t c no united_states tax_court norwest corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date 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 551_f2d_599 5th cir and adopted by this court in 90_tc_74 is not applied to the computer_software in issue the test of tangibility in 27_f3d_1142 6th cir is not adopted 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 dollar_figure big_number big_number big_number respondent also determined that the provision for increased interest under sec_6621 applied for and 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 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 large-scale mainframe computers which were used to process large amounts of data and transactions at a central location 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 personal computers pcs which were generally smaller stand-alone devices used for word- processing and spread-sheet applications each of the above-described computer systems requires operating software also called systems software and 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 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 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 machine- readable computer language known as executable or object code 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 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 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 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 dollar_figure 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 for example in the american standard code for information interchange ascii the binary representation for the letter a is and the binary representation for the letter z is 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 compact disk read-only memory 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 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 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 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 typically one copy was kept on site for immediate access and a 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 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 second copy was kept off site as a second backup to the on-site copy in the event of a disaster 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 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 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 sec_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 551_f2d_599 5th cir we adopted the intrinsic value test in 90_tc_74 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 27_f3d_1142 6th cir 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 675_f2d_1068 9th cir 588_f2d_1293 9th cir 549_f2d_576 9th cir 480_f2d_66 9th cir 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 congress did not intend the term tangible_personal_property to be defined narrowly the commissioner has held in revrul_71_ 1971_1_cb_5 that software acquired in conjunction with the purchase of a new computer is eligible for the itc the commissioner's treatment of software as export_property pursuant to other code provisions supports a finding that software is tangible_personal_property and 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 sec_38 allows the investment_tax_credit the itc is calculated as a specified percentage of the taxpayer's investment in sec_38 property placed_in_service during the taxable_year sec_48 defines sec_38 property as including among other things tangible_personal_property the term tangible_personal_property is not defined in the statute sec_1_48-1 income_tax regs however states that the term ‘tangible personal property’ means any tangible_property except land and improvements thereto sec_1_48-1 income_tax regs states that i ntangible property such as patents copyrights and subscription lists does not qualify as sec_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 pincite 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 pincite gsid's customers were furnished with pictures derived from a complicated collection and editing process that depicted the contours of the earth's different 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 pincite this court in 90_tc_74 adopted the so-called intrinsic value test created by the fifth circuit in 551_f2d_599 5th cir 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 homes with regulatory reporting requirements see ronnen v commissioner supra pincite 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 pincite the master source tape was held by the seller for security reasons and was available to hsl on an as-needed basis id pincite 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 pincite 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 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 pincite 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 pincite this court held that the computer_software in issue was intangible and thus ineligible for the itc id pincite we have since followed ronnen on numerous occasions and have held that computer_software is intangible_property for purposes of the itc see eg 98_tc_242 91_tc_713 affd on other grounds 905_f2d_241 8th cir more recently in 27_f3d_1142 6th cir 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 distribute id pincite 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 pincite 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 pincite 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 pincite the sixth circuit then analyzed the line of cases beginning with 327_fsupp_189 c d cal 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 pincite the court stated that u nless the fifth circuit's reasoning is somehow flawed texas instruments would appear to be dispositive of the issue presented in the case at bar id pincite 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 pincite 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 aftr 2d ustc par d vt 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 pincite ustc par at big_number that court distinguished 551_f2d_599 5th cir 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 aftr 2d pincite ustc par at big_number 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 pincite the sixth circuit also addressed our opinion in 90_tc_74 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 tape comshare inc v united_states f 3d pincite 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 pincite 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 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 27_f3d_1142 6th cir 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 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 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 u s c sec_102 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 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 f 2d pincite 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 551_f2d_599 5th cir as the master source codes were to the tapes and disks in 27_f3d_1142 6th cir 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 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 90_tc_74 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 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 pincite4 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 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 publaw_87_834 76_stat_962 first enacted the investment_tax_credit s rept 87th cong 2d sess 1962_3_cb_703 is the report of the committee on finance that accompanied h_r which became the revenue act of s rept supra c b pincite stated that except for specified exclusions all tangible_personal_property qualifies as sec_38 property tangible_personal_property is not intended to be defined narrowly here 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 ie rights and obligations created by law cf goldman comment from gaius to gates can civilian concepts survive the age of technology loy l rev 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 eg u s c sec 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 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 87th cong 2d sess 1962_3_cb_703 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 tax regs fed reg date 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 supra c b pincite 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 90_tc_74 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 the nature of the taxpayer’s ownership rights with respect to the software items in issue in both 98_tc_242 and 91_tc_713 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 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 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 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 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 property' and end with an examination of the legislative_history of the itc majority op p 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 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 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 27_f3d_1142 6th cir 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 ie the computer_program not the disk or tape itself see bank of i was the trial judge in this case the majority opinion adopted my findings_of_fact the adopted findings_of_fact are accurate vermont v united_states aftr 2d ustc par d vt 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 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 subsequent transfer to the computer the intellectual_property becomes dually housed on the disk or tape and 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 this court held in 90_tc_74 that computer_software is intangible personal_property we have steadfastly applied this characterization in other cases see 98_tc_242 95_tc_467 affd without published opinion sub nom stell v commissioner 999_f2d_544 9th cir 91_tc_713 affd on other grounds 905_f2d_241 8th cir b d morgan co v commissioner tcmemo_1988_569 smith v commissioner tcmemo_1988_420 salzman v commissioner tcmemo_1988_86 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 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 551_f2d_599 5th cir 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 pincite we adopted the intrinsic value test in ronnen v commissioner supra and held that computer_software is intangible_property because the intrinsic value of the taxpayer's software is attributable to its intangible elements rather than to its tangible embodiments id pincite 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 480_f2d_66 9th cir and 549_f2d_576 9th cir 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 the court in 27_f3d_1142 6th cir 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 pincite 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 which became the revenue act of to support their conclusion the senate_finance_committee report states in pertinent part sec_38 property -- and than buildings sec_38 property defined in sec_48 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 sec_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 sec_38 property this is also true of real_property other 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 87th cong 2d sess 1962_3_cb_703 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 productive facilities and thereby improve the economic nation's the of potential of the country s rept supra c b pincite 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 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 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' majority op note 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 sec_38 property s rept supra c b pincite h rept 87th cong 2d sess 1962_3_cb_402 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 27_f3d_1142 6th cir 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 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 pincite4 contrary conclusion majority op pp suggesting the 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


date ec - 20c department of the treasury internal_revenue_service washington d c contact person identification_number telephone number tb ob employer indentification number sin a o w a l i dear sir or madam this is in reply to a ruling_request dated date as amended by a letter dated date with respect to a proposed transfer of assets from btoc b is currently a nonprofit corporation recognized as exempt under sec_501 of the code and is classified as a private_foundation b was formed exclusively for charitable purposes and to implement the charitable goals of its principal donor a c will operate as a nonprofit grant making organization focusing on organizations that provide medical_research medical education and community assistance to the needy human services and wildlife habitat preservation all grants made by c shail only be made in the state where c was formed also distributions by c shall be subject_to the following limitations no distributions to religious organizations for religious purposes or to a church no distributions for political activities of any kind no distributions to any community_foundation or similar organizaiton no distributions to individuals no funds shall be used to pay salaries of individuals and distributions cannot be used for attending conventions or other similar activities awarding of funds does not entitle the recipient to receive the same funds in the future ais the principal contributor to b b's funds have been supplemented by its earnings b will accept donations from the general_public but has not received any yet and you anticipate that a will continue to be its principal contributor since b’s inception it has made annual or more frequent distributions to organizations_exempt_from_taxation under sec_501 c of the code the board_of directors has developed specific goals and patterns of giving since its inception these charitable goals and i -2- patterns carry out the charitable goals of a and the other directors aand the other directors intend to insure that their charitable giving goals and patterns continue beyond their lifetimes the board members are specifically concerned that future board members could easily change the existing charitable purposes by amending its by-laws or articles of incorporation or through unnecessary and costly litigation aimed at broadening b’s stated purposes therefore the board members have determined to fix b's charitable purposes by changing its governing entity from a corporation to a charitable_trust the terms of which will be fixed this trust will be called c the directors have approved and entered into a charitable_trust agreement which would govern all of c's future operations ais the grantor of c and all the current directors are the trustees for c b's board_of directors proposes to transfer all its assets to cand then b will dissolve thereafter c as the trust will control the administration of the assets the trust agreement provides that the charitable purposes not be changed after the death of a including the location of the trust aspecifically intends to discourage judicial intervention in any decisions regarding the trust's charitable purposes the trustees are required to make annual distributions of so much income and principal of the trust as is necessary to avoid application of sec_4942 of the code the trust agreement also provides that the trustees shall distribute assets only to organizations that are tax-exempt under sec_501 a or c of the code and to which contributions made are deductible under sec_170 by the donor distributions shall be made to any individual all distributions shall be made in the state in which c was formed and shall stay in this state the trustees shall make no distributions for any religious purpose or to any church or religious_organization and no distributions shall be made to or for political activities or any kind including publication or distribution of statements to influence any election or legislation or on behalf of or in apposition to any candidate for political office or for voter education or voter registration no c's current trustees are the initial trustees cshall always have at least three trustees and not more than five trustees a during her lifetime may remove add or appoint a trustee to fill a trustee vacancy following the death of a the remaining initial trustees shall have these same powers sec_507 of the code provides that except as provided in subsection b the status of any organization as a private_foundation shall be terminated only if- such organization notifies the secretary at such time and in such manner as the secretary may by regulations prescribed of its intent to accomplish such termination or a with respect to such organization there have been either willful repeated acts or failures to act or a willful and flagrant act or failure to act giving rise to liability for tax under chapter and b the secretary notifies such organization that by reason of subparagraph a such organization is liable for tax imposed by subsection c and either such organization pays the tax imposed by subsection c or any portion not abated under subsection g or the entire amount of such tax is abated under subsection g sec_507 of the code provides that for purposes of this part in case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee foundation shall not be treated as a newly created organization sec_507 of the code provides that there is imposed on each organization which is referred to in subsection a a tax equal to the lower_of the amount which the private_foundation substantiates by adequate_records or other corroborating evidence as the aggregate tax_benefit resulting from the sec_501 status of such foundation or the value of the net assets of such foundation sec_1_507-1 of the income_tax regulations provides that if a private_foundation transfers all or part of its assets to one or more other private_foundations or one or more private_foundations and one or more sec_509 or organizations pursuant to a transfer described in sec_507 and sec_1 c such transferor foundation will not have terminated its private_foundation_status under sec_507 sec_1_507-3 of the regulations provides that for purposes of part ii subchapter_f chapter of the code in the case of a transfer of assets of any private_foundation to another private_foundation pursuant to any liquidation merger redemption recapitalization or other adjustment organization or reorganization the transferee organization shall not be treated as a newly created organization thus in the case of a significant disposition of assets to one or more private_foundations within the meaning of paragraph c of this section the transferee organization shall not be treated as a newly created organization sec_1_507-3 of the regulations provides that a transferee private_foundation succeeds to that percentage of the transferor’s aggregate tax_benefit equal to the fair_market_value of the assets transferred divided by the fair_market_value of the assets held by the transferor immediately before the transfer the fair_market_value of the assets held and transferred are determined at the time of transfer sec_1_507-3 of the regulations provides that if a private_foundation incurs liability for one or more of the taxes imposed under chapter of the code or any penalty resulting therefrom prior to or as a result of making a transfer of assets described in sec_507 to one or more private_foundations then in any case where transferee_liability applies each transferee foundation shall be treated as receiving the transferred assets subject_to such liability to the extent that the transferor foundation does not satisfy such liability sec_1_507-3 of the regulations provide that except as provided in subparagraph a a private_foundation is required to meet the distribution_requirements of sec_4942 of the code for any taxable_year in which it makes a sec_507 transfer of all or part of its net assets to another private_foundation such transfer shall itself be counted toward satisfaction of such requirements to the extent that the amount transferred meets the requirements of sec_4942 sec_1_507-3 of the regulations provides that if a private_foundation transfers all of its assets to one or more private_foundations which are effectively controlled within the meaning of sec_1_482-1 directly or indirectly by the same person or persons which effectively controlled the transferor private_foundation for purposes of chapter of the code and sec_507 through sec_509 the transferee private_foundation shall be treated as if it were the transferor sec_1_507-3 of the regulations describes the criteria in order to come within the provisions of sec_507 of the code first the asset transfer must be from one private_foundation to another second the transfer must be pursuant to a liquidation merger redemption recapitalization or other adjustment organization or reorganization in this context other adjustment organization or reorganization includes any partial_liquidation or significant distribution of assets to one or more private_foundations third the transfer must represent percent or more of the fair_market_value of their net assets of the transferring foundation the transfer of assets from b to c qualifies as a sec_507 transaction first both b and c are qualifying foundations second the proposed transfer is an other adjustment organization or reorganization that constitutes a significant distribution of assets since it represents of the net assets of b as of the date of transfer well exceeding the threshold required by sec_1_507-3 of the regulations therefore pursuant to sec_1_507-3 of the regulations c will succeed to of b's aggregate tax_benefit sec_1_507-3 of the regulations provides that any person who is a substantial_contributor with respect to the transferor foundation shall be treated as a substantial_contributor with respect to the transferee foundation ais the only substantial_contributor with respect to b and will continue to be treated as such with respect to the trust c under sec_1_507-3 of the reguiations after b transfers all of the assets to c it will be responsible for any liabilities of c under chapter of the code to the extent c does not satisfy its own such liabilities incurred prior to or as a result of making the transfer of assets also the transfer of assets from b to ccounts towards the satisfaction of the distribution_requirements of sec_4942 for b’s taxable_year to the extent the amount transferred meets the requirements of sec_4942 b does not intend to notify the internal_revenue_service of its intention to accomplish a termination on or before the proposed transfer since b has neither been notified of any involuntary termination nor has committed any acts of which could trigger an involuntary termination the transfer of assets to c will not cause the imposition of the termination_tax under sec_507 of the code the transfer of assets from b to cis intended to further the charitable purposes of both organizations as a transfer from one organization described in sec_501 of the code to another such organization it does not give rise to any liability for tax under chapter of the code ads based on the facts submitted we rule as follows chas been recognized as exempt under sec_501 of the code and its exemption is unaffected by the transaction described in the ruling_request the transfer of assets from b to cis a non-terminating transfer under sec_507 of the code succeeds to all of the tax_attributes of b and the transfer is not an act or failure to act under sec_507 of the code we are informing your key district_director of this ruling because this ruling could help resolve future questions about your federal_income_tax status you should keep it in your permanent records this ruling is directed only to the organization that requested it sec_6110 of the code provides that it may not be used or cited as precedent if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely signed hoden u naipel wi robert c harper jr manager exempt_organizations technical group


department of the treasury i n t e r n a l r e v e n u e s e r v i c e washington d c jul conex-133672-05 cc ita b04 kaaqui office_of_chief_counsel number info release date uil the honorable richard h baker hilton avenue suite baton rouge la attention michael r eby dear congressman baker i apologize for the delay in responding to your letters dated may and date on behalf of your constituent asked about the irs policy on 263_f2d_119 which held that a taxpayer who executed a contingent_fee agreement with an attorney in alabama was not required to include the fee in her gross_income in date the supreme court of the united_states resolved a conflict among the circuit courts holding that a taxpayer could not exclude a contingent_fee from gross_income thereby overruling cotnam commissioner v banks 125_sct_826 subsequently the irs determined that was required to include in his gross_income the contingent_fee he paid to his attorney assessed the additional tax_liability and computed statutory interest on that liability seeks relief from the additional tax and interest apparently in response to yourfirst inquiry an irs employee stated that your constituent should not have followed the opinion of the fifth circuit where he resides because the irs never changed its position that a taxpayer must include contingent fees in income i hope the following information will explain the irs’ actions the irs has consistently taken the position that a taxpayer must include in gross_income the entire amount of a taxable settlement or judgment including any contingent_fee paid to his attorney the courts of appeals for the second third fourth seventh tenth and federal circuits and a panel of the ninth circuit agreed that a taxpayer could not exclude the contingent_fee from gross_income however the fifth sixth and eleventh circuits and a different panel of the ninth circuit had held that the law did not require taxpayers to include the contingent_fee in gross_income in banks the supreme court agreed with our position that under the anticipatory_assignment_of_income doctrine a taxpayer must include in income the fee paid to his attorney under a contingent_fee arrangement as noted above the supreme court decision resolved a conflict among the circuits on this issue thereby overruling cotnam when the supreme court applies a rule_of federal_law to the parties before it that rule is the controlling interpretation of federal_law and must be applied to all open tax years 509_us_86 thus the supreme court’s opinion in banks applies to the contingent_fee that your constituent paid even though he paid it before the supreme court rendered its opinion to permit him to exclude the contingent_fee from his gross_income would undercut the very purpose of seeking supreme court review ie to establish a national rule concerning contingent_fee payments until the supreme court renders an opinion on an issue taxpayers may rely on the opinion of the circuits to which their cases are appealable this reliance however does not shield taxpayers from liability for additional tax and statutory interest if the supreme court subsequently disagrees with the decision of that circuit and the tax_year is still open the irs generally will not assess a penalty for negligence however if at the time a taxpayer filed his income_tax return the law of the taxpayer’s circuit was inconsistent with the supreme court opinion ultimately deciding the law on this issue thus the irs did not assert any penalties against your constituent for failing to include the contingent_fee in his gross_income claiming financial hardship your constituent seeks abatement of the additional tax and interest the tax involved in this case is the income_tax sec_6601 of the internal_revenue_code imposes statutory interest on any underpayment_of_tax the irs may in its discretion abate the unpaid portion of any assessment of tax interest and penalties where the assessment is excessive in amount was assessed after the expiration of the period of limitations or was erroneously or illegally assessed sec_6404 however a taxpayer can not file a claim for the abatement of any income_tax_liability such as that in dispute here sec_6404 alternatively the irs can abate interest when the accumulated interest is the result of unreasonable errors and delays by the irs in performing a ministerial or managerial act sec_6404 however none of these criteria is present in this case i hope this information is helpful if you have any questions please call me at --------------------- or ----------------------- identification_number ------------- at ----- --------------------- sincerely michael j montemurro acting branch chief office of associate chief_counsel income_tax and accounting


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 1-plr-167700-01 date date legend x date dear sir this responds to your letter dated date and prior correspondence requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date the shareholder of x intended that x be treated as an s_corporation effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any plr-167700-01 taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal tax consequences of the facts described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent sincerely s dianna k miosi chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes cc