What is a “government”? Usually we’d answer that it’s an organized group, based in a specific geographical area, with command-and-control powers over all therein. But how about a multinational group, encompassing geography ostensibly governed by existing governments that have been there for years?

That’s the €20 million question, leading off Vol. 143 T. C., in Guardian Industries Corp., 143 T. C. 1, filed 7/17/14, with Judge Lauber writing for a unanimous Court.

Guardian admits it was a “little black sheep that has gone astray”, as Rudy Kipling would have it, entering into a price-fixing deal as regards its sales of “…float glass, fabricated-glass products, fiberglass insulation, and other building materials to customers in Europe and elsewhere.” 143 T. C. 1, at p. 11.

The Commission of the European Community, the executive arm of the European Union, has first whack at suspected price-fixers by treaty and executive order (or equivalent), and local regimes are supposed to defer to the Lord High Executioner, a/k/a the Commission.

But is the Commission a “government”, as that term is defined in Section 162(f), which bars deducting the USD$30 million or so that Guardian claimed was the dollar value of the price-fixing claim they paid, namely, the aforesaid €20 million.

“Respondent agrees that the Commission is neither ‘[t]he government of a foreign country’ nor ‘[a] political subdivision’ thereof. Accordingly, the question for decision is whether the Commission is an ‘entity serving as an agency or instrumentality’ of ‘[t]he government of a foreign country’ within the meaning of this regulation. The parties have not brought to our attention, and we have not discovered, any prior authority that addresses this question directly.” 143 T. C. 1, at p. 14. (Footnotes omitted, but Judge Lauber tells IRS to butt out; he can figure the answer without looking at IRS’ view of its regulations).

Like the New York/New Jersey Port Authority, lately in the news as a lane-closer-fixer on the George Washington Bridge, and which is an instrumentality of two governments, the Commission is not out as an instrumentality merely because it serves more than one government. So Judge Lauber uses Second Circuit learning, because, even though Guardian is a Michigan corporation, Sixth Circuit apparently hasn’t dealt with this yet.

Guardian didn’t concede that the payment was a “fine or penalty”, but wasn’t going to fight it out in Tax Court.

Judge Lauber diligently parses the terms “agency” or “instrumentality” (Guardian claims it means “subordinate”, but Judge Lauber finds five varieties of ambiguity in those terms). And the Commission need not exercise every governmental function to be recognized as an agency or instrumentality; it is enough that it exercises an essential function, and enforcing anti-monopolies laws certainly fit the bill.

“When sovereign states enter into a treaty to accomplish shared goals, it is rare that any signatory nation exercises unilateral control over the entities thus created. Typically, signatories voluntarily restrict their authority to act unilaterally, as the EC member states have done, in favor of a collective regulatory scheme that they believe will serve their long-term interests. The fact that the Commission is not subordinate to, or subject to the control of, any individual member state thus has little relevance in deciding whether it is an ‘agency or instrumentality’ of the member states collectively.” 143 T. C. 1, at p. 36.

And if the usual five-point test for governmental agency is applied, the Commission gets three out of five easily. The five are : (1) whether the foreign state created the entity for a national purpose; (2) whether the foreign state actively supervises the entity; (3) whether the foreign state requires the hiring of public employees and pays their salaries; (4) whether the entity holds exclusive rights to some right in the [foreign country]; and (5) how the entity is treated under foreign state law. See 143 T. C. 1, at p. 42.

Sorry, Guardian, you’re out of commission.