Judicial update

In a big win for the taxpayer, the U.S. Court of Appeals for the Ninth Circuit recently held that master copies of computer software qualify as export property for purposes of the foreign sales corporation regime. The court's December 3 decision in Microsoft Corporation v. Commissioner reversed an

The Ninth Circuit's opinion focused on the pre-1997 definition of "export property" set forth in section 927(a)(2)(B) of the Code, which requires that the property be "manufactured, produced, grown, or extracted in the United States." Excluded from the definition were "patents, inventions, models, designs, formulas, or processes, whether or not patented, copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use), good will, trademarks, trade brands, franchises, or other like property." The court relied on contemporary dictionary definitions of statutory terms such as "film" and "record" in finding that Microsoft's computer software master tapes were included the statute's specific listing of "films, tapes, and records," and its CD-ROMs, DVD-- ROMs, and diskettes within the meaning of "similar reproductions." (Congress specifically added computer software to the parenthetical in 1997, but provided that "no inference" was intended from its action.)

The appeals court next considered the temporary regulation that excluded computer software from the definition of export property. The court stated that "[b] ecause we conclude that the statute clearly expresses Congress's intent, we do not defer to the conflicting regulation." The court thus held the regulation invalid.

TEI President Drew Glennie explained that the decision could have great significance outside the FSC area. "The amount of deference to be given a regulation is an important one for taxpayers," Mr. Glennie stated. "It's the reason TEI became involved in this case and we are pleased that the court found merit in our argument."

TEI's brief in this case was reprinted in the January-February 2002 issue of The Tax Executive.

Boeing Case

On December 9, the U.S. Supreme Court heard oral argument in the case of Boeing Company v. United States, involving whether Treas. Reg. sec 1.861-- 8(e)(3) (relating to the allocation of research and development expenses) is valid when its application frustrates the operation of the domestic international sales corporation and FSC provisions. TEI filed amicus briefs earlier this year in support of Boeing's petition for a writ of certiorari and on the merits.

The appellate court's opinion in the Boeing case conflicts with the Eighth Circuit's opinion in St. Jude Medical, Inc. v. Commissioner that the Treasury Regulation is invalid in this context. The St. Jude case found that the mandated allocation method is inconsistent with Congress's intent to allocate costs to definitely related gross receipts. In May, the Supreme Court agreed to review the Boeing case to resolve the conflict.

A decision in the case is expected this spring. TEI's amicus briefs were reprinted in the March-April and September-October 2002 issues of The Tax Executive.