Opinion
8823-18
02-02-2023
CBOE GLOBAL MARKETS, INC. F.K.A. CBOE HOLDINGS, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge.
This case involves deductions claimed for "domestic production activities" under former I.R.C § 199(a). Petitioner contends that gross receipts it derived from customers' use of its electronic trading software are "domestic production gross receipts" (DPGR) within the meaning of I.R.C § 199(c). On August 26, 2022, respondent filed a Motion for Partial Summary Judgment, requesting a ruling that the gross receipts giving rise to the claimed deductions are not DPGR because petitioner's software is not "substantially identical" to allegedly comparable third-party vendors' software, as the applicable regulation requires. See Rule 121. On October 14, 2022, petitioner filed a Response to the Motion, contending that summary judgment is inappropriate because evidence it intends to present concerning the comparability of its software and third-party vendors' software indicates the existence of a genuine dispute of material fact. On November 18, 2022, respondent filed a Reply to petitioner's Response. On December 23, 2022, petitioner filed an unopposed Motion for Leave to File Sur-Reply to Reply. On December 28, 2022, petitioner filed its Sur-Reply.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Section 199(a) allowed a deduction equal to 9% of the lesser of (1) the qualified production activities income (QPAI) of the taxpayer, or (2) taxable income (determined without regard to I.R.C. § 199), for the taxable year. QPAI is an amount equal to the excess, if any, of the taxpayer's DPGR for such taxable year, over the sum of its cost of goods sold and certain deductions allocable to those gross receipts. I.R.C. § 199(c)(1). DPGR includes gross receipts derived from the lease, rental, license, sale, exchange, or other disposition of computer software developed in the United States. I.R.C. § 199(c)(4)(A)(i)(I) and (5)(B). DPGR does not include gross receipts derived from services. See I.R.C. § 199(c)(4); Treas. Reg. § 1.199-3(i)(4)(i)(A). The regulations specify that, absent an exception, DPGR does not include gross receipts derived from online services. Treas. Reg. § 1.199-3(i)(6)(ii).
Treasury Regulation § 1.199-3(i)(6)(iii) provides an exception to subdivision (ii): Gross receipts derived from providing customers access to U.S.-developed computer software for the customers' direct use online qualify as DPGR if Treasury Regulation § 1.199-3(i)(6)(iii)(A) or (B) is met. Subdivision (iii)(B) requires that another person derive, on a regular and ongoing basis in its business, gross receipts from the disposition in a tangible medium (e.g., DVD), or by download, of substantially identical software (as compared to the taxpayer's online software) to its customers. "Substantially identical software" is software that (1) from a customer's perspective has the same functional result as the taxpayer's online software and (2) has a significant overlap of features or purpose with the taxpayer's online software. Treas. Reg. § 1.199-3(i)(6)(iv)(A).
This is the so-called "third-party comparable exception."
Petitioner is the operator of U.S. securities exchanges. At issue in this case are gross receipts petitioner derived from fees it charged customers for using its online software to access the exchanges and for trades executed on the exchanges. Petitioner contends that these gross receipts are DPGR under Treasury Regulation § 1.199-3(i)(6)(iii)(B) because its software is "substantially identical" to third-party vendors' software. Respondent filed the instant Motion seeking a ruling that, as a matter of law, these gross receipts are not DPGR in light of this Court's holding in BATS Global Markets Holdings, Inc. v. Commissioner (Bats Global), 158 T.C. No. 5, 2022 WL 970316, appeal docketed, No. 22-9002 (10th Cir. Aug. 19, 2022), and that summary judgment on that issue is warranted.
In Bats Global, the taxpayer was an operator of securities exchanges that, similarly to petitioner, derived gross receipts from fees paid by customers in the course of using software related to the exchanges. The taxpayer contended that the fees were DPGR under Treasury Regulation § 1.199-3(i)(6)(iii)(B) because its software was asserted to be "substantially identical" to certain third-party vendors' software. The Court held that the taxpayer's software was not "substantially identical" to the third-party vendors' software for I.R.C. § 199 purposes because the taxpayer's customers used the software for "trading securities," while the third-party vendors' customers used the software for "operating a securities exchange" for others to trade securities. Bats Global, 2022 WL 970316, at *20. The Court explained that these were "two distinct activities and are not the same functional result from a customer's perspective." Ibid. In reaching its decision, the Court declined to consider alleged evidence the taxpayer proffered regarding the comparability of its online software and that of a certain third-party vendor's software (BIDS Trading Software) because the taxpayer did not timely identify that third-party vendor's software to respondent in advance of trial. See Bats Global, T.C. Docket No. 1068-17 (Orders dated May 7 and May 19, 2022).
In its Response to the Motion, petitioner contends that a genuine dispute exists concerning whether the software for which it received customer usage fees is "substantially identical" to certain third-party vendors' software and that, therefore, summary judgment is inappropriate. Petitioner states that it intends to present at trial evidence of the comparability of certain third-party vendors' software, including BIDS Trading Software, to prove that its software meets the third-party comparability requirements of Treasury Regulation § 1.199-3(i)(6)(iii)(B).
We agree with petitioner. The facts before the Court here are different than those before the Court in Bats Global, in particular with respect to evidence concerning BIDS Trading Software. We see no reason at this time that petitioner, unlike the taxpayer in Bats Global, would be precluded from presenting such evidence. Viewing all facts in the light most favorable to petitioner, we find that summary judgment is not appropriate on the issue of whether petitioner's software is "substantially identical" to allegedly comparable third-party vendors' software. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
In consideration of the foregoing, it is
ORDERED that respondent's Motion for Partial Summary Judgment, filed August 26, 2022, is denied.