FOR PUBLICATIONUNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT MICROSOFT CORPORATION,Appellant, No. 01-71584v. Tax Court No.16878-96COMMISSIONER OF INTERNALREVENUE, OPINIONAppellee.On Appeal from a Decision of theUnited States Tax CourtArgued and SubmittedSeptember 11, 2002—Pasadena, CaliforniaFiled December 3, 2002Before: David R. Thompson and Johnnie B. Rawlinson,Circuit Judges, and William W Schwarzer,*Senior District Judge.Opinion by Judge Thompson *The Honorable William W Schwarzer, Senior United States DistrictJudge for the Northern District of California, sitting by designation. 1COUNSELJames M. O’Brien, Chicago, Illinois, for the petitioner. Andrea R. Tebbets, Washington, D.C., for the respondent.OPINIONTHOMPSON, Circuit Judge: Microsoft Corporation appeals the tax court’s deficiencyjudgment in favor of the Commissioner of Internal Revenue(the “Commissioner”). In 1990 and 1991, Microsoft claimed“export property” deductions for certain commissions it paidto Microsoft Foreign Sales Corporation. These commissionswere for royalty income subsidiaries earned from the interna-tional distribution of master copies of Microsoft computersoftware. The Commissioner disallowed the deductionsbecause it concluded that master copies of computer softwarewere not deductible “export property” under now repealedI.R.C. § 927(a)(2)(B). During the applicable period, that sec-tion provided, in relevant part: The term ‘export property’ shall not include . . . pat-ents, inventions, models, designs, formulas, or pro-cesses whether or not patented, copyrights (otherthan films, tapes, records, or similar reproductions,for commercial or home use), good will, trademarks,trade brands, franchises, or other like property. . . .4 MICROSOFT CORP. v. CIR§ 927(a)(2)(B).1 Because we interpret this section’s phrase“copyrights (other than films, tapes, records, or similar repro-ductions, for commercial or home use)” to include computersoftware masters, we reverse the tax court’s judgment. IStatutory BackgroundIn 1970, in response to a troubled economy, Congress twicetried but failed to enact legislation that would have exemptedexport property from tax liability in certain circumstances.Both bills stated that intangible intellectual property wouldnot be deductible export property, but exempted certain copy-rightable materials. One bill provided that “copyrights (otherthan motion picture films or films or tapes used for radio ortelevision broadcasting)” were not export property. H.R.18392, 91st Cong. sec. 2, § 991 (1970). The other providedthat “copyrights (other than films, tapes, or records for thecommercial showing of motion pictures or used for radio ortelevision broadcasting or to provide background music),”were not export property. H.R. 18970, 91st Cong. sec. 402,§ 991 (1970). Neither bill was enacted. The next year, Congress successfully passed the RevenueAct of 1971, Pub. L. No. 92-178, 85 Stat. 497, with statedgoals which included putting the lagging economy on a highgrowth path, increasing the number of jobs, reducing the highunemployment rate, increasing exports, and improving thebalance of payments (hereinafter “the DISC legislation”). S.Rep. No. 92-437, at 1 (1971), reprinted in 1971 U.S.C.C.A.N.1918. The Senate Report explained that: 1Unless otherwise specified, all references are to the Internal RevenueCode (Title 26 of the United States Code) as in effect in 1990 and 1991.In 2000, Congress repealed §§ 921 through 927. See FSC Repeal andExtraterritorial Income Exclusion Act of 2000, Pub. L. No. 106-519, § 2,114 Stat. 2423. 5MICROSOFT CORP. v. CIRTo provide tax incentives for U.S. firms to increasetheir exports, [Congress] has provided tax deferralfor one-half of export-related profits, so long as theyare retained in a new type of U.S. corporation knownas a Domestic International Sales Corporation or a“DISC.” The requirements for qualification as aDISC in general are that substantially all of the cor-poration’s gross receipts and assets must be exportrelated. Id. at 12, reprinted in 1971 U.S.C.C.A.N. at 1928. By this leg-islation, Congress sought “to provide substantial stimulus toexports and at the same time to avoid granting undue taxadvantages to the DISC’s [sic].” Id. at 13, reprinted in 1971U.S.C.C.A.N. at 1928. In 1984, responding to pressure from signatories to theGeneral Agreement on Tariffs and Trade, Congress supple-mented the DISC regime with Foreign Sales Corporations(“FSCs”) in the Tax Reform Act of 1984, Pub. L. No. 98-369,§ 801(a), 98 Stat. 494, 991 (1984) (hereinafter “the FSC legis-lation”). Polychrome Int’l Corp. v. Krigger, 5 F.3d 1522,1526 (3d Cir. 1993) (citing Joint Committee on Taxation,General Explanation of the Revenue Provisions of the DeficitReduction Act of 1984, 98th Cong. 2d Sess., at 1041-42 (CCH1985)). Under the new legislation, FSCs promoted the samegoals as DISCs, but a FSC could permanently exclude, ratherthan defer, a portion of its profits from qualifying exportsales. See H.R. Conf. Rep. No. 98-861, at 968-77 (1984),reprinted in 1984 U.S.C.C.A.N. 1445, 1656-65. The languagethat determined qualifying export property remained the samein both the 1971 and 1984 versions of the law. In each, exportproperty must have been: (A) manufactured, produced, grown, or extractedin the United States by a person other than aDISC [FSC], 6 MICROSOFT CORP. v. CIR(B) held primarily for the sale, lease, or rental, inthe ordinary course of trade or business, by, orto, a DISC [FSC], for direct use, consumption,or disposition outside the United States, and (C) not more than 50 percent of the fair marketvalue of which is attributable to articlesimported into the United States. §§ 993(c)(1), 927(a)(1). Both statutes excluded from exportproperty “patents, inventions, models, designs, formulas, orprocesses[,] whether or not patented, copyrights (other thanfilms, tapes, records, or similar reproductions, for commercialor home use), good will, trademarks, trade brands, franchises,or other like property.” §§ 993(c)(2)(B), 927(a)(2)(B) (Theonly difference between the clauses is that a comma after theword “processes” was omitted from the § 927 version.). Although some uncertainty was expressed regardingwhether and to what extent this exception applied to copy-righted computer software programs, (see, e.g., Tech. Adv.Mem. 85-49-003 (Aug. 16, 1985)), the parenthetical excep-tion remained unchanged
View Full Document
Unlocking...