II

105TH CONGRESS

2D SESSION S. 1692

To amend the Internal Revenue Code of 1986 to provide software trade

secrets protection.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 27, 1998

Mr. NICKLES (for himself, Mr. BAUCUS, Mrs. HUTCHISON, and Mr. MURKOWSKI) introduced the following bill; which was read twice and referred to

the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

software trade secrets protection.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Software Trade Se5 crets Protection Act’’.

6 SEC. 2. SOFTWARE TRADE SECRETS PROTECTION.

7 (a) IN GENERAL.—Subchapter A of chapter 78 of the

8 Internal Revenue Code of 1986 (relating to examination

9 and inspection) is amended by redesignating section 7612

10 as section 7613 and by inserting after 7611 the following:
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1 ‘‘SEC. 7612. SPECIAL PROCEDURES FOR SUMMONSES FOR

2 COMPUTER SOFTWARE.

3 ‘‘(a) LIMITATION ON AUTHORITY TO REQUIRE PRO4 DUCTION OF COMPUTER SOFTWARE SOURCE CODE.—

5 ‘‘(1) IN GENERAL.—No summons may be

6 issued under this title, and the Secretary may not

7 begin any action under section 7604 to enforce any

8 summons, to produce or examine any computer soft9 ware source code or related customer communica10 tions, and training materials.

11 ‘‘(2) EXCEPTION WHERE INFORMATION NOT

12 OTHERWISE AVAILABLE TO VERIFY CORRECTNESS

13 OF ITEM ON RETURN.—Paragraph (1) shall not

14 apply to any portion, item, or component of com15 puter software source code if—

16 ‘‘(A) the Secretary, without examining the

17 computer software source code, is unable to

18 otherwise ascertain with reasonable accuracy

19 the correctness of any item on a return after

20 employing auditing procedures and practices

21 otherwise used pursuant to this title,

22 ‘‘(B) the Secretary identifies with reason23 able specificity the portion, item, or component

24 of such code needed to verify the correctness of

25 such item on the return, and
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1 ‘‘(C) the Secretary demonstrates that with

2 respect to the issue under examination the need

3 for the portion, item, or component of the com4 puter software source code requested outweighs

5 the burdens of production imposed on the sum6 moned person and the risks of disclosure of

7 trade secrets.

8 ‘‘(3) OTHER EXCEPTIONS.—Paragraph (1) shall

9 not apply to—

10 ‘‘(A) any inquiry into any offense con11 nected with the administration or enforcement

12 of the internal revenue laws, and

13 ‘‘(B) any computer software developed by

14 the taxpayer or a related person (within the

15 meaning of section 267 or 707(b)) for internal

16 use by the taxpayer or such person and not for

17 commercial purposes.

18 ‘‘(4) ENFORCEMENT PROCEEDING.—In any

19 proceeding brought under section 7604 to enforce a

20 summons issued under this section, the court shall

21 hold a hearing to determine whether the Secretary

22 has met the requirements of paragraph (2).

23 ‘‘(5) COMPLIANCE WITH SUMMONS FOR COM24 PUTER SOFTWARE SOURCE CODE.—Any person to

25 whom a summons for a portion, item, or component
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1 of computer software source code is issued shall be

2 deemed to have complied with such summons by pro3 ducing a hard-copy printout of such code.

4 ‘‘(b) PROTECTION OF TRADE SECRETS AND OTHER

5 CONFIDENTIAL INFORMATION.—

6 ‘‘(1) ENTRY OF PROTECTIVE ORDER.—In any

7 court proceeding to enforce a summons for any por8 tion of software, the court may receive evidence and

9 issue any order necessary to prevent undue burdens

10 or the disclosure of trade secrets or other confiden11 tial information with respect to such software, in12 cluding providing that any information be placed

13 under seal to be opened only as directed by the

14 court.

15 ‘‘(2) PROTECTION OF SOFTWARE.—Notwith16 standing any other provision of this section, and in

17 addition to any protections ordered pursuant to

18 paragraph (1), in the case of software that comes

19 into the possession or control of the Secretary in the

20 course of any examination with respect to any tax21 payer—

22 ‘‘(A) the software may be examined only in

23 connection with the examination of such tax24 payer’s return,
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1 ‘‘(B) the software may be disclosed only to

2 persons conducting such examination whose du3 ties or responsibilities require access to the soft4 ware,

5 ‘‘(C) the software shall be maintained in a

6 secure area or place, and, in the case of com7 puter software source code and related docu8 ments, shall not be removed from the owner’s

9 place of business,

10 ‘‘(D) the software may not be copied ex11 cept as necessary to perform such examination,

12 ‘‘(E) at the end of the examination (and

13 any judicial review of the summons issued

14 under this section), the software and all copies

15 thereof shall be returned to the person from

16 whom they were obtained and any copies there17 of made under subparagraph (D) on the hard

18 drive of a machine or other mass storage device

19 shall be permanently deleted and any notes or

20 other memoranda made with regard to such

21 software shall be destroyed,

22 ‘‘(F) the software may not be decompiled,

23 disassembled, or reverse engineered, and

24 ‘‘(G) the Secretary shall provide to the tax25 payer and the owner of any interest in such
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1 software, as the case may be, a written agree2 ment between the Secretary and any person

3 who will examine or otherwise have access to

4 such software, in which such person agrees—

5 ‘‘(i) not to disclose such software to

6 any person other than authorized employ7 ees or agents of the Secretary during and

8 after employment by the Secretary, and

9 ‘‘(ii) not to compete with the owner of

10 the software for a period of 2 years after

11 disclosure to such person of such software.

12 ‘‘The owner of any interest in the software shall be

13 considered a party to any agreement described in

14 subparagraph (G).

15 ‘‘(c) COMPLIANCE WITH SUMMONS FOR CERTAIN

16 COMPUTER SOFTWARE EXECUTABLE CODE.—Any tax17 payer to whom is issued a summons for commercially

18 available computer software executable code used to pre19 pare such taxpayer’s return or to account for the tax20 payer’s transactions with others shall be deemed to have

21 complied with such summons by producing a read-only

22 version of such code.

23 ‘‘(d) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) SOFTWARE.—The term ‘software’ includes

2 computer software source code and computer soft3 ware executable code.

4 ‘‘(2) COMPUTER SOFTWARE SOURCE CODE.—

5 The term ‘computer software source code’ means—

6 ‘‘(A) the code written by a programmer

7 using a programming language which is com8 prehensible to appropriately trained persons, is

9 not machine readable, and is not capable of di10 rectly being used to give instructions to a com11 puter, and

12 ‘‘(B) related programmers’ notes, design

13 documents, memoranda, and similar docu14 mentation, excluding customer communications

15 and training materials.

16 ‘‘(3) COMPUTER SOFTWARE EXECUTABLE

17 CODE.—The term ‘computer software executable

18 code’ means—

19 ‘‘(A) any object code, machine code, or

20 other code readable by a computer when loaded

21 into its memory and used directly by such com22 puter to execute instructions, and

23 ‘‘(B) any related user manuals.’’.

24 (b) UNAUTHORIZED DISCLOSURE OF SOFTWARE.—

25 Section 7213 of the Internal Revenue Code of 1986 (relat-
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1 ing to unauthorized disclosure of information) is amended

2 by redesignating subsection (d) as subsection (e) and by

3 inserting after subsection (c) the following:

4 ‘‘(d) DISCLOSURE OF SOFTWARE.—Any person who

5 divulges or makes known in any manner whatever not pro6 vided under section 7612 to any other person software (as

7 defined in section 7612(d)(1)) shall be guilty of a felony

8 and, upon conviction thereof, shall be fined not more than

9 $5,000, or imprisoned not more than 5 years, or both, to10 gether with the costs of prosecution.’’.

11 (c) CONFORMING AMENDMENT.—The table of sec12 tions for subchapter A of chapter 78 of the Internal Reve13 nue Code of 1986 is amended by striking the item relating

14 to section 7612 and by inserting the following:

‘‘Sec. 7612. Special procedures for summonses for computer software.

‘‘Sec. 7613. Cross references.’’.

15 (d) EFFECTIVE DATE.—The amendments made by

16 this section shall take effect on the date of enactment of

17 this Act.

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