Judicial update.

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In a big win for the taxpayer, the U.S. Court of Appeals for the Ninth Circuit recently held that master copies of computer software qualify as export property for purposes of the foreign sales corporation regime. The court's December 3 decision in Microsoft Corporation v. Commissioner reversed an opinion of the U.S. Tax Court and invalidated a temporary regulation providing that the computer masters were not entitled to FSC benefits. TEI filed an amicus brief in support of the taxpayer last December, addressing the standard of deference to be accorded temporary regulations by the courts.

The Ninth Circuit's opinion focused on the pre-1997 definition of "export property" set forth in section 927(a)(2)(B) of the Code, which requires that the property be "manufactured, produced, grown, or extracted in the United States." Excluded from the definition were "patents, inventions, models, designs, formulas, or processes, whether or not patented, copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use), good will, trademarks, trade brands, franchises, or other like property." The court relied on contemporary dictionary definitions of statutory terms such as "film" and "record" in finding that Microsoft's computer software master tapes were included the statute's specific listing of "films, tapes, and records," and its CD-ROMs, DVD-ROMs, and diskettes within the meaning of "similar reproductions." (Congress specifically added computer software to the parenthetical in 1997, but provided that "no inference" was intended from its action.)

The appeals court next considered the temporary regulation that excluded computer software from the definition of export property. The court stated that "[b]ecause we conclude that the statute clearly expresses Congress's intent, we do not defer to the conflicting...

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