108 T.C. No. 18

UNITED STATES TAX COURT

NORWEST CORPORATION AND SUBSIDIARIES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13908-92. Filed April 30, 1997.

P purchased operating and applications software

for use in its banking and related businesses. The

software was acquired subject to license agreements

that entitled P to use the software on a nonexclusive,

nontransferable basis for an indefinite or perpetual

term. P did not purchase any exclusive copyright

rights or other intellectual property rights underlying

any of the software in issue and was not permitted to

reproduce the software outside P's affiliated group.

Held: The computer software acquired by P is

tangible personal property eligible for the investment

tax credit. The intrinsic value test set forth in

Texas Instruments, Inc. v. United States, 551 F.2d 599

(5th Cir. 1977), and adopted by this Court in Ronnen v.

Commissioner, 90 T.C. 74 (1988), is not applied to the

computer software in issue. The test of tangibility in

Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir.

1994), is not adopted.
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Mark Hager, Robert J. Jones, and Susan K. Matlow, for

petitioner.

Robert M. Ratchford and Robert M. Fowler, for respondent.

HALPERN, Judge: Respondent determined the following

deficiencies in petitioner's Federal income taxes:

Year Deficiency

1983 $2,605,571

1984 2,442,134

1985 29,187

1986 19,301,530

Respondent also determined that the provision for increased

interest under section 6621(c) applied for 1983, 1984, and 1986. 

Unless otherwise noted, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure. 

 After concessions by the parties and the continuation of

other issues, the sole issue for decision is whether certain

computer software expenditures made by petitioner during the

years in issue qualify for the investment tax credit. Resolution

of that issue depends on the characterization of the acquired

software as either tangible or intangible property, as only

investments in tangible property are eligible for the investment

tax credit. We conclude that the acquired software is tangible

personal property eligible for the investment tax credit.
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1 The stipulation of facts and accompanying exhibits are

incorporated herein by this reference. The trial Judge made the

following Findings of Fact, which we adopt.

FINDINGS OF FACT1

Background

Petitioner is a group of affiliated corporations (the

Norwest affiliated group) that provides banking and other

financial services. Petitioner files consolidated Federal income

tax returns. At the time the petition was filed, petitioner's

principal place of business was located in Minneapolis,

Minnesota.

Petitioner extensively uses computers in processing data and

in providing essential accounting and other business functions. 

During the years in issue, petitioner utilized three types of

computer systems: (1) large-scale “mainframe” computers, which

were used to process large amounts of data and transactions at a

central location, (2) minicomputers, which were typically used to

process self-contained single business applications, such as

processing transactions from automated teller machines (ATMs) or 

controlling the work stations that tellers use to process

transactions in a bank, and (3) personal computers (PCs), which

were generally smaller stand-alone devices used for wordprocessing and spread-sheet applications.

Each of the above-described computer systems requires

operating software (also called systems software) and
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2 Typically, a substantial portion of the time used in

developing a computer program is spent in the design phase, with 

considerably less time spent on programming (typing or “keying

in”) the lines of source code.

applications software to enable the computer to function and

perform specific tasks. Operating software is used to manage the

operations of a computer; it schedules and controls jobs, keeps

track of the placement and storage of information, manages

traffic, and generally enables a computer to process a particular

application. Applications software provides specific business

functions like accounting, transaction processing, calculating

interest, and producing customer statements. Petitioner

purchased both operating and applications software during the

years in issue.

Software enables a computer to function and perform specific

tasks by providing instructions, or commands, to the computer

system. The instructions are written in a programming language,

or source code, understandable to humans, such as COBOL (Common

Business Oriented Language) or FORTRAN (Formula and Translation

code). The source code is written, line by line, by programmers

in accordance with the overall design of the computer program and

the specific tasks a computer is to perform.2 A completed

computer program may contain hundreds of thousands of lines of

source code and is eligible for copyright protection.

A compiler is used to convert source code into a machinereadable computer language, known as executable, or object, code. 
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3 For example, in the American Standard Code for Information

Interchange (ASCII), the binary representation for the letter “A”

is 01000001, and the binary representation for the letter “Z” is

01011010.

4 The surface of the computer disk or tape is magnetically

encoded with the executable code by magnetizing the crystals or

particles in the recording medium corresponding to the sequence

of zeros and ones making up the binary system of executable code. 

For example, under the “nonreturn to zero inverted” (NRZI)

encoding method, every zero is represented on the disk or tape by

a magnet pointing in a certain direction, and every one by a

magnet pointing in the opposite direction. The amount of

information contained on a disk or tape is a function of the

magnetic recording density of the disk or tape. The information

on the disk or tape is interpreted by the computer when the

magnetic bits are converted into electrical signals.

Executable code is composed of sequences of binary digits (zeros

and ones). Each digit is called a “bit”, and eight-bit sequences

are called “bytes”.3 A computer program can be written onto a

magnetic disk or tape by encoding its particular executable code

on the surface of the disk or tape.4 That magnetic recording

allows the computer processor to read the executable code and to

perform the specific tasks directed by the code.

Generally, the cost of a blank tape, similar to one upon

which the computer programs acquired by petitioner were placed,

was less than $25 during the years in issue. An encoded computer

program can easily be transferred or copied onto additional blank

tapes and disks, resulting in identical reproductions of the

program. A computer program can also reside on media other than

magnetic tapes and disks, such as punch cards and CD-ROMs
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5 Although CD-ROM technology had been developed, it was not

widely used as a means of distributing software during the years

in issue. Further, during the years in issue, punch cards had

become obsolete.

(compact disk read-only memory).5 Moreover, computer programs

can be received preinstalled on a computer's hard disk drive

(internal storage device) and can be transferred from one

computer to another via electronic transmission over telephone

lines without the use of intervening tapes and disks. Although

telephonic transmission was technologically possible during the

years in issue, it was slow and unreliable and, therefore, was

not a feasible method of transferring a large computer program. 

All of the software in issue was delivered to petitioner as

computer programs encoded on magnetic tapes and disks. The

software was purchased separately from computer hardware.

Petitioner's Software Expenditures

All of the software expenditures in issue were for software

developed by third parties and sold to members of the Norwest

affiliated group for use in their banking and financial services

operations. The software was either of a type available to the

general public or a specialized type of software used by

financial institutions like petitioner. The software was sold

subject to license agreements that entitled petitioner to use the

software on a nonexclusive, nontransferable basis for an

indefinite or perpetual term. Petitioner did not purchase any

exclusive copyright rights or other intellectual property rights
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6 In some cases, the computer program source code (or a

portion of it) was made available to petitioner to assist in

making the desired modifications and in correcting program

errors. In those instances, however, petitioner was not entitled

to reproduce the source code for use outside the Norwest

affiliated group.

7 Pursuant to the license agreements, petitioner was typically

permitted to make a limited number of backup copies of each

computer program for emergency purposes only.

underlying any of the software in issue; petitioner did not

purchase the right to reproduce such software outside the Norwest

affiliated group.

All mainframe software purchased by petitioner during the

years in issue consisted of computer programs encoded on magnetic

tape (for large applications, on several reels of tape) and was

either shipped or personally delivered by a service

representative to petitioner's mainframe site. Each computer

program was loaded (copied from the magnetic tape) onto the

mainframe computer's own storage medium, known as a “disk pack”. 

The computer program would then be tested and modified, as

necessary, over a period of several weeks or months. 

Modifications were made, for example, to change the layout of a

screen, to add or revise reports, or to conform the title of a

field to normal usage in petitioner’s business operations.6

After the computer program was installed, petitioner retained the

original tape or an exact copy in case a problem occurred that

required the program to be reloaded onto the mainframe computer.7

Typically, one copy was kept on site for immediate access, and a
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8 The installation process was essentially the same for

minicomputer software. A computer program would be received on

magnetic tape, loaded onto the minicomputer, and tested for

errors before being put into service. Additionally, both on-site

and off-site backup copies were maintained. Computer programs

for personal computers (PCs) were received on small diskettes

(floppy disks) and loaded onto the PC's hard disk drive. Because

PC software is significantly cheaper and easier to replace,

petitioner did not make backup copies of PC software for off-site

storage.

second copy was kept off site as a second backup to the on-site

copy in the event of a disaster.8

Petitioner typically entered into a maintenance and support

agreement with the vendor (usually for an additional periodic

fee) in conjunction with the purchase of mainframe or

minicomputer software whereby the vendor agreed to correct errors

in the computer program and to provide updated versions of the

software as they became available. If a copy of software had

been lost or destroyed (and a backup had not been made), a

replacement copy would have been provided to petitioner by the

vendor without charge.

Petitioner was entitled to only one running version of each

copy of software purchased. Thus, if petitioner desired to load

a copy of software onto a second computer (which it did),

additional copies had to be purchased (sometimes at reduced

rates) or a multiple-machine license was required.
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OPINION

I. Introduction

A. Issue

Petitioner purchased during the years in issue operating and

applications software for use in its banking and financial

services businesses. The software was acquired subject to

license agreements that entitled petitioner to use the software

on a nonexclusive, nontransferable basis for an indefinite or

perpetual term. Petitioner did not purchase any exclusive

copyright rights or other intellectual property rights underlying

any of the software in issue and was not permitted to reproduce

the software outside the Norwest affiliated group. The sole

issue for decision is whether petitioner's software expenditures

qualify for the investment tax credit (ITC). Resolution of that

issue depends on the characterization of the acquired software as

either tangible or intangible property. We conclude that the

acquired software is tangible personal property eligible for the

investment tax credit.

B. Arguments of the Parties

Petitioner contends that the computer software it purchased

during the years in issue constitutes tangible personal property

eligible for the investment tax credit under section 38. 

Petitioner's position stems from its interpretation of the

“intrinsic value” test first enunciated by the Court of Appeals

for the Fifth Circuit (the Fifth Circuit) in Texas Instruments,
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Inc. v. United States, 551 F.2d 599 (5th Cir. 1977). We adopted

the intrinsic value test in Ronnen v. Commissioner, 90 T.C. 74

(1988), and held that the computer software in issue in that case

was intangible property for purposes of the ITC. Petitioner

argues that Ronnen and its progeny are distinguishable from the

present case and finds support for its position that computer

software is tangible personal property in a more recent decision

of the Court of Appeals for the Sixth Circuit (the Sixth

Circuit), Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir.

1994). In Comshare, the court adopted an interpretation of the

intrinsic value test seemingly different from our own and held

that a computer program's master source code embodied in magnetic

tapes and disks constituted tangible personal property for

purposes of the ITC. Petitioner argues that the rationale in

Comshare is the better one as it stems from and is supported by

the approach of the Fifth Circuit in Texas Instruments and by the

approach of the Court of Appeals for the Ninth Circuit (the Ninth

Circuit) in a series of cases holding that certain master sound

recordings and motion picture negatives were tangible personal

property eligible for the investment tax credit (Disney line of

cases). See EMI N. Am. Holdings, Inc. v. United States, 675 F.2d

1068 (9th Cir. 1982); Bing Crosby Prods., Inc. v. United States,

588 F.2d 1293 (9th Cir. 1979); Walt Disney Prods. v. United

States, 549 F.2d 576 (9th Cir. 1976); Walt Disney Prods. v.

United States, 480 F.2d 66 (9th Cir. 1973).
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In addition to relying on the cases cited above, petitioner

contends that computer software should be eligible for the

investment tax credit for the following reasons: (1) Congress

did not intend the term “tangible personal property” to be

defined narrowly; (2) the Commissioner has held in Rev. Rul. 71-

177, 1971-1 C.B. 5, that software acquired in conjunction with

the purchase of a new computer is eligible for the ITC; (3) the

Commissioner's treatment of software as “export property”

pursuant to other Code provisions supports a finding that

software is tangible personal property; and (4) software is

treated as tangible property upon which sales and use taxes may

be imposed under the laws of a majority of the States.

Respondent contends that computer software is intangible

property and that our holdings to that effect in Ronnen v.

Commissioner, supra, and its progeny are applicable herein. 

Respondent also argues that Comshare, Inc. v. United States,

supra, was incorrectly decided or, alternatively, that Comshare,

as well as the Fifth and Ninth Circuit decisions relied upon by

petitioner, are distinguishable from the present case. Lastly,

respondent disagrees with petitioner's interpretation of and

reliance on the additional authorities mentioned above.

II. Analysis

A. Code and Regulations

Section 38 allows the investment tax credit. The ITC is

calculated as a specified percentage of the taxpayer's investment
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in “section 38 property” placed in service during the taxable

year. Section 48(a) defines “section 38 property” as including,

among other things, “tangible personal property”. The term

“tangible personal property” is not defined in the statute. 

Section 1.48-1(c), Income Tax Regs., however, states that “the

term ‘tangible personal property’ means any tangible property

except land and improvements thereto”. Section 1.48-1(f), Income

Tax Regs., states that “[i]ntangible property, such as patents,

copyrights, and subscription lists, does not qualify as section

38 property.” In sum, the relevant statutory provisions and

regulations thereunder provide limited guidance in determining

the characterization of operating and applications software for

purposes of the ITC.

B. Case Law

The Fifth Circuit in Texas Instruments, Inc. v. United

States, supra at 611, held that seismic data tapes and film “have

intrinsic value because the seismic information thereon does not

exist as property separate from the physical manifestation” and,

therefore, were tangible personal property for purposes of the

ITC. A subsidiary of Texas Instruments, Inc. (GSID), was in the

business of collecting, processing, and selling or licensing

seismic information to customers engaged in oil and gas

exploration. Id. at 608. GSID's customers were furnished with

pictures derived from a complicated collection and editing

process that depicted the contours of the earth's different
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strata. Id. The Fifth Circuit described that process as

follows:

The method used in collecting the seismic data

needed to produce such pictures was to introduce sound

into the ground and then capture the various reflected

vibrations from the subterrain in microphone-like

receivers. Those receivers then transmitted the

electronic impulses to recording stations where the

impulses were transcribed onto magnetic computer tapes

known as “field” tapes. From there the impulses

recorded on the field tapes were taken to a processing

center where background noise or signals were

eliminated. With the retained or primary signals

sharpened by the editing process, a “final” or “output”

tape was produced. Using a computer, the information

contained on the output tapes as electronic impulses

was then transformed into a picture representing a

vertical slice of the earth. The computers through

which the field tapes were processed are digital

computers and the reflex signal data were placed on the

output tapes in digital form. [Id.]

The Fifth Circuit explained its holding as follows:

[T]he value of the seismic data is entirely dependent

upon existence of the tapes and film. If the tapes and

film were destroyed prior to any reproduction of the

film analog, nothing would remain. An investment in

the data simply does not exist without recording of the

data on tangible property. Thus the basis of the

tangible tapes and films must include the costs of

collecting seismic * * * data and recording it on the

tangible property, with the result being an asset

constituting “tangible personal property.” [Id. at

611.]

This Court in Ronnen v. Commissioner, 90 T.C. 74 (1988),

adopted the so-called intrinsic value test created by the Fifth

Circuit in Texas Instruments, Inc. v. United States, 551 F.2d 599

(5th Cir. 1977). In Ronnen, the taxpayers were principal

shareholders of an S corporation, HSL, formed to purchase the

rights to a computer software package designed to assist nursing
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homes with regulatory reporting requirements. See Ronnen v.

Commissioner, supra at 75-77. The corporation received, among

other things, copies of the computer program and the right to

commercially exploit the program in a particular territory. See

id. at 82-83. The master source tape was held by the seller for

security reasons and was available to HSL on an as-needed basis. 

Id. at 83.

This Court found inapplicable the series of cases in the

Ninth Circuit holding that certain master sound recordings and

motion picture negatives were tangible personal property eligible

for the ITC. We distinguished the master negatives in the Disney

line of cases by stating, “HSL's software was not a ‘capital

asset’ used to create copies. In fact, HSL was not in possession

of the master tape.” Id. at 98. This Court then turned to the

Fifth Circuit's analysis in Texas Instruments, Inc. v. United

States, supra. This Court stated:

The Internal Revenue Service took the position

that the investment was in the cost of the intangible,

the seismic data, and not in the tangible films and

tapes. The Fifth Circuit interpreted the Internal

Revenue Service's argument to suggest “that property is

intangible if its intrinsic value is attributable to

its intangible elements rather than to any of its

specific tangible embodiments.” Based on this

“intrisic value” [sic] test, the court held that the

taxpayer's investment in the information was an

investment in tangible property because “the value of

the seismic data was totally dependent upon the

existence of the tapes and films. If the tapes and

film were destroyed prior to any reproduction, nothing

would remain. An investment in the data simply does

not exist without recording of the data on tangible

property.” In looking at the property's “intrinsic
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value,” the court found that the information placed on

the tangible disks and tapes was tangible personal

property because the seismic data did not exist as

property separate from the physical manifestation. 

* * * [Ronnen v. Commissioner, supra at 99; citations

omitted.]

After presenting the Fifth Circuit's explanation of its

holding in Texas Instruments, Inc. v. United States, supra, this

Court simply stated: “We apply the ‘intrinsic value’ test

adopted by Texas Instruments to the facts of this case to

conclude that the intrinsic value of the HSL software is

attributable to its intangible elements rather than to its

tangible embodiments.” Ronnen v. Commissioner, supra at 99-100. 

This Court held that the computer software in issue was

intangible and, thus, ineligible for the ITC. Id. at 100. We

have since followed Ronnen on numerous occasions and have held

that computer software is intangible property for purposes of the

ITC. See, e.g., Kansas City S. Indus., Inc. v. Commissioner, 98

T.C. 242, 262-264 (1992); Gantner v. Commissioner, 91 T.C. 713,

728 (1988), affd. on other grounds 905 F.2d 241 (8th Cir. 1990).

More recently in Comshare, Inc. v. United States, 27 F.3d

1142 (6th Cir. 1994), the Sixth Circuit held that a computer

program's master source code embodied in magnetic tapes and disks

constituted tangible personal property for purposes of the ITC. 

The taxpayer in Comshare purchased tapes and disks embodying

master source codes and the “associated know-how, copyrights,

licenses, manuals, and rights to modify, reproduce, and
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distribute.” Id. at 1143. The source code was converted into

executable code, and from a master copy of the executable code,

duplicates (executable code software) were distributed to

Comshare's customers. Id. at 1144.

First, the Sixth Circuit, citing the statutory language,

acknowledged that Congress extended the ITC to tangible personal

property in general, subject only to specified exceptions

inapplicable to the case at bar. Id. at 1145. The court noted

that the legislative history supported a broad interpretation of

the term “tangible personal property”. Id. Considering the

legislative purpose in enacting the ITC, the Sixth Circuit

believed that Congress intended “to encourage precisely the kinds

of investments” made by Comshare in acquiring the master source

codes. Id. at 1146.

The Sixth Circuit then analyzed the line of cases beginning

with Walt Disney Prods. v. United States, 327 F. Supp. 189 (C.D.

Cal. 1971). The court could not distinguish film negatives used

to make positive prints of movies from computer tapes used to

make copies of executable code software. The Sixth Circuit then

considered Texas Instruments, Inc. v. United States, supra, and

considered “highly pertinent” the language quoted above relating

to the intrinsic value test. Comshare, Inc. v. United States,

supra at 1148. The court stated that “[u]nless the Fifth

Circuit's reasoning is somehow flawed, Texas Instruments would
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appear to be dispositive of the issue presented in the case at

bar.” Id. at 1149.

In disposing of the Government's argument that the

“inextricable connection” between the intangible information and

the tangible tapes in Texas Instruments, Inc. v. United States,

supra, was not replicated in Comshare, Inc. v. United States,

supra, and that “sound waves reverberating through the earth's

crusts” are distinguishable from the “thought processes of the

people who developed the master source code”, the Sixth Circuit

stated:

We find neither of these arguments persuasive. 

Sound waves and brain waves are about equally

incorporeal, it seems to us--and the connection between

the information and the medium embodying it is no less

inextricable in this case than it was in Texas

Instruments, or, for that matter, in the Disney cases. 

[Id. at 1149.]

The court believed that “[w]hat matters, under Texas Instruments,

is that the value of the source code and the associated

intangible rights was entirely dependent upon the existence of

the tapes and discs.” Id. In addition, the Sixth Circuit was

not persuaded by the assertion in Bank of Vermont v. United

States, 61 AFTR 2d 88-788, 88-1 USTC par. 9169 (D. Vt. 1988),

that a computer program is not inextricably connected to the

medium on which it is stored.

The court in Bank of Vermont held that computer software

consisting of application programs stored on magnetic tapes was

intangible property and, therefore, ineligible for the ITC. Id.
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at 88-792, 88-1 USTC par. 9169, at 83,251. That court

distinguished Texas Instruments, Inc. v. United States, 551 F.2d

599 (5th Cir. 1977), in the following manner:

[T]he intangible information (seismic data) and the

tangible medium (magnetic tape) were inextricably

connected. The former could not exist without the

latter. In the present action, the intangible

information (the software) is not necessarily dependent

upon the tangible medium (the magnetic computer tapes). 

The application programs exist on paper and conceivably

in the mind of the programmer as well. The placement

of the program on the tape, facilitates the sale of the

program--it is not, however, the only way that the

program can exist. The computer tape functions merely

as one type of conduit for the ideas contained on it. 

The nexus between the intangible information and the

tangible medium is far more attenuated in this action

than in Texas Instruments. [Bank of Vermont v. United

States, 61 AFTR 2d at 88-790, 88-1 USTC par. 9169, at

83,250.]

The Sixth Circuit in Comshare, Inc. v. United States, supra,

explicitly rejected that distinction, finding it to be contrary

to the facts in Comshare, and stated that the ideas and the

medium in the case at bar were inextricably connected because the

“master source code tapes and discs could not exist in usable

form without the tangible medium.” Id. at 1149.

The Sixth Circuit also addressed our opinion in Ronnen v.

Commissioner, 90 T.C. 74 (1988). The court stated that the

discussion in Ronnen regarding the Disney line of cases supported

Comshare's position because Comshare used the master source code

tapes and disks as capital assets to create products for its

customers, whereas the corporation in Ronnen did not purchase a

capital asset used to create copies or possess the master source
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tape. Comshare, Inc. v. United States, 27 F.3d at 1150. Turning

to this Court's application of the test of tangibility set forth

in Texas Instruments, Inc. v. United States, supra, the Sixth

Circuit stated:

We express no view as to whether the Fifth

Circuit's “totally dependent” test was applied

correctly in Ronnen. If the same test is applied to

the facts of record here, however, it seems clear to us

that the property acquired by Comshare was no less

tangible than the property acquired by the taxpayer in

Texas Instruments. * * * the critically important fact

is that the taxpayer's investment could not be put to

productive use, and would thus be worthless, unless the

information were embodied on tapes and discs accessible

to the taxpayer. [Comshare, Inc. v. United States,

supra at 1150.]

The court concluded that Comshare was entitled to an investment

tax credit on the total cost of the master source codes and

associated intellectual property rights.

C. Examining the Distinction Between Seismic Data and a

Computer Program

This Court in Ronnen v. Commissioner, supra, applied the

intrinsic value test set forth in Texas Instruments, Inc. v.

United States, supra, and held that the computer software in

issue in that case was intangible property for purposes of the

ITC. We did so without making either a rigorous analysis of the

rationale underlying that test or a detailed comparison of the

computer software in issue and the seismic data tapes and film in

Texas Instruments, Inc. v. United States, supra. This Court

determined, implicitly, that the intangible component of the

property in issue, the computer program, existed as property
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separate and apart from its physical manifestation, the tapes. 

In other words, by holding that the computer software in issue

was intangible property, this Court concluded that the

inextricable connection between the seismic data and the tapes

and film in Texas Instruments, Inc. v. United States, supra, does

not exist between a computer program and its tangible residences. 

In Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir. 1994),

the Sixth Circuit found no significant distinction between sound

waves and brain waves in relation to the physical embodiment of

any resulting information. The analysis made by the Sixth

Circuit brings into question the distinction relied on by us in

Ronnen v. Commissioner, supra, and prompts us to reexamine the

basis for that distinction.

For the purposes of applying the intrinsic value test as

interpreted by this Court, there is no fundamental difference

between seismic data and a computer program. Seismic data

theoretically exists in the geologic features of the subterrain

in the same way that a computer program theoretically exists in

the mind of its creator. Similar to a computer program, seismic

data may exist in various forms and occupy numerous tangible

residences in that it can be embodied in field tapes, output

tapes, analog film, or even seismic pictures. The compilation of

both types of information requires human exertion.

Those who see a distinction between seismic data and a

computer program may contend that the fundamental difference
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between the two types of information is that a compilation of

seismic data is an original recording of physical events that

could never be perfectly reproduced; in other words, it is a

particular rendition of human exertion, whereas numerous

renditions of human exertion in writing a computer program could

result in identical source codes. That distinction, however, is

illusory. First, the fact that seismic data may differ each time

the same subterrain is bombarded with sound waves is relevant

only if differences in the data create material changes to the

seismic pictures that would be purchased by oil and gas

explorers. It seems unlikely that changes in geologic features,

which generally occur over long periods of time, qualitatively

affect the nature of the corresponding seismic data. Second,

even if the seismic picture of an unchanging feature would be

different because of changes in the recording and editing

process, it is still theoretically possible to disregard those

different processes and to reproduce a materially

indistinguishable seismic picture, just as it would be

theoretically possible to disregard different programming

languages and to rewrite a computer program in the language used

to create the original source code. The essential point is that

there is no material distinction in the theoretical duplicability

of the human exertion required to gather both types of

information.
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Those who see a distinction between seismic data and a

computer program may also assert that, although the inextricable

connection between both types of information to its respective

tangible residences may be analogous, seismic data does not exist

as property apart from its physical manifestation, whereas a

computer program does exist as property apart from the disks and

tapes upon which it resides. In other words, the argument is

that if the seismic data tapes and film are destroyed prior to

reproduction, nothing remains, but if the only copy of a computer

program's source code that has not yet been converted to

executable code is destroyed, the computer program still exists

as intellectual property. First, that assertion fails to

recognize a basic condition of copyright protection, that a work

must be fixed in a “tangible medium of expression”; ideas alone

are not protected. See 17 U.S.C. sec. 102 (1994). In addition,

the coexistence of two distinct property interests, the right to

a specific copy of a computer program and the copyright

underlying that computer program, should not affect the tangible

or intangible character of either. In any event, there is no

principled distinction between seismic data and a computer

program in terms of the existence of either as property apart

from its physical manifestation. 

In sum, seismic data embodied in field tapes as electronic

impulses are analogous to a computer program embodied in tapes

and disks as a master source code written in COBOL, FORTRAN, or
- 23 -

any other programming language. Thus, operating and applications

software, which is the product of converting a source code by

means of a compiler into configurations of machine-readable

computer language known as executable code, is analogous to the

output tapes that were produced from the field tapes using a

digital computer. See Texas Instruments, Inc. v. United States,

551 F.2d at 608 (“the impulses recorded on the field tapes were

taken to a processing center where background noise or signals

were eliminated. With the retained or primary signals sharpened

by the editing process, a ‘final’ or ‘output’ tape was

produced.”). Essentially, for the purposes of applying the

intrinsic value test as interpreted by this Court, the seismic

data were as inextricably bound to the field and output tapes in

Texas Instruments, Inc. v. United States, 551 F.2d 599 (5th Cir.

1977), as the master source codes were to the tapes and disks in

Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir. 1994),

and the configurations of executable code are to the tapes and

disks in the present case.

D. Weakness of the Intrinsic Value Test

Application of this Court's interpretation of the intrinsic

value test to the facts in Texas Instruments, Comshare, and the

present case does not produce meaningful distinctions that

justify differential treatment for purposes of the ITC. Indeed,

our interpretation of the intrinsic value test calls into

question the Fifth Circuit's application of the very test it
- 24 -

created. If a materially indistinct copy of the seismic data

tapes and film could be reproduced from another pass over the

relevant portion of the earth's surface, this Court would assert

that the intrinsic value of the property is in the seismic data

and not in the tapes and film, contrary to the Fifth Circuit's

conclusion. That discrepancy exists because this Court, under

the rationale of Ronnen v. Commissioner, 90 T.C. 74 (1988), and

its progeny, would likely focus on the theoretical duplicability

of the seismic data tapes and film in determining whether the

seismic data exists as property separate and apart from its

physical manifestation, whereas the Fifth Circuit would focus on

the nonexistence as property of the particular seismic data in

the absence of a recording of that data on some tangible medium. 

In addition, the Sixth Circuit's interpretation of the test

of tangibility created by the Fifth Circuit in Texas Instruments,

Inc. v. United States, supra, referred to as the “totally

dependent” test in Comshare, Inc. v. United States, supra, may

lead to anomalous results. By focusing on whether a taxpayer's

investment can be put to productive use in the absence of the

tangible medium, the Sixth Circuit's approach would conceivably

characterize both the information underlying a complex patent

that could only be conveyed to and used by a purchaser if

embodied in some tangible medium and the associated intellectual

property rights of that patent as tangible personal property for

purposes of the ITC. Arguably, however, that result would be
- 25 -

different under the Sixth Circuit's test if the Government could

prove that the information underlying the complex patent could be

transferred via electronic transmission over telephone lines and

that the purchaser could use the information in that form without

receiving a disk, tape, or document. We believe that the

characterization of property for purposes of the ITC should not

depend on the capacity or reliability of “affordable

communications technology” at the time of transfer. Cf.

Comshare, Inc. v. United States, supra at 1143-1144 (suggesting

the contrary conclusion).

In sum, it is reasonable to state that the Fifth Circuit's

test of tangibility set forth in Texas Instruments, Inc. v.

United States, supra, as interpreted either by this Court or the

Sixth Circuit, leads to questionable conclusions in some

instances. In addition, our conclusion in Ronnen v.

Commissioner, supra, and its progeny that computer software is

intangible property is inconsistent with the Sixth Circuit's

conclusion that a master source code embodied in magnetic tapes

and disks is tangible property. Those divergent applications of

the Fifth Circuit's test indicate that there does not exist one

universally applied intrinsic value test; indeed, the courts have

not even settled on a name for the Fifth Circuit's test. Instead

of attempting to refine or reformulate the Fifth Circuit's test,

we believe that resolution of the issue before the Court should
- 26 -

begin with the term “tangible personal property” and end with an

examination of the legislative history of the ITC.

E. A Traditional Approach

Petitioner acquired operating and applications software that

was subject to license agreements entitling petitioner to use the

software on a nonexclusive, nontransferable basis for an

indefinite or perpetual term. Petitioner did not purchase any

exclusive copyright rights or other intellectual property rights

underlying any of the software in issue and was not permitted to

reproduce the software outside the Norwest affiliated group. We

must determine whether the software acquired by petitioner

constitutes tangible personal property for purposes of the ITC.

As an initial matter, the relevant statutory provisions and

regulations thereunder provide limited guidance and do not

resolve the issue of whether the term “tangible personal

property” includes operating and applications software. The

Revenue Act of 1962, Pub. L. 87-834, sec. 2, 76 Stat. 962, first

enacted the investment tax credit. S. Rept. 1881, 87th Cong., 2d

Sess. (1962), 1962-3 C.B. 703, is the report of the Committee on

Finance that accompanied H.R. 10650, which became the Revenue Act

of 1962. S. Rept. 1881, supra, 1962-3 C.B. at 722, stated that,

except for specified exclusions, “all tangible personal property

qualifies as section 38 property. * * * Tangible personal
- 27 -

9 Some have suggested that the expansive definition of the

term “tangible personal property” applies only in relation to

fixtures or other items regarded as real property for certain

purposes under local law because the examples presented in S. 

Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 703, 722,

address such property. The examples illustrate the adjective

“personal” in the term “tangible personal property” and do not

foreclose a broad interpretation of the adjective “tangible”.

property is not intended to be defined narrowly here”.9 That

explicit legislative intent to define broadly the term “tangible

personal property” suggests that the term may encompass all

personal property that is not intangible property in the narrow,

traditional sense; i.e., rights and obligations created by law. 

Cf. Goldman, Comment, “From Gaius to Gates: Can Civilian

Concepts Survive the Age of Technology?”, 42 Loy. L. Rev. 147,

166 (1996) (defining incorporeals as legal rights and

obligations, and corporeals as that which is not incorporeal).

Intangible intellectual property rights and the tangible or

physical manifestations or embodiments of those rights are

distinct property interests. See, e.g., 17 U.S.C. sec. 202

(1994) (ownership of copyright distinct from ownership of any

material object in which work is embodied). A purchaser of a

particular tangible manifestation or embodiment of intellectual

property acquires only property rights in that manifestation or

embodiment and does not acquire any rights to the underlying

intellectual property. In this case, petitioner acquired

copyrighted articles and did not acquire any of the underlying,

exclusive copyright rights. Cf. sec. 1.861-18, Proposed Income
- 28 -

Tax Regs., 61 Fed. Reg. 58152 (Nov. 13, 1996) (proposed

regulations that distinguish between a copyrighted article and a

copyright right in clarifying the treatment under certain

provisions of the Code and tax treaties of income from

transactions involving computer programs). In light of the

legislative directive to construe the term “tangible personal

property” broadly and “[t]he objective of the investment credit

* * * to encourage modernization and expansion of the Nation’s

productive facilities and thereby improve the economic potential

of the country”, S. Rept. 1881, supra, 1962-3 C.B. at 717, we

believe that petitioner's acquisition of the operating and

applications software without any associated, exclusive,

intangible intellectual property rights is precisely the type of

investment Congress intended to encourage in enacting the ITC. 

Therefore, the computer software acquired by petitioner

constitutes tangible personal property eligible for the ITC. 

Although we have not relied here on a consideration of

intrinsic value, we do not necessarily disagree with the

conclusion in Ronnen v. Commissioner, 90 T.C. 74 (1988), that the

software acquisition in issue in that case was ineligible for the

ITC. It must be remembered that the corporation in that case

received more than a limited license to use a copy of the tapes;

the corporation received the right to commercially exploit the

tapes in a particular territory. That suggests the acquisition

of copyrightlike rights. Lastly, we did not make an inquiry into
- 29 -

the nature of the taxpayer’s ownership rights with respect to the

software items in issue in both Kansas City S. Indus., Inc. v.

Commissioner, 98 T.C. 242 (1992), and Gantner v. Commissioner, 91

T.C. 713 (1988), because we relied on Ronnen. Those cases also

must be read in light of the analysis we adopt today.

III. Conclusion

Petitioner's software expenditures during the years in issue

qualify for the ITC.

An appropriate order

will be issued.

Reviewed by the Court.

SWIFT, WELLS, RUWE, WHALEN, COLVIN, BEGHE, VASQUEZ, and

GALE, JJ., agree with this majority opinion.

CHIECHI, J., did not participate in the consideration of

this opinion.
- 30 -

FOLEY, J., concurring in result only: I agree with the

majority's holding. Specifically, I agree that our analysis

should focus on the nature of the rights petitioner acquired. I

do not agree, however, with two aspects of the majority's

opinion. The majority's examination in part II.C of "the

Distinction Between Seismic Data and a Computer Program" is

unpersuasive. Majority op. p. 20. Moreover, this analysis is

unnecessary under the new approach adopted by the majority, which

focuses on the underlying property rights in, rather than the

physical characteristics of, the asset acquired. In addition,

the legislative history accompanying the investment tax credit

does not support the majority's assertion in part II.E that

petitioner's acquisition of software is "precisely the type of

investment Congress intended to encourage in enacting the ITC." 

Majority op. p. 29. This is an unfounded statement of

congressional prescience rather than congressional intent. The

legislative history relied on by the majority related to the

original enactment of the ITC in 1962. At that time, Congress

probably did not foresee the myriad of technological innovations

relating to computer software. Therefore, the legislative

history accompanying the ITC provides minimal, if any, guidance

in determining whether petitioner's purchase qualifies for the

credit. 

I agree with the majority that "resolution of the issue

before the Court should begin with the term 'tangible personal
- 31 -

property' and end with an examination of the legislative history

of the ITC." Majority op. p. 26. In the absence of legislative

guidance on this issue, it is reasonable and appropriate to

analyze the nature of the rights petitioner acquired and conclude

that petitioner's software qualifies for the ITC as tangible

personal property. 

PARR, J., agrees with this concurring in result only

opinion. 
- 32 -

1 I was the trial Judge in this case. The majority opinion

adopted my findings of fact. The adopted findings of fact are

accurate.

JACOBS, J., dissenting: The majority ruling today overturns

this Court's firmly established jurisprudence by holding that

computer software is tangible personal property, eligible for the

investment tax credit. I believe the majority is wrong; therefore,

I dissent.1

I. Preliminary Matters

A. Software's Encoded Information Is Intellectual Property,

Which Is Intangible

Preliminarily, computer software possesses both tangible and

intangible characteristics. Computer programs like the ones in

issue are configurations of executable code that instruct a

computer to process data in a specified manner. The encoded

information is intangible property; the computer tapes and disks on

which the information is embodied is tangible property. Comshare,

Inc. v. United States, 27 F.3d 1142, 1145 (6th Cir. 1994).

Although a program may be perfectly reproduced onto numerous

tangible residences, the program itself is inherently intellectual

property. And intellectual property is intangible property.

B. Purchaser of Software Only Interested in Using the

Intellectual Property Contained on Tapes and Disks

When one acquires computer software, the item desired is the

intellectual property stored on the tangible disk or tape, i.e.,

the computer program, not the disk or tape itself. See Bank of
- 33 -

Vermont v. United States, 61 AFTR 2d 88-788, 88-1 USTC par. 9169

(D. Vt. 1988). One would not pay thousands, or even tens of

thousands of dollars, for the disk or tape without the software's

intellectual property placed thereon. 

The software here acquired was sold subject to nonexclusive,

nontransferable license agreements. Pursuant to those agreements,

petitioner was entitled to use the software it purchased in its

banking and related activities but was not permitted to reproduce

or resell the software to others. It is clear from the license

agreements that petitioner was interested only in using the

intangible programs contained on the tapes and disks. This point

is demonstrated by the description provided in a license agreement

entered into in conjunction with the purchase of "ESTIMATICS"

software from Management and Computer Services, Inc.:

The intangible knowledge, information and

know-how to be made available hereunder shall

be provided on 5 1/4" diskette for the IBM

personal computer.

C. A Computer Program Is Not Inextricably Bound to a Single

Tangible Medium

Software's intellectual property is fluid. The intellectual

property was placed on a tangible medium simply for ease of

transmission. The initial housing of the intellectual property on

a tangible medium is temporary, and ultimately, the program's

intellectual property is mirror-image transferred onto a computer.

And it is this mirror-image transfer that the purchaser of the

computer software desires when acquiring the software. Upon the
- 34 -

subsequent transfer to the computer, the intellectual property

becomes dually housed: (1) On the disk or tape, and (2) on the

computer. Moreover, an unlimited number of mirror-image transfers

of the computer program can occur; the computer program can even be

mirror-image transferred from one disk or tape to another. 

A computer program can be transferred electronically over

telephone lines, although during the years in issue, telephonic

transmission was slow and unreliable. A computer program can be

erased from the disk or tape and typed in exactly anew by

programmers from written documentation of the source code without

destroying the underlying intellectual property. Clearly, a

computer program is not inextricably bound to any single tangible

medium. 

II. Case Law

Beginning in 1988, this Court held in Ronnen v. Commissioner,

90 T.C. 74, that computer software is intangible personal property.

We have steadfastly applied this characterization in other cases.

See Kansas City S. Indus., Inc. v. Commissioner, 98 T.C. 242, 262

(1992); Alexander v. Commissioner, 95 T.C. 467, 470 (1990), affd.

without published opinion sub nom. Stell v. Commissioner, 999 F.2d

544 (9th Cir. 1993); Gantner v. Commissioner, 91 T.C. 713, 728

(1988), affd. on other grounds 905 F.2d 241 (8th Cir. 1990); B.D.

Morgan & Co. v. Commissioner, T.C. Memo. 1988-569; Smith v.

Commissioner, T.C. Memo. 1988-420; Salzman v. Commissioner, T.C.

Memo. 1988-86.
- 35 -

The Court of Appeals for the Sixth Circuit in Comshare, Inc.

v. United States, supra, reached a result different from ours in

Ronnen and its progeny. The court in Comshare held that tapes and

disks containing computer program master source codes are tangible

personal property; consequently, the purchaser of the tapes and

disks was entitled to investment tax credits and accelerated

depreciation deductions calculated on the full investment. 

 A discussion of the case law in this area is set forth in the

majority opinion pp. 12-18; no useful purpose would be served by

repeating it here.

III. Intrinsic Value Test

The intrinsic value test, which the majority criticizes, is a

facts and circumstances test first enunciated by the U.S. Court of

Appeals for the Fifth Circuit in Texas Instruments, Inc. v. United

States, 551 F.2d 599 (5th Cir. 1977). In applying the intrinsic

value test, one compares the investment in the intangible aspects

of the property being characterized (here, the software program; in

Texas Instruments, the seismic data) with the investment in the

tangible embodiments (here, the tapes and disks; in Texas

Instruments, the film and tapes). After making the comparison, if

the property's "intrinsic value is attributable to its intangible

elements rather than to any of its specific tangible embodiments",

the property is considered intangible. Id. at 609.

We adopted the intrinsic value test in Ronnen v. Commissioner,

supra, and held that computer software is intangible property
- 36 -

because "the intrinsic value of the * * * [taxpayer's] software is

attributable to its intangible elements rather than to its tangible

embodiments." Id. at 99-100. I believe this interpretation of law

is correct; thus, I would continue to follow it, notwithstanding

Comshare. 

IV. Computer Software Is Different From Master Film Negatives and

Seismic Data Tapes

As noted in Ronnen v. Commissioner, supra, and as it appears

clear to me today, computer software is distinguishable from the

master film negatives in Walt Disney Prods. v. United States, 480

F.2d 66 (9th Cir. 1973), and 549 F.2d 576 (9th Cir. 1976), and the

seismic data tapes and films in Texas Instruments. In those cases,

the tapes and films contained original recordings of physical

events that could never be perfectly duplicated or repeated. As

noted by the Court of Appeals for the Fifth Circuit in Texas

Instruments, if the original recordings were destroyed prior to

reproduction, the information stored thereon would also be lost.

Because the seismic data recordings (in Texas Instruments) and the

motion picture negatives (in Disney) could never be perfectly

recreated if the originals were destroyed or lost, those courts

held the intangible information was inextricably bound to its

tangible medium. But as preliminarily noted, no such relationship

exists between a computer program and the magnetic tape or disks

upon which the computer program is stored.
- 37 -

The court in Comshare, Inc. v. United States, 27 F.3d 1142

(6th Cir. 1994), emphasized that the taxpayer therein would not

have purchased the master source code unless it was on tapes or

disks. But the intrinsic value test is not dependent upon whether

the property must appear on a tangible medium to be usable.

Rather, the test rests upon whether the software exists separate

and apart from the tangible tapes and disks. Such an

interpretation of the intrinsic value test is consistent with the

Court of Appeals for the Fifth Circuit's application of that test

in Texas Instruments. See Texas Instruments, Inc. v. United

States, supra at 611 ("the seismic information * * * [on the tapes

and film] does not exist as property separate from the physical

manifestation" (emphasis added)). Hence, because computer software

can exist separate and apart from the tangible tapes and disks, it

differs from the seismic information and should be characterized as

intangible property.

V. Majority Misreads Statement in Committee Reports

The majority, as well as the court in Comshare, Inc. v. United

States, supra, relies upon a statement (related to the type of

property eligible for the investment tax credit) made in the Senate

Finance Committee report that accompanied H.R. 10650 (which became

the Revenue Act of 1962) to support their conclusion. The Senate

Finance Committee report states, in pertinent part:

Section 38 property.--
- 38 -

Section 38 property (defined in sec. 48(a)),

is the only property (either new or used)

which is treated as "qualified investment."

Except for the exclusions noted below, all

tangible personal property qualifies as

section 38 property. Except for buildings and

their structural components, real property

which is used as an integral part of

manufacturing, production or extraction or of

furnishing transportation, communications,

electrical energy, gas, water or sewage

disposal services also qualifies as section 38

property. This is also true of real property

(other than buildings and structural

components) used for research or storage

facilities with respect to any of the above

categories. Tangible personal property is not

intended to be defined narrowly here, nor to

necessarily follow the rules of State law. It

is intended that assets accessory to a

business such as grocery store counters,

printing presses, individual air-conditioning

units, etc., even though fixtures under local

law, are to qualify for the credit.

Similarly, assets of a mechanical nature, even

though located outside a building, such as

gasoline pumps, are to qualify for the credit.

Real property (other than buildings and

structural components) which qualifies as

integral parts of categories referred to above

includes such assets as blast furnaces, oil

and gas pipelines, railroad track and signals,

and fences used in connection with raising

cattle.

S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 703, 722.

As I read the majority opinion, the sole stated reason for

holding that the computer software at issue is tangible personal

property, qualifying for the investment tax credit, is as follows:

In light of the legislative directive to

construe the term "tangible personal property"

broadly and "[t]he objective of the investment

credit * * * to encourage modernization and

expansion of the Nation's productive

facilities and thereby improve the economic
- 39 -

potential of the country", S. Rept. 1881,

supra, 1962-3 C.B. at 717, we believe that

petitioner's acquisition of the operating and

applications software without any associated,

exclusive, intangible intellectual property

rights is precisely the type of investment

Congress intended to encourage in enacting the

ITC. * * * [Majority op. p. 28.]

The majority, as well as the court in Comshare, have expanded

the Senate Finance Committee's statement "Tangible personal

property is not intended to be defined narrowly here" in a manner

I believe not intended by Congress. Both the majority and the

court in Comshare have taken the Senate Finance Committee's

statement out of the context in which the Senate Finance Committee

carefully placed it. Unlike the majority and the court in

Comshare, I am unable to conclude that when enacting the investment

tax credit provisions Congress contemplated a situation in which

property containing both tangible and intangible qualities (such as

computer software) qualifies for the credit, or that the investment

tax credit was intended to cover property whose value derives

substantially from its intangible components. In my opinion, the

committee report statement "Tangible personal property is not

intended to be defined narrowly here" has reference in relationship

to fixtures, components, or other items which under State law would

be characterized as real property. The majority has in effect

conceded as much in note 9. Although the majority may be correct

that the context of the Senate Finance Committee statement does

"not foreclose a broad interpretation of the adjective 'tangible'",
- 40 -

majority op. note 9, it is also correct that the context shows that

the Senate Finance Committee report does not require the "broad

interpretation" that the majority and the court in Comshare give to

the term "tangible". Further, to me, it is clear from other parts

of the Senate Finance Committee and the Committee of Conference

reports that Congress intended a distinction between tangible and

intangible property by declaring that "Intangible property, such as

patents and copyrights, does not qualify as section 38 property."

S. Rept. 1881, supra, 1962-3 C.B. at 858; H. Rept. 1447, 87th

Cong., 2d Sess. (1962), 1962-3 C.B. 402, 516. 

Thus, the legislative history does not clarify the narrow

problem we deal with herein.

VI. Majority Sets Forth No Test or Standard To Determine the

Characterization of Property That Has Both Intangible and Tangible

Aspects

The majority's holding destabilizes existing law without

substituting or improving the intrinsic value test with a coherent

standard to fill the vacuum. Further, the majority finds fault

with the court's interpretation in Comshare, Inc. v. United States,

27 F.3d 1142 (6th Cir. 1994), of the tangibility test by stating:

By focusing on whether a taxpayer's investment

can be put to productive use in the absence of

the tangible medium, the Sixth Circuit's

approach would conceivably characterize both

the information underlying a complex patent

that could only be conveyed to and used by a

purchaser if embodied in some tangible medium

and the associated intellectual property

rights of that patent as tangible personal

property for purposes of the ITC. Arguably,

however, that result would be different under
- 41 -

the Sixth Circuit's test if the Government

could prove that the information underlying

the complex patent could be transferred via

electronic transmission over telephone lines

and that the purchaser could use the

information in that form without receiving a

disk, tape, or document. We believe that the

characterization of property for purposes of

the ITC should not depend on the capacity or

reliability of "'affordable communications

technology'" at the time of transfer. Cf.

Comshare, Inc. v. United States, supra at

1143-1144 (suggesting the contrary

conclusion). [Majority op. pp. 24-25.]

Only in this regard, I agree with the majority.

VII. Apply Doctrine of Stare Decisis

To conclude, I would apply the doctrine of stare decisis in

this case. Except for the court in Comshare, no other court has

found that computer software is eligible for the investment tax

credit and/or accelerated depreciation deduction. I find no

compelling reason in the instant setting to depart from the view

that computer software does not qualify for the investment tax

credit, especially when because of firmly established jurisprudence

taxpayers (other than petitioner) have refrained from claiming an

investment tax credit with respect to computer software purchases.

COHEN, CHABOT, GERBER, and LARO, JJ., agree with this dissent.