TAX COURT OPINION

Case: Computervision Corporation and Subsidiaries
Docket Number: 25135-93
Judge: Wells
Opinion Type: memo
Filed: 03/18/1996
Pages: 56

. . ADM. RECOEDED sumo . T . C Memo . 1996-131 UN TÉD STA"ES TAX COURT COMPUTERVISION INTERNAT ONAL CORP. , Petitioner COMMISSIONER OF ÍNTERNAL REVENUE, Respondent . COMPUTERVISION CORPORATION AND SUBSIDIARIES, Petitioners1 y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 25134-93, 2513 93. . Filed March 18, 1996. . John S.- Brown, George P. Mair, Donald-Bruce Abrams, Jody E. Forchheimer, for petitioners. Charles W. Maurer, Jr. and John C. Galluzzo Jr. , . for re spondent .3 . 1 These cases have been consolidated for purposes of trial, briefing, and opinion and shall hereinafter be referred to as the instant case. SERVED MAR 1 8 199 - 2 - MEMORANDUM FINDINGS OF FACT AND OPINION WELLS, Judge: Respondent determined a deficiency of $9,460,419 in the Federal income tax of petitioner Computervision International Corp. (CVI) for its taxable year ended January 31, 1984. Respondent determined the following deficiencies in the Federal income tax of .petitioners Computervision Corp. (CV) and subsidiaries for the following years: Taxable Year Ended Deficiency Dec. 31, 1983 Dec. 31, 1984 Dec. 31, 1987 Feb. 5, 1988 . . $25,226 32,279 4,720,840 570,819 After concessions, the following issues remain for decision: (1) Whether CVI qualifies as a domestic international sales corporation (DISC) for its taxable years ended January 31, 1983 and 1984; ·(2)^ whether petitioners are ent-itled to net inter'est income against interest expense in calculating CV's deduction for commissions payable to CVI with -respect to each of. CVI's taxable years ending January 31, 1983 and 1984, and December 31, =1984;- and, (3) whether the net proceeds of the sale of a certain stock warrant held by CV are long-term capital gain, ordinary income, or a reduction in CV's cost of goods sold. 3 - FINDINGS OF FACT Unless othérwiselindicated, all Rule references are to the Tax Coûrt Rules of Practice and Procedure, and all sect~ion . references are to the Internal evenue Code iñ*effect for the years in issue. Some of the fabts have been stipulated for trial pursuant 'to Rule 91. The Jparties' stipulatiions are incorporated in this Memorandum Opinion by refe ence and are found accordingly except as noted below with respect to àertain stipulations to which objections were reserved. General Background The principal place of business of both CV and CVI was .Bedford, ·Massachusetts, at the time each fïled its petitiion in the instant case. CV, a Delawa è corporation, designs, manufactures,+ and sells compute -aided design, computer-aided manufacturing, and computer-aid d engineering (CAD/CAM/CAE) products. CV maintains its bo >ks and records on an accrual accounting; basis using a calend r year During'relevant periods, CVI,- a Massachusetts c rporation, maintained its books and records on an accrual accounting basis using a fiscal year ending January 31.3 During CV' and CVI's taxable years ending in 1983 and 1984, CVI was a who Lly owned subsidiary of CV. In 1988, however, CV, toge her with at least certain of its income tax return for subsidiaries, filed a' consolidated Federal the period beginning Jan.. 1, 1988, and ending Feb.. 5, 1988. . 3 In 1985, however, CVI, fil d a Form 1120-DISC for the period beginning Feb. 1, 1984, .and end ng Dec. 31, 1984. DISC Qualification Issue CVI was organized in 1972. to serve as a sales agent for CV with respect to CV's sales of its products to customers located outside the.United States. CVI qualified as a DISC for each of its taxable years ending prior to the taxable years for which its DISC status is in issue in the instant case (viz, its taxable years ending January 31, 1983 and 1984 (relevant taxable years)). Throughout the periods relevant to the instant case, . Martin Allen was CVI's president, Richard Krieger was its treasurer, and James Spindler was its clerk. They were also the directors of CVI. CV and CVI entered into a series of agreements with respect to their export sales activities. Under a written agreement entitled "Commission Agreement" (commission agreement) dated as of March 22, 1972, that was in effect during the periods relevant to the instant case, CVI was appointed CV's sales agent with respect to CV's sales of CV's products to customers located outside the United States. .The commission agreement provided that, in exchange for services provided under the agreement, CVI would receive a commission equal to the maximum amount allowable pursuant to section 994. Pursuant to a written agreement entitled "Agreement Designating Foreign Marketing Departments and Related Intercompany Accounts" (export promotion agreement) dated as of February 1, 1980, that wa.s also in effect during the periods relevant to the instant case, certain departments within CV were designated foreign marketing departments of CVI for purposes of accounting -for export promotion expenses within the. meaning of sectiong994 (c) to,be incurred by CVIsand certain accounts were. designated as export-promotion expense accounts. Pursuant to the export promotion agreement,. CVI obligated itself to reimburse CV annually(cid:16)042for exportk promotion expenses accounted for .in: the designated -accounts that were -to be paid byt CV in the first instance. The.export promotiòn agreement.provided'thát CV would bill the expenses to CVI.at the close of CVI's fiscal-year and that the amount due -was:payable within 60 days after billing.2 Pursuant to a written agre ment entitled"'!Accounts Receivable Purchase Agreement" (master receivables,purchase agreement) dated as of January 3J, 1981, CVI wasvauthorized to · . purchase from time to time lm undivided interest in CV's accounts receivable arising from certain of the types of transactions that give rise to qualified export receipts pursuant to ,section 993 (a ) (1,) and on which CVI. was ntitled to ireceive à cotùmission (qualified export receivables). .Pursuant to the'master receivables purchase.agreement, the purchase price toybe paid for the undivided interest in.the: qualified export receivablès was to be determiried at the.. time of purchase and was ito reflect a reasonable discount on the amount of.the receivables purchased. The agreement also.provided that CV would produce, upon demand by CVI, a list of- the qualified export receivables:in which- CVI had än interest, including the iden ity of the- accou'nt debtor, 'the amount of, each receivable, and he date on which it arose: CV was required to bill and, collect áll payments on:the qualified export receivables in which CVI had an interest on CVI's behalf and, unless requested to remit the proceeds to CVI, to substitute an undivided interest in additional receivables for those discharged. Using the commissions paid it by CV, CVI, pursuant·to the master receivables purchase agreement, periodically purchased at a discount interests in CV's qualified export receivables that were qualified export·assets within the meaning of section 993(b). During its 1981 taxable year, CV entered into the following sales of.qualified export receivables to CVI at a discount under the master receivables purchase agreement: Date of Sale Receivables Face Amount Oct. 1, 1981 Oct. 15, 1981 Dec. 1, 1981. $23,345,288 1,874,000 4,028,369 Under the terms of the sales, CV was obligated to pay to CVI all proceeds collected with respect to CVI's interest in the qualified export.receivables on September 30, 1982. During 1982, CV made an election to use the installment method to report its income with respect to domestic and foreign sales. Because CV believed.that further purchases of qualified export receivables by CVI would result in recognition of income by CV at the time of the purchases, a plan was developed.during September 1982 by CV's tax department and its outside accountants, Price Waterhouse, both to avoid recognition of income from the purchase of qualified export receivables and to maintain CVI's ·status as a DISC (the plan). Under the plan, when I CV became obligated to páy CVI he proceeds åollected with . respect. to CVI's intérest in the qualified.export recëivables'on September 30,? 1982, CVI would usé the proceeds of the investméñt to fund demand loáns to CV that would not be"" Iualified -export- assets" within the meaning of section.993 (b) . ?CVI would cáll those loans prior to the 'end of its taxable year ;and use their proceeds to (1) purchase ·qualif ..ed export receivables; (2) - reimburse CV for- export promo'ti n exþenses "incufred on behalf· of CVI, and (3) pay a dividend tò¤CV. It cwas expected that "the - execution of the plan would cause CV1 to satisfy the 95 pèrcents of assets test- provided by-sect:on 992 (a) (1) (B) at 'the close of its taxable year. The 41an was approved by Mr:·.Krieger and'Mr. Spindler. By purchasing CV's 'qualified eicport receivables at the . end of January of 1983, CVI sought. to minimize - the amount of the receivables that might be paid before the end,o'f its'taxable yèar because- the' conversion of the eceivableá tö cash could have cáùsed CVI to fail the 95 percertt *of assets test . The following series of ^ev(cid:16)254átsóccùrred pùrsuánt tó the plan. First, CVI made demand loans. to CV on the followincj clates in .1982 in' the . following amoùrit Date Sept . 30 Oct. 29 Nov. Nov. 16 Dec. 1 1 Amount' of Loan $2 7+, 272, 888 . 00 1,142,311.00 1,135,689..50 1,046,278.76 1,099,944:32 Then) on Januarf 27, 1983, CVI ade 'written demand for lpayment bf both the principal amounts of the loans (viz;- $311,697,111.58)· and _ 8 - accrued interest thereon (viz, $1,386,326.55), which totaled $33,083,438.13. On January 31, 1983, the following occurred: (1) CV wired the sum to CVI in full payment of the principal amounts and interest, and the sum was deposited in CVI's account with the First National Bank of Boston; (2) CVI received the proceeds of two maturing time deposits, totaling $5,663,970.38, that were also deposited on that date in.the account; (3) CVI wired both the payment it had received from CV and the proceeds of the maturing time deposits to CV, transferring a total of $38,747,408.51. The receipt by CVI of the proceeds of its maturing time deposits was recorded in its general ledger by entries recorded and approved between January 20, 1983, and January 25, 1983. The repayment by CV of CVI's demand loans and the subsequent transfer of funds by CVI to CV described above were recorded in CVI's general ledger by entries prepared and approved on January 31, 1983. For accounting purposes, the transfers between CV and CVI were recorded as passing through an account designated "intercompany account". On January 31, 1983, and prior to the application of the above-described payment by CVI to CV, CV held qualified export receivables as described in the master receivables purchase agreement and CVI was indebted to CV (1) pursuant to the export promotion agreement for expenses that previously had been paid by CV but had not yet been reimbursed by CVI and (2) for accrued State taxes that would be paid by CV in the first instance. At the time .CVI wired the payment to CV, bothsCVrandi CVI intended: that CVI would (1) purchase from CV the receivables of CV' that were outstanding at the close of business on January 31, 1983 (2)-.reimburse' CV for the aforementioned experises, (3) pay CV an amount equal to the(cid:16)042accrued Stat e taxes, and (4) pay a dividend to CV from a portion of the transférred funds.^ All events necessary*to determine 'the'total amount of the receivables, . expenses, and taxed hád taken pYace by) the close óf business on that date; however the information necessary .to ^ compute the total amount of the ritems"was not1available to CV and CVI's tax and accounting .departm!ents on thatvdate. In prior years, CVI regularly had reimbugsed CV for export promötion expenses pursuant to 'the export promotionvagreement ©and -for State tax payment s . -Additionally, ¿CVI ' s wand, CV' s tax and account ing departments. did not ha've available to them on January 31, 1983, the information snecessary,to com ute .the amount of the dividend CVI intended to pay CV. Ät the imë CVL made the foregoing transfers to CV,c neither CVI nor CV intended that any portion- of the funds transferred would be repaid to' CVI;3 By February 23, 1983, CV's and CVI's tåx ånd accounting departments had, received the' inf rmation necéssary to compute the outstanding balance of CV' s qualified export receivables and the amount of unreimbursed export promotioni expenses as of January 31, 1983 / and to prepare the doc ments memorializing the transactions . "On .or , about that date, an 'agreement entitled "Purchase of .Qualified Accounts Recéivable Ac)reement",- dated - 10 - effective as of January 31, 1983, provided for CVI's purchase from CV of qualified export receivables in.the aggregate face amount of $24,027,770. at a discount of $1,541,782, resulting in a purchase price of $22,485,988. All of the receivables purchased thereby were qualified export assets within the meaning of section 993(b). The amount CVI owed CV as expense reimbursements under the export promotion agreement was $2,570,631, and the amount of accrued State tax CVI owed CV was $228. A portion of the funds CVI transferred to CV on January 31, 1983, was applied to reimburse CV for the expenses and taxes. Also on or about February 23, 1983, an "Action of Directors ,In Lieu of a Meeting" was signed by the directors of CVI.in which it was voted as of January 31, 1983, to pay CV a dividend of . $13,690,561, the difference between (1) the amount of funds CVI wired to CV on January 31, ,1983 (viz, $38,'747,408), and (2) the sum of (a) the aggregate purchase price of the receivables purchased by CVI (viz, $22,485,988), (b) the amount CVI owed CV as expense reimbursements under the export promotion agreemeht (viz, $2,570,631) and accrued State. tax. The foregoing transactions were recorded in CVI's general ledger by entries that were prepared and approved after January 31,.1983, but prior to the time CV and CVI closed their books in accordance with their usual accounting practice. With respect to.CVI's taxable year ending January 31, 1984, the following series of events occurred pursuant to the plan that had been developed in September 1982. CVI made demand loans to CV .on the following dates in 1933 in ,the following amounts: - 11 - . Date Mar. , 31 Aug. 29 Oct . 31 . . Amount of Loan $4;694., 145 28 , 552, 907 3, 365, 590 Subse;quently, non January 27, 1984, the folloWing occurred: (1) CVI made written,demand fór payment of both:the principal amounts of the foregoing loans (viz $36,612,642) and accrued interest thereon . (viz, . $1, 797, 153) ,. whicE 3totaled $38, 409, 795; (2) CV wired $38 409, 795 to CVI in full payment of the principal amouñts and interest on the fforegoing loans, and the payment was * deposited in CVI's. account with the iFirst National Bank of Boston; and (3) CVI wired i$38, 409,1795 to CV. , . The foregoing transfers were.. recorded in CVI's general ledger by. entries that were. pr.epared and approved on or before .. February 15, 19.84, but before. CV and CVI closed their lbooks for the month of January 1984 in accordance with their usual accounting practice. For, accounting purposes~, not all^of the sums transferred. between CV and CVI were recorded -as- passing through the "intercompany accoun " bècause the eritries used to record the foregoing transactiona Were more simplified than those used to record the corresponding tránsfers that had occürred in January 1983 . On January. 27, 1984, and prior to. the application of the above-described payment, by CVI to CV, CV held qualified 'export ·receivables as described in the' master~receivables purchase agreement and CVI was indebted to CV (1) pursuant to the export - 12 - promotion agreement for expenses that previously had been paid by CV but had not ÿet been reimbursed by CVI and (2) for accrued State taxes that would be paid by CV in the first instance. At the time CVI wired the payment to CV, CV and CVI intended that CVI would (1) purchase from CV receivables that were outstanding at the close of business on January 31, 1984, (2) reimburse CV for the aforementioned expenses, (3) pay CV an amount equal to the accrued State taxes, and (4) pay a dividend to CV from a portion of the transferred funds. .All events necessary to determine the total amount of the receivables, expenses and taxes as of that date had taken place by the close of business on that date; however, the information necessary to compute the total amount of the items was not available to CV's or CVI's tax and accounting departments by the close of business.on January 31, 1984. Additionally, CVI's and CV's tax and accounting departments did not have available to them on January 31, 1984, the information necessary to compute the amount of the dividend CVI intended to pay CV. At the time CVI made the foregoing transfers to CV, neither CVI nor CV intended that any portion of the transfers would be repaid to CVI. By February 15, 1984, CVI's and CV's tax and accounting departments had received the information necessary to compute the outstanding balance of qualified export receivables.and the . amount of unreimbursed export promotion expenses as of January 31, 1984. On or about February 15, 1984, an agreement entitled "Purchase of Accounts Receivable Agreement" was executed and .. 13 _ dated as of January 31, 1984 . The;agréemeht. þrovided fór - CVI ' s ' purchases from CV÷of qualified*expört receivábles having an aggregate face amount of $33,517,418bat a discount of $2,151,817, for =an aggregate purchase sprice of $31, 365, 601.. All. of 'the receivables purchased pursuant to the .agreement were qualified export assets within the meaning of section 993 (b) e Also on or about February J5, T984; an' "Äction of Directors in Lieu of a Meeting":wäs signed by each .of CVI's directors in which it was voted to pay as of January 31, 1984, a dividend of $5 million to CV. . The amount of the dividend is equal'to the difference. between (1). the amourit of· funds 'CVI wired to 1CV on January ,27, 1984, (viz / .$38, 409, 795) and (2), the súm of E (a) the . aggregate purchase price for theP receivables purchased by CVI (viz, $31, 365, 60.1) , (b) (i) the amount of expense reimbursement s CVI owed CV,,under the export ÷pronotion agreement as of that datë, and (ii) .accrued State taxes a(vir, .$228) , and (c) can unapplied balance of $228. . . The foregoing transactionswere recorded in CVI's general ledger by entries that· were pfepared and approved after January 317 1984, but prior ' to the time CVI land CV dlosed their books for the month of January in accordañce with their usual account'ing practice. . 3 . . For the period January 31, :.982, through January 31, 1984, no security agreement was executed with respect to the qualified export receivables sold nor was any financing statement filed. - 14 - Computation of DISC Commission . For each of CVI's taxable years ending'January 31, 1983 and 1984, and December 31, 1984 (taxable years in question), .petitioners computed the commission payable to CVI using the 50 percent of·combined taxable income method (50 percent of CTI method) provided pursuant to section 994(a) (2), allocating a ratable·portion of gross interest expense to qualified,export receipts by product line for purposes of the method. Stock Warrant Issue Background Prior to May 1983, CV decided that, in order to meet its. customers' needs, it required a new, more advanced computer workstation4 on which to run its CAD/CAM software. Its customers desired a computer workstation with an "open system environment" that would enable its user to run software other than CV's. To CV, the change to such a system was a significant strategic change because CV previously had sold products based only upon its own closed proprietary operating systems. An additional significant strategic change for CV was the decision to purchase its workstations from a vendor, rather than to manufacture them itself, because manufact.uring workstations had been its primary activity up to such time. Due to its large investment in 4 A computer workstation is a desktop computer utilized by scientists or engineers that performs complex computing tasks using its own computing power rather than that of a central computer shared with other users. Workstations, however, may be linked together to form a network. manufacturing assets, however, V needed be able to continue manufacturing. CV sought to est ablish a long-term relationship with a supplier for the design and- manufacture of its new workstation. Two manufacturers, Apollo Computer, Inc. (Apollo), an established firm .in the computer workstation. industry, and Sun Microsystems, Inc. (Sun) , a smaller competitor, submitted bids to CV for such a workstation in. res onse to a solicitation by CV. In a May 9, 1983, letter to CV, Sun acknowledged that it might not be able to produce workstations in quantities sufficient to meetaCV's demands, and indicated that it would becwilling to ^ grant CV the right to manufacture the workstations were Sun.'s capacity insufficient. Sun also set forth its method of discounting purchases, which was to allow a»36·-to 40-percent discount from the list price of product for purchases of between $10 million and $30 mill on, and.a 40-percent discount for purchases above $30 million: In a May, 11, 1983, letter to CV, Sun made reference to, a ;"max mum Computervision discount" of 45 percent. Neither letter .discussed stock warrants. Although CV made a preliminary decision to select Apollo as its vendor, CV continued to consider Sun because (1) Sun possessed valuable technology and know-how. with respect to UNIX, a nonproprietary, open computer operating system- that CV believed Such .discount -apparently represented the: sum of the maximum quantity discount from list price offered by Sun (viz, 40 percent) and the discount allowed for early payment. (viz, percent) . 5 - 16 - was best·suited to provide the open system environment desired by its customers, but with which CV did not have experience, and (2) Sun aggressively pursued the business. CV decided to,propose to Sun a technology sharing arrangement under which CV and.Sun would jointly develop a workstation using Sun's technology and the UNIX operating system. Also, in order to both allow CV to manufacture workstations and assure Sun that CV would purchase workstation manufactured by Sun and would not manufacture all the workstations itself, CV decided to propose~ to Sun a "reverse royalty" arrangement under which CV'could manufacture workstations but would be discouraged from being its primary manufacturer because the "royalty" paid Sun with respect to the workstations would increase as the number of workstations manufactured by CV increased. During June.1983, representatives of CV and Sun met to discuss the proposals and to develop the framework for their business relationship. During the negotiations, CV.sought to minimize the price at which it would purchase workstations by maximizing the discount from Sun's list price for Sun's products, and Sun sought to maximize the selling price of the workstations, and sought to minimize the discount from its list price. CV pressed for a higher discount although.it was aware that, in the computer industry, a 45-percent discount was on the high end of normal purchase discounts given by suppliers to original equipment manufacturers (OEM's). Near the conclusion of the June 1983 meeting, CV and Sun discussed giving CV warrants to purchase Sun stock eas means tof' reducing. the cost io CV of the transaction - 1-7 - with iSun! The Preliminary .Agreement e . The . negotiations culminated- in an agreement that was signed on · or about June 17, 1983 ('June 17, . 1983, agreement ) , , and that established guidelines for the oint-development andimanufacture of workstations by CV. and Sun The June 17-, 1983, agreement providedsthat the relationship etween »CV and Sun was to encompass : . (1) . An exchange of current i product . technologies ; (2) cooperation on· future product d velopment; (3) sharing of field support services and facilities (4) investment participation in Sun by CV; and (5) the basis for use of mutually owned designs and manufacturing implementatio1 s. The terms regarding the . purchase of workstations themselves were "subject to the terms and conditions of a separate OE contract to be negotiated between the parties". Consummation of the transactions outlined in the agreement was subject to a number of conditions, including the signing of definitive agreements implementing the basic unders'tanding set forth in the ne 17, 1983, agreement. The June 17, 1983, a reeme t contempÊated tha Sun would grant to CV two stock warrants and a convertible debenture (debenture) . The first warrant was to be .exèrcisable iff within a 36-inonth period, CV had transacted $20 million iof busi-ness with Sun, consisting cf purchasês of Sun-'mariufactured products and royalties paid by CV The secon stock warrante (second narrant) was to be exercisable if CV's business with Sun (computed on the 18 - same basis) reached a level of·$30 million within the same 36- month period.' Sun regarded the warrants as an incentive for CV to purchase workstations from Sun: Sun believed that it was unlikely that the parties would have agreed on the June 17, 1983, agreement, or that the transactions outlined therein would have been consummated, without the warrants. Additionally, concern1ng a $2.5 million loan made to Sun by CV, the June 17, 1983, agreement provided for the issuance of a 5-year, 8-percent, $1.5 million debenture convertible into 100, 000 shares of . Sun common stock, and a $1 million 6 The June 17, 1983, agreement provided in relevant part: ' (E) Investment Participation in Sun by CV --Warrants (5 Year) (a) On 100,000 shares of common stock at $12.00/share, exercisable after CV has received $20 million of Sunmanufactured product plus royalties paid by CV within 36 months after 1st production CV delivery for revenue. (b) On 100, 000. share [s] of common stock at $15.00/share exercisable. after CV has received $30 million of Sun-manufactured product plus royalties paid by CV within 36 months of 1st production CV delivery for revenue. nonconvertible note. The Definitive Agreements 0 . - 19 - On or aboutvNovember 22,1 1 83, CV and Sun executed the following three agreementss (agreements) : A purchase agreement (purchase agreement)-, pursuant o which Sun agreed, inter. alia, to sell CV certain workstations on certain terms and conditions and CV agreed, inter alia, to abidec by the terms and conditions in the event it purchased ,any w rkstations, from 'Sun; an Agreement Relating to Investments by Computervision Corporation in -Sun Microsystems=,, Inc. (investment greement), which related, inter alia, to the warrants and the d benture eto be issued by Sun to CV; and a joint. development agr ement (joint development agreement) , which related, inte alia,1 to the oint development of certain computer products an provided for the $1 million loan referred to in the June 1 , 1983,. agreement . The division of the respective undertakings of CV and Sun into separate agreements had no particular sign fi ance, and the parties viewed the agreements as a single inteÚrated agreement . 7 Ihe - June 17, 1983, agreemen provided in relevant part : --Debenture . A $1. 5 million debenture (5* year 8%) convertible into in conjunction with a $1.0 100,000 shares of common std>ck, million loan~ at(cid:16)0428%, such . lodn to: be repaid quarterly at the rate of 10% of until.the loan-is repaid in full. in invoices) the previous three months invoices to CV (i.e., after $10-million - 20 - Pursuant to the terms of the purchase agreement, as set forth in the exhibit entitled "Volume Pricing Terms", CV was allowed an "across the board" discount of 40 percent on all purchase orders for the first 6 months, and after that, a maximum. volume discount of 40 percent' off list price. The purchase agreement, which ran for a period of approximately 3 years, contained no reference to the warrants. It also provided the "The Joint Development Agreement shall prevail over this Agreement." The purchase agreement also stated that [CV] shall get the benefit of lower prices that * * * the * [Sun] for current [CV]. If * [Sun] does to the lowest price * * [CV] a price equal are given to other customers.of * * and future products that are sold on terms and . conditions that are the same as the terms and conditions offered to * not offer * * being offered to such other customer of * because the terms and conditions being offered to that customer are different from those offered to * * * [CV], lower price on the same terms and conditions as are being offered to the other customer. conditions shall items as payment quantities, .technology exchanges, warranties and upfront investment by a purchaser. include, but not be limited to, such terms, manufacturing rights, [CV] shall have the option to accept Terms and * * * * * [Sun] Pursuant to the investment agreement, Sun agreed to issue two stock warrants to CV to provide a further "incentive for an ongoing business.relationship." The exercise of the first stock warrant was contingent upon CV's purchase of $20 million of products (including royalties paid by CV to Sun pursuant to the joint development agreement) within 36 months of the first shipment by Sun to CV; the exercise of the second warrant required $30 million of purchases within the same 36-month period. The stock warrants were exercisable in whole or in part at any time:within 5 years-after theyùfirst became exercisable. The investment greement p ovided in relevant part : Sun and CV have enter d into ar Joint Development * * providing for the sharing Agreement of ·even date * by the parties of certain t echnologies, manufacture by CV of certain reasonable workstation configurations ("RWCs") and for the purchase by CV from Sun of RWCs.. expectation of a continuinÙ business relationship of value to both parties, CV has indicated its willingness to make certain loans .to Si n and Sun has indicated its willingness to grant Sun. to CV an equity participation in In recognitidn of their mutual for the 3 . The Warrants As addìtional incentive for an ongoing business relationsh p Sun .is .issuing to CV (a) a warrant to purchase 10,.00 s Series F Preferred Stock.at a price f $120.00 per share, such warrant to become. exercisable on -the -day af ter the Cumulative Sun +Business with CV (referred to below) exceeds $20 million if suchi figure is reached within 36 months of the date of the first shipment by, CV of a First Generation RWC (as defined in the Joint shares of Su(cid:0)576i' . Development~.Agreement) for Ëevenue tand (b) a warrant to purchase 10,000 shares of SÄn's Series G Preferred Stock at a-price of -$150.00]per share, such warrant to become exercisable on+the .day "after the Cumulative Sun Business with CV exceeds $30 million . if such f igure is reached-within the 36 month period mentioned "in (a) above. with CV" and of revenue appear- below. * * * Definitions of "Cumulative Sun Business the first sliipment by CV of a uhit for - . 4. Cumulative Sun Business.with CV. The Cumulative the Warrants as provided above, shall Sun, Business with CV, which determines the .i exercisability of be the aggregate cumulative sum of Sun's invoices (net of freight, and returned products) by CV under the Purchase Agreement and (ii) royalties payable by CV to Sun pursuant Section 5 of the Joint Devel pment Agreement. insurance, duty, (i) the amount of taxes to CV for Sun. products purchased (as defined below), to * (b) * * The shÍ.pme * * * * reveriuee refers to the first bona' fide regular way placement of such a unit by CV with an independent by CV of a First Generation RWC for - 22 - The use by CV of units internally, customer, whether such unit be placed on sale or lease terms. units used by its subsidiaries, shall not be regarded as shipments for revenue. notice of Generation RWC for revenue within 30 days after such shipment . the first shipment of such First . CV will give Sun written the date of including . * * * * * * * * ANNEX I I 10,000 Shares Series F/G Preferred Stock * * Preferred Stock Purchase Warrant * * * * . SUN MICROSYSTEMS, INC. ("Sun"), a California for value received, corporation, hereby certifies that, COMPUTERVISION CORPORATION ("CV") , or permitted assigns, entitled, subject to the terms set forth below, Sun at any time or from time to time after the Initial Exercise Date and before * nonassessable shares of Series F/G Preferred Stock of Sun, at purchase price per share of The number and character .of such shares of Preferred Stock and the purchase price per share are subject to adjustment as provided herein. * the Expiration Date, 10, 000 fully paid and to purchase from [$120/150] is * * * * the This Warrant is one of the Preferred Stock Purchase issued in connection with an Warrants (the "Warrants") Agreement Relating to Investments by Computervision Corporation in Sun Microsystems, 21, 1983, evidence rights to purchase an aggregate of 10,000 shares of Series F Preferred Stock and 10,000 shares of Series G Preferred Stock of Sun * (the "Investment Agreement") . Inc. dated November The Warrants * * CV had not invested in a supplier prior to the transaction with Sun described above. CV did not make a practice of investing in its suppliers and did not view the warrants as an investment in Sun. The linking of CV's ability to exercise the warrants to the dollar volume of business CV transacted with Sun served as an incentive for CV to do business with Sun. The warrants served as - 23 - an incentive to -CV to^ purchase orkstations manufactured by ;Sun, rather than to manufacture the workstations itself, during the initial -phase?of the atransaction . bétween CV and Sun For * workstations manufactured 3by ·Sun, the purchase >agreement provided a higher price .to be paid by . CV to Sun than the royalties that CV was obligated to pay .Sun for wo kstations manufactured by CV. . Consequently, the volume purchase levels at . which .the warrants' became exercisable would be rea hed more quickly were CV . to purchase _workstations manufactu ed by Sun than would be the case if CV were to manufacture them itself and pay Jroyalties to iSun. The dollar volume Aof business at which the warrants became exercisable was ·within the expected dol'lar volume: of business to be transacted between- CV and Sun. Although TCV did not commit to buying the volume specified -in the investment agreement for exercisability of the warrants, ts projections- furnished to Sur indicated th t CV believed it wo ld be able to éffect purchases at those volume, levels. The joint development agreement contained provisions implementing the objectives of CV and Sun with respect to the development of future products. As noted above, Sun possessed valuable technology and know-how with respect to the operation of UNIX, an open computer operating system compatible with hardware and software developed by compan es besides CV and with which CV did not have experience. CV int nded to develop software for future products, and it was nece sary for CV to coordinate such advanc ment with the development of the workstations by Sun. - 24 - Further, the parties had to develop an appropriate interface between the systems in order to facilitate the use of Sun's workstations with CV'.s existing product line. They al.so agreed . to contribute mutually to the design of new workstation products. The parties agreed to broadly share all current product information and knowledge relating to development of future products and to exchange specific items such as hardware and software. The joint development agreement also specified the royalties to be paid by CV for Sun's technology. It also·gave CV the right to manufacture workstations if Sun did not supply them under the purchase agreement. Finally, although there was no .commitment to purchase any minimum volume of workstations, CV. agreed to purchase 50 percent of its workstation requirement from. Sun during the 3-year term of the purchase agreement. The joint development agreement also stated that . 9. CV Investment in Sun. The parties are entering into a separate Agreement Relating to Investments by * * loans. by CV to Sun and investments by CV in Sun. in Sun Microsystems, Inc. which provides for * [CV) The Warrants and the Debt Financing Both at the time of the negotiations and when the agreements were entered into, neither CV nor Sun knew the extent, if any, to which the stock warrants would appreciate in value, although CV hoped that Sun would be successful and believed that Sun had the potential to be successful. Sun obtained an independent appraisal of the fair market value, as of November 21, 1983, of the stock warrants. The appraisal estimated the fair market value of the warrant to purchase series F preferred stock to be - 25 - $146, 000 and the fair market value of the warrant to purchase series G preferred stock to be 58,000. The,apprai 1 was made by the investment banking firms of Robertson, Colman & Stephens and Alex, Brown & Sons, nc. an is e forth in a letter dated March 28, 1984 . CV did not acquire Sun stock pursuant to the warrants, but instead ltimately sold the warrants in 1986 and 1987 to underwriters. . During i s 1984 fi cal year, Sun had an unsecured working line of credit pursuant to whic it could borrow up to $8 million at a rate of interest equal to prime plus .75 percent. Sun also had a $3 million loan commitment from banks that provided for interest equal to the prime rate plus percent . The prime rate in May and June 1983 was 10.5 percent, and, on December 2, 1983, it was 11 percent . During its negotiations with CV, Sun tried to obtain $5 million of financing from CV. , which had a large cash reserve, would only agree to loah $2.5 million to Sun; the financing consisted of the $1.5 million debenture that was convertible and was subordinated to the extent and in the manner set forth therein to "all Sun s Senior Indebtedness" (as defined tiherein), and a $1 million note. The form of the debenture attached to tlié Investment Agree ent as Annex I def ined "Senior Indebtedness" as: (and premium, indebtedneds of ·Sun, whether the principal of interest on, (i) outstanding on the date hereof ór hereafter created, -to banks, lending . institutions, regularly engaged .in the business lending money, which is for money borrowe'd by Sun or of if any) and unpaid leasing companies, ir surance companies or ·other - 26 - . a subsidiary of Sun, whether or not secured, or equipment any deferrals, indebtedness. renewals or extensions of any such leased by Sun or a subsidiary of Sun and (ii) The debenture was also not entitled to a sinking fund. The terms of the debenture, issued on December 1, 1983, required Sun to pay $1.5 million to CV on or before December 1, 1988, with interest accruing on the unpaid balance at the rate of 8 percent per year. The principal amount of the debenture was convertible into Sun's series G preferred stock at a price equal to $150 per share. CV acquired common stock.in Sun in conversion of the debenture and recognized gain on the sale of that stock in 1986 and 1987.8 Sale of the Warrants On March 4, 1986, Sun made its initial public offering of its common stock. Subsequently, pursuant to the agreements, each share of the Sun preferred stock covered by the stock warrants issued to CV was converted into 15 shares of Sun common stock. Cons.equently, for each of the two stock warrants, CV had the contingent right to purchase 150,000 shares of Sun common stock. The first warrant to purchase Sun common stock (at a price of $8 per share, derived by dividing the original exercise price of $120 per share of series F preferred stock by 15, corresponding to the 15-to-1 conversion ratio referred to above) 8 It appears that the preferred stock that CV was entitled to receive pursuant to the debenture was converted into common stock, as was the case with the stock CV became entitled to receive pursuant to the warrants as discussed below. - 27 - became7exercisable in the fourth quarter of-Sun·'s 1986 fiscal year (i.e. µ April through June 986). and was exercised on November 24, 1986. On thatn dat , CV sold :its. rights ^to the first warrant ·to an underwriter, who- hen exercised; the first warrant. . The closing sale price of .Sun còmmon stock as reported in the NASDAQ National Market System on November 24,1 1986, was^$19.375 per share, or $11.375.per share greater than the $8-per-share exercise price. During January 1987, the s cond warrant became exercisable by CV (at a price of $103 per share, derived by dividing the original exercise price of $150 r share of series F preferred stock by 15, corresponding to the 15-to-1 conversion^ ratio r'eferred to aböire) . CV sold its rights to the rsecond warrant (the "second warrant") to an.und rwriter on March 12, 1987. The cloÁing sa e >ric of S n cc mon stock s reported in t e NASDAQ National Market System on March 1, 1987, was $31.375 per share, $21. 375 greater than CV' s $10 -pe -share xercise price . CV received a net amount of $3, 002, 750 in proceeds from sale of the secon2d 'w rrant, a t r aking intò account underwriting costs and other expenses of the sale. Tax Return and Financial Reporting Treatment of the Warrants the Sale of . On its Federal income tax r turn for its 1987 taxable year, CV reported part of the gain on disposition of ther secònd warrant as q reduction in~its cost of go ds sold: andopart as a91ong-term capital gain. CV computed a capital gain from the sale of the second warrant of $1,179,578 by subtracting from the $3,002,750 - 28 - net sale proceeds an "adjusted basis" of $1,823,172.- The "adjusted·basis" represented the amount that CV would have realized had it disposed of the second warrant whén the warrant first became exercisable and which CV treated in its tax return as a reduction in CV's cost of goods sold (i.e., as a discount in the price paid by CV for goods purchased from Sun). On its Form 10=Q for the quarter.ended March 31, 1987, filed with the Securities and Exchange Commission (SEC), CV reported a $4.7 million gain The portion of the gain attributable to the from the sale of stock and warrants that had been received in conjunction with a convertible loan and a volume purchase agreement. volume purchase rebate ($1.4 million) was accounted for as a favorable purchase price variance and included in the costof goods sold. The remaining $3.3 million gain on the sale of stock. and warrants has been reflected in other income (net). On its Form.10-Q for the quarter ended June 30, 1987, filed with the SEC, CV also reported that it had received during the first quarter of the year gain from the sale. of common stock and warrants that had been received in conjunction with a convertible loan and volume purchase agreement. The Form 10-Q reported that the portion of the gain attributable to the volume purchase agreement ($1.4.million) had been accounted for as a favorable purchase price variance and included in cost of goods sold. DISC Qualification Issue OPINION The first issue that we address is whether CVI qualifies as - - 29 - a DISC pursuant to section-992 ( ) (1) for each of its relevant taxable years. In Computervision Corp. v. Commissioner, 96 T.C. 652, 656 (1991) , we stated : .(cid:16)042 In general, a corporation that qualifies as a DISC is not taxable on its prof ts . DISC's shareholder is taxe each year, on a specified portion of the DISC's earnings and profits as deemed distributions,' while -the r maining portion of profits is not until the- erstwhile.DISC c ases-,to qualify as a DISC. taxed until actually withdrawn from the DISC or Instead, the * * * To: ensure .that a DISC's tax-deferred profits are used for export activities, Congress provided strict requirements for qualification as a DISC. * * * . Becausesof »minimal capitalization and e organizational requirements a DISC may be no more than , Sec. 992 (a) (1) provides as ollows: DISC.--For purposes of this title, the term "DISC" means, with respect incorporated under the laws of a ly State and satisfies the following conditions - for the taxáble year: a corporation which is to any taxable year (A) 95'percent or more of the gross9recèipts (as defined in section 993 (f) ) of such corporation consist of qualified exportireceipts ( s defined in- section 993(a)), (B)o the adjusted basis of the qdalifiedfexport assets )) of the corporation at the (as defined in section 993( close of the sum of corporation at the taxable year equals or exceeds 95 percenè of the adjusted basis .of all assets of the the close of the taxable yeãr, (C) such corporation does not have .more -than.one class of stock and the par or stated value of stock ,is at and least $2, 500 on each day of the taxable year, its outstanding (D) the corporation has made an election pursuant to to be :treate as a DISC and such election is subsection (b) in effect for the taxable ye r. - 30 - a corporation that serves primarily as a bookkeeping device to measure ·the amount of export earnings that are subject [Citation omitted.] to tax deferral. In that case, we 'concluded that CVI was organized and operated solely as an accounting device for computing income subject to deferral under the DISC provisions. ·Id. at.670. Based on the record in the instant case, we similarly conclude that CVI was merely an accounting device to defer taxation of income during the taxable years in.issue by qualifying as a DISC. The parties agree that the only question in dispute concerning CVI's qualification as a DISC for its relevant taxable years.is whether the adjusted basis of CVI's qualified export assets exceeded 95 percent of all of its assets at the close of those taxable years (95 percent of assets test). Sec. 992(a) (1) (B). The parties further agree that resolution of that question depends solely upon whether CVI's transfers of funds to CV prior to the close of each of those years were effective to complete (1) the purchase from CV of qualified export receivables, (2) the reimbursement of CV for certain expenses, and (3).the.payment of a dividend to CV prior to the close of those taxable years. The parties agree that, in the event the transfers were effective to complete the foregoing, CVI satisfied the 95 percent of assets test as of the close of each of its relevant taxable years. · Petitioners contend that the transfers in issue effected the purchase of qualified export receivables and the transfer of ownership of the cash used to reimburse CV for certain expenses 31 - and to pay dividends to CV, so that CVI's .assets' as of the close of its relevant taxable yeàrs' did not include the funds transferred to CV but. did include the receivables purchased with a portion of the funds . P Pet-iti ners further contend that the actions taken subsequent to the end of each of CVI's relevant taxable years, when the iinformation ñecessary to ascertain the amount of receivables, purchased becamé available, nierély memorialized òr documented the ransactions that had taken place before the end of-eäch year. Respondent, however, contedds that the actions taken before the close'of each of CVI's relevant taxable ye'ars were nót .sufficient.to effect thé purchase of CV's qualified export receivables, the reimbursement f 'expenses' incurred by CVi and· . payment of- dividends to CV, but that CV and CVI merely had an intention to. do such *things àt he close of eadh of CVi's relevant taxable years which was not''carried out -until àfter the close of each of those years, wlden -therfinal steps of 'each transaction were carried out . C nsequéntly, respondent inaintains that CVI's assets as of the close of each year·included an open account of, or loan to, CV, equal to the amount of fiinds transferred, which was not a qualified export asset of CVI and that, therefore, CVI failed to satisfy the 95 percerit 'of assets test as ~of -the close of each of its relevant taxable years . We consider whether? 1for pui^póses o the 95 percent of . assets test for each of CVI's relevant taxable years, CVI's assets inc"luded qualified accounts, réceivable purchased fröm CV - 32 - or an open account equal to the amount of funds transferred from CVI to CV on each of January 31, 1983, and January 27, 1984. Resolution of that question depends upon whether a completed sale of the receivables occurred prior to the close of each.of CVI's relevant taxable years. . Petitioners contend that so-called "relaxed ownership requirements" with respect to the acquisition by a DISC of an . interest in its parent's accounts receivable, such as were announced by the Commissioner in Rev. Rul. 75-430, 1975-2 C.B. 313, means that arrangements less formal than may be customary are sufficient to effect the purchase of receivables for purposes of the 95 percent of assets test. We, however, do not find the ruling on point because it concerns only the question of whether a DISC's interest in receivables is sufficient for the receivables to be considered qualified export assets of the DISC for purposes of the 95 percent of assets test; it does not address the time at which a transfer of ownership occurs. In Derr v. Commissioner, 77 T.C. 708, 723-724 (1981), we set forth the following approach to resolve the issue of when a sale is complete: For purposes of Federal income taxation, a sale the occurs upon the transfer of the benefits and burdens of ownership rather than upon the satisfaction of technical requirements for the passage of title under State law. Federal applicable test the facts and circumstances, with no single factor controlling the outcome. The question of when a sale is complete for is a practical one which considers all tax purposes is essentially one of fact. The See also J.B.N. Tel. Co., Inc. v. United States, 638 F.2d 227, {Citations omitted.] 232 (10th-Cir.g1981); Rich Lumber Co. v. United States, 237 F.2d 424, 427 (1st Cir. 1956) ; Guardian Indus.' Corp. v. Commissioner, 97 T.C. 308, 318 (1991), affd. ithout published opinion 21 F.3d 427 (6th .Cir. 1994); Yelencsics v. Commissioner, 74 T.C. 1513,. 1527 (1980) . Respondent contends that tl e sale~of CV's igualified export receivables could not have occurred prior to the close of CVL' s relevant taxable years becauseuthe. requirements for. the transfer of accounts receivable. prescribe by. Article 9 of the .Uniform Commercial Code (U. C. C. ) as .adop ed by Massachuset ts were not satisfied. We do not agree-. Generally, State-law is not dispositive of whether or when a sale or :transfert of, property occurs for Federal tax purposes . Burnet v. Harmel, : 287 U. S. 103, 110 (1932); Snyder v.-Commissioner, 66 T.C 7852992 (1976). As the Supreme ,Court has stated the revenue laws are to be construed, in the light of their general purpose to est!ablish a nationwide scheme of ;taxation uniform in its Application.. Hence their . provisions are not to be taNen as subject to state control or limitation unless the language or necessary implication of the section :i]nvolved makes its application, dependent on state law. States v. Peltzer, 312 U.S. 399, 402-403 (1941) .] [United (cid:16)042 * * * Respondent does not point to any circumstance showing that Congress intended that a DISC's ability to satisfy the 95 percent of assets test depends solely upon State law governing the passage of title,- and we are unab e to discern any such intent on the part of Congress. See also Tumac Lumber Co. v. United States,2625 F. Supp. 1030, 1032 3(D..Or. 1985) ('It was not the intention of the U.C.C. drafters that the U.C.C. should apply to - 34 - . transactions such as those" involving the assignment of accounts receivable to a DISC).1° Generally, the time of passage of title under State law, while highly significant, is only one factor to be considered in . deciding when a sale occurs for Federal.tax purposes and is not controlling. See Morco Corp. v. Commissioner, 300 F.2d 245, 246 (2d Cir. 1962), affg. T.C. Memo. 1961-57; Rich Lumber Co. v. United States, supra. Where passage of legal title is delayed, an agreement may still result in a.sale of property where, looking to all of the facts and circumstances, the parties to the agreement intended the agreement to result in a sale, and the agreement transfers substantially all of the accouterments of ownership. Baird v. Commissioner:, 68 T.C. 115, 128 (1977); Pacific Coast Music Jobbers, Inc. v. Commissioner, 55 T.C. 866, 874 (1971), affd. 457 F.2d 1165 (5th Cir. 1972). In discerning their intent, we rely on the objective evidence of intent furnished by the overt acts of the parties to the agreement. Pacific Coast Music Jobbers, Inc. v. Commissioner, supra; Haqqard v. Commissioner, 24 T.C. 1124, 1129 (1955), affd. 241 F.2d 288 (9th Cir. 1956). Other factors considered in addition to the passage of title 10 We note that, although the Commissioner's rulings are not binding upon this Court, Halliburton Co. v. Commissioner, 100 T.C. 216, 232 (1993), affd. without published opinion 25 F.3d 1043 (5th Cir. 1994), Commissioner ruled that accounts receivable transferred to a DISC by its parent were "qualified export assets" within the meaning of sec. 993(b) (3) without considering whether the transfer complied with the applicable provisions of State law. in Rev. Rul. 75-430, 1975-2 C.B. 313, the .. 35 - include, inter alia: (1) How the partïes to the agreement treat the transaction; (2) whether th right of possession is vested in the purchaser; (3) which party o the .agreement bears'the risk of loss with respect to the proper y; and (4) which party to. the agreement receives the profits rom the property. Grodt & McKay Realty, Inc. v. Commissioner,, 77 T.C. 1221, 1237-1238 (1981) . With the foregoing in mind we consider whether the benefits and burdens of ownership of the qualified export receivables in issue passed to CVI by January 1 of each of its relevant taxable years or at a later time. Alth ugh, as noted above, State law (in this case, Massachusetts law) is not controlling as to the time at which the sales of qual i fied export receivables occurred, we consider Massachusetts law as a factor in our analysis. Respondent, . relying.on Mass. Ann. Laws. ch. 106, sec. 9-102 (b) (1) (Law. Co-op 1984), contends tha the time at a which title passes is governed by the provisions of Massachusetts law embodying article 9 of ·the U. C. C. , Mass . Ann . Laws ch . 106, secs . 9-101 to 9-507. (Law: Co-op 1984) (article 9) . Respondent, relying on Mass Ann. Laws ch. 106, sec.. 9-203 (Law. Co-op 1984), contends that a written agreement is required in order to ef fect a transfer of ownership under that law, and that the sale of the qualified export receivables in ssue, therefore, did not occur until each of' the written agreements was executed after the close of each of CVI's relevant taxable years. Petitioners posit, and we agree, ,that compliance with the provisions of article 9 was not necessary to effect a transfer of ownership of the receivables from CV to CV'I by the close of CVI's relevant taxable - 36 - years. A recent commentary by the Permanent Editorial Board for'the U.C.C. addressing this precise question is especially relevant here. We quote below the pertinent language from PEB Commentary No. 14, 3B U.L.A. 89-91 (Supp. 1995): it law that an owner of No such reason is expressed or implied in * [article 9 of the Uniform Commercial] Code or the the sale of receivables It is a fundamental principle of property may transfer ownership to another person. Were a statute intended to take away.that right, would do so explicitly and such a significant curtailment of rights would be supported by substantial reason. * Official Comments. long antedates adoption of the Code, and it cannot be supposed that either the drafters of legislatures that enacted it intended to work so drastic a change in existing law without clearly saying so. Moreover, a close reading of the text of Article 9 and its Comments, particularly in the context of pre-Code history, compels the conclusion that Article 9 does not prevent transfer of ownership. the code or the Indeed, the * * * * * * * * CONCLUSION Article 9's application to sales of receivables does not prevent Comment 2 to * adding the following paragraph: the transfer of ownership. Official * sec. 9-102 therefore is amended by * Neither Section 9-102 nor.any other provision The the transfer is intended to prevent of Article 9 of ownership of accounts or chattel paper. determination of whether a particular transfer of accounts or chattel paper constitutes a sale or a transfer for security purposes (such as in connection with a loan) is not governed by Article 9. Article 9 applies both to sales of accounts or chattel paper and loans secured by accounts on chattel paper primarily to incorporate Article 9's perfection rules. "security interest" to include the interest of a buyer of accounts or chattel paper, party" to include a buyer of accounts or chattel terminology such as The use of "secured - 37 - "debtor" to in lude a sellerb of accounts or paper, chattel paper, and "c llateral" to include accounts or chattel p er that have been sold is intended solely as a afting technique to achieve e this end and is not rblevant tos the. sale or secured transaction determination. ref. omitted.] * * [Fn. * - We cannot conclude that th .Massachusetts; legislature, in enacting article 9, int-ended to repeal pre-existing law. governing transfer. of ownership of accoun s receivable and:to: create an exclusive method for effecting.such transfers. Under Massachusetts law, ani effective assignment of-accounts .receivable may be made orallyi and. no part cular form. of .words or of conduct is necessary to constitute such an assignment . Kagan v. Wattendorf &. Co., 3 N.E.2d 275 278 (Mass: 1936) . A valid assignment may be made by any w rds or acts swhich fairly indicate an intention stotmake the assignee the owner of a ;claim. " Id. at 279.. (quoting Cosmopoli-tan :Trust Co v. Leonard Watch Co. 143 N.E 827, 829 (Mass., 1924)). An assignment -may occur prior to the execut'ion 'of a writ ten agree nent ,· if that is vthe . intent- of the parties to *the agreement . I . .at 277 279; . cf .' Rosen -v. Garston, 66 N.E.2d r29, 32-33 (Mass.. 1946) -(time at which title to goods sold passes dependscon intent of parties to,the-agreement). The intent of the parties .to the agreement. is a question of fact, to be decided from theirmdeclaratiöns, coriduct?"and motive, and all the attending circumstances. Casev v. Gallagher, 96 NiE±2d 709, 712 (Mass: 1951) . Ansenforceable agreeme^nt, however, does not arise unless its terms afford a sotind basis for- (1) determining when a breach of the agreement could occur and (2) - 38 - affording an appropriate remedy to the party aggrieved in the event of a breach. Louis Stoico, Inc. v. Colonial Dev. Corp., 343 N.E.2d 872, 875 (Mass. 1976); see also 1 Restatement Contracts 2d, sec. 33, comment a (1979). Consequently, we reject'respondent's contention that Mass. Ann. Laws ch. 106, sec. 9-203 (Law. Co-op 1984), requires a written agreement in order to effect a sale of accounts receivable. We, therefore, consider whether, pursuant to general principles of Massachusetts law, ownership of the qualified export receivables in issue passed to CVI prior to the close of its relevant taxable years. . . The question we must resolve is whether CV and CVI adequately manifested an intention that ownership of the . qualified export receivables in issue pass to CVI by the close of its relevant.takable years and whether a sufficiently definite .agreement for the transfer of the receivables existed at those . times. Although the manner in which CVI and CV effected the sales in issue was not perfect, there are sufficient circumstances in the.record to satisfy us that, based on all of the factors discussed above, sales did in fact occur prior to the close of CVI's relevant taxable years. CV developed a plan in September, 1982 to maintain CVI's status as a DISC by transferring the receivables to CVI by the close of CVI's relevant taxable years. A framework for -the. purchase of the receivables was.furnished by the master receivables.purchase agreement. In pursuance of the September - 39 - 1982 plan, CVI transferred funds-to?CV 'to. purchase the receivables prior to theáclose of its relevant taxable years and written memorials of "the transa tions ·were prepared 7as soon . as the information necessary to compute the_amount of :receivables purchased became available. The witnesses at trial credibly testified that the written agreements - covering the sales in issue simply memorialized the .transact:ions that had occurred during the relevant taxable years. CV and CVI 'documented and accounted for the transactions in a. manner consistent .with an 'intent to effect sales by ethe, close of CVI's relevant taxable years. Old Colony Trust Associates v. Hassett, :150 F.2d 179., 182 (1st Cir. .1945); Baird v.. Commissioner,. 68 T.C. t 128;- Devoe v. Commissioner, 66 T. C. 904, 911 (19-76) ; Clodfelter v. Commissioner, 48. T. C.. 694, 700-701- (1967), affd. 426 F.2d 391 (9th Cir. 1970) . The record satisfies us that CV and CVI in ended the sales of the- qualified export receivables. to take effect" prior to the close of CVI's ~ relevant,taxable years.. We have considered respondent's. contentions,withsrespect to the purported* defects in the manner in whiche ther sales were effected but conclude that petitioners have nonetheless established tha sales)of thV qualified export receivables occurred prior to th close4 of the. relevant taxable We next consider whether th funds~CVI transferred to CV that were used to. reimburse CV for exporta promotion expenses .incurred on behalf of CVI pursuà tv to-the export-promotion agreement and to pay dividends to CV continued~to;be"assets of - 40 - CVI after the close of CVI's relevant taxable years. Respondent contends that the transfers of funds to CV from CVI merely created."open accounts" or receivables of CVI from CV. Petitioners contend that ownership of the funds passed from CVI to CV at the :time of their transfer. The question whether a transfer of property effective for Federal income tax purposes has been made is a question of fact. Danenberg v. Commissioner, 73 T.C. 370, 390 (1979). The test for deciding whether a transaction.is completed is a practical one, and the transaction must be viewed in its entirety. Morco Corp. v. Commissioner, 300 F.2d at 246. In deciding whether a transfer has been completed, we rely upon the.objective evidence of intent provided by the overt acts of the parties to the transfer. Pacific Coast Music Jobbers, Inc. v.- Commissioner, 55 T.C. at 874.. Similarly, for Federal tax purposes, the question of whether a debt has been created as a result of a transfer or distribution depen.ds upon whether, at the time the funds are disbursed, the parties to the transfer at the time of disbursement, intend that they be repaid. Crowlev v. Commissioner, 962 F.2d 1077, 1079 (1st Cir. 1992), affg. T.C. Memo. 1990-636; Delta Plastics Corp. v. Commissioner, 54 T.C. 1287, 1291 (1970). Viewing in its entirety each of the transfers by CVI of funds insofar as the transfer concerned the export promotion expenses incurred by, and the dividends paid to, CV, we conclude that the funds were not assets of CVI as, of the close of each of its relevant taxable years. -»41 - One factör we cònsider is' whether," pursuant to Massachusetts law, titile tò the-fund(cid:0)541transferred by CVI to; CV passed to CV by thè close of CVI'si relevánt taxable yeárs. Massachusetts' läw provides that possession of propekty,' with the exercise of the rights òf cownership, is evidenc of title and ordinarily makes a prima facie case of title by th possessor. Hurley v. Noone, 196 N. E . 2d 905, 90 8 -90 9 (Mas(cid:0)541:1964 . I f , howeverf evidence ' is introduced to qualify the - evidence of possession, the whole of the evidence iscto be considere together^todletermine the true title. Id. at 909 In thê in ant case, CV was in possession of, and'e(cid:0)576ercisedownership rights over, al'1 öf the .cásh tránsferred ~by CVI by the closé of CVI's. relevant taxable yeärs, and the évidence of CV's possession h~as nöt been qualified by any other evidence in'the record indicat'ing that GV w s not the owner . of the cash Abcordingly, fwe conclude, that, pursuant to Massachusetts law, title'to the cash passed to CV bý the closé of CVI'.s relevant takable; ye'ars (cid:16)042t The fact: that' the diviidends received by CV were nöt declared by the diredtors of7CVI_unt'ils aftier 7the_close of CVI s relevant taxable. years aléo. does inot . prevent us. ffom concluding that dividends were.effectively paid by'the close of tho'se years. As a general matter, Mässachusett s law provides that n'o 'dividend can arise, and shareholders have rio right to,1or interest in, the acbumulated earnings -o^f a corporation until tihe authorized representatives of a corporatiori vòt-e to declare a 'dïviderid. Galdi v. Caribbean Sugar'Co.y 99 N.E.2d 69,' 71 (Mass. %951); - 42 - Willson v. Laconia Car Co., 176 N.E. 182, 184 (Mass. J931); Joslin v. Boston & M.R. Co., 175 N.E. 156, 158 (Mass. 1931); Anderson v. Bean, 172 N.E. 647, 652 (Mass. 1930). Although the distribution of dividends by CVI had not been formally authorized by the close of its relevant taxable years, an act performed without authority may be ratified if it could have been authorized at the time it was performed. It has generally been held that ratification of an act relates back to the time at which the act was performed and is equivalent to prior authority for the act, unless the rights of third parties have intervened. Tarrants v. Henderson County Farm Bureau, 380 S.W.2d 274, 277 (Ky. 1964);.Phillips v. Colfax Co., 243 P.2d 276, 281 (Or. 1952); Hannigan v. Italo Petroleum Corp. of America, 47 A.2d 169, 171- 173 (Del. 1945); see generally 18B Am. Jur. 2d, Corporations, secs. 1635-1660, 1657-1658 (1985); 2A Fletcher ·Cyclopedia of Corporations, secs. 750-784 (1992). Consequently, a corporation's board may ratify an unauthorized dividend payment, and, absent intervening rights of third parties, the ratification is retroactive. Meyers v. El Teion Oil & Refining Co., 174 P.2d 1, 2-3 (Cal. 1946); Milligan v. G.D. Milligan Grocer Co., 233 S.W. 506, 510 (Mo. Ct. App. 1921). In the instant case, no intervening rights of third parties intervened between performance and the subsequent ratification. Although we have found no Massachusetts case directly on point, it appears to us that a corporation could effectively ratify a dividend in Massachusetts under the circumstances of the instant case. See, 43 - e.g., Town of Canton v. Bruno, 282 N.E.2d .8.7,-~93 n:8 :(Mass: 1972); Shoolman v Wales Manufacturing Co., 11'8 N..E.2d 71, 75 (Mass. 1954); Rochfordiv. Rochford, 74 N.E. 299, 300 (Mass. 1905); McDowell v. Rockwood, .65^N.Ev65, 67' (Máss. 1902)u .In the instant caser the.directors of CVI. declared dividends effective às of the last day of .each of CVI ' s; relevant. taxable years . We consider the.declarations of dividendssto have effectively ratified the distributions- made prior to the close of CVI's relevant taxable years. As with the receivables; :S ate law is only, onelfactor to consider.3 Other circumstances urrounding the transfers in issue -also indicate that -ownership of the-funds transferred to CV passed to it by the, close of CV ' s relevant taxable years . Both CV and: CVI , intended that , prior to . each transfer, CVI . would continue to qualify as a DISC and would satisfy t'he 95 percent of assets test. Both CV and ,CVI i tended that, prior'to the end of CVI' s taxable year, CVI cwould reimburse CV' s export pYomotion expenses and pay a .dividend with the -funds that were not required to ,reimburse . the expenses and purchase qualif ied :receivables f rom CV. CVI, transferred funds to C 's possession prior to,the end of each of the taxable years in issue for those purposes. CV treated those funds as..its own, deposiating' them in its 'bank account, and each transfer was decorded.on the respective books of CV and CVI át that· time as a payment by CVI. to CV, not as a loan or open account . There :were rio circumstances contempláted by the parties under which those funds would be .repaid.to CVI and there were no further conditions that CV was required to satisfy . - 44 - in order to be entitled to those funds. Consequently, we conclude that the funds were subject to CV's complete dominion and control at the time they were deposited in its bank account. Although, by the close of each of CVI's relevant.taxable years, all events had occurred to determine the total amount of export promotion expenses owed and qualified accounts receivable to be purchased, that information was not available to CV's and CVI's tax and accounting departments at that time. That unavailability was the only circumstance preventing the each of CVI's payments to CV from being allocated to and among the expenses reimbursed, the qualified receivables purchased and the dividends paid. Moreover, under the terms of the export promotion agreement, CV was required to bill the export promotion expenses to CVI at the close of CVI's fiscal- year, and the amount due was payable within 60 days thereafter. Consequently, we conclude that CVI was obligated to reimburse CV for the export promotion expenses at the close of its relevant taxable years. Once the necessary information became available, the appropriate book entries were prepared, effective as of January 31 of each year. The making of the entries effective as of each of those dates, while not conclusive, indicates that the parties intended the transactions in each of those years to take place on each of those dates. Devoe v. Commissioner, 66 T.C. at 911; Clodfelter v. Commissioner, 48 T.C. at 696, 700-701. The foregoing circumstances persuade us that CV and CVI - 45 - intended that the reimbursement ofrexpenses and'payment of dividends would . occur 'on, January 31 of each of CVI' s relevant taxable years and that. the transfers didi occur on those dates. , Consequently; we conclude that the payments of^expense reimbursements and dividends occurring prior to, the'close*of 3CVI's relevant taxable years we e effective for the purpose of satisfying section 992 (a) (1) (B) Accordingly we hold that the funds paid to CV by· CVI, during I's ,relevant taxable years thät were .used to reimburse :export p omótion í expenses and. pay dividends to CV were-nots assets of CV·I as :of ¡the close of those . years .for purposes :of the195 percent of 'assets test of section , 992 (a) (1) (B)- in each of its taxable years ended January 31, 1983 and 1984, and that CVI qualified as a DISC for..each of _those . Years. , Computation .of DISC CommÊssi n The next issue that w cons der* is whether, in cotÑputincj the commission due CVI from CV for C I's taxable years ending January 31, 1983 and 1984, and December 1, 1984, using the 50 percent of CTI method provided y section 994 (a) (2) aïici (b) , CV and CVI are entitled to apportion net, rather than gross, interest Our hölding renders it unnecessary to address respondent's determinations that, during its relevant the .commission income CVI received from CV for thóse yeáfá should be reallocated to CV . undef sec. 482, or, its income for those years. in the event CVI'does"not qualify as ,a DISC in the alter ative, taxable years, that CVI is taxable on We note that CVI's status a a DISC is not in dispute fo its taxable year ending Dec. 31, 1984. expense among their respective product lines." If net interest expense is apport'ioned, the combined taxable income (CTI) of CV and CVI will rise, increasing the commission payable to CVI and . . therefore the amount of income on which tax is deferred under the DISC provisions. Section 994 (a) generally provides methods for computing the transfer price for property sold to a. DISC by a related person. Section 994 (a) provides that the transfer price is deemed to be set at a level that will allow the DISC to derive taxable income from the sale" of property to a DISC by a related person equal to the greatest of, inter alia, 50 percent of the CTI of the DISC and the person from whom it purchased the property attributable 13 The parties.agree that, in the event we hold, as we have, taxable years, the amount of commissions payable to CVI for that CVI qualifies as a DISC for its relevant the computation.of those years and the amount of CV's deduction for those commissions is governed by our decision in Computervision Corp. v. Commissioner, 96 T.C. 652 (1991). The parties also agree that a reduction of $876,993 is necessary in the adjustment reflecting our holding in Computervision Corp. v. Commissioner, supra, respondent made in CV's deduction for DISC commissions payable to CVI for CVI's taxable year ending Dec. 31, 1984. Their agreement is to be taken into account below. in the Rule 155 computation we order that that Although the Internal Revenue Code provides that the taxpayers to annually. elect to group transactions on the transfer price computation is to be made on a transaction-bytransaction basis, the regulations promulgated under sec. 994 permit basis of products or product computation. Regs. Petitioners elected to group their export sales transactions by product lines in each taxable year with respect to which the DISC commission issue under consideration has been raised. Sec. 994 (a).; sec. 1.994-1(c) (7) (i), lines for purposes of transfer price Income Tax - 47 - to the qualified export receipts fro.m the sale of thesproperty plus 10 percent of the export promotion expenses attributable to the- receipts . . Sec. 994 (a) . Th methods provided by section 994 (a) are also used to compute the maximum amount of income that a DISC acting as. a commission a ent is permitted to earn in a year. Sec. 1.994-1(d) (2) (i), Ihcome Tax Regs. The 50 percent of CTI method defines CTI generally as the excess of gross receipts from.a sale of* property over the^total costs of the DISC and its related supplier . that relate to the sale . . Sec . 1. 994 -1 (c) (6) , Income Tax Regs. The regulations further provide: Costs (other than cost of goods sold) which shall be treated as relating to gross receipts from sales of export property are (a) deductions definitely related, and therefore allocated and apportioned,wthereto, and- (b) a ratable part of any other expenses, . losses, or other deductions which are not definitely related to a class of gróss income, determined in a manner consistent with the rules set forth in * * * [Income Tax Regs.) . [Sec . 1. 994 -1 (c) (6) (iii) , losses, and other Income Tax Regs . ] [section] 1 861-8, thå expenses, . Interest is among the expenses subject to apportionment under the rules set f orth in section 1 861-8, Income Tax Regs . Sec . 1. 861- 8 (e) (2), Income Tax Regs. The regulation apportions interest "based on the approach that money is fungible and that interest expense is attributable to all activities and property regardless of any specific purpose for inc rring an obligation on which interest is paid." Id. Although the pertinent provisions of section 1.861-8(e) (2), Income Tax Regs., do not specifically provide that the interest expen e subject to apportionment is the taxpayer' s interest expense net of interest income, rather than gross interest expense, we conc uded in Bowater, Inc. v. - 48 - Commissioner, 101 T.C. .207 (1993), that a taxpayer's net interest expense was the appropriate interest expense to be apportioned. We reasoned that the interest expense net of.interest income represents a taxpayer's actual cost of borrowing and noted that interest is assumed to be fungible for.purposes of the regulation. Id. at 211, 214-215. Accordingly, we held that, for purposes of the 50 percent of.CTI method, a taxpayer may . apportion a ratable part of net, rather than gross, interest expense to its qualified export receipts in calculating CTI. Id. at 214-215. Petitioners contend, and we agree, that CV and CVI are entitled to apply the holding of Bowater, Inc. v. Commissioner, supra, in calculating their CTI. Respondent, contending that Bowater was wrongly decided, urges us to reverse it and hold that gross, _rather than net; interest expense.must be apportioned in computing CTI. We have considered respondent's arguments, but decline to overrule our prior case. See Coca Cola Co. & Subs. v. Commissioner, 106 T.C. __ (1996). Respondent further argues that a nexus is required between the interest income and expense to be netted. We do not, however, read the cases that have allowed netting of interest income against interest expense for purposes of calculating the interest expense subject to apportionment to require a nexus between the income and expense, although such a nexus often may exist. Nor do we consider such a requirement to be consistent with the approach of section 1.861-8(e) (2), Income Tax Regs., or of Bowater, Inc. v._ Commissioner, supra, which both - 49 - consider interest to be fungible for 'purposes of apportionment . -We, therefore, reject responden 's «argument and hold for petitioners on this issue. Coca Cola Co. & Subs. v. Commissioner, supra. Accordingly, although in their returns with respect to CVI's taxable years in question, petitioners computed the commission payable to CVI under the 50 per ent of CTI method using gross interest expense, they are enti led, pursuarit to the authority of Bowater, Inc. v. Commissioner, supra, to. compute the commission using net interest expense for those' years. Stock Warrant Issue The final issue that we consider is the character of the net proceeds from the sale of the s cond warrant for the purchase of stock in Sun. Petitioners, contending thati the second warrant was a capital asset, argue that tihe eritire amount of the proceeds from the sale of the second warrant constitutes long-term capital gain. Respondent, contending that the second warrant constituted a discount from .the(cid:16)042priceof.work tations purchased from Sun and relying on section 1:471-3 (b) ,. income Tax Regs . , argues that the entire amount of the net proceeds from the sale of the second warrant constitutes; either arriricrease in CV's gross income or a 15 t (cid:16)042 (cid:16)042 We note that only the tax treatínent of the second warrant, which CV sold on Mar. 12 1987, is in issue in the instant case. reduction in its cost of goods sold. The transaction in issue is the same one that we considered in Sun Microsystems, Inc. v. Commissioner, T.C. Memo. 1993-467, where we decided the tax treatment of the first and second warrants with respect to their grantor, Sun, except that in the instant case we must decide the tax treatment of the second warrant with respect to its recipient. We conclude that the approach we took in resolving the issue in Sun Microsystems, Inc. v. Commissioner, supra, that is, considering all the facts and circumstances of the transaction between Sun and CV, is also appropriate in resolving the issue presented in the instant case." 16 the second warrant. Petitioners, however, rely on. Petitioners have objected, solely on grounds of relevance,. to the admission of certain stipulations and exhibits concerning the transaction between Sun and CV that occasioned CV's acquisition of certain of the stipulations and exhibits in their proposed findings of fact, and we deem petitioners to have conceded that those stipulations and exhibits are relevant to the instant case. We consider the remainder of relevant the second warrant constitutes a trade discount or a capital asset must be based on all the second warrant. stipulations and exhibits do not bear directly on the matters in dispute herein, we find the stipulations to be admissible as background evidence aiding our understanding of and concerning which we have wide discretion in admitting. United States v..Blackwell, 853 F.2d 86, 88 (2d Cir. 1988); United States v. Daly, 842 F.2d 1380, 1388 (2d Cir. 1988). to the instant case because our decision as to whether Fed. R. Evid. 401. Moreover, even if the the facts and circumstances concerning the stipulations and exhibits those-matters, Respondent objects to petitioner's offer of.respondent's trial memorandum submitted in Sun Microsystems, Commissioner, T.C. Memo. 1993-467, on the grounds that it is irrelevant to the instant case. However, that we admitted the stipulations and exhibits referred to above, we admit the trial memorandum. for the same reasons- Inc. v. Respondent also objects to petitioners' offer of an expert (continued...) .. u 51 - We noteminitially..that an allowance otherwise constituting a trade discountvshould not bertreated: differently for tax purposes simply becauseait takes $he forn£ of property that' may ordinarily be <considered a capital- asset.. Consequentlyi, our- inquiry will focus on whether or not the stock"warrant -in issue constituted a trade di'scount given CV by Suntfor the purchase of workstations. Consideration of f the facts and circumstances surrounding the transaction between Sun and: CV concerning the granting of- th second warrant leads us to conã1ude that the second warrant constituted a trade discount frbm Sun to CV related to the . . cont inued) " ( .. report- subrñitted by reãþorident 15 Sbn Microsyst exés Commissioner, supra, on the grognds that irrelevant, hearsay without compliance with Rule 143. We. declined to admit report supra, because we found it, inter alia, argumentative and . irrelevant, and we decline to aÊlmit it in the instånt case. into evidence in ÍÚn ÑÏcÈo(cid:0)570vstems,Inc. v. Commissioner, and: constitutes opinion evidence offered the report,is Inc. v. the Petitioners contend that respondent abandoned on brief the thatt, the warrants in 1ssue were within the inventory exception to sec. -1221(1), and suggest the- determinatiö in the notice of deficiency, the net proceeds from the sale of that is raising a new theory on brief by arguing that the argument oriéjinally advanced in respondent's trial memorandum that the definition of capital asset respondent stock warrants constituted a trade discount. respondent's argument on brief, however, development' of which was that were taxable "as ordinary income or as a decrease to cost of goods sold." We also disagree has conceded that a portion of the warrants .is taxable.as long term capital gain. Respondent merely stated on brief, in the event we decided that the appropriate time for recognitior of the. trade discount 'afförded by the .warrants was the date on which the narrants were first exercisable., price 'over their valtie on that date was gain from.the äale or exchange of a capit al ·asset . ith petitioners that respondent respondent would cóncede-that t he amount realized on the sale of the Sun warrants the excess of the sale We consider to be merely a - 52 - purchase of workstations. Respondent presented the testimony of James Berrett,, who.was CV's president at the time of the negotiation of the agreements for the purchase of the workstations and the issuance of the warrants. He testified that, although the warrants were not a significant component of the agreements between CV and Sun, they were an incentive for the purchase of workstations from $un by CV and served to lower the overall cost to CV of the transaction with Sun. Moreover, he testified that CV had never invested in a supplier prior to the transaction wi-th Sun, did not make such investments, and did not regard the warrants as an investment in Sun. Other witnesses . testified similarly. CV, in fact, never acquired any Sun stock pursuant to the warrants, but sold the warrants shortly after . they first became exercisable to underwriters. Additionally, the fact that the second warrant was exercisable only upon the transaction of a.specified dollar volume of business between CV and Sun, either in the form of purchases of Sun products or payment of- royalties by CV, indicátes that it was in the nature of a trade discount.is Other circumstances connected with the transaction support such characterization. The investment agreement made between Sun and 18 A trade discount is allowed upon the purchase of a specified quantity of is generally considered a.price reduction that merchandise. See Benner Tea ·Co. v. N.W.2d 39, 43 (Iowa 1961); Argonaut Co., 582 S.W.2d 883, 887-888 (Tex. Civ. App. 1979); Sperry & Huchinson Co. v. Margetts, 96 A.2d 706, 713 (N.J. Super. Ct. Ch. Div. 1953), affd. 104 A.2d 310 (N.J. 1954). Iowa State Tax Commn., 109 Ins. Co. v. ABC Steel Prod. 53 - CV described the warrants as "an·"additional~ incentive4for an ongoing busiriess relationship" between them. Theatransaction wi*th Sun involved a major strategic shift:for CV.from manufacturing workstations ·to2purchasing-them from a vendor, .and the warrants ^operated as ari additional incentive for CV ·to purchase -the workstations from un rathèr tlian manufacturing them itself,- as did t'he reverse royalty arrangement,with Sun. Under the terms of the purchase agreement, CV twoul~d reach tihe dollar volumés 'of business with ~Sun at which -the second warrant wou-ld become =exercisable more trapidly if it purchased workstation's from Sun rather than manufactured. thèm itself . If Sun became successful by virtüe of CV's pu chasing workstations manufactured by Sun, Sun's value would" be en1anced, and CV could benefit from the increased value through the exercise of .the warrants. The warrants CV received from Sun were' intended to, and did in fact, lower. the cost to CV of spurchas ng workstations from Sun.1 Additiorially, in -theîr T987 income tax return, - jetitioners 19 Petitioners, in an effort t o bolster their argument that the the the sale of If .in fact the net the sec nd. warrant constituted additional second warrant was a capital asget of CV, suggest . that. the warrant represented "partial compensation to Computervision for the below-market, interest i rate on t-he loans:' CV. made to Sun as part of the workstation purchase transaction. proceeds of interest income to CV wit-h resp ct to its loan to Sun, proceeds would be taxable as or inary income .and not capital gain. See,Comtel Corp. v. Commissioner, 376 F.2d 791,. 796-797 (2d Cir..1967), affg. 45 T.C. 29.4. (1965);,Green v. Commissioner, 367 F.2d 823, 825 (7th Cir. 1966), affg. 1965-272. Accordingly, accepting petitioners' suggestion would not cause us -to adopt vpetitioners/ characterization of the' second warrant as a capital asset . long-term , 'f.C. Memo. - 54 - treated the net proceeds of the sale of the second warrant as a reduction of cost of goods sold to the extent of the proceeds that would have been realized on the sale of the second warrant had it been disposed of when it first became exercisable ($1,823,172). Petitioners treated the remainder of the net proceeds ($1,179,578) of the sale of the second warrant as long- term capital gain. Moreover, CV described the second warrant in its Forms 10-Q for the quarters ended March 31 and June 30, 1987, as. having been received "in conjunction with * * * a volume purchase agreement" and treated.a'portion the net proceeds of the sale of the warrant as a "volume purchase rebate". Petitioners'· treatment of the second warrant for tax and financial reporting . purposes indicates that the warrant was in the nature of a trade or volume purchase discount.2o Consequently, based on our consideration of all the facts and circumstances in the instant case, we find that the second warrant represented a trade discount received by CV from Sun in the amount respondent determined is includible in petitioners' income; i.e., the net proceeds.realized by CV from its sale.21 20 The fact that only a portion of the net sale proceeds was treated as a volume purchase discount merely indicates that CV took the position that the amount of determined at exercisable and does not affect the admission as to its character. As discussed below, we need not address the appropriate time for measuring the amount of that discount. the discount was to be the time that the second warrant first became 21 of Respondent contends that the full amount of the net proceeds the sale constitutes a trade discount, but notes that - (continued...) Having decided that the seöondiarrant constituted 'a trade discount, "we- next -considef how thé discount is to be tiaken into' account+in computing, petitioners'~ taxable income . As' a general matter forstax purposes, where trade discount is obtained with. respect .to; goods the cost of- which has been included in a taxpayer's cost of goods sold, the- discount is treated as an it'em of gross income1 If, howèver, the discount relates to'goóds the cost of whichsis.still in a taxp yer's inventory the ^cost of the goods: is reduced by . the amoùnt . of the discount . See Turt le Wax, Inc. vr. Commissioner, 43vT.C. 460,1466 -(1965) -The parties have not addressed whether, in the event we decide that the second warrant constitutessa'trade.disc unt, the'discount should be treated as a reduction ins thë cost of goods in CV's inventory or as an item of gross income.·· In t heir return for 1987, (. . . continued) the amount of· discount is to be determined)as of the discount is the date used in. petitioners' the net proceeds of the sale of the second warrant is the time at which the second warrant the appropriate date for recognition of the treatment of the net sale proceeds in petitioners' petitioners may .argue that the a propriate time for measurement of first became exercisable, which s the position petitioners took in their return for 1987. Respo dent further concedes that, the event we decide that the amount of return, return was correct. Petitioners, on brief, contend that amount of long-term capital gain and that the appropriate time for recognition is the time at which the second warrant was sold. Petitioners do not attempt that regard, and we treat petitioners as not. disputing respondent's determination of the appropriate time for recognition of the discount attri utable to the second warrant . We note that we have recently rulåd that the amount of a seller' s deduction for a trade discount attbributable to the grant of a stock warrant exercised. Convergent Technologies, Memo . 1995 -320 . the time the warrant is Inc. v. Commissioner, T. C. to sustain their return position in in the full is - 56 - petitioners treated a portion of the net proceeds of. the sale of the second warrant as a reduction of CV's cost of goods sold, rather than as an item of gross income . Petitioners have not argued that, in the event we decide that the second warrant represented a trade discount, that treatment is incorrect . Respondent also does not dispute that - treatment, arguing simply that the net proceeds of the sale of the second warrant constitutes either ordinary income to CV or a reduction in its cost of goods sold. We, therefore, hold that the entire amount of the net proceeds of sale of the second warrant is a reduction in CV's cost of.goods sold. To reflect concessions and the foregoing, Decisions will be entered under Rule 155 .