1 5 5 T.C. No . 3

UNITED STATES TAX COURT

T GS-NOPEC GEOPHYSICAL COM PANY AND SUBSIDIARIES, Pet it i o n er v .

COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 8 1 40 -1 4
. Fi l edAu gu s t 2 6 , 2 0 2 0
.
R d i s al l o wedP’ s cl ai m edI.R.C. s ec. 1 9 9 d edu ct i o n o f $ 1 ,9 4 6,3 2 4 fo r the 2 00 8 t ax y ear. R d et erm in edth at P’ s g ro s s recei p t s fro m

the l eas i ng o f p ro ces s edm ari n e s ei s m i c d at a are n o t co n s i d eredd o m es t ic p ro du ct i o n g ro s s recei p t s (DPGR). Hel d : P’ s p ro ces s edm ari n e s ei s m i c d at a i s n o tqu al ify i n g p ro du ct i o n p ro p ert y

wi th i n th e m ean i ng o f I.R.C. s ec. 1 9 9 (c)(5 ) b ecau s e i t i s n ei th er t an g i b l e p ers o n al p ro p erty n o r a s o u ndreco rd i n g. Hel d , fu rt h er, P’ s p ro ces s i n g o f m ari n e s ei s m i c d at a co n st i tu t es en g i neeri n g s erv i ces p erfo rm edi n th e Un i tedSt at es wi th res p ectt o th e co ns tru ct i o n o f real p ro p ert y u n d er I.R.C. s ec. 1 9 9(c)(4 ), b u ti t s g ro s s recei p ts fro m

s u ch s erv i ces are DPGR o n l y t o th e ex t en t th at s u ch co n st ru ct i o n act i vi ti es are wi th in th e Un it edSt at es . Hel d , fu rt h er, t o th e ex t en tth atP recei v edg ro s s recei p t s fro m i t s p aren tco m

pan y fo r p ro ces si n g s erv i ces o f i t s p aren t’ s d at a fo r t h e p aren t ’ s cl i en t s, s uch rev en u e d o es n o tco ns t i tu te DPGR.- 2
-

Val J . Al b ri g h t , M i ch el l e Y. Ku , an dBren tC. Gard n er, J r., fo r p et i t i o n er. Bet t in a M . Nad l er, Caro l B. M cCl u re, an d As h l ey V. Targ ac, fo r
res p o n d en t.
PARIS, J u d g e: Res p on d en td et erm i n ed a d efi ci en cy o f $ 8 58 ,3 9 2 wi th
res p ectt o p et i t i o n er’ s Fed eral i n co m e t ax fo r 2 0 0 8 . Th e d efi ci en cy i s b as edo n
res p o n d en t’ s d i s al l o wan ce o f a cl ai m edd edu ct i o n o f $ 1 ,9 4 6 ,3 24 fo r i n co m e at tri b u t ab l e t o d om es t i c p ro du ct i o n act iv i t i es , p u rs u an tt o s ect i o n 1 9 9
. 1 Th e i s s u e fo r d eci s i o n i s wh et h er p et i t i on er i s en t i t l edt o th e d edu ct i on . Pet i t i o ner b ears th e b u rd en o f p ro of. See Ru l e 1 4 2 (a). 2

FINDINGS OF FACT I. Pet i t i o ner’ s Back g ro un d Pet i t i o ner co n si s t s o f TGS-NOPEC Geo p h y s i cal Co
. , In c. (TGS), an di t s
s ub s i d i ari es , wh ich t og et h er m ak e up an affi l i at edg ro up o f co rp o rat i o n s th atfi l es

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect fo r t h e y ear i n i s s ue, an dal l Ru le referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.

2 Pet i t i on er h as n o t rai s edth e i s s u e o f s ec. 7 49 1 (a), wh ich s h i ft s the b u rd en o f p ro o f t o the Co m

m i ss i o n er i n cert ai n s i tu at i o n s. Th e Co u rtco n cl ud es th ats ec. 7 4 9 1 (a) d o es n o t ap p ly

h ere b ecau s e p et i ti o n er h as n otp ro duced ev id en ce t h ati t h as s at i s fi edth e p reco n d i t i on s fo r i t s ap p l i cat i o n .- 3
-

a co n so l i d at edretu rnfo r Fed eral i n co m e t ax p u rp o s es . TGS i s a co rp o rat i o n
o rg an i zedan dex i s ti n g u n d er t h e l aws o f t h e St at e o f Del aware. It i s a wh o l l y
o wn eds ub s i d i ary

o f TGS-NOPEC Geo p hy s i cal Co . ASA, a p ub l ic l i m i t ed l i ab i l it y
co m p an y fo rm edu n der t h e l aws o f No rway . St o cki n TGS-NOPEC Geo p h y s i cal Co . ASA i s t rad edo n th e Os l o St o ckEx ch an g e u n d er t h e s ym b o l “ TGS”. Fo r 2 0 0 8 p et it i o n er m ai n t ai n edi t s b o o ks an dreco rd s u s i n g th e accru al
m et h o d o f acco u n ti n g an dco m p u t edi t s i n co m e o n th e b as i s o f a cal en d ar y ear. At th e t i m e i tfi l edi t s p et it i on , p et i t i o n er’ s p ri n ci p al p l ace o f b u s i n es s was i n Ho u s t o n , Tex as . II. Pet i t i o ner’ s Bu s i n es s Act i v it i es A. Ov erv i ew Pet i t i o ner i s en g ag edi n th e b u s i n es s o f acq u iri n g, p ro ces s i n g, an dl i cen s i n g
m ari n e s ei sm i c d at a. Duri n g 2 0 0 8 p et i t io n er earn edrev en u e b y l i cen si n g th e p ro ces s eds ei s m i c d at a t o co m pan i es i n th e o il an dg as i n du s try . As d i scu s s ed b el o w, raw s ei s m i c d at a i s co l l ect edth ro u g h s ei s m ic s urv ey s, du ri n g wh i ch refl ect eden erg y wav es are reco rd edo n m ag net i c t ap es . Th e d at a o n th os e t ap es i s th en p ro ces s edt o d ev el o p an i m ag e o f s ub su rface g eo p h y si cal s tru ctures . Th e p ro ces s edd at a i s u l t i m at el y p u rch as ed o r l i cen sedb y co m p an i es i n th e o il an dg as- 4
-

i n du s try t o ex p l o re fo r h y dro carb o n d ep o s it s an dt o d ev el o p dri l l i n g an d p ro duct i o n equ i p m en t . As o f Decem

ber 3 1 , 2 0 0 8 , p et i t i o n er em p l o y ed 5 31 i n d i v i du al s i n th e Un i ted St at es . Fo r 2 0 08 p et i ti o n er rep ort eds al ary an dwag e p aym en ts t o t al i n g $ 2 7 ,2 9 6 ,1 4 0 . Am o ng i t s em p l o y ees , p et i t i o ner em

p l oy eda s p eci al i zedi m ag i n g
s erv i ces t eam

(i m ag i n g t eam ) o f ap p ro x im at el y 5 5 i n di v idu al s wi th ad v an ced d eg rees o r ex t en s i v e ex p eri en ce i n m at h em at i cs o r t h e p h y s i cal s ci en ces . Th e i m ag i n g t eam

was res p o n s i b l e fo r p ro ces si n g the raw s ei s m i c d at a. M o s t o f t h e raw d at a p ro ces s edi n 2 0 0 8 was acq u i redfro m m ari ne s ei s m i c
s u rv ey s thatwere co m

p l et edb efo re t h e y ear i n i s s u e. B. M ari ne Sei s m i c Dat a Acqu i si t i o n Back g ro u n d Th e p ro ces s o f m ari n e s ei s m i c d at a acq u i s it i on i n vo l v es th e reco rd i n g an d
m eas u rem en to f t h e t rav el t i m e o f s ei sm ic wav es fro m a kn own en erg y s ou rce at o r
n ear t he o cean ’ s s u rface t o v ari o u s d ep th s i n th e eart h’ s s ub s u rface. Gen eral l y , t o
co n du ct a s ei s m i c s u rv ey , p et i t i o n er wo u l dh i re a m ari n e v es s el equ i pp edwi th
co m p u t ers , s o u rci n g equ i pm en t , an dreco rd i n g equ i pm en t . 3

3 Du ri n g 2 0 0 8 p et i t i o ner d i dn o to wnan y s ei s m i c v es s el s an dd i dn o to wn th e v es s el s wh en th e s ub

jectraw s ei s m i c d at a was co l lect ed . Rat h er, p et i t i o n er wo u l dco n tract fo r v es s el s an dcrews t o acq u i re s urv ey d at a o n p aram et ers s etb y p et i t i o n er’ s p ro

jectd ev el o p m en tt eam s .- 5
-

Th e p ro ces s i n v ol v es th ree m ai n co m p o n en t s : an aco u s t i c s o un d s ou rce, a recei v er cab l e (s o m et i m es referred t o as th e s tream er), an dt ech n o l o g y t o reco rd th e d at a. Th e aco u st i c s ou n ds o u rce i s a carefu l l y t i m edan d p o s i t i o nedm an -m ad e
s o u rce s i g n al . Itty

pi cal l y co n si s t s o f an array o f 3 6 aco u st i c el em en t s tu n edt o a g i v en freq u en cy

an dp ro g ram edt o fi re s i m u l t an eo u s l y

(i .e., wi th i n o n e o r t wo
m i l l is eco n d s ). Th e aco u s t i c s o u n ds o u rce i s p l aced i n th e wat er an dt o wedb eh i n d th e v es s el
. Th e recei ver cab l es trai l b eh i n dthe v es s el , ty p i cal l y at a d ep th o f 1 0 t o 1 5
m et ers b el ow t h e s u rface o f t h e wat er. Th e s tream ers are l o n g, s m al l -d i am et er tub es th atco n t ai n l i s t en i n g d ev i ces cal l edh y dro p h o n es , wh i ch d et ectth e refl ect ed
s ei s m i c en erg y

fro m the aco u s t i c s o u n d s o u rce. Each s tream er i s ap p ro x im at el y 1 2 k i l o m et ers l o n g , co ns i s t s o f s eg m en ts b et ween 5 0 an d2 0 0 m et ers l o n g , an d
co n tai n s th o u s an d s o f h y dro p h o n es . Du ri n g a t y

pi cal m ari n e s ei s m i c s u rv ey , th e aco u st ic s ou n d s o u rce fi res a p u l s e o f m ech an i cal en erg y , fo rced d o wn ward i n t o th e s eab ed , g en erat in g a
co m p l ex s equ en ce o f m ech an i cal wav es . Th e p u l s es refl ecto ff ro cks trat a at
v ary i n g freq u en ci es . Th e m ech an i cal wav es p ro p ag at edth ro u g h th e s ub s urface are refl ect edfro m

th e s eab edb ackup t o th e s tream er, wh ere t hey are reco rd edb y- 6
-

th e p res s u re-s en s it i v e h y dro p h o n es . 4 Th e fi ri ng o f t h e p u l s e i s rep eat edev ery 1 0 t o 2 0 s eco n d s as th e s u rv ey i s co n du ct ed . Th e h y dro p h o n es reco rdth e refl ect ed
wav es b y co nv ert i n g p res su re o s ci l l at i o n s t o el ect ro ni c d at a, wh i ch i s tran s m i t t ed t o the v es s el th ro u g h th e s tream er cab l e an dreco rd edo n t o m ag n et i c fi el d t ap es . Two s et s o f t ap es are u s u al l y p ro du ced : o n e s etco n t ai n i ng th e raw s ei s m i c d at a
an d an o th er co n tai n i n g th e raw s ei s m i c d at a co m b i n ed an d co o rd i nat edwi th th e
n av ig at i o n o r l o cat i o n d at a. Th e s u rv ey edarea t y

p i cal l y s p an s th o u s an d s o f s qu are k i l om et ers , an dth e
s ei s m i c s u rv ey s can t ak e t h ree m o n th s o r m o re t o co m pl et e. 5 A ty

p i cal 3 -D
s ei s m i c s u rv ey 6 co l l ect s ap p ro x i m at el y 1 ,7 5 0 g i g ab ytes o f d at a ev ery 2 4 h o u rs .

4 Th e aco u s ti c s o u n d s o u rce p ro du ces an au di bl e n o i se wh en i ti s fi red , b u t th atn o i s e i s n o treco rd edduri ng th e co l l ect i o n o f s ei s m i c d at a.

5 So m e s u rv ey s were co n du ct ed i n m u lt i pl e p h as es . Fo r ex am p le, p et i t i o n er’ s s u rv ey o f t h e M i s s i s s i p p i Can y o n area o f t h e U.S. Gu l f o f M ex i co , a jo i n t ven tu re wi th two o th er s ei s m i c co n tract o rs , was p erfo rm edo v er s i x p has es th att o okp l ace d u ri n g 1 9 99 an d2 0 0 0
.

6 A 3 -D s u rv ey co l l ect s d at a t h ro u gh m u l ti p l e aco us t i c s o u n ds o u rces an d m u lt i p l e s tream ers p l aced s o th atthe res u lt i ng d at a can fo rm a t h ree-d i m en s i o n al p i ctu re o f t h e s ub s u rface. In co n tras t , a 2 -D s u rv ey i n v o l v es a s i n g l e aco u st i c s o u n d s o u rce an d a s i n gl e s tream er, an dth e refl ect ed d at a refl ect s a fl at“ s l i ce” o f th e eart h . Pl aci n g m

u l ti p l e s o un ds o u rces an dm u l t i p l e s tream ers effect iv el y p ro duces s l i ces s o cl os e t o g et h er as t o g en erat e a t hree-d im en s i o n al i m ag e.- 7
-

M ag n et i c fi el dt ap es co n t ai n i n g t h e raw s ei s m i c d at a are s hi p p edb y h el i co p t er o r
s up p ly b oatab o utev ery

fi v e week s t o s ei s m i c d at a p ro ces s i n g cen t ers . C. Pro ces s in g o f M ari n e Sei s m i c Dat a Pro ces s in g s ei s m i c d at a i n v o l v es ap p l y i n g s o ft ware p ro gram s b as edo n g eo ph y si cal p ri n ci pl es t o m an i p u l at e an dco n v ertth e raw s ei s m i c d at a i n t o a fo rm th atcan b e i nt erp ret edb y p et i t i o n er’ s cl i en t s . Pet i t i o n er em p l o y edan i m ag i n g t eam o f ap p ro x i m at el y 5 5 i n d i v i du al s wi th ad v an cedd eg rees o r ex t en s i v e
ex p eri en ce an dtrai ni n g i n g eo l o g i cal an dg eo ph y s ical s ci en ces , m ech an i cal
en g in eeri n g , m at h em at i cs , o r p h y s i cs , am o n g o th er rel at edfi el d s , t o p ro ces s
s ei s m i c d at a. Sei s m i c s u rv ey p ro ject s p rep aredfo r cl i en t s were t y p ical l y p ro ject s
o f 6 ,0 0 0 s qu are k i l om et ers an dco u l d t ak e up t o two y ears t o p ro ces s , requ i ri n g fo u r t eam m em b ers wo rk i n g fu l l t i m e t o co m pl et e. Th e m em b ers o f t he i m ag i n g t eam m an i pu l at e t h e raw s ei sm i c d at a u s i n g h i g h -p o w eredco m

pu t ers an dco m

p l ex p ro ces s i n g s o ft ware, i n cl ud i n g p ro p ri et ary
s o ft ware, b as edo n s op h i s ti cat edal g o ri th m s . Th e p ro ces s i n g s equ en ce i s a m u l t i
s t ep p ro cedu re, req u i ri n g th e s k i l l an dju dg m en t o f t h e i m ag i n g t eam , th e en dg o al
o f wh ich i s t o p ro du ce an i m ag e o f t h e s ub s u rface g eo l o g y th ato i l an dg as
co m p an i es are ab l e t o u se t o fi n dh y dro carb o n d ep o s i ts .- 8
-

Th e i m ag in g t eam ’ s i n i t ial s t ep i n v ol ves rem o v in g o r at t en u at i ng u n wan t ed
s i gn al , s o m et i m es referred t o as “ n o i s e”, 7 wh i l e ret ai n in g th e u sab l e s i g nal . Fro m th ere, t he i m ag i ng t eam

ap p l i es g eo ph y s i cal al g o ri th m s an d rel at edco m p u t er p ro g ram s t o ap p l y

s p at i al an dt em

p o ral s am p l i n g ad ju s t m en t s t o th e raw d at a; ap p li es s i g n al wav el et co rrect i o n s , s u ch as t im i n g , am p l i tu de, p h as e, an ds p ect ru m
co rrect io n s ; d et erm i n es i m ag i n g eart h m o d el p aram et ers ; an dap p l i es fi n al i m ag i n g
an d p o s t i m ag i n g en h an cem en t s . Pro ces s in g s ei s m i c d at a req u i res s i g n i fi can t co m pu t er p o w er an dd at a u s e. Du ri n g 2 0 0 8 p et i t i o n er u s ed2 5 ,0 0 0 co m p u t er p ro ces s i n g u n it(CPU) co res , 2 ,2 0 0 t erab ytes o f i n tern al d is k sp ace, an d1 5 0 t erab yt es o f d is ks p ace i n s to rag e s erv ers req u i ri n g 1 .5 m i l l i o n k i l o w at t h o u rs o f el ect ri ci ty p er m o n th
. As t ech n o l o gy

i m p ro v es o r n ew al g o ri th m s are d ev el o p ed , the q u al i ty o f i m ag i n g th atp et i t i o n er i s ab l e t o p ro du ce th ro u g h th e p ro ces si ng s equ en ce al s o i m p ro v es . Acco rd i ng l y , p et i ti o n er wo u l d o ft enp ro ces s th e s am e raw s ei s m i c d at a
m o re th an o nce, a p ract i ce p et i t i o n er refers t o as “ rep ro ces s in g ”. Rep ro ces s i n g
s ei s m i c d at a i n v o l v es s ub m i t ti ng th e raw s ei s m i c d at a th ro u g h t h e en t i re

7 No i s e refers t o an y

u n wan t eds i g n al p i ck edup b y th e h y dro p ho n es du ri n g th e acq u is i t i o n p ro ces s t h atm ay d i s t o rto r i n t erfere wi th th e s ei s m i c d at a. So u rces o f n o is e m ay i n cl ud e s tream er jerk , s tream er l ev el i n g , s h i p n o i s e, dri l l in g o p erat i o n s o r o ther s ei s m ic o p erat io n s , m ari n e en v i ro n m en tn o i s e, o r s ea s u rface rev erb erat i on s .- 9
-

p ro ces s i n g s equen ce a n ew t i m e, u s i n g the l at es td ev el o pm en t s i n h ard ware,
s o ft ware, al g o ri th m s , an d p ro ces s i n g t ech n i qu es , wi th th e o b ject i v e o f i m

p ro v i ng th e qu al i ty

o f t h e p rev i o u s l y

p ro ces s eds ei s m i c d at a. Rep ro ces s in g s ei s m ic d at a i s
s i gn i fi can t l y

l es s ex p en s i v e t h an th e i n i ti al p ro ces s i n g b ecau s e p et i t i o n er d o es n o t i n cu r t he co s t o f acq u i ri n g th e raw s ei s m i c d at a. Pet i t i o ner’ s p ro ces s i ng cen t er i s i n Ho us t o n, Tex as . Th e p ro ces s i n g cen t er
co n si s t s o f co m

p u t er t erm i n al s an dco m

p u t er b an k s m ai n t ai nedi n a s ecu re faci l i t y wi th th e n eces s ary

p o wer req u irem en t s an dco o l i ng cap ab i l it i es . To s t aff t h e p ro ces s i n g cen t er, p et i t i on er em p l oy edi n 2 0 0 8 (i n ad di t io n t o the i m ag i n g t eam ) 1 5 s ci en t i s t s wh o ai d edi n res earch an dd ev el o p m en tt o i m p ro v e an den h an ce t he p ro ces s i n g al g o ri th m s an dm et h o d o l o g y , as wel l as i n fo rm at i o n t ech no l o g y
s p eci al i s t s t o s up p o rtan dm ai n t ai n t h e co m p ut ers an drel at edh ard ware. Th e p ro ces s edd at a i s s av edo n m ag n et i c t ap e an ds t o redi n p et i ti o n er’ s
s ecu redd at a m an ag em en tcen t er i n Ho u st on , wh i ch m ai n t ai n s p et it i o n er’ s d at a l i brary . Pet i t io n er’ s p ract i ce i s t o m ai n t ai n atl eas ttwo co p i es o f th e m ag n et i c t ap e
co n tai n i n g th e p ro ces s eds ei s m i c d at a, wi th each co p y h el data d i fferen tl o cat i o n , i n o rd er t o m it i g at e t h e ri sko f l o s s o r d am ag e. 8

8 Pet i t i on er’ s d at a m an ag em en tcen t er i s i n Ho u s t o n. Th e reco rdi s u n cl ear as t o th e l o cat i on at wh i ch th e b ackup co p i es o f th e d at a are s t o red
.- 1 0 -

Wh en th e n eedfo r p ro ces s i n g s erv i ces o u tp aced p et i t i o n er’ s cap aci ty , p et i t i o n er wo u lds o m et i m es co n t ract o u t a p o rt io n o f th e p ro ces si n g wo rkt o o th er
co m p an i es . 9 In s u ch cas es , p et i t i o n er wo u l d s etth e p aram et ers o f th e p ro ces s i n g p ro ject an das si g n a m em

ber o f i t s qu al it y

co nt ro l t eam t o s erv e o n s i t e atth e p ro ces s i n g co m

p an y t o en s u re t h atp et i ti o n er’ s s t an d ard s were m et . Pet i ti o n er ret ai n ed o wn ers h i p o f b o th th e raw s ei s m i c d at a an dth e fi n al p ro du ct . Wh en p et i t i o n er recei v eda d at a o rd er fro m a cl i en t, th e p ro ces s eds ei s m i c d at a fro m th e m ag n et i c t ap es wo u l db e co pi edan dd el i v eredt o th e cl i en t o n a
co m p actd is c, d ig i t al v i d eo d i s c, co m p ut er h arddri v e, co m

p u t er t ap e, o r s o m e
o th er t an g i b l e, wh i ch the p urch as er wo u l du s e t o l o adthe d at a o n t o i t s o wn
co m p u t er s y s t em . Th e p ro ces s eds ei s m i c d at a co u l db e (an dwas ) co p i edm u l t i p l e t i m es an dl i cen s edt o m

u lt i pl e cl i en t s . 1 0 Pet i t i o n er d i d n o tm anu fact u re t h e m ed ia
o n wh i ch i t d el i v eredthe p ro ces s eds ei s m i c d at a t o i t s cl i en t s .

9 In 2 0 0 8 p et i t i o n er d i dn o tco nt ract p ro ces s i n g wo rkt o o ther co m p an i es b ut d i ds el l p ro ces s edd at a t h ath adb een p ro ces sedb y o ther co m

pan i es u n d er p et i t i o n er’ s s up erv i s i o n . Th e reco rdi s n o tp reci s e reg ard i n g wh en p o rt io n s o f t h e p ro ces s edd at a were co n tract edt o o th er p art ies , b u tb y 2 00 8 p et i t i o n er n o l o n g er co n tract ed i t s p ro ces s i ng s erv i ces .

1 0 Pet i t i o ner refers t o s u ch d at a as “ M u l t i -Cl i en t Sei s m i c Dat a” (M CS) b ecau s e i ti s i n t en d t o b e, an dwas , l i cen s edt o m u lt i p l e cl i en ts .- 1 1 -

III. Li cen s i n g o f Dat a Du ri n g 2 0 0 8 p et i t i o n er g en erat edrev en u e b y , am o n g o th er act i v it i es , l i cen si n g t h e u s e o f t h e p ro ces seds ei s m i c d at a t o i t s cl i en t s i n th e o i l an dg as i n du s try . Duri n g 2 0 08 i t w as p et i t i o n er’ s p ract ice t o en ter i n t o a m as t er l i cen s i n g ag reem en t(M L A) wi th each cl i en tt o wh i ch i tl i cen sedth e p ro ces s eds ei s m i c d at a. In m os ti n s t an ces , p et i t i o n er en t eredi n t o ad d i t i o n al s up p l em en t al ag reem en t s wi t h i t s cl i en t s . Th e t erm s o f t he M L As an ds up p l em en t al ag reem en t s co n t ai n edcert ai n
co m m o n cl au s es . Pet i ti o n er wo u l dg ran tth e l i cen s ee th e n o n ex cl u s i v e ri g htt o u s e th e p ro ces s eds ei s m i c d at a, wh i l e ret ai n i ng o wn ers h i p i n th e p ro ces s edd at a an d th e fi el dt ap es . Th e M LAs res tri ct ed u s e o f t he d at a s o l el y t o co m p an i es h ol d i n g a
v al i du s e-l i cen se fro m

p et i t i on er an dt o rel at eden t i t i es (as d efi nedi n th e M LA). IV. Rep ro du ct io n Rev en u e an d Ov erri d i n g Ro y al ty Rev en ues A p o rt io n o f t h e rev en ue p et i t i o n er earn eddu ri n g 2 0 0 8 was fo r wh at p et i t i o n er d es cri b es as “ rep ro du ct i o n rev en ue”. Rep ro duct i o n rev en u e refers t o
rev en u e earn edb y

p et it i o n er wi th res p ectt o p ro ces s eds ei s m i c d at a s o l do r l i cen sedb y

p et i t i o n er b u to wn edb y p et i t io n er’ s p aren tco m p an y . Pet i t i o ner p ro ces s edraw s ei sm i c d at a o wn edb y i t s p aren t, s t o redth e d at a i n i t s (i .e., p et i t i o n er’ s) d at a m an ag em en tcen t er, an dfi l l edo rd ers fro m cl i en t s b y

co p y i n g- 1 2 -

th atp ro ces s edd at a fro m

i t s l ib raryo n t o t an g i b l e m ed i a an dp ro v i d i n g i t t o t h e cl i en t. Pet i t io ner’ s p aren twas co n s i d eredth e p art y t o thes e M L A s an dwo u l d
reco g n ize t h e l i cen s i n g rev enu e o n i t s o wnb o o k s . Pet i t i o n er recei ved a p o rt i o n o f th atrev en u e b ecau s e i tb o re t h e co s t s o f t ran s ferri n g th e d at a t o th e t an g i b l e
m ed i u m an dp ro v i d i n g i tt o the cl i en t . Pet i t i o ner ad d it i o n al ly

recei vedrev enu e fro m

cert ai n o v erri di n g ro y al ty i n t eres t s th ati th el d
. V. Pet i t i o ner’ s 2 0 0 8 Tax Retu rn Pet i t i o ner t i m el y

fi l edFo rm

1 1 2 0, U.S. Co rp o rat i o n In co m e Tax Retu rn , fo r 2 0 0 8 . Onth e ret u rn , p et i ti o n er cl ai m ed , p u rs u an t t o s ect io n 1 9 9 , a d o m es ti c p ro duct i o n act i v i ti es d educt i o n (DPAD) o f $ 1 ,9 4 6 , 3 2 4 , o n th e b as is o f d o m es t i c p ro duct i o n g ro s s recei pt s (DPGR) o f $ 7 4 ,0 9 8 ,8 5 4
. 1 1 Res p on d en tex am i n edth e retu rn , d i s al l o wed$ 1 ,9 4 1 ,0 87 o f t h e cl ai m edd edu ct i o n, an di s s u eda s t atu t o ry
n o t i ce o f d efi ci en cy , d et erm i n i n g a d efi ci en cy o f $ 8 58 ,3 9 2 b as edo n t h e d i s al lo wan ce.

1 1 Pet i t i o ner l at er fi l edFo rm 1 1 2 0 X, Am en d ed U.S. Co rp o rat i o n In co m e Tax Retu rn . Th e ad

ju s t m en t s cl ai m edo n th e Fo rm 1 12 0 Xwere u n rel at edt o an dd i d n o taffect the cl ai m edDPAD.- 1 3 -

Pet i t i o ner t i m el y

fi l eda p et i t i o n wi th t h i s Co u rtfo r red et erm i n at i o n o f t h e d efi ci en cy , d i s ag reei ng wi th res p o n d en t ’ s d i sal l owan ce o f th e d edu ct i o n an d al l eg in g th ati t s DPAD s h o u l d b e i n creas ed
. 1 2 OPINION Th e i s s u e b efo re t h e Co u rti s wh et h er p et i t i o ner i s en t i tl edt o a d edu ct i o n fo r d o m es t ic p ro du ct i o n act i v i t i es p u rs u an t t o s ect i o n 1 9 9
. 1 3 Pet i t i o n er co n t en d s th at i t is en t i t ledt o th e d edu ct io n o n t h e g ro u n d s th at i t s g ro s s recei p t s fro m th e s al e o r l i cen se 1 4 o f p ro ces s eds ei sm i c d at a co n s ti tut e DPGR, b ecau s e ei th er (1 ) t he p ro ces s eds ei s m i c d at a m eet s th e d efi n i t io n o f qu al i fy i ng p ro du ct i o n p ro p erty (QPP), ei th er as t an g i b l e p ers o n al p ro pert y o r s o u n dreco rd i n g s , thatwere

1 2 In i t s p et i t i o n, p et it i o n er al l eg es th ati ti s en t i tl edt o a d edu ct i o n o f $ 2 ,4 6 7 ,0 9 1 fo r i nco m e at tri b u t ab l e t o d o m es t i c p ro duct i on act i v it i es . Th e p art i es h av e s in ce s t ip u l at edth at , i f th e Co u rtd eci d es th atth e p ro ces s eds ei s m i c d at a s o l d o r l i cen s edb y

p et i t i o n er i s qu al i fy i n g p ro du ct i on p ro p ert y u n d er s ec. 1 9 9(c)(5 ) an d th atp et i t io n er m eet s al l o ther req u i rem en t s u n der s ec. 1 9 9 , th en p et i t io n er i s en t i t l edt o a DPAD o f $ 2 ,3 61 ,7 4 6 . Th e p art i es h av e al s o s t i p u l at edth at , i f th e Co u rtd eci d es th atp et i t i on er’ s act i v it i es co n s t i tu te en gi n eeri n g s erv i ces wi th i n th e m ean i n g o f s ec. 1 99 (c)(4 )(A)(i i i ) an dth at p et i t i o n er m eet s al l o ther req u i rem en t s u n d er s ec. 1 9 9 , th en p et i t io n er i s en t i t l edt o a DPAD o f $ 2,2 9 5 ,0 8 4
.

1 3 Th e p art i es b ri efed a n um b er o f ev i d en t i ary

o b j ect i o n s th atthe Co urth ad res erv eddu ri n g t ri al . Th o s e o b ject i o n s n o tad dres s ed i n th i s Op i n i o n h av e b een res o l vedb y

o rd er d at edAu g u s t2 6 , 2 0 2 0
. 1 4 Al th o u g h the p art i es refer t o p et i t i o n er’ s act i v i t i es as “ th e s al e o r l i cen si n g” o f p ro ces s eds ei s m i c d at a, t h e Co u rtwi l l u s e s i m p ly th e t erm “ l i cen s i n g ” fo r eas e o f d es cri p ti o n .- 1 4 -

m an u fact u red , p ro du ced , g ro wn , o r ex tract edwi thi n th e Un i t edSt at es , s ec. 1 9 9 (c)(4 )(A)(i ); s ee al s o s ecs . 1 9 9 (c)(5 ), 1 6 8 (f)(4 ); o r (2 ) t h e p ro ces s i ng o f
s ei s m i c d at a i s an en gi n eeri n g s erv i ce p erfo rm edi n th e Un it ed St at es wi th res p ect t o the co n s tru ct i o n o f real p ro p ert y i n th e Un i t edSt at es , s ec. 1 99 (c)(4 )(A)(i i i ). Res po n d en tco n t en d s th atp et i t i o n er i s n o t en t i t ledt o th e d educt i o n u n d er an y
s ect i on 1 9 9 d efi n i t io n. I. Ov erv i ew o f Sect i o n 1 9 9 Sect io n 1 9 9 was ad d edt o th e Co d e b y th e Am eri can J o b s Creat i o n Acto f 2 0 0 4 , Pub . L. No
. 1 0 8-3 57 , s ec. 1 0 2 (a), 1 1 8 St at . at1 4 2 4, t o p ro v id e a t ax d educt i o n fo r cert ai n d o m es t i c p ro du ct i o n act i v i t i es . 1 5 Sect i o n 1 9 9 al l o ws a d educt i o n fo r a s p eci fi edp ercen t ag e o f t h e l es s er o f a t ax p ay er’ s “ qu al i fi ed p ro duct i o n act i v i ti es i n co m e” (QPAI) fo r t h e t ax ab l e y ear o r t h e t ax pay er’ s t ax ab l e i n co m e. 1 6 Sec. 1 9 9 (a). Fo r 2 0 0 8 th e s p eci fi ed p ercen t ag e was 6 %. Sec. 1 9 9 (a)(2 ).

1 5 Th e Tax Cu t s an dJ o b s Acto f 2 0 17 , Pub. L. No . 1 1 5 -9 7 , s ec. 1 3 3 05 (a) an d (c), 1 3 1 St at . at2 1 2 6 , el im i nat eds ec. 1 9 9 fo r t ax ab le y ears b eg i n ni n g aft er Decem b er 3 1 , 2 0 17
. 1 6 Th e am o u nto f t he d edu ct i o n m ay n otex ceed 5 0 % o f t h e Fo rm W -2 wag es o f t h e t ax p ay er fo r t h e t ax ab l e y ear. Sec. 1 99 (b )(1 ). Pet i t i o n er’ s cl ai m edDPAD o f $ 2 , 3 6 1 ,7 4 6 (o r $ 2 ,2 95 ,0 84 u n d er p et i t io n er’ s al t ern at i v e p o si t io n ) i s l es s th an 5 0 % o f p et i t i o n er’ s 2 0 0 8 rep ort edFo rm W -2 wag es o f $ 2 7,2 9 6 ,1 4 0.- 1 5 -

Fo r p u rp o s es o f s ect i on 1 9 9 , QPAI m ean s an am o u ntequ al t o th e ex ces s , i f
an y , o f t h e t ax p ay er’ s DPGR fo r t h e t ax ab l e y ear o ver t h e s u m o f co s to f g o o d s
s o l dal l o cab l e t o s u ch recei p t s an do th er ex p en s es , l o s s es , o r d edu ct i o n s p ro p erl y al l o cab l e t o s u ch recei p ts . Sec. 1 9 9(c)(1 ). Sect io n 1 9 9 (c)(4 ) d efi n es DPGR. Rel ev an tt o t h e p res en tcas e, DPGR i n cl u d es th e g ro s s recei p t s o f the t ax p ay er wh ich are d eri v edfro m an y l eas e,
ren t al , l i cen s e, ex ch an ge, o r o th er d i s p o si t io n o f QPP wh i ch was m an u fact u red , p ro duced , g ro wn , o r ex tract edb y th e t ax p ay er i n wh o le o r i n s i gn i fi can tp art wi th i n th e Un i t edSt at es . Sec. 1 9 9 (c)(4 )(A)(i )(I). In the cas e o f a t ax p ay er
en g ag edi n th e act i v e co n du cto f an en gi n eeri n g o r arch i tect u ral s erv i ces trad e o r b u s i n es s , DPGR i n cl u des th e g ro s s recei p t s d eri v edfro m en gi n eeri n g o r arch i t ectu ral s erv i ces p erfo rm edi n th e Un i t edSt at es b y th e t ax p ay er i n th e
o rd i n ary co u rs e o f s u ch trad e o r b u si n es s wi th res p ectt o th e co n s tru ct i o n o f real p ro p erty i n th e Un i tedSt at es . Sec. 1 9 9 (c)(4 )(A)(i i i ). Th e Co u rtex am i n es each o f th o s e d efi n i t i o ns m ore cl os el y b el o w. II. Ex p ertW it n es s es A. Ov erv i ew Each p art y

i nt ro duced ex p ertt es t i m o n y i n s up po rto f t he p o s i ti o n th at p et i t i o n er’ s g ro s s recei p t s d o o r d o n otco n s ti tu t e DPGR. Pet i t io n er cal l ed two- 1 6 -

i n d i v i du al s t o t es t i fy

as ex p ert s o n d i fferen tas p ect s o f t he s ei s m i c d at a i ndu s try . Res po n d en tcal l edo n e i n d i vi du al t o t es t i fy as an ex p erti n p h y si cs an dg eo p h y s i cs , es p eci al ly as i tp ert ai n s t o the acq u i s i t i on , reco rd i n g , an di n t erp ret at i on o f s ei s m i c d at a. Th e Co u rtreco g n i zedeach o f t h e t h ree i nd i v i du al s as an ex p ertan drecei v ed i n t o ev i d en ce as d i rect t es ti m o n y each i n d i v i dual ’ s wri tt en rep o rt . See Ru l e 1 4 3 (g ). Ex p ertt es t i m o n y

i s ad m is s i b l e wh ere i tas si s t s th e Co u rtt o u n d ers t an dth e
ev i d en ce o r t o d et erm i n e a fact i n i s s u e. See Fed . R. Ev i d . 7 0 2 ; s ee al s o Gi b s o n & As s ocs ., In c. v . Co m

m i s s i o n er, 1 3 6 T.C. 1 9 5 , 2 2 9 (2 0 1 1 ). Det erm in i n g wh et h er
ex p ertt es t i m o n y

i s h el pfu l t o th e Co u rti s a m at ter wi th i n th e Co u rt ’ s s o un d d i s cret i o n . Gi bs o n & As s o cs ., In c. v . Co m m i s si o n er, 1 3 6 T.C. at 2 3 0 . Th e Co u rt h as b ro add i s cret i o n t o ev al u at e t h e co g en cy o f an ex p ert ’ s an al y s i s , an d th e Co u rt wei g h s an ex p ert ’ s t es t i m o n y i n l i g h to f h is o r h er q u al i fi cat i o ns an dwi th du e reg ardt o al l o th er cred i b l e ev i d en ce i n t he reco rd
. Id . Th e Co u rtm ay em b race o r rejectan ex p ert ’ s o p i n io n i n t o t o , o r t h e Co u rtm ay p i ck an dch oo s e wh at p o rt i o n s
o f t h e o p i n i o n t o ad o p t . See Hel v eri n g v . Nat ’ l Gro ceryCo
. , 3 0 4 U.S. 2 8 2, 2 9 4
- 2 9 5 (1 93 8 ); Gi b so n & As so cs ., In c. v . Co m m i s s io n er, 1 3 6 T.C. at2 3 0. Th e Co u rt i s n o tb o u n db y

an ex p ert ’ s o p i n i o n an d wi l l rejectan ex p ert ’ s o p i n i o n t o th e
ex t en tth ati ti s co n traryt o th e ju d g m en t th e Co u rtfo rm s o n th e b as i s o f o ur- 1 7 -

u n d ers t an d i n g o f t h e reco rdas a wh o l e. Gi b s on & As s o cs . , In c. v . Co m m i s s i o n er, 1 3 6 T.C. at2 30
. B. Pet i t i o ner’ s Ex p ert s 1
. Pet er Sei d el Pet i t i o ner p res en t edth e t es t im o n y o f Pet er Sei del as an ex p erti n th e acq u is i t io n o f m ari n e s ei s m i c d at a. Atth e t i m e o f t ri al M r. Sei d el was s erv i n g as th e d i rect o r o f m ari ne acq u i s i t i o n fo r p et it i o n er, h adwo rk edi n the g eo p h y s i cal i n du s try fo r ap p ro x i m at el y

4 0 y ears , an dp art i ci p at ed i n m ul t ip l e p ro fes s i o nal
o rg an i zat i o n s .

2
. Th o m as E. Neu g eb au er Pet i t i o ner al s o p res en t edth e t es t i m o n y o f Th om as E. Neu geb au er as an
ex p erti n th e u ti l i zat i on , p ro ces s i n g , an dh an d l in g o f s ei s m i c d at a. At th e t i m e o f tri al M r. Neu geb au er s erv edas v i ce p res i d en to f No rt h Am eri ca p ro ject s fo r p et i t i o n er. He h adp rev i o u s l y co n du ct edp ro

jectd ev el o p m en tfo r p et it i o n er, wh i ch i n v o l v ed d ev el o p i n g m

u l t i cl ien tp ro

ject s th atco u l d th en b e l i cen s ed t o p et i t i o n er’ s cl i en ts . M r. Neu g eb au er h as a b ach el o r o f s ci en ce d eg ree i n o cean en g i n eeri n g
an d h as p rev i o u s l y

wo rk edwi th o th er g eo p h y s ical co m p an i es . As o f t h e t i m e o f tri al , h e h adap p ro x i m at el y 3 8 y ears o f ex peri en ce i n th e s ei sm i c i n du s try , i n cl u d i n g ex p eri en ce i n t h e acq u i s i t i o n an dp ro ces s in g o f s ei s m i c d at a.- 1 8 -

M r. Neu g eb au er’ s ex p ertrep o rto ffered an ex p l an at i o n o f t h e n atu re o f
s ei s m i c d at a, i n cl u d i n g h i s v i ew as t o wh et h er s u ch d at a co n st i tu t es s o u n d
reco rd i n g ; h o w th e d at a i s acq u i red an dp ro ces s ed ; an d h o w co m pan i es u lt i m at el y
u s e t h e p ro ces s edd at a. C. Res p o nd en t ’ s Ex p ert Res p o n d en tp res en t edth e t es t i m o n y o f Kev i n Bi s h o p as an ex p erti n p h y s i cs
an d g eo p h y s i cs , es peci al l y as i tp ert ai n s t o the acq u i s i t i o n, reco rd i ng , an d i n t erp ret at io n o f s ei s m i c d at a. As o f t h e t i m e o f t ri al M r. Bi s h o p h ad3 5 y ears o f
ex p eri en ce i n t h e o i l an dg as i n du s try an d , s i nce 2 0 12 , h as p ro v i d edad v i s i n g an d
co n su l t i n g s erv i ces rel at edt o s ei s m i c d at a. M r. Bi s h o p’ s rep o rtad d i t i o n al l y
o ffered h i s o p i n i o n o n wh eth er p ro ces s eds ei s m ic d at a co ns t i tu t es s o u n d
reco rd i n g . III. Qu al i fy in g Pro du ct io n Pro p ert y A. Ov erv i ew Sect io n 1 9 9 (c)(5 ) d efi n es QPP as t an g i bl e p ers o n al p ro p ert y , an y co m p u t er
s o ft ware, an dan y

s o u n d reco rd i n g d es cri b edi n s ect i o n 1 6 8 (f)(4 ). Pet i t i on er arg u es th atth e p ro ces s eds ei sm i c d at a t h ati tl i cen s es t o i t s cl i en t s co n s t i tu tes QPP
u n d er s ect i o n 1 9 9 (c)(5 ) as ei th er t an g i bl e p ers o n al p ro p ert y u nd er s ect i o n- 1 9 -

1 9 9 (c)(5 )(A) o r as a s o u n d reco rd i n g wi th i n t h e m ean i n g o f s ect io n s 1 9 9 (c)(5 )(C)
an d 1 6 8 (f)(4 ). Fo r t h e reas on s s etfo rt h b el o w, th e Co u rt d i s ag rees . 1 7 B. Tan g i b l e Pers o n al Pro p ert y Fo r t h e p u rp o ses o f cal cu l at in g DPGR, a t ax p ay er d et erm in es wh et h er g ro s s recei p t s qu al i fy o n an i t em -b y -i t em b as i s . Sec. 1
. 1 9 9 -3 (d )(1 ), In co m e Tax Reg s . Th e t erm “ it em ” m ean s th e p ro p ert y o ffered b y

th e t ax p ay er i n th e n o rm al co u rs e
o f t h e t ax p ay er’ s b u s i n es s fo r l eas e, ren t al , l i cen s e, s al e, ex ch an g e, o r o ther d i s p o s i t i on t o it s cl i en ts . Sec. 1 .1 9 9 -3 (d )(1 )(i ), In co m e Tax Reg s . Th e p art i es ag ree t h atth e p ro pert y

o ffered fo r s al e o r l i cen s e i n th i s cas e i s th e p ro ces s ed
s ei s m i c d at a. See s ec. 1
. 1 9 9 -3 (d )(1 ), In co m e Tax Reg s . Pet i t i o n er co n t en d s th at th e p ro ces s eds ei s m i c d at a co n s t i tu t es t an g i bl e p ers o n al p ro p ert y b ecau s e i ti s d el i v eredt o cl i en t s v i a o n e o r m o re t an g i bl e m ed i a, s u ch as co m pu t er h arddri v es , co m p actd is cs , co m

p ut er t ap es , o r m ag n et i c m ed i a t ap e. Rel y i n g o n Tex as In s tru m en t s , In c. v . Un i t ed St at es (Tex as In s tru m en t s I), 5 5 1 F.2 d 5 9 9 (5 th Ci r. 1 9 7 7 ), p et i t i o n er arg ues th at th e d at a s h o ul db e co n s i d eredt an g i b l e p ers o n al p ro p erty b ecau s e th e v al u e o f t h e p ro ces seds ei s m i c d at a d ep en d s en t irel y o n th e

1 7 Becau s e t h e Co u rt ’ s fi n d i n g th at th e p ro ces s eds ei s m ic d at a d o es n o t co n st i tu t e QPP i s s u ffi ci en tt o res o l v e p et i ti o ner’ s qu al i fi cat i o n fo r th e d edu ct i o n p u rs u an t t o s ec. 1 9 9(c)(4 )(A)(i )(I), t h e Co urtm ak es n o fi n d i n g as t o wh et h er p et i t i o n er’ s act i v i t i es fal l wi th i n th e d efi n i t io n o f “ m anu fact u red , p ro duced , g ro wn , o r ex tract ed ”.- 2 0 -

ex i s t en ce o f t h e t an g i b l e m ed i a an dth e d at a wo u ldn o t ex i s t wi tho u tb ei n g
reco rd edth ereo n. Res p o n d en tm ai n t ai n s th atd at a, b y i t s n atu re, i s i n tan g i b l e, an d t h e fact th at i t is d el i v eredt o p et i t i on er’ s cl i en t s o n a t an g i b l e m ed i u m d o es n o ttran s fo rm

th e d at a i n t o a t an g i b le i t em . Res p o n d en tfu rth er arg u es th atTex as In st ru m en t s I i s d i s t i n gu i sh ab l e fro m

the p res en tcas e o n b o th the l aw an dth e fact s. Th e Co u rtag rees wi th res p o n d en tth atth e p ro ces s eds ei s m i c d at a l i cen s ed b y p et i t i o n er i s i n tan g i b le. Tan g i b l e p ers o n al p ro p ert y , g en eral l y , i s an y t an g i b l e p ro p erty o th er th an l an d , real p ro p ert y , co m p u t er s o ft ware, s o u n d reco rd i n g s , qu al i fi edfi l m s , el ect ri ci ty , n atu ral g as , o r p ot ab l e wat er. Sec. 1 .1 9 9 -3 (j)(2 )(i ), In co m e Tax Reg s .; s ee al s o ADVO, In c. & Sub s . v . Co m m i s s io n er, 1 4 1 T.C. 2 9 8 , 3 1 6 (2 01 3 ). Tan g i b le p ers o n al p ro p ert y i s th atwh i ch i s “ co rp o real ,” cap ab l e o f b ei n g “ s een , wei g h ed , m eas u red , fel t , t o uch ed , o r i n an y o ther wayp ercei v edb y th e s en s es ”. Bl ack ’ s Law Di ct i o n ary (1 1 th ed . 2 0 19 ). Th e t erm “ t an g i bl e p ers o n al p ro p ert y ” d oes n o t i n cl u d e p ro p ert y i n a fo rm
o th er t han a t an g i b l e m ed i u m . Sec. 1 .1 9 9 -3 (j)(2 )(i i i ), In co m e Tax Reg s . Th e reg u l at i o n s p ro v i de, b y

way o f ex am p l e, t hatm as s -p ro duced b o o k s are t an g i b l e p ers o n al p ro p ert y , b u t n ei ther t h e ri g h t s t o th e u n d erl y in g m an u s cri p tn o r an o n l i n e
v ers i on o f t h e b o o ki s t an g ib le p ers o n al p ro p erty . Id . Si m i l arl y , co m p ut er- 2 1 -

s o ft ware, s o u n d reco rd i n gs , an dqu al ifi edfi l m s are n o t , g en eral l y s p eak i ng , t an g i b l e p ers o nal p ro p erty , ev en i f affi x edt o a t an g i b l e m ed i u m . 1 8 Id . s ub d i v . (i ). Rat h er, th e g ro s s recei p ts fro m th e s al e o f s uch i t em s are DPGR b y v irtu e o f
ex p li ci tcarv e-o u t s wi th i n th e Co d e. See s ec. 1 99 (c)(4 )(A)(i )(II), (5 ). Th e t an g i b l e
m ed i u m t o wh i ch s u ch p ro p ert y

m ay b e affi x ed , h o wev er, i s t an g i b l e p ers o n al p ro p erty . Sec. 1 .1 9 9 -3 (j)(2 )(i ), In co m e Tax Reg s . Th e i t em l i cen sed b y p et i t i o n er i n thi s cas e i s the p ro ces s eds ei s m ic d at a. Dat a, as s u ch , i s i nh eren t l y i n t an g i b l e. Itl ack s co rp o real fo rm . Th e i nt an g i b l e
n atu re o f t h i s d at a i s n o tch an g edb y p et i t i o ner’ s l oad i n g t h e i n fo rm at i o n o n t o a CD o r o th er t an g i b le m ed i u m . Su ch a m ed i u m s erv es o nl y

as the v eh i cl e o f tran s fer fo r t h e d at a; i t d o es n o tb eco m e anem b o d im en to f t h e d at a i t sel f. In
co n tras t t o th e p ri n t i ng o f a b o o k , wh ere t h e p h y s i cal m ed i u m b eco m es th e i t em i t sel f, th e d at a an dth e d el iv ery m ed i u m rem ai n s ep arat e an ds ep arab l e i t em s . Pet i t io n er’ s cl i en t s are ab l e t o tran s fer t h e p ro ces s edd at a fro m th e t an g i b le
m ed i u m , co p y

th e i nfo rm at io n , an ds h are i t wi th i n t h ei r o rg an i zat i o n. Pet i t i o ner arg u es th atTex as In s tru m en t s I co m p el s a fi n d i n g th atth e p ro ces s eds ei s m i c d at a i s t an g ib l e p ers o n al p ro p ert y . InTex as In s tru m en ts I, 5 5 1

1 8 Cert ai n ex cep t i o n s t o th i s g en eral ru l e ex i stwh ere t h e t ax p ay er h as m an u fact u redth e p h y s i cal m ed i u m o n wh ich th e s o ft ware, s o un dreco rd i ng , o r fi lm i s affi x ed
. See s ec. 1 .1 9 9 -3 (j)(5 )(i i), (k )(2 )(i ), In co m e Tax Reg s .- 2 2 -

F.2 dat 6 08 , th e U.S. Co u rto f Ap p eal s fo r t h e Fi ft h Ci rcu i tco n s id eredwh et h er
s ei s m i c fi el dt ap es an do u tp u tt ap es co n st i tu t edt an gi bl e p ers o n al p ro p ert y fo r p u rp os es o f t he s ect i on 3 8 i n v es t m en tt ax cred it(ITC). 1 9 A s ubs i d i ary o f t he t ax p ay er i n th atcas e was , l i k e p et it i on er, en g ag edi n th e b u s i n es s o f co l l ect i n g , p ro ces s i n g , an d s el l i n g o r l i cen s i n g o ffs h o re s ei s m i c d at a t o co m p an i es i n th e o i l
an d g as i n du s try . Id . Th e co m p an y co l lect edraw s ei s m i c d at a, wh i ch was
reco rd edan dtran s cri b edo n t o m ag n et i c co m pu t er t ap es cal led“ fi el dt ap es ”. Th e fi el d tap es were t h en t ak en t o th e t ax p ay er’ s p ro ces si n g cen t er, wh ere b ack g ro u n d
n o i s e an ds i g nal s were el i m i n at edan dth e ret ai n eds i g n al s s h arp en edan d
co n vert edi n t o an i m ag e rep res en t i n g a v ert i cal s li ce o f th e eart h. Id . Th e d at a rep res en t i n g th e ret ai n eds i gn al s was s to redo n “ o u tp u tt ap es ”. Id . Us i n g th e

1 9 Befo re i ts am en d m en tu n d er t h e Tax Refo rm Acto f 1 9 86 , Pub. L. No . 9 9
- 5 1 4 , 1 0 0 St at . 2 0 8 5 , th e ITC en t i tl edqu al ify i n g t ax pay ers t o an i n v es t m en tt ax cred i tequ al t o a s p eci fi ed p ercen t ag e o f t h e b as i s o f “ s ect i o n 3 8 p ro p ert y ”. Un d er th e fo rm er s ec. 4 8 (a)(1 ), the t erm “ s ect i o n 3 8 p ro p ert y ” was d efi n edt o i n cl u d e “ t an g i b le p ers o n al p ro pert y .” See al s o Tex as In s tru m en t s , In c. v . Un i t edSt at es , 5 5 1 F.2 d5 9 9, 6 0 8 (5 th Ci r. 1 9 77 ). Al th o u g h cert ai n d i s s i m i l ari t ies b et ween th e two p ro v i s i o n s ex i s t(e.g ., “ t an g i b l e p ers o n al p ro p ert y ” u nd er fo rm er s ec. 4 8 (a)(1 ) i n cl u d edco m

p u ter s oft ware, s ee No rt h wes t Co rp . & Sub s . v . Co m m i ss i o ner, 1 0 8 T.C. 3 5 8 (1 9 9 7 ), an ds o u ndreco rd i n g s , s ee EM I N. Am . Ho l d i n g s , In c. v . Un i t ed St at es , 6 7 5 F.2 d1 0 6 8 (9 th Ci r. 1 9 8 2)), t h e Co u rti n t erp ret s th e t wo p ro vi s i o n s t o b e g en eral l y

co n s is t en t. See El ec. Art s , In c. v . Co m m is s i o n er, 1 1 8 T.C. 2 2 6 , 2 4 1 (2 0 0 2) (“ Co d e p ro v i s i o n s g en eral l y are t o b e i n t erp ret eds o co n g res s io nal u s e o f th e s am e wo rd s i nd icat es an i n t en tt o h av e t h e s am e m ean i n g ap p l y , an d co n gres si o n al u s e o f d i fferen two rd s i n d icat es an i n t en tt o h av e a d ifferen t m ean i n g ap p l y .”).- 2 3 -

t ap es , th e t ax p ay er wo u ldp ro du ce co p ies o f t h e d at a, wh i ch i two u l d t h en l i cen s e t o i ts cl i en t s . Id . Th e t ax p ay er’ s el i g i b i l it y tu rn edo n wh et h er t h e d at a t ap es
co n st i tu t edt an g i b l e p ers o n al p ro p ert y . Id
. at6 0 9. Th e Co u rto f Ap p eal s co n cl ud edth atth e t ap es i n Tex as In s tru m en t s I were t an g i b l e p ers o nal p ro p erty . In reach i n g i t s co n cl u s i on , th e Co u rto f Ap p eal s art i cu l at edwh ath as co m e t o b e kn o wnas th e “ i n tri n s i c v al u e” t es t : th atp ro p ert y i s co n s i d ered“ i n t an g i b l e i f i ts i n tri n s ic v al u e i s at tri b u tab l e t o i ts i n t an g i bl e el em en t s rat h er t h ant o an y o f i t s s p eci fi c t an gi b le em b o d im en t s.” Id . at 6 0 9 . In th e cas e o f t h e d at a t ap es , th e Co u rto f Ap p eal s reas on edth at“ th e v al u e o f t h e
s ei s m i c d at a i s en t i rel y

d ep en d en tup o n ex is ten ce o f t he t ap es an dfi l m s . If th e t ap es an dfi l m were d es tro y edp ri o r t o an y rep ro duct i o n o f t h e fi l m

an al o g , n o th i n g
wo u l drem ai n . An i n v es t m en t i n the d at a s i m p l y d o es n o t ex i s t wi tho u treco rd i n g
o f t h e d at a o n t an g i bl e p ro p ert y .” Id . at6 1 1
. Th e Co u rt o f Ap p eal s co m p aredth e d at a o n th e t ap es t o m as t er fi l m n eg at i v es u s edi n t h e m o t i o n p i ctu re i n dus try , wh i ch th e U.S. Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i th adh el dwere al s o t an g i b l e p ers o n al p ro p ert y

fo r ITC an d d ep reci at io n p urp o s es . Id . at6 1 0-6 1 1 ; s ee al s o W al tDi sn ey

Pro d s . v . Un i t edSt at es , 4 80 F.2 d 6 6 (9 th Ci r. 1 9 7 3 ). Pet i t i o ner u rg es th atth e p res en tcas e i s an al og o u s t o th ato f t he t ax p ay er i n Tex as In st ru m en t s I. Th ere, as h ere, t h e t ax p ay er co l l ect eds ei s m i c d at a o n fi el d- 2 4 -

t ap es an d , u s i n g co m

p l ex co m p u t er p ro ces s i n g m et h od s , tran s l at edth at d at a i n to
u s ab le i n fo rm at i o n th at itwo u l dth en s el l o r l i cen s e t o i t s cl i en t s fo r o i l an dg as
ex p lo rat i o n . Th erefo re, p et i t i o n er’ s arg u m en tg o es , l i k e th e t ax p ay er’ s d at a i n Tex as In st ru m en t s I, p et it i o n er’ s d at a s h o u l db e t reat edas t an g i b l e p ers o n al p ro p erty . Th e Co u rtd i s ag rees . Th o u g h th e s i m i lari t i es b et ween Tex as In s tru m en t s I
an d th e p res en tcas e are s up erfi ci al l y ap p eal i n g , th ere are m at eri al an dcru ci al d i fferen ces b et ween th e t w o cas es . InTex as In st ru m en t s I, th e o ri gi n al t ap es an d fi lm were t h e p ro pert y

ati s su e i n d et erm i n i ng el i g i b il i ty fo r t h e ITC. Th os e t ap es
co n tai n edth e o ri g i n al d at a t h atwas u s ed t o p ro duce co p i es o f t h e d at a an d i m ag es th atwere ev en tu al l y

s o l d o r l i cen s edt o th e t ax p ay er’ s cl i en t s . Inco n tras t , th e i t em i n the p res en t cas e i s n o tthe o ri g i n al t ap es b u tth e p ro ces s eds ei s m i c d at a, wh i ch p et i t i o n er n o n ex cl u s iv el y l i cen s es t o i t s cl i en t s . Un l i k e t h e o ri g i n al d at a t ap es i n Tex as In st ru m en t s I, th e p ro ces s eds ei s m i c d at a l icen s edb y p et it io n er i s n o t i n ex tri cab l y

l i n kedt o th e t an g i b l e m ed i u m o n wh ich i t i s reco rd ed
. Rat h er, t h e t an g i b l e m ed i u m serv es o nl y as a d el i v ery

v eh i cl e t o t ran s m i trep ro du ct i o n s o f t h e d at a fro m p et i ti o n er’ s l i b raryt o t h e cl i en t ’ s co m pu t er s y s t em . Pet i t io n er m ai n t ai n s atl eas t two co p ies of t h e d at a, i n d i fferen tl o cat i o n s , an di s cap ab l e o f reco v eri n g th e d at a s h ou l dan yth i n g h ap p en t o th e t ap es . Iti s the d at a i ts el f, an dn o tth e- 2 5 -

t an g i b l e m ed i u m , th atth e cl i en ti s i n teres t edi n . On ce t h atd at a h as b een tran s m i t t edt o th e cl i en t , th e cl i en t i s ab l e t o l o adi t o n t o i ts co m p u ters , m ak e i t s
o wnco p ies o f t h e d at a, an ds h are t h e d at a wi th i n i t s o rg an i zat i on . Th e Co u rtreco g n izedth e d i st i nct i o n b et ween th e o ri g i n al t ap es an d rep ro du ct i on s o f t h e d at a i n Tex as In st ru m en t s , In c. v . Co m m i ss i o n er (Tex as In s tru m en t s II), 9 8 T.C. 6 2 8 (1 9 9 2 ). In th atcas e t h e Co u rt co ns i d ered wh et h er t he t ax p ay er was el i g i b l e fo r t h e ITC wi th res p ect t o d at a co l l ect io n an dp ro ces s i n g
co s t s i ncu rred i n creat i n g s p ecu l at i v e d at a t ap es fro m cert ai n s ei sm i c s u rv ey s . Id
. at6 3 2
. Al l o f t h e s urv ey s were co n du ct edo n th e Ou t er Co n t i n en t al Sh el f, an dth e d at a t ap es fo r t h o s e s u rv ey s were s t o redi n Cal g ary , Al bert a, Can ad a. Id . at6 3 1. Th e t ax p ay er l icen s edth e s ei s m i c d at a t o i t s cl i en ts , d el i veri n g th e d at a o n co p ies
o f t h o s e d at a t ap es . Id . Rel y i n g o n Tex as In s tru m en t s I, th e Co u rtaccep t edth at th e o ri gi n al t ap es were t an gi bl e p ers o n al p ro p ert y . Res ol u t io n o f th e cas e tu rn ed
o n wh et h er t h o s e t ap es were “ pro p ert y ” o f a Un it edSt at es p ers o n th atwas “ u s ed fo r t h e p u rp o s e o f ex p l o ri n g fo r” res o u rces o n th e Ou t er Co n ti n en t al Sh el f wi th i n th e m ean i n g o f the rel ev an ts t atu t e. Id
. at6 3 4 . Th e t ax p ay er arg u edth at , al th o u g h th e d at a t ap es w ere s to redi n Can ad a, i ts n o n ex cl u s iv e cl i en t s u l t i m at el y u s edth e p ro p erty fo r o i l an dg as ex p l orat i o n p urp o s es o n t h e Ou t er Co n t i n en tal Sh el f, wh i ch , i n th e ab s en ce o f a p as s th ro u g h el ect i on , th e t ax p ay er arg u ed , en t it l edi tt o- 2 6 -

th e ITC. Id . at6 3 5 -6 3 6 . Th e Co u rtreject edthe t ax p ay er’ s arg u m en t , p o i n t i n g o u t th atth e t ax p ay er d i d n o t l eas e t h e o ri g i n al d at a t ap es t o i ts cl i en t s b u t, rat h er, l i cen sedco p i es o f t h e p ro ces s eds ei s m i c d at a t o i t s cl i en t s . Th e Co u rtex p l ai n ed : [T] h e fo u n d at i o n o f t h e co n cl u si o n o f th e Co urto f Ap p eal s i n * * * [Tex as In st ru m en t s I] th atth e s ei s m i c t ap es an dfi l m s were t an g i b l e p ers on al p ro p ert y

an dth atthe b as i s up o n wh ich th e ITC was co m p ut edi n cl u dedthe co s t s o f t h e s ei s m i c d at a an d i n fo rm at i o n reco rd edth ereo n was th atth ati n t an g i b l e i nfo rm at i o n d i dn o tex i s tas p ro p ert y s ep arat e fro m

i ts p h y s i cal m an i fes t at i on i n th e o ri g i n al t ap es an dfi lm s . Th o se o ri g in al t ap es an d fi l m s h adi n tri n s i c v al u e i n that th e v al u e o f t h e t ax pay er’ s i nv es t m en t i n th e s ei sm i c i n fo rm at i on was d ep en d en t up o n t h e ex i s t en ce o f t h o s e o ri g in al t ap es an dfi l m s . * * * Id . at6 3 6
. In th e p res en t cas e, p et i t i o n er d o es n o t l i cen se, l eas e, o r s el l i ts o ri gi n al t ap es o r d at a reco rd i n gs t o i t s cl i en t s . Rat h er, s i m i larl y t o t h e t ax p ay er i n Tex as In s tru m en t s II, p et i ti o n er co p i es th e p ro ces s ed d at a o nt o a s ep arat e t an g i bl e
m ed i u m , wh i ch i t u s es t o tran s m i tth e p ro ces s eds ei s m i c d at a t o i t s cl i en t s . Si g n ifi can tl y , i ti s the i n fo rm at i o n co n t ai n edo n th e t an g i b l e i t em , the p ro ces s ed
s ei s m i c d at a t h atp ro v id es i n s i g h t i n t o the p o t en t i al p res en ce o f h y dro carb o n d ep os i t s , th atp et i ti on er’ s cl i en t s s eek . Th e i n tri n s i c v al u e o f t h e i t em p et i t i o n er l i cen ses i s at tri b u t ab l e en t i rel y t o i t s i n t an g i b l e el em en t s , rat h er t h an the t an g i b l e
em bo d i m en t . Un li k e t he o ri g i n al d at a t ap es o r t h e m as t er fi l m n eg at iv es , th e v al u e
o f t h e p ro ces s edd at a i s n o ti nex t ri cab l y t i edt o the t an g i b l e m ed iu m .- 2 7 -

Th e Co u rtth erefo re co n cl u d es th at th e p ro ces s eds ei s m i c d at a d o es n o t
co n st i tu t e t an g i b l e p ers o n al p ro p ert y fo r t h e p u rp o s es o f s ect i o n 1 9 9 (c)(5 )(A). C. So u n d Reco rd in g Pet i t i o ner arg u es th at , ev en i f t h e p ro ces s eds ei s m i c d at a i s n o tt an g i b l e p ers o n al p ro p ert y , i ts t i ll fal l s wi th i n th e d efi n i t io n o f QPP b ecau s e i ti s a s o u n d
reco rd i n g , as d es cri b edi n s ect i o n 1 6 8(f)(4 ). See s ec. 1 9 9 (c)(5 )(C). Pet i t i o n er t ak es the p os it i o n th atth e reco rd i n g o f t h e refl ect eds ei s m i c en erg y wav es
co n st i tu t es a reco rd in g o f s o un db ecau s e th e l o n g itu d i n al m ech an i cal wav es th at
cau s e t h e p res su re o s ci l lat i o n s m eas u redb y the h y dro p h o n es duri n g th e s ei s m i c
s u rv ey are, i n fact , “ s o u n d ”, wi th i n th e m ean i n g o f t h e rel ev an ts t atu t es . Res po n d en td i s ag rees , arg u in g th atth e reco rd i n g o f th e s ei s m i c d at a i s n o t a s o u n d
reco rd i n g b ecau s e s o u n di s n o treco rd ed o r fi x ed
. Sect io n 1 6 8 (f)(4 ) d efi n es s o u n d reco rd i n gs as “ [a] ny wo rk s wh i ch res u l t fro m th e fi x at i o n o f a s eri es o f m u si cal , s p o k en , o r o th er s o u n d s , reg ard l es s o f t h e
n atu re o f t h e m at eri al (s u ch as d i s cs , t ap es , o r o th er p h on o reco rd i n g s ) i n wh i ch
s u ch so u n d s are em

bo d i ed .” See al s o s ec. 1 .1 9 9 -3 (j)(4 )(i ), In co m e Tax Reg s . Th e t erm “ so u n dreco rd in g s ” d oes n o ti n cl u d e t h e creat i on o f co p yri g h t edm at eri al i n a fo rm o th er t han a s o u n d reco rd i n g , s u ch as l y ri cs o r m u s ic co m po s i ti o n . Id
. s ub d iv . (i i ).- 2 8 -

Th e p ro ces s eds ei s m i c d at a, i n th e fo rm i n wh i ch i ti s d el i v eredt o p et i t i o n er’ s cl i en t s , i s n o ts o u n d ; rat h er, i t i s a v is ual rep res en t at io n o f t h e
s ub s u rface o f t h e s u rv ey edarea, as d eri v ed th ro u g h an al y s i s an dp ro ces s i n g o f t h e
reco rd eds ei sm i c en erg y . Ev en i f t h e Co u rtwere t o accep t p et i t i o n er’ s co n t en t i o n th atth e m ari n e s ei s m i c d at a co n s t i tu t es s o u n d wi th i n th e m ean i n g o f t h e s t atu t e, i t d o es no tfo l l o w th atth e fi n al p ro du ct(i .e., th e p ro ces s eds ei s m i c d at a) i s a “ wo rk [] wh i ch res u l t [s ] fro m

th e fi x at i on o f a s eri es o f m u s i cal , s po k en , o r o th er s o u n d s ”. See s ec. 1 6 8 (f)(4 ). A v i s u al rep res en t at i o n o f reco rd eds ei s m i c en erg y (wh et h er o r
n o ts u ch en erg y

i s co n s i d ered so u n d ) d o es n o tfal l wi th in the am b i to f s ect i o n 1 6 8 (f)(4 ). Th e Co u rtfi n d s fu rt h er s up p ortfo r t h i s co n cl u s i o n i n s ect i o n 1 .1 9 9
- 3 (j)(4 )(i i ), In co m e Tax Reg s ., wh i ch ex cl u d es fro m th e d efi n i ti o n o f s o u n d
reco rd i n g s “ co p y

ri g h t edm at eri al i n a fo rm o th er t h an a s o u n d reco rd in g , s u ch as l yri cs o r m

u s i c co m p os i ti o n .” In o th er wo rd s , rep res en t at i o n s o f s o u n di n a
m an n er o th er t han i n an au d i bl e fo rm at are n o tth em s el v es “ s o u n dreco rd i ng s ”. Th i s l o g i c i s n o l es s ap p l i cab l e t o s ub s u rface m ap pi n g, wh i ch , l i k e l yri cs o r m u s i c
co m p o s i t i o n , i s a v i s u al p o rtray al d eri v edfro m th e reco rd eds o u nd , an d n o ta
reco rd i n g o f s o u n d i n an do f i t s el f. Fu rt her, t h e p ro ces seds ei s m i c d at a n ei th er i s a “ wo rk ” n o r res u l t s fro m th e

“ fi x at i o n ” o f s ou n d . A wo rki s “ an o ri gi n al ex p res si o n , i n fi x edo r t an g i b l e fo rm- 2 9 -

* * * t hatm ay

b e en t i t l edt o co m

m o n -l aw o r s t atu t ory

co p yri g h t p ro t ect i on .” Bl ack ’ s Law Di ct i o n ary

(1 1 th ed . 2 0 19 ). “ Fi x at i o n ” i s an ot h er t erm o f artwi th i n
co p y ri g h tl aw, referri n g t o th e “ p ro ces s o r res u l t o f reco rd i n g a wo rko f au th o rs h i p i n t an g i b l e fo rm

s o thati tcan b e co p yri g h t edu n d er fed eral l aw.” Id .; s ee al s o 1 7 U.S.C. s ec. 1 0 1 (2 0 1 8 ) (d efi n i ng “ fi x ed ” i n the co n t ex t o f t i t l e 1 7 ). Pet i t i o ner d o es n o tco n t en d , an d t h e Co u rtd o es n o tfi n d , th atth e p ro ces s ed
s ei s m i c d at a i s an o ri g i n al wo rko f au th o rs hi p p ro tect edb y U.S. co p yri g h t l aw. Rat h er, th e p ro ces s edd at a i s m o re ak i n t o a u s efu l art i cl e, a cat eg o ry t o wh i ch Co n g res s h as n o tex t en d edco p yri g h tp ro t ect i o n . 2 0 Th e Co u rt co n cl u d es thatth e d efi n i t i o n o f “ s o u n dreco rd in g ” i n s ect i o n 1 9 9 (c)(5 )(C) refers t o o ri g i n al p ieces o f
au th o rs h i p an dn o t , as p et i t i o n er co n t en d s , s u ch u s efu l art icl es as p ro ces s edm ari ne
s ei s m i c d at a. Th e Co u rtth erefo re co n cl u d es th at th e p ro ces s edm ari n e s ei s m i c d at a i s n o t a “ s o u n d reco rd i n g ” wi th i n th e m ean i n g o f s ect i on s 1 99 (c)(5 )(C) an d1 6 8(f)(4 ). D. Co n cl u si o n Th e Co u rth o l ds thatthe p ro ces s edm ari n e s ei s m i c d at a i s n ei th er t an g i b l e p ers o n al p ro p ert y

n o r a s o u n d reco rd i n g wi th i n th e m ean i n g o f s ect i o n 1 9 9.

2 0 A u s efu l art i cl e i s “ an art i cl e h av in g i n tri n s i c u t i l it ari an fu n ct i o n th ati s n o t m erel y t o p o rt ray

th e ap p earan ce o f t h e art icl e o r t o co n v ey i n fo rm at i o n.” 1 7 U.S.C. s ec. 1 0 1 (2 0 1 8 ).- 3 0 -

Pet i t io n er th erefo re h as n o ts at i s fi edth e req u i rem en t s o f s ect io n 1 99 (c)(4 )(A)(i )(I) b ecau s e th e p ro ces s edm ari n e s ei s m i c d at a l eas edb y p et i t i o n er i s n o tQPP, as d efi n edb y

s ect i o n 1 9 9 (c)(5 ). IV. En g i n eeri n g Serv ices W it h Res p ect t o Co n s tru ct i o n o f Real Pro pert y i n th e Un i t edSt at es Pet i t i o ner arg u es , al t ern at i v el y , thati t s g ro s s recei p t s fro m the s al e o r l i cen si n g o f p ro ces sed m ari n e s ei s m i c d at a co n s t i tu t e DPGR b ecau s e t h e recei p t s are d eri v edfro m

en g i n eeri n g s erv i ces wi th res pect t o the co n st ru ct io n o f real p ro p erty i n th e Un i tedSt at es 2 1 wi th i n th e m ean in g o f s ect i o n 1 9 9(c)(4 )(A)(i i i ) an d th e reg u l at i o n s . As d i s cu s s edi n g reat er d et ai l b el o w, th e Co u rtag rees . 2 2

2 1 Fo r p u rp o s es o f s ec. 1 9 9 , “ Un i tedSt at es ” i s d efi n edt o i n cl u d e “ th e t erri t ori al wat ers o f t he Un it edSt at es , an dth e s eab edan d s ub s oi l o f t ho s e s ub m ari n e areas th at are ad j acen tt o t h e t erri t o ri al wat ers o f t h e Un i t edSt at es an d o v er wh i ch th e Un i tedSt at es h as ex cl us i v e ri g ht s , i n acco rd an ce wi th i n tern at i o n al l aw, wi th res p ectt o th e ex p l o rat i o n an dex p l o i tat i o n o f n atu ral res o u rces .” Sec. 1 .1 99 -3 (h ), In co m e Tax Reg s .

2 2 Pet i t i o ner p erfo rm ed cert ai n s erv ices ei th er o u t s i d e th e Un i t edSt at es o r i n co n nect io n wi th th e co n s tru ct i o n o f real p ro p ert y o u t s i d e t he Un i t edSt at es . Th e p art i es h av e s ti p ul at ed th at , i f t h e Co u rtfi n d s t h at p et i t i o n er’ s act i v i t i es co n s t i tu t e en g in eeri n g s erv i ces wi th i n th e req u i rem en t s o f s ec. 1 9 9 (c)(4 )(A)(i i i ), p et i t i o n er’ s DPAD wo u l d be l i m it edt o an am o u n twh i ch refl ect s o n l y th o s e recei p t s i n co n nect io n wi th co n s tru ct i o n o f real p ro p ert y i n th e Un i t edSt at es .- 3 1 -

A. En g i n eeri n g Serv ices In th e cas e o f a t ax p ay er en g ag ed i n th e act i v e co n du cto f an en g i n eeri n g o r arch i t ectu ral s erv i ces trad e o r b u s in es s , s ect i o n 1 9 9(c)(4 )(A)(i i i ) i n cl u d es wi th i n th e d efi n i t i o n o f DPGR t h e g ro s s recei p t s o f t h e t ax p ay er wh i ch are d eri vedfro m

“ en g i n eeri n g o r arch it ectu ral s erv i ces p erfo rm edi n th e Un i t ed St at es b y th e t ax p ay er i n th e o rd i n ary

co u rs e o f s u ch trad e o r b u s i n es s wi th res p ectt o th e
co n st ru ct i o n o f real p ro p ert y i n th e Un i t edSt at es .” As a t h res h ol dm at ter, t h e Co u rt m u s tfi rs t d et erm i n e wh et h er p et i t i on er i s
en g ag edi n th e act i v e co n du cto f an en gi n eeri n g o r arch i tect u ral s erv i ces trad e o r b u s i n es s . “ En g i n eeri n g s erv i ces ” i n cl u d es “ an y p ro fes s i o nal s erv i ces req u i ri n g
en g in eeri n g edu cat i o n , trai n i n g, an dex p eri en ce an dth e ap p li cat i o n o f s p eci al kn o wl ed g e o f t h e m at h em at i cal , p h y s i cal , o r en g i n eeri n g s ci en ces t o tho s e p ro fes s i on al s erv i ces s u ch as co n s u l tat i o n , i n v es t i g at i o n , ev al u at i o n , p l an n i n g , d es i g n , o r res p o n si b l e s up erv i s i o n o f co n s tru ct io n * * * o r erect i o n , i n co n n ect io n wi th an y co n s tru ct i o n p ro

ject .” Sec. 1 .1 9 9 -3 (n )(2 ), In co m e Tax Reg s. Atth e t i m e a t ax p ay er p erfo rm s t h e en g i n eeri n g s erv ices , th e t ax p ay er m u s tb e “ en g ag edi n a trad e o r b u si n es s * * * th ati s co n si d ereden g i n eeri n g o r arch i t ectu ral s erv i ces fo r p u rp os es o f t he * * * [No rth Am eri can In du s try Cl as s ifi cat i o n Sy s t em

(NAICS)]
o n a reg u l ar an do n g o i ng b as i s .” Id . s ub p ara. (1 ).- 3 2 -

Pet i t i o ner p ro v i d edex ten s i v e ev i den ce d em o n s trat i n g th ati ti s en gag edi n th e act i v e co n du cto f an en g i n eeri n g s erv i ces trad e o r b u si n es s an dth ati t s act i vi t i es co n s ti tu t e en g i n eeri n g s erv i ces wi th i n th e m ean i n g o f s ect i o n 1 9 9 (c)(4 )(A)(i ii ). Pet i ti on er’ s b u s i n es s i n v o l v es th e acq u i s i t i o n, p ro ces s i n g, an d l i cen si n g o f m ari n e s ei s m ic d at a, act i v i t i es wh ich req u i re ex t en s i v e kn o w l ed g e an d trai n in g i n , i n t er al i a, g eo lo g i cal an dg eo p h y s ical s ci en ces , m ech an i cal
en g in eeri n g , m at h em at i cs , an dp h y s i cs . Th e p ro ces s i n g of t h e raw s ei sm i c d at a req ui res h i g h -p o weredco m p u t er t ech n o l o g y

an dco m p l ex p ro ces s i ng s o ft ware. Pet i t i o ner m ai n t ai n s a s ei s m i c d at a p ro ces s i n g cen t er i n Ho u s t o n , atwh i ch i th o u ses i t s co m p ut er t erm i n al s an dd at a
s t orag e s erv ers . Duri n g 2 0 08 p et i t i o ner’ s p ro ces s i n g cen t er em p lo y edan i m ag i n g t eam o f ap p ro x i m at el y 5 5 i n d i v i du al s wi th ad v an cedd eg rees o r ex t en s i v e
ex p eri en ce i n m at hem at i cs o r t h e p h y s i cal s ci en ces . Th es e em pl o y ees were i n v o l v ed i n v ari ou s s t ag es o f th e d at a p ro ces si ng s equ en ce, ap p l y in g t h ei r edu cat i o n an d trai n i n g t o m an i p u l at e t h e raw s ei s m i c d at a u s i n g g eo p h y s i cal p ri n ci p l es t o p ro du ce a v i su al rep res en t at i o n o f t h e s ub s u rface o f a g i v enarea. In ad d it i o n , p et i t i o n er em

p lo y s 1 5 s ci en t i st s , wh o ai di n res earch an dd ev el o p m en tt o i m p ro v e an den h an ce t he p ro ces s i n g al g o ri th m s an d m et h o d o l o g y , an d v ari o u s- 3 3 -

i n fo rm at i o n t ech n o l o g y

s p eci al i s t s t o s up p o rtth e co m p u t er an drel at edh ard ware fu n ct i o n al i ty o f t he p ro ces s in g g ro up. M o reo v er, p et i t i o n er’ s act i v i t ies fal l s qu arel y wi thi n NAICS b u s i n es s act i vi ty co d e 5 4 1 36 0 , “ Geo p h y s i cal Su rv ey i n g an d M ap p i n g Serv i ces ”, wh i ch i s cat eg o ri zedu n d er t he d es i g nat i o n 5 4 1 3 , “ Arch i t ectu ral En g i n eeri n g , an dRel at ed Serv i ces ”. See s ec. 1 .1 99 -3 (n )(1 ), In co m e Tax Reg s . NAICS d efi n es

“ Geo ph y si cal Su rv ey i n g an d M ap p i n g Serv i ces ” as fo l lo ws : Th i s i ndu s try

co m p ri ses es t ab l i s h m en t s p ri m ari l y en g ag edi n g at h eri n g , i n t erp ret i n g , an dm ap p i n g g eo p h y s i cal d at a. Es t ab l i s h m en t s i n thi s i n du s try o ft en s peci al i ze i n l o cat in g an d m eas u ri n g th e ex t en t o f s ub s u rface res o u rces , s uch as o i l , g as , an d m i n eral s, b u tth ey

m ay al s o co n du cts u rv ey s fo r en g i n eeri n g p u rp o s es . Es t ab l i sh m en t s i n th i s i n du s try u s e a v ari et y o f s u rv ey i n g t ech ni qu es d ep en di n g o n th e p u rp o s e o f t h e s u rv ey , i n cl u d i n g m ag n et i c s u rv ey s , g rav i ty s u rv ey s , s ei s m i c s u rv ey s , o r el ect ri cal an d el ect ro m ag n et ic s u rv ey s. Du ri n g 2 0 0 8 p et i t i o n er was act iv el y i n v o l v edi n th e i n t erp ret at i o n an d
m ap p i ng o f m ari n e s ei s m i c d at a t o as s i s ti n th e l o cat io n an dacq u i s i ti o n o f o i l an d g as . Th e Co u rtco n cl u d es th atp et i t i o n er was en g ag ed i n th e act iv e co n ducto f an
en g in eeri n g o r arch i t ectu ral s erv i ces trad e o r b u s i n es s an d t h ati t s p ro ces s in g o f
raw s ei s m i c d at a co n s t itu t ed en g i n eeri n g s erv i ces wi th i n th e d efi n i t i on s etfo rt h i n
s ect i on 1 9 9 (c)(4 )(A)(i i i ) an dthe reg u lat i o ns th ereu n der.- 3 4 -

B. Co n s tru ct io n o f Real Pro p ert y Ev en i f p et i t i o n er was en g ag edi n the act i v e co n ducto f an en g in eeri n g
s erv i ces trad e o r b u s i n es s , i ts g ro s s recei pt s fo r t h o se s erv i ces d o n o tqu al i fy as DPGR u n l es s th e s erv i ces were p erfo rm ed“ wi th res p ectt o th e co n s tru ct i o n o f real p ro p erty i n th e Un i tedSt at es .” Sec. 1 9 9 (c)(4 )(A)(i i i ). Th e Co u rtm u s t th erefo re
co n si d er wh eth er p et i t i o n er’ s p ro ces s i n g o f m ari n e s ei s m i c d at a fo r i ts cl i en t s was p erfo rm ed“ wi th res p ectt o co n s t ru ct i o n o f real p ro pert y .” 2 3 Sect io n 1 .1 9 9 -3 (m )(1 )(i ), In co m e Tax Reg s ., d efi nes “ co n s tru ct i o n ” t o m ean

“ act i v i t ies an ds erv i ces rel at i n g t o the co n s tru ct i o n o r erect i o n o f real p ro p ert y (as d efi n edi n p arag rap h (m )(3 ) o f t h i s s ect i o n ) i n the Un i t ed St at es b y a t ax p ay er t h at , atthe t im e t h e t ax pay er co n s tru ct s th e real p ro p ert y , i s en g ag ed i n a t rad e o r b u s i n es s * * * th ati s co n si d eredco n s tru ct i o n fo r p u rp o s es o f t h e * * * [NAICS]
o n a reg u l ar an do n g o i ng b as i s .” See al so i d. p ara. (n )(1 ) (“ DPGR i n cl ud e g ro s s recei p t s d eri vedfro m

en g i n eeri n g o r arch i tect u ral s erv i ces p erfo rm edi n th e Un i t ed St at es fo r a co n st ru ct i o n p ro jectd es cri bedi n p arag rap h (m )(1 )(i ) o f t h i s s ect i o n .”). Su ch co n s tru ct i o n act i vi ty m ay rel at e t o the co n st ru ct i o n o f real p ro p ert y s u ch as

2 3 As referen ceds up ra n o t e 2 2 , th e p art i es ag ree t h at , i f p et i t i o n er o th erwi s e m eet s th e req u irem en t s o f s ec. 1 9 9(c)(4 )(A)(i i i ), p et i t i o ner’ s DPGR wi l l b e l i m i ted t o o n l y th o se g ro s s recei p ts recei v edfo r p ro ces s in g d at a i n the Un i t edSt at es , wi t h res p ectt o o i l an d n atu ral g as p ro p ert ies i n th e Un i t edSt at es . Th e Co u rt ’ s d i s cu s s i o n h erei n i s t h erefo re l i m i t edt o o n l y s u ch s erv i ces .- 3 5 -

dri l l i n g o i l an dg as wel l s o r s up p ortact i v i t i es fo r o i l an d g as o p erat i o n s . Id . p ara. (m )(1 ), (3 ). Act i v i t i es co ns t i tu t i n g co n st ru ct io n are act i v i ti es “p erfo rm edi n
co n nect io n wi th a p ro

jectt o erect o r s ubs t an t i al l y ren o v at e real p ro p ert y ”. Id
. s ub p ara. (2 )(i ). As d et ai l edi n t he t es t i m o n y o f ex p ertwi tn es ses p res en t edb y b o th p art i es , p ro ces s eds ei s m i c d at a i s u s edb y o il an dg as co m

p an ies i n s up p o rto f t he
ex p lo rat i o n , ap p rai sal , d ev el o p m en t , an d p ro du ct i o n p h as es o f o i l an dg as p ro duct i o n . Pet i t io n er’ s cl i en t s i n cl u dedv ari o u s en erg y o r o i l an dg as co m

p an i es , as wel l as o ther co m

p an ies en g ag edi n th e ex p l orat i o n fo r o r d ev el o p m en t o f dri l l i n g o i l an dg as wel l s . Res p o n d en tco n t en d s th atp et i t i o n er’ s act i v i t i es are n o tp erfo rm ed“ wi th
res p ectt o co n s tru ct io n o f real p ro p erty ” b ecau s e p et i t i o n er’ s cl i en t s u s e t h e p ro ces s eds ei s m i c d at a “ fo r a v ari et y o f reas o n s o th er t h an t o dri l l a wel l ”. Us es fo r p ro ces s eds ei sm i c d at a i n cl u d e t o d et erm i n e s tru ctu ral an ds trat i g rap h i c p ro p ert i es ; t o qu al i fy

o r quan t i fy

co m p et i t o r p ro sp ect s ; t o d et erm i n e g o v ern m en t l eas i ng v al u e; t o ev al u at e o p p o rtu n i ti es t o i n v es ti n a p ro ject ; t o d et erm i n e
res erv o i r h o ld in g s ; t o t i e t o wel l co n tro l fo r l i th o l o g i cal i d en t i fi cat i o n ; t o es t i m at e
res erv o i r ro ckty

p es an dp o ro s i ty ; t o p rep are res erv o i r p ro du ct i o n eco n o m ic fo recas ts ; fo r wel l p l an n i n g ; t o i m p ro v e o r m ai n tai n res erv o ir p ro du ct i o n rat es ; t o- 3 6 -

o p t i m i ze i n fi ll dri l l i n g l o cat i o n s t o as s es s reg i o n al tren ds ; an d t o acq u i re m o re ad v an cedd at a t h an th at wh i ch th e co m p an y al read y h as . 2 4 Res p o n d en ti s co rrect th atp et i t i o n er’ s cl ien t s m ay l icen s e t h e p ro ces s ed
s ei s m i c d at a o th er t h an fo r t h e d i rect an d i m m ed i at e p u rp o se o f dri l l i n g o f a wel l
. Al l o f t he p u rp o s es ci t edb y res p o n d en t , h o wev er, are i n s erv ice o f th e cl i en t ’ s
u l t i m at e o b

ject i v e, wh i ch i s t o i d en t i fy p o t en t i al d ep os i t s o f h y dro carb o n s an d
co n st ru ctdri l l i n g an ds up po rti n fras tru cture. Su ch en d s are co n si s t en twi th th e
s t atu te, wh ich req u i res th atth e en gi n eeri n g s erv i ces b e p ro v id ed“ wi th res p ectt o”
co n st ru ct i o n , s ec. 1 99 (c)(4 )(A)(i i i ), an dwi th th e reg u l at io n s , wh i ch d efi ne
co n st ru ct i o n t o i n cl u de “ act i v i ti es an ds erv i ces rel at in g t o ” th e co ns tru ct i o n o f real p ro p erty , s ec. 1 .1 9 9 -3 (m )(1 )(i ), In co m e Tax Reg s . Pet i t i o ner’ s cl i en t s u s e t h e p ro ces s ed s ei sm i c d at a, am o n g o th er reas o n s , t o
ev al u at e t h e p res en ce o f h y dro carb o n d ep o s i t s , t o d et erm i ne wh ere (o r wh et h er) t o dri l l o r co n s tru ctwel ls an drel at edi n fras tru ctu re, t o d et erm i n e wh et h er t o i n v es ti n a p art icu l ar wel l , t o d et erm i n e res erv o i r h o l d i ng s , o r t o g ai n a m o re co m pl et e
u n d ers t an d i n g o f t h e s ubs u rface o f a g i ven area. Th e Co u rtco n cl u d es th atth e

2 4 Sei s m i c d at a m ay

al s o b e u s edfo r o th er p u rp o s es , s u ch as s ci en ti fi c o r res earch p u rp o s es . Res po n d en td o es n o tal l eg e, an dn o th i n g i n th e ev i den ce s u g g es t s , th atp et i t i o n er’ s cl ai m edDPGR i n cl u des s u ch s al es . In d eed , p et i t i o n er’ s cl i en t l i s tan ds al es cal cu l at i o n i n cl u d e o n l y co m p an i es en g ag edi n o i l an d g as ex p lo rat i o n an dp ro du ct i o n .- 3 7 -

p ro ces s edm ari n e s ei s m i c d at a i s u sedb y p et i t i o n er’ s cl i en ts i n s upp o rto f th e
co n st ru ct i o n o f real p ro p ert y , as d efi n edb y s ect i o n 1 9 9 (c)(4 )(A)(i i i ) an d t h e reg u l at i o n s th ereu n d er. C. Res p o nd en t ’ s Arg u m en t s Res p o n d en tco n t en d s th atp et i t i o n er d o es n o t m eetth e req u i rem en t s fo r ap p li cat io n o f s ect i on 1 99 (c)(4 )(A)(i i i). Sp eci fi cal l y , res po n d en targ ues th at p et i t i o n er i s n o tp ro v i d i n g a s erv i ce; th atan y s erv i ce p et i t i o n er d o es p ro vi d e i s n o t p ro v id edatth e t i m e i t s cl i en tco n s tru ct s th e p ro p ert y ; an dth ats ei s m ic d at a i s o n l y
o n e o f m an y

ty p es o f d at a rel i edup on b y g eo s ci en t is t s i n d et erm i n i n g wh et h er t o dri l l
. Th e Co u rtd i s ag rees wi th th es e arg u m en t s . Res p o n d en t ’ s co n t en t i o n th at p et i t i o n er i s “ n o t pro vi d i n g a s erv i ce” i s wi th o u tm eri t . Res p o n d en t arg ues th at p et i t i o n er “ d o es n o th i n g m o re t h an p ro v i d e d at a t hati s i nco rp o rat ed , as o n e p i ece
o f a d at a p i e, i n to an al y s i s d o n e b y i t s cl i en t s . * * * [Pet i t i o ner] h as n o ro l e i n an y
s ub s equ en tact iv i ty

aft er th e cu s t o m er g et s th e d at a.” Th i s as s es sm en t
m i s ch aract eri zes p et i t i on er’ s act i v it y . Pet i t io n er’ s p ro ces si n g an d rep ro ces s i n g o f
s ei s m i c d at a i s a h i g h l y

t ech n i cal an dco m

p l ex p ro cedure t h atreq ui res th e l ab o r
an d s erv ices o f wel l-edu cat edem p l oy ees an dth e ap p l i cat i o n o f t h ei r s p eci al i zed- 3 8 -

kn o wl ed g e an d j u d gm en t . A ty p i cal s ei s m i c s u rv ey

m ay t ak e o n e t o two y ears t o p ro ces s , requ i ri n g at l eas tfo u r t rai n edg eo p hy s i ci s t s wo rk in g fu l l t i m e. M o reo v er, t h atp et i t i o n er’ s s erv i ces are o n l y p arto f i ts cl i en t’ s l arg er
o p erat i o n i s n o ti n co n s i s t en twi th th e s t atu to ry req u i rem en t th at s uch s erv i ces b e p ro v id ed“ wi th res p ectt o the co n s tru ct i o n o f real p ro p erty i n th e Un i t edSt at es , ”
s ec. 1 9 9(c)(4 )(A)(i i i ), o r wi th th e reg u l at ory req u i rem en t th ats u ch s erv i ces b e p ro v id ed“ i n co n n ect i o n wi th an y co n s tru ct i o n p ro

ject ”, s ec. 1 .1 9 9 -3 (n )(2 ), In co m e Tax Reg s . No th i n g i n th e t ex to f t h e s t atu t e o r t h e reg u l at io n s req u i res th atth e en gi n eeri n g s erv i ces th atp et i t i o ner p ro v i d edb e th e s ol e d at a up o n wh i ch i t s cl i en trel i ed , n o r d o es th e t ex to f ei th er req u i re t h atp et i t i o n er rem ai n i n v o l v ed th ro u g h ou tth e du rat i o n o f th e co n s tru ct i o n p ro ject
. Si m i l arl y , res p o n d en t’ s arg u m en tth atp et i t i o n er d o es n o t“p ro v i d [e] an y
s erv i ces atth e t i m e i ts cu s t o m er co n s tru ct s an y real p ro p erty ” m is read s th e rel ev an t t ex t . Sect i o n 1 .1 99 -3 (n )(1 ), In co m e Tax Reg s., p ro vi d es th at“ [a] tth e t i m e t h e t ax p ay er p erfo rm s th e en g i n eeri n g o r arch i t ectu ral s erv i ces , the t ax p ay er
m u stb e en g ag edi n a t rad e o r b u s i n es s * * * th at i s co ns i d ered en gi n eeri n g o r arch i t ectu ral s erv i ces fo r p u rp os es o f t h e NAICS * * * o n a reg u l ar an do n go i n g b as i s .” “ Co n s tru ct i o n p ro ject ” fo r th e p u rp o s es o f s ect i o n 1 9 9 (c)(4 )(A)(i i i ) refers t o the d efi n i t i o n p ro v i d ed i n s ect i o n 1 .1 9 9 -3 (m )(1 )(i ), In co m e Tax Reg s. See s ec.- 3 9 -

1 .1 99 -3 (n )(1 ), In co m e Tax Reg s . Sect i o n 1 .1 9 9 -3 (m )(1 )(i ), In co m e Tax Reg s ., s et s fo rth th at [t ] h e t erm co ns tru ct i on m ean s act i v i ti es an ds erv i ces rel at in g t o th e co n s tru ct io n o r erect i o n o f real p ro p ert y * * * i n th e Un i t edSt at es b y a t ax p ay er t h at , at th e t i m e t he t ax p ay er co n s tru ct s the real p ro p ert y , i s en g ag edi n a t rad e o r b u s i n es s * * * th ati s co n si d eredco n st ru ct io n fo r t h e p u rp o s es o f t h e * * * [NAICS] o n a reg u l ar an do ng o i n g b as i s . In th e reg u lat i o n ab o v e, t h e p h ras e “ atth e t i m e t h e t ax p ay er co n s tru ct s th e real p ro p ert y ” refers t o t ax p ay ers s u ch as p et i t i o ner’ s cl i en t s, wh o p erfo rm th e
co n st ru ct i o n , requ i ri n g th ats u ch t ax p ay ers b e en g ag edi n th e reg u l ar an d o n g o i n g trad e o r b u si n es s o f co ns tru ct i o n act i v i ty . Th atd efi n i t i o n , readi n co n jun ct i o n wi th s ect i o n 1 .1 9 9-3 (n )(1 ), In co m e Tax Reg s ., d o es n o treq u ire t h atth e
co n st ru ct i o n b e u n d erwayat th e t i m e t h e en g i n eeri n g s erv i ces are p ro v i d ed , b u t rat h er, t h at the en g i n eeri n g s erv i ces b e p ro v i d edb y t ax p ay ers l i k e p et i t i o n er i n
s up p orto f a co n s tru ct i o n p ro jectu n d ert ak en b y

p art i es en g ag edi n th e co n s tru ct i o n i n du s try . Fu rt her, t h e p h ras e “ act i vi t i es an d s erv i ces rel at i n g t o ” co n s tru ct i o n act i vi t i es i s co n s tru edt o i n cl u de, i n the co n t ex to f p ro v id i n g en g i n eeri n g s erv i ces , act i vi t i es th ato ccu r b efo re t h e co n s tru ct i on act i v i ty b eg i n s . Sect io n 1 .1 9 9 -3 (n )(1 ), In co m e Tax Reg s ., ex p l i ci t l y p ro v i d es fo r th e i n cl u s i o n o f g ro s s recei pt s fo r

“ feas i b i l i ty

s tu d ies fo r a co ns tru ct i on p ro jecti n t h e Un i t edSt at es , ev eni f t h e- 4 0 -

p l an n ed co n s tru ct i o n p ro

jecti s n o tu n d ert ak en o r i s n o tco m p l et ed .” (Em

p has i s ad d ed .) A feas i b i l i ty s tu dy , b y d efi n it i o n , o ccu rs b efo re th e co m m en cem en to f t h e
co n st ru ct i o n act i v i ty . Si m i larl y , a t ax pay er p ro v i d in g en gi n eeri n g s erv i ces t o d et erm i n e t h e s u i t ab il i ty

o f a d ri l l i n g p ro

jectwi l l g en eral ly

d o s o b efo re t h e p ro

ject i s u n d ert ak en . Res p o n d en tad d i t io n al l y

arg u es th at , ev en i f th e p ro ces si n g o f s ei sm i c d at a d o es co n s t i tu t e en g in eeri n g s erv i ces wi th i n th e m ean in g o f s ect i o n 1 9 9 (c)(4 )(A)(i ii ), p et i t io n er’ s rep ro du ct i o n rev en u e an dth e rev en u e earn edi n
co n nect io n wi th th e l icen s i n g o f d at a fo r wh i ch the p ro ces s i ng s erv i ces were
co n tract ed t o o ther co m

p an i es d o n o t . Acco rd i ng l y , res p o n d en t co n t en ds th at
rev en u e earn edfro m s uch act i v i t i es s h o u l d n o tb e i n cl u d edi n DPGR. Du ri n g 2 0 0 8 p et i t i o n er recei v ed an dcl ai m edas DPGR $ 9 ,5 9 2 ,9 7 4 i n rep ro du ct i on rev en u e. Rep ro du ct io n rev en u e refers t o rev en u e recei v ed b y p et i t i o n er wi th res p ectt o p ro ces s eds ei s m i c d at a s o ldo r l i cen s ed b y p et i t i on er b u t
o wn edb y p et i ti o n er’ s p aren t co m

p an y . Pet i t io n er p ro ces s edth e raw s ei sm i c d at a
o wn edb y i t s p aren t, s t o redth e d at a i n i t s d at a m an ag em en tcen t er, an dfi l led
o rd ers fro m

cl i en ts b y

co p y i n g th e p ro ces s edd at a fro m i t s l i b rary

o n to t an g i b l e
m ed i a an d p ro v i d in g i t t o th e cl i en t . Al l o f t he act iv i ti es p et i t i o n er p erfo rm edwere p erfo rm edwi th i n t h e Un i t ed St at es .- 4 1 -

Onth e b as is o f th e ev i d en ce i n th e reco rd , th e Co u rtco n cl u d es th at , t o th e
ex t en tth atp et i t i o n er recei v ed rep ro du ct i o n rev en u e fro m i t s o wncl i en t s fo r p ro ces s i n g s erv i ces fo r co n s tru ct i o n act i v i t i es i n th e Un i t edSt at es , s u ch recei p t s
are n o d i fferen tfro m

th e s erv i ces p et i t i o ner g en eral ly p ro vi d ed ; th e d i fferen ce i s
m erel y th e o wn ers h i p o f the u nd erl y i n g raw s ei s m i c d at a. Wh ere, h o wev er, p et i t i o n er h as rep ro du ct i o n rev en u e recei v edfro m i t s p aren twh ere p et i t i o n er h as
u s ed raw s ei s m ic d at a o wn edb y i t s p aren t , t o p ro v i d e an d p ro ces s s u rv ey s t o th e p aren t ’ s cl i en t s, th e Co u rtco n cl u d es th atth e s erv i ces p et i t i o n er p ro v id es are t o o
rem o v edfro m th e co n s tru ct i o n act i v i ty t o s at i s fy th e req u i rem en t s o f s ect i o n 1 9 9 (c)(4 )(A)(i ii ) an dthatp et i t i o n er i s n o ten t it l edt o a DPAD fo r an y o f th o s e
am ou n t s . W i th res p ect t o th e rev en u e earn edi n co n n ect i o n wi th th e l i cen s i n g o f d at a fo r wh i ch th e p ro ces s i n g s erv i ces were co n tract edt o o th er co m p an i es , th e Co u rt ag rees wi th p et i ti o n er t h ats u ch rev en u e m ay b e i n cl u d edi n p et i t i o n er’ s DPGR (t o th e ex t en tth atth e o th er req ui rem en t s o f s ect i o n 1 99 are m etan dth e d at a was p ro ces s edfo r p et i t i o n er’ s cl i en t s an dn o ti t s p aren t ’ s cl i en t s ) b ecau se p et i ti o n er p erfo rm eden g i n eeri n g s erv i ces fo r i t s cl i en t s i n co n n ect i o n wi th the p ro ces s i n g o f th atd at a, as wel l . Att i m es , p art i cu l arl y wh en th e co m

p an y was s m al l er, p et i t i o n er
wo u l dco n tract a p o rt i o n o f i t s p ro ces s i n g wo rkt o o th er co m p an i es wh en th e n eed- 4 2 -

fo r s erv i ces o u tp aced i t s cap aci ty . Wh en d oi ng s o , p et i t i o n er wo ul ds etth e p aram et ers o f th e as si g n m en tan dwo u l dd es ig n at e a m em ber o f i t s qu al i ty co n t ro l t eam t o wo rko n s i t e atth e co n tract edco m p an y t o en s u re co m

p l ian ce wi th p et i t i o n er’ s s t an d ard s. Su ch act i v i t i es s t i ll req u i re kn o wl ed g e an dap p l i cat i o n o f
s ei s m i c p ro ces s i n g an d , th e Co u rtfi n ds , are s u ffi ci en tt o fal l wi th in th e s co p e o f

“ en g i n eeri n g s erv i ces ”, as d efi n ed b y th e Co de an dth e reg u l at io n s . Fi n al l y , th e p art ies h av e s t i p u l at edth ats o m e p o rt i o n o f th e DPGR was
rev en u e d eri vedfro m

p et it i o n er’ s o wn ers hi p o f o v erri d in g ro y al ty i n t eres ts (ORRI). Pet i t i o n er h as fai l edt o ex p l ai n wh y an y g en eral l y accep t ed d efi n i t i o n o f ORRI wo u l dqual i fy

u nd er t h e en g i n eeri n g ex cep t io n fo r t h e co n st ru ct io n o f real p ro p erty wi th i n th e Un i t edSt at es . Su ch ORRI i n co m e d o es n o t s at i sfy th e req u i rem en t s o f s ect i o n 1 9 9 (c)(4 )(A)(i i i ). Th e Co u rtco n cl u d es th atp et i t i o ner’ s act i v i ti es co n s t i tu t e en g i n eeri n g
s erv i ces wi th i n th e m ean i ng o f s ect i o n 1 9 9 (c)(4 )(A)(i i i ). Acco rd i ng l y , the Co u rt h o l d s th atp et i t i on er i s en t i tl edt o a DPAD i n th e am o un tco n di t i o n al l y s ti p u l at ed b y th e p art i es fo r 2 0 0 8 , s ub

jectt o th e l i m i t at i on s s etfo rt h ab ov e. V. Co n cl u si o n Fo r t h e fo reg o i n g reas o n s an ds ub jectt o th e l i m i t at i o n s d i s cu s s eds up ra
n o t es 2 2 an d2 3 an d p artIV.C, th e Co u rtco n cl u d es th at p et i t io n er’ s g ro s s recei p t s- 4 3 -

fro m i t s l i cen s in g o f p ro ces s edm ari n e s ei sm i c d at a co n s t itu t e DPGR b ecau s e t h e recei p t s are d eri v edfro m en gi neeri n g s erv i ces wi th res p ectt o th e co n s tru ct i o n o f real p ro p ert y

i n t h e Un i t edSt at es . Th e Co u rth as co n s id eredth e p art ies ’ arg u m en t s an d , t o th e ex t en t n o tad dres sedh erei n , co n cl u d es th atth ey are m o o t , i rrel ev an t , o r wi th o u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.