Opinion
3755-17 3756-17
11-03-2022
Bloomberg L.P., Bloomberg, Inc., Tax Matters Partner, ET AL., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke Judge
On September 21, 2022, respondent filed a Motion in Limine to exclude evidence relating to Bloomberg L.P.'s (Bloomberg) order management software (OMS) and portfolio analytics software (PORT) as irrelevant under Fed.R.Evid. 402. On October 21, 2022, petitioner filed an Objection to respondent's Motion, and on November 1, 2022, respondent filed a Reply to petitioner's Objection. These cases are calendared for trial on March 27, 2023.
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), title 26, U.S.C., in effect for the years at issue, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), and all Rule references are to the Tax Court Rules of Practice and Procedure.
In his Reply, respondent stated that he does not object to the introduction of evidence relating to OMS and PORT as components of Bloomberg Professional Services (BPS) "so long as petitioner establishes that they were part of the BPS and were not separate offerings."
Petitioner has alleged that OMS and PORT were available only to customers that subscribed to BPS and for additional monthly charges. Bloomberg computed its domestic production gross receipts (DPGR) by including gross receipts from BPS, OMS, and PORT. In the Notices of Final Partnership Administrative Adjustment respondent determined that no amount of gross receipts qualified as DPGR. Thus, respondent determined that gross receipts from BPS, OMS, and PORT did not qualify as DPGR. Thus, gross receipts derived from OMS and PORT are clearly at issue.
The parties' disagreement over the OMS and PORT evidence involves application of the shrink back rule of Treas. Reg. § 1.199-3(d)(1)(ii). We understand that petitioner's primary position is that BPS, OMS, and PORT should be treated as an item under Treas. Reg. § 1.199-3(d)(1) for customers who subscribe to all three offerings. The term "item" means property offered by the taxpayer in the normal course of the taxpayer's business (property) for lease, rental, license, sale, exchange, or other disposition (collectively, disposition) to customers if the gross receipts from the disposition of such property qualify as DPGR. Treas. Reg. § 1.199-3(d)(1)(i). Where such property does not qualify as producing DPGR (i.e., the property does not qualify as an item), taxpayers are permitted to shrink back the property to any of its components to determine whether any component produces DPGR, in which case the component is treated as the item. Id. subdiv. (i).
Petitioner has indicated an alternative position that the components OMS and PORT should be treated as items under Treas. Reg. § 1.199-3(d)(1)(ii) and gross receipts derived from OMS and PORT may qualify as DPGR in the event the Court determines that gross receipts from BPS do not qualify. In which case, BPS, OMS, and PORT collectively would not be an item. Petitioner seeks to establish that OMS and/or PORT satisfy the third-party comparable exception.
Respondent characterizes the alternative position as a new argument that would cause him undue prejudice if the Court were to allow petitioner to raise it at this stage of these cases. However, we find that the First Amended Petition sufficiently raised the alternative position and there is no prejudice to respondent. The parties' filings clearly demonstrate that petitioner raised and respondent was aware, or should have been aware, of the shrink-back rule and component issue including the application of the third-party comparable exception to the components, with the parties referring to this issue in a Joint Status Report filed on September 30, 2020 as whether "some or all of BPS meets the third-party comparable exception." We will not exclude evidence with respect to OMS and PORT and will deny respondent's Motion.
Petitioner's failure to include the shrink-back issue in the List of Issues and Evidence in its Status Report filed on September 15, 2021, does not deem the issue conceded or justify the exclusion of relevant evidence in the light of the multiple Court filings that raise the issue.
Petitioner has not provided any DPGR computations on the basis of its alternative position. It stated that the existing allocation method could be used with respect to the alleged OMS and PORT components and that it may include computations in expert analysis. Respondent has objected to petitioner's introduction of a new allocation method. Given petitioner's representations, respondent's objection is premature and does not warrant exclusion of evidence.
Upon due consideration, it is
ORDERED that Respondent's Motion in Limine, filed September 21, 2022, is denied.