, and to obtain such other relief as is provided in this subsection. In determining whether a mark is distinctive and famous, a court may consider factors such as, but not limited to—
      “ ‘(A) the degree of inherent or acquired distinctiveness of the mark;
      “ ‘(B) the duration and extent of use of the mark in connection with the goods or services with which the mark is used;
      “ ‘(C) the duration and extent of advertising and publicity of the mark;
      “‘(D) the geographical extent of the trading area in which the mark is used;
      “‘(E) the channels of trade for the goods or services with which the mark is used;
      “‘(F) the degree of recognition of the mark in the trading areas and channels of trade used by the marks’ owner and the person against whom the injunction is sought;
      “ ‘(G) the nature and extent of use of the same or similar marks by third parties; and
      “ ‘(H) whether the mark was registered under the Act of March 3,1881, or the Act of February 20, 1905, or on the principal register.
      “ ‘(2) In an action brought under this subsection, the owner of the famous mark shall be entitled only to injunctive relief unless the person against whom the injunction is sought willfully intended to trade on the owner’s reputation or to cause dilution of the famous mark. If such willful intent is proven, the owner of the famous mark shall also be entitled to the remedies set forth in sections 35(a) and 36, subject to the discretion of the court and the principles of equity.
      “ ‘(3) The ownership by a person of a valid registration under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register shall be a complete bar to an action against that person, with respect to that mark, that is brought by another person under the common law or a statute of a State and that seeks to prevent dilution of the distinctiveness of a mark, label, or form of advertisement.
      “ ‘(4) The following shall not be actionable under this section:
      “‘(A) Fair use of a famous mark by another person in comparative commercial advertising or promotion to identify the competing goods or services of the owner of the famous mark.
      ‘“(B) Noncommercial use of a mark.
      “‘(C) All forms of news reporting and news commentary.’
      “(b) Conforming Amendment. — The heading for title VIII of the Trademark Act of 1946 is amended by striking ‘AND FALSE DESCRIPTIONS’ and inserting ‘, FALSE DESCRIPTIONS, AND DILUTION.’
      “SEC. 4. DEFINITION.
      “Section 45 of the Trademark Act of 1946 (15 U. S. C. 1127) is amended by inserting after the paragraph defining when a mark shall be deemed to be ‘abandoned’ the following:
      “ ‘The term “dilution” means the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of—
      “‘(1) competition between the owner of the famous mark and other parties, or
      “‘(2) likelihood of confusion, mistake, or deception.’” 109 Stat. 985-986.

       After being advised of a proposal to change the store name to “VICTOR’S LITTLE SECRETS,” respondents’ counsel requested detailed information about the store in order to consider whether that change “would be acceptable.” App. 13-14. Respondents filed suit two months after this request.

       Respondents described their business as follows: “Victoria’s Secret stores sell a complete line of lingerie, women’s undergarments and nightwear, robes, caftans and kimonos, slippers, sachets, lingerie bags, hanging bags, candles, soaps, cosmetic brushes, atomizers, bath products and fragrances.” Id., at 168.

       In answer to an interrogatory, petitioners stated that they “sell novelty action clocks, patches, temporary tattoos, stuffed animals, coffee mugs, leather biker wallets, zippo lighters, diet formula, diet supplements, jigsaw puzzles, whyss, handcufs [sic], hosiery bubble machines, greeting cards, calendars, incense burners, ear air fresheners, sunglasses, ball caps, jewelry, candles, lava lamps, blacklights, fiber optic lights, rock and roll prints, lingerie, pagers, candy, adult video tapes, adult novelties, t-shirts, etc.” Id., at 87.

       “It is quite clear that the statute intends distinctiveness, in addition to fame, as an essential element. The operative language defining the tort requires that ‘the [junior] person’s . . . use . . . caus[e] dilution of the distinctive quality of the [senior] mark.’ 15 U. S. C. § 1125(c)(1). There can be no dilution of a mark’s distinctive quality unless the mark is distinctive.” Nabisco, Inc. v. PF Brands, Inc., 191 F. 3d 208, 216 (CA2 1999).

       The Second Circuit explained why it did not believe “actual dilution” need be proved:
      “Relying on a recent decision by the Fourth Circuit, Nabisco also asserts that proof of dilution under the FTDA requires proof of an ‘actual, consummated harm.’ Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Utah Division of Travel Dev., 170 F. 3d 449, 464 (4th Cir. 1999). We reject the argument because we disagree with the Fourth Circuit’s interpretation of the statute.
      “It is not clear which of two positions the Fourth Circuit adopted by its requirement of proof of ‘actual dilution.’ Id. The narrower position would be that courts may not infer dilution from ‘contextual factors (degree of mark and product similarity, etc.),’ but must instead rely on evidence of ‘actual loss of revenues’ or the ‘skillfully constructed consumer survey.’ Id. at 457, 464-65. This strikes us as an arbitrary and unwarranted limitation on the methods of proof.” Id., at 223.

       “In this case, for example, although the word ‘secret’ may provoke some intrinsic association with prurient interests, it is not automatically linked in the ordinary human experience with lingerie. ‘Secret’ is not particularly descriptive of bras and hosiery. Nor is there anything about the combination of the possessive ‘Victoria’s’ and ‘secret’ that automatically conjures thought of women’s underwear-except, of course, in the context of plaintiff’s line of products. Hence, we conclude that the ‘Victoria’s Secret’ mark ranks with those that are ‘arbitrary and fanciful’ and is therefore deserving of a high level of trademark protection. Although, the district court applied a slightly different test from the one now established in this circuit, the court would undoubtedly have reached the same result under the Nabisco test. Certainly, we cannot say that the court erred in finding that the preliminary factors of a dilution claim had been met by Victoria’s Secret.” 259 F. 3d, at 470-471.

       The court had previously noted that the “Second Circuit has developed a list of ten factors used to determine if dilution has, in fact, occurred, while describing them as a ‘nonexclusive list’ to ‘develop gradually over time’ and with the particular facts of each case. Those factors are: distinctiveness; similarity of the marks; ‘proximity of the products and the likelihood of bridging the gap;’ ‘interrelationship among the distinctiveness of the senior mark, the similarity of the junior mark, and the proximity of the products;’ ‘shared consumers and geographic limitations;’ ‘sophistication of consumers;’ actual confusion; ‘adjectival or referential quality of the junior use;’ ‘harm to the junior user and delay by the senior user;’ and the ‘effect of [the] senior’s prior laxity in protecting the mark.’” Id., at 476 (quoting Nabisco, 191 F. 3d, at 217-222).

       The German court “held that the use of the mark, ‘Odol’ even on noncompeting goods was ‘gegen die guten Sitten,’ pointing out that, when the public hears or reads the word ‘Odol,’ it thinks of the complainant’s mouth wash, and that an article designated with the name ‘Odol’ leads the public to assume that it is of good quality. Consequently, concludes the court, complainant has ‘the utmost interest in seeing that its mark is not diluted [verwüssert]: it would lose in selling power if everyone used it as the designation of his goods.’” 40 Harv. L. Rev., at 831-832.

       Schecter discussed this distinction at length: “The rule that arbitrary, coined or fanciful marks or names should be given a much broader degree of protection than symbols, words or phrases in common use would appear to be entirely sound. Such trademarks or tradenames as ‘Blue Ribbon,’ used, with or without registration, for all kinds of commodities or services, more than sixty times; ‘Simplex’ more than sixty times; ‘Star,’ as far back as 1898, nearly four hundred times; ‘Anchor,’ already registered over one hundred fifty times in 1898; ‘Bull Dog,’ over one hundred times by 1923; ‘Gold Medal,’ sixty-five times; ‘3-in-1’ and ‘2-in-1,’ seventy-nine times; ‘Noxall,’ fifty times; ‘Universal,’ over thirty times; ‘Lily White’ over twenty times; — all these marks and names have, at this late date, very little distinctiveness in the public mind, and in most cases suggest merit, prominence or other qualities of goods or services in general, rather than the fact that the product or service, in connection with which the mark or name is used, emanates from a particular source. On the other hand, ‘Rolls-Royce,’ ‘Aunt Jemima’s,’ ‘Kodak,’ ‘Mazda,’ ‘Corona,’ ‘Nujol,’ and ‘Blue Goose,’ are coined, arbitrary or fanciful words or phrases that have been added to rather than withdrawn from the human vocabulary by their owners, and have, from the very beginning, been associated in the public mind with a particular product, not with a variety of products, and have created in the public consciousness an impression or symbol of the excellence of the particular product in question.” Id., at 828-829.


source: Caselaw Access Project

author: Justice Stevens Justice Thomas,

license: Public Domain

text:
    BOEING CO. et al. v. UNITED STATES
    No. 01-1209.
    Argued December 9, 2002
    Decided March 4, 2003

      Stevens, J., delivered the opinion of the Court, in which Rehnquist, C. J., and O’Connor, Kennedy, Souter, Ginsburg, and Breyer, JJ., joined. Thomas, J., filed a dissenting opinion, in which Scalia, J., joined, post, p. 457.

      Kenneth S. Geller argued the cause for petitioners in No. 01-1209 and respondents in No. 01-1382. With him on the briefs were Charles Rothfeld, David M. Gossett, Alan I. Horowitz, Joel V. Williamson, Wayne S. Kaplan, Roger J. Jones, Patricia Anne Yurchak, Marjorie M. Margolies, and John B. Magee.

      Kent L. Jones argued the cause for the United States in both cases. With him on the brief were Solicitor General Olson, Assistant Attorney General O’Connor, Deputy Solicitor General Wallace, David English Carmack, and Frank P. Cihlar.

      Together with No. 01-1382, United States v. Boeing Sales Corp. et al., also on certiorari to the same court.

      Briefs of amici curiae urging reversal were filed for Caterpillar, Inc., et al. by C. David Swenson; for the National Foreign Trade Council, Inc., by Stephen D. Gardner; and for the Tax Executives Institute, Inc., by Fred, F. Murray and Mary L. Fahey.

   Justice Stevens

delivered the opinion of the Court.

This suit concerns tax provisions enacted by Congress in 1971 to provide incentives for domestic manufacturers to increase their exports and in 1984 to limit and modify those incentives. The specific question presented involves the interpretation of a Treasury Regulation (26 CFR § 1.861—8(e)(3) (1979)) promulgated in 1977 that governs the accounting for research and development (R&D) expenses under both statutory schemes. We shall explain the general outlines of the two statutes before we focus on that regulation.

The 1971 statute provided special tax treatment for export sales made by an American manufacturer through a subsidiary that qualified as a “domestic international sales corporation” (DISC). The DISC itself is not a taxpayer; a portion of its income is deemed to have been distributed to its shareholders, and the shareholders must pay taxes on that portion, but no tax is payable on the DISC’S retained income until it is actually distributed. See 26 U. S. C. §§ 991-997. Typically, “a DISC is a wholly owned subsidiary of a U. S. corporation.” 1 Senate Finance Committee, Deficit Reduction Act of 1984, 98th Cong., p. 630, n. 1 (Comm. Print 1984) (hereinafter Committee Print). The statute thus provides an incentive to maximize the DISC’S share — and to minimize the parent’s share — of the parties’ aggregate income from export sales.

The DISC statute does not, however, allow the parent simply to assign all of the profits on its export sales to the DISC. Rather, “to avoid granting undue tax advantages,” the statute provides three alternative ways in which the parties may divert a limited portion of taxable income from the parent to the DISC. See 26 U. S. C. §§994(a)(1)-(3). Each of the alternatives assumes that the parent has sold the product to the DISC at a hypothetical “transfer price” that produced a profit for both seller and buyer when the product was resold to the foreign customer. The alternative used by Boeing in this suit limited the DISC’S taxable income to a little over half of the parties’ “combined taxable income” (CTI).

Soon after its enactment, the DISC statute became “the subject of an ongoing dispute between the United States and certain other signatories of the General Agreement on Tariffs and Trade (GATT)” regarding whether the DISC provisions were impermissible subsidies that violated our treaty obligations. Committee Print 634. “To remove the DISC as a contentious issue and to avoid further disputes over retaliation, the United States made a commitment to the GATT Council on October 1, 1982, to propose legislation that would address the concerns of other GATT members.” Id., at 634-635. This ultimately resulted in the replacement of the DISC provisions in 1984 with the “foreign sales corporation” (FSC) provisions of the Code. See Deficit Reduction Act of 1984, Pub. L. 98-369, §§801-805, 98 Stat. 985.

Unlike a DISC, an FSC is a foreign corporation, and a portion of its income is taxable by the United States. See ibid.; see also B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders ¶ 17.14 (5th ed. 1987). Whereas a portion of a DISC’S income was tax deferred, a portion of an FSC’s income is exempted from taxation. Compare 26 U. S. C. §§991-997 with 26 U. S. C. §§921, 923 (1988 ed.). Hence, under the FSC regime, as under the DISC regime, it is in the parent’s interest to maximize the FSC’s share of the taxable income generated by export sales. Because the differences between the DISC and FSC regimes for the most part are immaterial to this suit, the analysis in this opinion will focus mainly on the DISC provisions.

The Internal Revenue Code gives the taxpayer an election either to capitalize and amortize the costs of R&D over a period of years or to deduct such expenses currently. See 26 U. S. C. § 174. The regulation at issue here, 26 CFR § 1.861-8(e)(3) (1979), deals with R&D expenditures for which the taxpayer has taken a current deduction. It tells the taxpaying parent and its DISC “what” must be treated as a cost when calculating CTI, and “how” those costs should be (a) allocated among different products and (b) apportioned between the DISC and its parent.

With respect to the “what” question, the Treasury might have adopted a broad approach defining the relevant R&D as including all of the parent’s products, or a narrow approach defining the relevant R&D as all R&D directly related to a particular product being exported. Instead, the regulation includes a list of two-digit Standard Industrial Classification (SIC) categories (examples are “chemicals and allied products” and “transportation equipment”), and it requires that R&D for any product within the same category as the exported product be taken into account. See ibid. The regulation explains that R&D on any product “is an inherently speculative activity” that sometimes contributes unexpected benefits on other products, and “that the gross income derived from successful research and development must bear the cost of unsuccessful research and development.” Ibid.

With respect to the two “how” questions, the regulations use gross receipts from sales as the basis both for allocating the costs among the products within the broad R&D categories and also for apportioning those costs between the parent and the DISC. Thus, if the exported product constitutes 20 percent of the parties’ total sales of all products within an R&D category, 20 percent of the R&D cost is allocated to that product. And if export sales represent 70 percent of the total sales of that product, 70 percent of that amount, or 14 percent of the R&D, is apportioned to the DISC.

I

Petitioners (and cross-respondents) are The Boeing Company and subsidiaries that include a DISC and an FSC. For over 40 years Boeing has been a world leader in commercial aircraft development and a major exporter of commercial aircraft. During the period at issue in this litigation, the dollar volume of its sales amounted to about $64 billion, 67 percent of which were DISC-eligible export sales. The amount that Boeing spent on R&D during that period amounted to approximately $4.6 billion.

During the tax years at issue here, Boeing organized its internal operations along product lines (e. g., aircraft models 727, 737, 747, 767, 767) for management and accounting purposes, each of which constituted a separate “program” within the Boeing organization. For those purposes, it divided its R&D expenses into two broad categories: “Blue Sky” and “Company Sponsored Product Development.” The former includes the cost of broad-based research aimed at generally advancing the state of aviation technology and developing alternative designs of new commercial planes. The latter includes product-specific research pertaining to a specific program after the board of directors has given its approval for the production of a new model. With respect to its $1 billion of “Blue Sky” R&D, Boeing’s accounting was essentially consistent with 26 CFR § 1.861-8(e)(3) (1979). Its method of accounting for $3.6 billion of “Company Sponsored” R&D gave rise to this litigation.

Boeing’s accountants treated all of the Company Sponsored research costs as directly related to a single program, and as totally unrelated to any other program. Thus, for DISC purposes, the cost of Company Sponsored R&D directly related to the 767 model, for example, had no effect on the calculation of the “combined taxable income” produced by export sales of any other models. Moreover, because immense Company Sponsored research costs were routinely incurred while a particular model was being completed and before any sales of that model occurred, those costs effectively “disappeared” in the calculation of the CTI even for the model to which the R&D was most directly related. Almost half of the $3.6 billion of Company Sponsored R&D at issue in this suit was allocated to programs that had no sales in the year in which the research was conducted. That amount (approximately $1.75 billion) was deducted by Boeing currently in the calculation of its taxable income for the years at issue, but never affected the calculation of the CTI derived by Boeing and its DISC from export sales.

Pursuant to an audit, the Internal Revenue Service reallocated Boeing’s Company Sponsored R&D costs for the years 1979 to 1987, thereby decreasing the untaxed profits of its export subsidiaries and increasing the parent’s taxable profits from export sales. Boeing paid the additional tax obligation of $419 million and filed this suit seeking a refund. Relying on the decision of the Eighth Circuit in St. Jude Medical, Inc. v. Commissioner, 34 F. 3d 1394 (1994), the District Court entered summary judgment in favor of Boeing. It held that 26 CFR § 1.861-8(e)(3) (1979) is invalid as applied to DISC and FSC transactions because the regulation’s categorical treatment of R&D conflicted with congressional intent that there be a “direct” relationship between items of gross income and expenses “related thereto,” and with a specific DISC regulation giving the taxpayer the right to group and allocate income and costs by product or product line. The Court of Appeals for the Ninth Circuit reversed, 258 F. 3d 958 (2001), and we granted certiorari to resolve the conflict between the Circuits, 535 U. S. 1094 (2002). We now affirm.

II

Section 861 of the Internal Revenue Code distinguishes between United States and foreign source income for several different purposes. See 26 U. S. C. § 861. The regulation at issue in this suit, 26 CFR § 1.861-8(e)(3) (1979), was promulgated pursuant to that general statute. Separate regulations promulgated under the DISC statute, 26 U. S. C. §§ 991-997, incorporate 26 CFR § 1.861-8(e)(3) (1979) by specific reference. See § 1.994-1(c)(6)(iii) (citing and incorporating the cost allocation rules of § 1.861-8). Boeing does not claim that its method of accounting for Company Sponsored R&D complied with § 1.861-8(e)(3). Rather, it argues that § 1.861-8(e)(3) is so plainly inconsistent with congressional intent and with other provisions of the DISC regulations that it cannot be validly applied to its computation of CTI for DISC purposes.

Boeing argues, in essence, that the statute and certain specific regulations promulgated pursuant to 26 U. S. C. § 994 give it an unqualified right to allocate its Company Sponsored R&D expenses to the specific products to which they are “factually related” and to exclude any allocated R&D from being treated as a cost of any other product. The relevant statutory text does not support its argument.

As we have already mentioned, the DISC statute gives the taxpayer a choice of three methods of determining the transfer price for an exported good. Boeing elected to use only the second method described in the following text:

“Inter-company pricing rules
“(a) In general
“In the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of—
“(1) 4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts,
“(2) 50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, or
“(3) taxable income based upon the sale price actually charged (but subject to the rules provided in section 482).
“(b) Rules for commissions, rentals, and marginal costing
“The Secretary shall prescribe regulations setting forth
“(2) rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a DISC is seeking to establish or maintain a market for export property.” 26 U. S. C. §§994(a)(1)(3), (b)(2) (emphasis added).

The statute does not define the term “combined taxable income,” nor does it specifically mention expenditures for R&D. Congress did grant the Secretary express authority to prescribe regulations for determining the proper allocation of expenditures in computing CTI in certain specific contexts. See, e.g., §§ 994(b)(1)-(2). Yet in promulgating 26 CFR §1.861-8 (1979), the Secretary of the Treasury exercised his rulemaking authority under 26 U. S. C. § 7806(a), which gives the Secretary general authority to “prescribe all needful rules and regulations for the enforcement” of the Internal Revenue Code. See 41 Fed. Reg. 49160 (1976) (“The proposed regulations are to be issued under the authority contained in section 7805 of the Internal Revenue Code”). Even if we regard the challenged regulation as interpretive because it was promulgated under § 7805(a)’s general rulemaking grant rather than pursuant to a specific grant of authority, we must still treat the regulation with deference. See Cottage Savings Assn. v. Commissioner, 499 U. S. 564, 560-561 (1991).

The words that we have emphasized in the statutory text do place some limits on the Secretary’s interpretive authority. First, the “does not exceed” phrase places an upper limit on the share of the export profits that can be assigned to a DISC and also gives the taxpayer an unfettered right to select any of the three methods of setting a “transfer price.” Second, the use of the term “combined taxable income” in subsection (a)(2) makes it clear that the taxable income of the domestic parent is a part of the equation that should produce the CTI. As Boeing recognizes, even a charitable contribution to the Seattle Symphony that reduces its domestic earnings from sales of 767’s must be treated as a cost that is not definitely related to any particular category of income and thus must be apportioned among all categories of income, including income from export sales. See Brief for Petitioners in No. 01-1209, p. 8, n. 7. Third, the word “attributable” places a limit on the portion of the domestic parent’s taxable income that can be treated as a part of the CTI. It is this word that provides the statutory basis for Boeing’s position.

Under Boeing’s reading of the statute, a calculation of the domestic income “attributable” to the export sale of a 767 may include both the direct and indirect costs of manufacturing and selling 767’s, but it may not include the direct costs of selling anything else. Moreover, if Boeing’s accountants classify a particular cost as directly related to the 767, that classification is conclusive. Thus, while the Secretary asserts that Boeing’s R&D expenses are definitely related to all income in the relevant SIC category, Boeing claims the right to divide its R&D in a way that effectively creates three segments: (1) Blue Sky; (2) Company Sponsored R&D on products that have no sales in the current year; and (3) Company Sponsored R&D on products that are being sold currently. Boeing, like the Secretary, essentially treats Blue Sky R&D as án indirect cost in computing both its domestic taxable income and its CTI. With respect to the second segment, Boeing uses the R&D to reduce its domestic taxable earnings on every product it sells, but eliminates it entirely from the calculation of CTI on any product by charging the R&D costs to programs without any sales. The third segment is used for both domestic and CTI purposes, but with respect to CTI only for the export sales to which it is “factually related.”

The Secretary’s classification of all R&D as an indirect cost of all export sales of products in a broadly defined SIC category — in other words, as “attributable” to such sales — is surely not arbitrary. It has the virtue of providing consistent treatment for cost items used in computing the taxpayer’s domestic taxable income and its CTI. Moreover, its allocation of R&D expenditures to all products in a category even when specifically intended to improve only one or a few of those products is no more tenuous than the allocation of a chief executive officer’s salary to every product that a company sells even when he devotes virtually all of his time to the development of an Edsel.

On the other hand, even if Boeing’s method of accounting for R&D is fully justified for management purposes, it certainly produces anomalies for tax purposes. Most obvious is the fact that it enabled Boeing to deduct some $1.75 billion of expenditures from its domestic taxable earnings under 26 U. S. C. § 174 and never deduct a penny of those expenditures from its “combined taxable earnings” under the DISC statute. See Brief for Petitioners in No. 01-1209, at 11. Less obvious, but nevertheless significant, is that Boeing’s method assumed that Blue Sky research produces benefits for airplane models that are producing current income and — at the same time — assumed that Company Sponsored research related to a specific product, such as the 727, is not likely to produce benefits for other airplane models, such as the 737 or 767.

In all events, the mere use of the word “attributable” in the text of § 994 surely does not qualify the Secretary’s authority to decide whether a particular tax deductible expenditure made by the parent of a DISC is sufficiently related to its export sales to qualify as an indirect cost in the computation of the parties’ CTI. Boeing argues, however, that the text of § 994 should be read in light of § 861, the more general provision dealing with the distinction between domestic and foreign source income.

Title 26 U. S. C. § 861(b) contains the following two sentences:

“Taxable income from sources within United States
“From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States.” (Emphasis added.)

Focusing on the emphasized words, Boeing interprets this section as having created a background rule dividing all expenses into two categories: those that can be allocated to specific income and those that cannot. “Ratable” allocation is permissible for the second category, but not for the first, according to Boeing. Moreover, in Boeing’s view, any expense in the first category cannot be ratably apportioned across all classes of income.

There are at least two flaws in this argument. First, although the emphasized words authorize ratable apportionment of costs that cannot definitely be allocated to some item or class of income, the sentence as a whole does not prohibit ratable apportionment of expenses that could be, but perhaps in fairness should not be, treated as direct costs. Second, the Secretary has the authority to prescribe regulations determining whether an expense can be properly apportioned to an item of gross income in the calculation of CTI. See 26 U. S. C. § 7805(a). Thus, as in this suit, if the Secretary reasonably determines that Company Sponsored R&D can be properly apportioned on a categorical basis, the italicized portion of § 861 is simply inapplicable.

In sum, Boeing’s arguments based on statutory text are plainly insufficient to overcome the deference to which the Secretary’s interpretation is entitled.

III

Boeing also advances two arguments based on the text of specific DISC regulations. The first resembles its argument based on the text of §861, and the second relies on regulations providing that certain accounting decisions made by the taxpayer shall be controlling.

The regulations included in 26 CFR §1.994-1 (1979) set forth intercompany pricing rules for DISCs. They generally describe the three methods of determining a transfer price, noting that the taxpayer may choose the most favorable method, and may group transactions to use one method for some export sales and another method for others. See ibid. With respect to the CTI method used by Boeing, there is a rule, § 1.994 — 1(c)(6), that describes the computation of CTI. The rule broadly defines the CTI of a DISC and its related supplier from a sale of export property as the excess of gross receipts over their total costs “which relate to such gross receipts.” Subdivision (iii) of that rule, on which Boeing relies, provides:

“Costs (other than cost of goods sold) which shall be treated as relating to gross receipts from sales of export property are (a) the expenses, losses, and other deductions definitely related, and therefore allocated and apportioned, thereto, and (b) a ratable part of any other expenses, losses, or other deductions which are not definitely related to a class of gross income, determined in a manner consistent with the rules set forth in § 1.861-8.” § 1.994-1(c)(6)(iii) (emphasis added).

Boeing interprets the emphasized words as prohibiting a ratable allocation of R&D expenditures that can be “definitely related” to particular export sales. The obvious response to this argument is provided by the final words in the paragraph. Whether such an expense can be “definitely related” is determined by the rules set forth in the very regulation that Boeing challenges, §1.861-8. Moreover, it seems quite clear that the Secretary could reasonably determine that expenditures on 767 research conducted in years before any 767’s were sold were not “definitely related” to any sales, but should be treated as an indirect cost of producing the gross income derived from the sale of all planes in the transportation equipment category.

Boeing also argues that the regulations expressly allow it to allocate and apportion R&D expenses to groups of export sales that are based on industry usage rather than SIC categories. The regulations providing the strongest support for this argument are §§ 1.994—1(c)(7)(i) and (ii)(a), which control the grouping of transactions for the purpose of determining the transfer price of sales of export property, and §1.994-1(c)(6)(iv), which governs the grouping of receipts when the CTI method of transfer pricing is used. Treasury Regulation § 1.994-1(c)(7) reads, in part, as follows:

“Grouping transactions, (i) Generally, the determinations under this section are to be made on a transaction-by-transaction basis. However, at the annual choice of the taxpayer some or all of these determinations may be made on the basis of groups consisting of products or product lines.
“(ii) A determination by a taxpayer as to a product or a product line will be accepted by a district director if such determination conforms to any one of the following standards: (a) A recognized industry or trade usage, or (b) the 2-digit major groups ... of the Standard Industrial Classification .. . .”

As we understand the statutory and regulatory scheme, it gives controlling effect to three important choices by the taxpayer. First, the taxpayer may elect to deduct R&D expenses on an annual basis instead of capitalizing and amortizing those costs. See 26 U. S. C. § 174(a)(1). Second, when engaging in export transactions with a DISC, the taxpayer may choose any one of the three methods of determining the transfer price. See § 994(a). Third, the taxpayer may decide how best to group those transactions for purposes of applying the transfer pricing methods. See 26 CFR § 1.994-1(c)(7) (1979). Conceivably, the taxpayer could account for each sale separately, by product lines, or by grouping all of its export sales together. These regulations confirm the finality of the third type of choice (i. e., which groups of sales will be evaluated under one of the three alternative transfer pricing methods), but do not speak to the questions answered by the regulation at issue in this suit — namely, whether or how a particular research cost should be allocated and apportioned.

Nor does § 1.994-1(c)(6)(iv) support Boeing’s argument. It provides that a “taxpayer’s choice in accordance with subparagraph (7) of this paragraph as to the grouping of transactions shall be controlling, and costs deductible in a taxable year shall be allocated and apportioned to the items or classes of gross income of such taxable year resulting from such grouping.” The regulation makes clear that if the taxpayer selects the CTI method of transfer pricing (as Boeing did), then the taxpayer may choose to group export receipts according to product lines, two-digit SIC codes, or on a transaction-by-transaction basis. Ibid. The regulation also establishes that there shall be an allocation and apportionment of all relevant costs deducted in the taxable year. Ibid. Notably, however, the regulation simply does not speak to how costs should be allocated among different items or classes of gross income and apportioned between the DISC and its parent once the taxpayer (pursuant to § 1.994-1(c)(6)) groups its gross receipts. Treasury Regulation § 1.861-8(e)(3) fills this gap by providing that R&D expenditures that are related to all income reasonably connected with the taxpayer’s relevant two-digit SIC category or categories are “allocable to all items of gross income as a class . . . related to such product category (or categories).” 26 CFR § 1.861-8(e)(3) (1979) (emphasis added).

IV

Boeing also relies heavily on legislative history, particularly on statements in Reports prepared by the tax-writing committees of the House and the Senate on the DISC statute. Those Reports are virtually identical in terms of their discussion of the DISC provisions. See H. R. Rep., at 58-95; S. Rep., at 90-129. Neither says anything about R&D costs. They both contain statements supporting the proposition that in determining how to calculate income that qualifies for a tax benefit, the expenses to be deducted from gross income are those expenses that are “directly related” to the income. See H. R. Rep., at 74; S. Rep., at 107. Those statements are not, however, inconsistent with the proposition that particular R&D expenses may be factually related to more than one item of income, or with the proposition that the Secretary has broad authority to promulgate regulations determining which expenses are directly or indirectly related to particular items of income.

If anything, what little relevant legislative history there is in this suit weighs in favor of the Government’s position in two important respects. First, whereas the DISC transfer price could be set at a level that attributed over half of the CTI to the DISC, when Congress enacted the FSC provisions in 1984, it lowered the maximum allowable share of CTI attributable to an FSC to 23 percent. Compare 26 U.S.C. §994(a)(2) with 26 U.S.C. §926(a)(2) (1988 ed.). This dramatizes the point that even though the purpose of the DISC and FSC statutes was to provide American firms with a tax incentive to increase their exports, Congress did not intend to grant “undue tax advantages” to firms. S. Rep., at 13. Rather, the statutory formulas were designed to place ceilings on the amount of those special tax benefits. See Committee Print 636 (“[T]he income of the foreign sales corporation must be determined according to transfer prices specified in the bill: either actual prices for sales between unrelated, independent parties or, if the sales are between related parties, formula prices which are intended to comply with GATT’s requirement of arm’s-length prices”).

Second, the 1977 R&D regulation at issue in this suit had been in effect for seven years when Congress enacted the FSC provisions. Yet Congress did not legislatively override 26 CFR § 1.861-8(e)(3) (1979) in enacting the FSC provisions. In fact, although a moratorium was placed on the application of § 1.861-8(e)(3) for purposes of the sourcing of income in 1981, a 1984 conference agreement specified that the moratorium would “not apply for other purposes, such as the computation of combined taxable income of a DISC (or FSC) and its related supplier.” H. R. Conf. Rep. No. 98-861, p. 1263 (1984). The fact that Congress did not legislatively override 26 CFR § 1.861-8(e)(3) (1979) in enacting the FSC provisions in 1984 serves as persuasive evidence that Congress regarded that regulation as a correct implementation of its intent. See Lorillard v. Pons, 434 U. S. 575, 580-581 (1978).

The judgment of the Court of Appeals is affirmed.

It is so ordered.

Justice Thomas,

with whom Justice Scalia joins, dissenting.

Before placing its hand in the taxpayer’s pocket, the Government must place its finger on the law authorizing its action. United Dominion Industries, Inc. v. United States, 532 U. S. 822, 839 (2001) (Thomas, J., concurring) (citing Leavell v. Blades, 237 Mo. 695, 700-701, 141 S. W. 893, 894 (1911)). Despite the Government’s failure to do so here, the Court holds in its favor; I respectfully dissent.

To read the majority opinion, one would think that the Court has before it a perfectly clear statutory and regulatory scheme and that the position of petitioners/cross-respondents (hereinafter Boeing) is utterly without support. Nothing could be further from the facts of this suit. Indeed, the Internal Revenue Service (IRS) itself initially read the statutory and regulatory provisions at issue here to permit precisely what Boeing asserts it is allowed to do.

When regulations governing DISCs were first proposed in 1972, the IRS received public comments recommending that the regulations be amplified to include rules and examples on how expenses should be treated for purposes of determining the combined taxable income of the DISC and a related supplier. The IRS, however, declined to incorporate the recommendations in the final regulations, explaining that proposed regulation § 1.861-8, which had been published in 1973, provided ample guidance on the subject. Technical Memorandum accompanying T. D. 7364, 1974 T. M. Lexis 30, pp. *20-*21 (Oct. 29, 1974).

Proposed regulation § 1.861-8(e)(3), in turn, explained that where “research and development... is intended or is reasonably expected to result in the improvement of specific properties or processes, deductions in connection with such research and development shall be considered definitely related and therefore allocable to the class of gross income to which the properties or processes give rise or are reasonably expected to give rise.” 38 Fed. Reg. 15843 (1973). The regulations went on to note that in “other cases, as in the case of most basic research, research and development shall generally be considered definitely related and therefore allocable to all gross income of the current taxable year which is likely to benefit from the research and development.” Ibid. Example 1 in § 1.861-8(g) illustrated this principle by considering the research and development (R&D) expenditures of a corporation manufacturing four-, six-, and eight-cylinder gasoline engines. The corporation conducted both general and engine-specific research. The example made clear that, while general R&D expenses were “definitely related” to gross income resulting from sales of all three .types of engines, R&D expenses in connection with a specific type of engine were to be allocated only to gross income arising from sales of that type of engine. Id., at 15846 (“X’s deductions for its research and development expenses in connection with the 4 cylinder engine are definitely related to the gross income to which the 4 cylinder engine gives rise, i. e., gross income from the sales of 4 cylinder engines ..

Indeed, the IRS’ 1974 position on the proper allocation of R&D expenses incurred in connection with separate lines of products is the only one that makes sense under the relevant DISC regulations. See, e.g., 26 CFR §§ 1.994-1(c)(6), (7) (1979). As the Court explains, ante, at 440, 26 U. S. C. § 994 was designed to provide special tax treatment for American companies engaged in export activities. To that end, §994 permits a DISC and its related supplier to compute their relevant transfer price (and, relatedly, their income tax liability) based on one of three methods. See §994 (providing that the transfer price for sales between a DISC and a related supplier can be computed based on (1) the gross income method, (2) the combined taxable income method, and (3) the usual transfer-pricing rules set forth in §482).

The Treasury Department has promulgated regulations explaining how the statutory framework must be applied. Section 1.994-1(c)(7) of those regulations explains that, as a general rule, a determination of the transfer price under §994 is to be made on a transaction-by-transaction basis. Section 1.994-1(c)(7), however, provides that, instead of following the transaction-by-transaction rule, taxpayers may make §994 transfer price determinations based on groups consisting of products or product lines. § 1.994-1(c)(7)(i). Specifically, the regulation states:

“A determination by a taxpayer as to a product or a product line will be accepted by a district director if such determination conforms to any one of the following standards: (a) A recognized industry or trade usage, or (b) the 2-digit major groups (or any inferior classifications or combinations thereof, within a major group) of the Standard Industrial Classification [SIC] as prepared by the [Office of Management and Budget].” § 1.994-1(e)(7)(ii).

Section 1.994-1(c)(6)(iv), in turn, provides that, in connection with the computation of combined taxable income, “[t]he taxpayer’s choice in accordance with [§ 1.994-1(c)(7)] as to the grouping of transactions shall be controlling, and costs deductible in a taxable year shall be allocated and apportioned to the items or classes of gross income of such taxable year resulting from such grouping” (Emphasis added.) Thus, in tandem, §§ 1.994-1(c)(6)(iv) and 1.994-1(c)(7) give a taxpayer the choice of allocating and apportioning costs to items or classes of gross income resulting from (1) case-by-case transactions, (2) products or product lines grouped together based on industry or trade usage, and (3) products or product lines grouped together based on 2-digit SIC codes or lesser included subgroups.

Although under § 1.991-1(c)(7) taxpayers are given three choices with respect to the proper grouping of export income (and the related allocation of expenses), and although § 1.994-1(c)(6)(iv) provides that the taxpayer’s selection under § 1.991-1(c)(7) shall be “controlling,” § 1.861-8(e)(3) takes away the very choices §1.991-1 provides. Under § 1.861-8(e)(3), the taxpayer is told that R&D expenses may be allocated solely to items or classes of gross income resulting from products that are within the same 2-digit SIC group — which happens to be only one of the three options given under § 1.991-1(c)(7). In my view, the rule set forth in § 1.861-8(e)(3) entirely eviscerates the options given in § 1.991-1. Thus, despite the Court’s efforts to show that the two regulations complement, rather than contradict, each other, ante, at 453-455, the conflict is irreconcilable. On these facts, a taxpayer should be permitted to compute its tax liability under §1.991-1, rather than under §1.861-8(e)(3), based on the principle that a specific rule governs a general one. See Morales v. Trans World Airlines, Inc., 504 U. S. 374, 384 (1992); Crawford Fitting Co. v. J. T. Gibbons, Inc., 482 U. S. 437, 445 (1987); see also St. Jude Medical, Inc. v. Commissioner, 34 F. 3d 1394 (CA8 1994).

The Court disapproves of Boeing’s method of allocating R&D because, as the Court sees it, Boeing’s approach results in the “disappear[anee]” of relevant costs, ante, at 445, in “the sense that [R&D costs] were not accounted for by Boeing in computing its [combined taxable income],” ante, at 445, n. 10. The Court is troubled by the fact that this computation method has enabled Boeing “to deduct some $1.75 billion of expenditures from its domestic taxable earnings under 26 U. S. C. § 174 and never deduct a penny of those expenditures from its ‘combined taxable earnings’ under the DISC statute.” Ante, at 450. But the “disappearance” of Boeing’s R&D expenses is the direct result of Congress’ decision to encourage such expenditures by making them immediately deductible under 26 U. S. C. § 174(a)(1). Moreover, the approach adopted in the regulations, and approved by the Court, does not remedy the alleged problem of disappearing R&D expenses. A company that decides to enter the export market with a product unrelated to its existing business remains free to deduct in the current tax period all R&D expenses incurred in connection with the new product, even though those expenses would not be used to offset DISC income resulting from the sale of existing products. Finally, neither the Court nor the Government provides a satisfactory explanation for why §861 can be read to permit the “disappearance” of most expenses, see, e. g., 26 CFR § 1.861-8(d)(1) (1979) (“Each deduction which bears a definite relationship to a class of gross income shall be allocated to that class ... even though, for the taxable year, no gross income in such class is received or accrued .... In apportioning deductions, it may be that, for the taxable year, there is no gross income in the statutory grouping (or residual grouping), or that deductions exceed the amount of gross income in the statutory grouping (or residual grouping)”); see also 1 J. Isenbergh, International Taxation: U. S. Taxation of Foreign Persons and Foreign Income ¶ 21.10 (3d ed. 2003) (“[I]f an expense incurred in one year is properly allocable to income arising in another, the expense will be allocated to the class to which the income belongs and may therefore produce a loss in that class for the year”), but to disallow the “disappearance” of R&D expenses.

Because I believe that § 1.861-8(e)(3) does not apply to a DISC, I need not decide here whether § 1.861-8(e)(3) is consistent with the text of § 861(b) and may be properly applied in other contexts. I am puzzled, however, by the Court’s assertion that the Secretary is free to determine that certain expenses “can be properly apportioned on a categorical basis,” ante, at 451, and the implication that the Secretary has authority to require “ratable apportionment of expenses that could be, but perhaps in fairness should not be, treated as direct costs.” Ibid. By its terms, § 861(b) appears to contemplate two types of expenses: (1) those that can definitely be allocated to some item or class of gross income and (2) those that cannot 26 U. S. C. § 861(b) (providing for the deduction of “the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income” (emphasis added)). Moreover, on its face, the statute does not appear to permit expenses to be “deemed” related to an item or class of gross income, even though in actual fact they are not so related. Yet, § 1.861-8(e)(3) relies on the notion of “deemed relationships.” The regulation states that the methods of allocation and apportionment established there “recognize that research and development is an inherently speculative activity, that findings may contribute unexpected benefits, and that the gross income derived from successful research and development must bear the cost of unsuccessful research and development.” 26 CFR § 1.861-8(e)(3)(i)(A) (1979). The regulation then proceeds to require the allocation of R&D expenses based on 2-digit SIC groups. But neither the regulation nor the Court attempt to reconcile the statutory text with the regulation’s determination to allocate certain R&D expenses to items or classes of gross income that admittedly did not benefit from that research.

* * *

In short, I conclude that Boeing properly computed its tax liability for the years at issue here. I would therefore reverse the judgment of the Court of Appeals. Because the Court concludes otherwise, I respectfully dissent.

       In 1996, the provisions of 26 CFR § 1.861-8 were amended, renumbered, and republished as 26 CFR §1.861-17. See 26 CFR §1.861-17 (2002); see also 60 Fed. Reg. 66503 (1995).

       To qualify as a DISC, at least 95 percent of a corporation’s gross receipts must arise from qualified export receipts. See 26 U. S. C. § 992(a)(1)(A). In addition, at least 95 percent of the corporation’s assets must be export related. See § 992(a)(1)(B).

       S. Rep. No. 92-437, p. 13 (1971) (hereinafter S. Rep.).

       To be more precise, it allowed the DISC “to derive taxable income attributable to [an export sale] in an amount which does not exceed ... 50 percent of the combined taxable income of [the DISC and the parent] plus 10 percent of the export promotion expenses of such DISC attributable to such receipts ....” 26 U. S. C. §994(a)(2).
      A hypothetical example in both the House and Senate Committee Reports illustrated the computation of a transfer price of $816 based on a DISC’S selling price of $1,000 and the parent’s cost of goods sold of $650. The gross margin of $350 was reduced by $180 (including the DISC’S promotion expenses of $90, the parent’s directly related selling and administrative expenses of $60, and the parent’s prorated indirect expenses of $30), to produce a CTI of $170. Half of that amount ($85) plus 10 percent of the DISC’s promotion expenses ($9) gave the DISC its allowable taxable income of $94, leaving only $76 of income immediately taxable to the parent. The $184 aggregate of the two amounts attributed to the DISC (promotion expenses of $90 plus its $94 share of CTI) subtracted from the $1,000 gross receipt produced the “transfer price” of $816. See S. Rep., at 108, n. 7; H. R. Rep. No. 92-533, p. 74, n. 7 (1971) (hereinafter H. R. Rep.).

       In 2000, Congress repealed and replaced the FSC provisions with the “extraterritorial income” exclusion of 26 U. S. C. § 114.

       Two aspects of the 1984 statute that do have special significance to this suit are discussed in Part IV, infra.

       Treasury Regulation § 1.861-8 (1979) also specifies how other specific items of expense should be treated. See, e. g., 26 CFR § 1.861-8(e)(2) (1979) (interest fees); § 1.861-8(e)(5) (legal and accounting fees); § 1.861-8(e)(6) (income taxes).

       The original regulation used two-digit SIC categories. See §1.861-8(e)(3). The current regulation uses narrower three-digit SIC categories, see 26 CFR § 1.861-17(a)(2)(ii) (2002), but the change is not relevant to this suit.

       Because all of Boeing’s commercial aircraft were “transportation equipment” within the meaning of the Treasury Regulation, it properly allocated all of its Blue Sky research among all of its programs, and then apportioned those costs between the parent and the DISC. However, according to the Government, it erroneously did so on the basis of hours of direct labor rather than sales. See Brief for United States 10.

       When Boeing charged R&D costs to programs that had no sales in the year the research was conducted, the R&D costs effectively “disappeared” in the sense that they were not accounted for by Boeing in computing its CTI.

       This assumption, of course, runs contrary to the Secretary’s determination that R&D “is an inherently speculative activity” that sometimes contributes unexpected benefits on other products. 26 CFR § 1.861-8(e)(3)(i)(A) (1979).

       Treasury Regulation § 1.994 — 1(c)(6), 26 CFR § 1.994-1(c)(6) (1979), provides in part:

        “Combined taxable income. For purposes of this section, the combined taxable income of a DISC and its related supplier from a sale of export property is the excess of the gross receipts (as defined in section 993(f)) of the DISC from such sale over the total costs of the DISC and related supplier which relate to such gross receipts. Gross receipts from a sale do not include interest with respect to the sale. Combined taxable income under this paragraph shall be determined after taking into account under paragraph (e)(2) of this section all adjustments required by section 482 with respect to transactions to which such section is applicable. In determining the gross receipts of the DISC and the total costs of the DISC and related supplier which relate to such gross receipts, the following rules shall be applied:
      “(i) Subject to subdivisions (ii) through (v) of this subparagraph, the taxpayer’s method of accounting used in computing taxable income will be accepted for purposes of determining amounts and the taxable year for which items of income and expense (including depreciation) are taken into account. See § 1.991-1(b)(2) with respect to the method of accounting which may be used by a DISC.”

       In support of its argument that §§ 1.994-1(c) and 1.861-8(e)(3) conflict, Boeing also points to various proposed regulations, including example 1 of proposed regulation §1.861-8(g). See Brief for Petitioners in No. 01-1209, pp. 22-26. Unlike Boeing and the dissent, see post, at 458-459 (opinion of Thomas, J.), we find these proposed regulations to be of little consequence given that they were nothing more than mere proposals. In 1972 — when regulations governing DISCs were first proposed — the Secretary made clear that the proposed regulations were suggestions only and that whatever final regulations were ultimately adopted would govern. See Technical Memorandum accompanying Notice of Proposed Rule-making, 1972 T. M. Lexis 14, pp. *8-*9 (June 29, 1972) (providing that in determining deductible expenses, “the rules of section 861(b) and § 1.861-8 are to be applied in whatever form they ultimately take in a new notice to be prepared”).

       In 1981, Congress imposed a temporary moratorium on the application of the cost allocation rules of 26 CFR § 1.861-8(e)(3) (1979) solely for the geographic sourcing of income. See Economic Recovery Tax Act of 1981, Pub. L. 97-34, §223, 95 Stat. 249. As a result, research expenditures made for research conducted in the United States were allocated against United States source gross income only — not between United States source income and foreign source income. See H. R. Conf. Rep. No. 98-861, p. 1262 (1984).

       Because, as the Court notes, ante, at 442, differences in the rules governing domestic international sales corporations (DISCs) and foreign sales corporations do not affect the outcome of this suit, I too focus only on the relevant DISC provisions.

       A taxpayer wishing to (1) group its sales based on an accepted industry practice, for example, based on different models, and (2) allocate its R&D expenses with respect to a specific model to the items or classes of gross income resulting from that model is not, on the Government’s view, permitted to do so. Rather, the taxpayer must first allocate R&D expenses incurred in connection with the relevant model to items or classes of gross income resulting from all models falling within the same 2-digit SIC group and only after doing so can the taxpayer deduct a portion of that model’s R&D expenses from the income earned by sales of that model.

       With respect to a DISC, § 1.991-1 provides the more specific rules because it applies only to DISCs, while §1.861-8(e)(3) sets forth more general rules because it applies to all taxpayers that have foreign source income.

       Boeing illustrates this point with the following example: Suppose a company that produces and exports athletic clothing (SIC Code 23) decides to invest the proceeds of its clothing sales in research to develop a line of athletic equipment (SIC Code 39). The company has current DISC sales of $1 million from the athletic clothing, no current sales of athletic equipment, and $500,000 in athletic equipment R&D expenses. Under the regulations, the $500,000 of equipment-related R&D will be allocated to the athletic equipment SIC Code, which has no income. It will not be allocated to the athletic clothing SIC Code to reduce the income eligible for the DISC benefit related to the clothing. Thus, in the words of the Court, the expense will simply “disappear.” Brief for Petitioners.in No. 01-1209, p. 37, n. 17.