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T.C. Memo. 2024-108

BLOOMBERG L.P., BLOOMBERG, INC., TAX MATTERS PARTNER,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 3755-17, 3756-17.

Filed December 11, 2024.

—————

P is a major financial technology, information, and

news business. P created an interactive financial

information/analysis product that customers paid a

subscription fee to use. The product was a combination of

financial data, news, analytical and graphing software, and

communication (email and instant messaging) features. P’s

agreements with customers did not specify what portions

of the subscription fees were attributable to the various

product features. Software that enabled the product to

function was hosted on P’s servers. Customers accessed

that software by internet/private network connection, with

only nominal software installed on their own hardware.

For the years at issue, 2008–10, P claimed I.R.C.

§ 199 deductions. In calculating those deductions, P

reported that substantial portions of the subscription fees

(and related expenses) were allocable to product software.

P’s position is that, while the general rule is that provision

of access to software is a service, the software at issue

meets an exception to the general rule based on similar

third-party software that was available to customers by

disk or download. See Treas. Reg. § 1.199-3(i)(6)(ii), (iii)(B).

P also created a second product that helped

customers keep track of their transactions and

Served 12/11/24

[*2]

investments. This product required a subscription to the

first product to operate, though it had separate customer

agreements and a separate subscription fee. Software that

enabled the second product to function was hosted on P’s

servers.

Customers

accessed

the

software

internet/private network connection rather than by

installing the software on their own hardware. With

respect to the second product, P claims that (1) most

subscription fees (and related expenses) were allocable to

product software and (2) the software at issue meets an

exception to the rule that the provision of access to software

is a service based on similar third-party software that was

available to customers by disk or download. See Treas. Reg.

§ 1.199-3(i)(6)(ii), (iii)(B).

R issued P Notices of Final Partnership

Administrative Adjustment for years 2008–10 disallowing

P’s claimed I.R.C. § 199 deductions. R’s position is that

none of P’s gross receipts were derived from the provision

of access to software, but rather that all of P’s gross receipts

were derived from the provision of other services. R also

argued that P did not meet other requirements of the

Treas. Reg. § 1.199-3(i)(6)(iii)(B) exception to the general

rule that the provision of access to software constitutes a

service. Alternatively, R argued that P’s allocation of gross

receipts (and related expenses) between software and

services was incorrect.

P filed Petitions challenging R’s determinations. P

later argued in support of allocations of gross receipts (and

related expenses) between software and services different

from the allocations reported on its 2008–10 returns.

Held: Regarding the first product, P derived gross

receipts from the provision of access to analytical and

graphing software.

Held, further, regarding the first product, P did not

derive gross receipts from the provision of access to other

software, as such software merely enabled the provision of

services.

[*3]

Held, further, regarding the first product, the

requirements of Treas. Reg. § 1.199-3(i)(6)(iii)(B) are

satisfied with respect to the analytical and graphing

software.

Held, further, regarding the second product, P

mostly derived gross receipts from the provision of access

to software.

Held, further, regarding the second product

software, the requirements of Treas. Reg. § 1.1993(i)(6)(iii)(B) are satisfied.

Held, further, P’s allocation of gross receipts (and

related expenses) between software and services was

incorrect.

—————

Armen N. Nercessian, William R. Skinner, Michael Farbman Solomon,

Michael D. Knobler, Vanessa Park-Thompson, Jedediah Wakefield,

Adam R. Gahtan, and James S. Trainor, for petitioner.

Patrick F. Gallagher, M. Jeanne Peterson, Andrew Michael Tiktin,

Rachel G. Borden, Brian M. Howell, Charles E. Buxbaum, Travis Vance,

Paul A. George, Duy P. Tran, Craig Connell, and Erin H. Stearns, for

respondent.

TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 7

FINDINGS OF FACT .............................................................................. 8

History and Overview of Bloomberg ............................................. 8

II.

BPS User Agreements and Fees ................................................... 9

III. BPS Hardware and Software Architecture ................................ 10

IV.

BPS Features and Functions ...................................................... 11

Data ................................................................................... 12

News .................................................................................. 13

Software ............................................................................ 14

Email and Instant Messaging .......................................... 17

Helpdesks and Sales Support .......................................... 17

Order Management System ........................................................ 17

[*4] VI.

Tax and Other Representations .......................................... 18

Promotional Materials ...................................................... 18

Income Tax Returns and Financial Statements ............. 19

Massachusetts Sales Tax Returns ................................... 19

Letters Regarding Foreign Withholding Taxes ............... 19

Advance Pricing Agreements ........................................... 20

VII. McKinsey & Co. Survey of BPS Users........................................ 22

VIII. Competing Systems ..................................................................... 23

IX.

3000 Xtra........................................................................... 23

RMDS ................................................................................ 24

Combination of 3000 Xtra and RMDS ............................. 25

Charles River Investment Management System ............ 25

Miscellaneous .............................................................................. 26

OPINION ................................................................................................ 27

Burden of Proof and Issues Presented ....................................... 27

II.

Evidentiary Matters Regarding APAs........................................ 28

III. Section 199, Treasury Regulation § 1.199-3, and

Computer Software ..................................................................... 29

IV.

VI.

General Information ......................................................... 29

Computer Software ........................................................... 31

Background on the Self-Comparable and ThirdParty Comparable Exceptions.......................................... 32

Job Creation in the United States .............................................. 34

BATS Global and Direct Supply ................................................. 35

BATS Global I and II ........................................................ 35

BATS Global I ........................................................ 35

BATS Global II ....................................................... 37

Direct Supply I and II....................................................... 37

Direct Supply I ....................................................... 37

Direct Supply II...................................................... 39

Distinguishing Bloomberg’s Cases ................................... 40

Issues with Treasury Regulation § 1.199-3 ................................ 42

[*5]

VII.

BPS Software Qualification Issue .............................................. 45

General Issues .................................................................. 42

Interpreting Treasury Regulation § 1.199-3.................... 42

Treatment of Gross Receipts as Derived from the

Disposition of Computer Software ................................... 44

The Parties’ Use of Certain Evidence .............................. 46

The Treasury Regulation § 1.199-3(i)(6)(iii)

Threshold Requirement .................................................... 46

Element One: Deriving Gross Receipts from

Providing Customers with Access to

Software ................................................................. 47

Collection and Search Software .................. 48

Email and IM Software ............................... 51

Analytical and Graphing Software ............. 53

Other BPS Software .................................... 55

Conclusion Regarding Element One .......... 56

Considering BPS Analytical and Graphing

Software Alone ....................................................... 56

Element Two: Software MPGE in Whole or

in Significant Part Within the U.S........................ 58

Element Three: Direct Use of Software by

Customers .............................................................. 58

Element Four: Use of Software While

Connected to the Internet or Any Other

Public or Private Communications Network ........ 59

Other Arguments Related to the Threshold

Requirement ........................................................... 59

Bloomberg’s APA Request........................... 60

Massachusetts Sales Tax Returns.............. 60

Foreign Tax Withholding Letters ............... 62

Federal Returns .......................................... 63

McKinsey Survey and Customer

Testimony .................................................... 63

Data Center Connection Requirement ....... 64

Treasury Regulation § 1.199-3(d)(1),

(i)(1)(i), and (i)(4)(i)(A)................................. 64

Treasury Regulation § 1.1993(i)(1)(i) ............................................. 65

ii.

Treasury Regulation § 1.1993(d)(1) ................................................ 66

iii.

[*6]

Treasury Regulation § 1.1993(i)(4)(i)(A) ........................................ 70

The Third-Party Comparable Exception ......................... 72

Reuters Derived Gross Receipts from the

Disposition of 3000 Xtra and RMDS

Analytical and Graphing Software. ...................... 73

3000 Xtra and RMDS Analytical and

Graphing Software Was Provided by Disk or

Download. ............................................................... 73

Reuters’s Analytical and Graphing Software

Was Substantially Identical to BPS

Analytical and Graphing Software. ...................... 74

Aggregating RMDS and Portions of

3000 Xtra Software ..................................... 75

Substantially Identical Software ................ 77

BPS Qualification Issue Conclusion ................................ 80

VIII. OMS Software Qualification Issue ............................................. 80

IX.

Allocation Issue: Expert Reports ................................................ 84

Separate Item ................................................................... 80

The Threshold Requirement ............................................ 82

The Third-Party Comparable Exception ......................... 83

Respondent’s Expert: Dan Peters .................................... 85

Bloomberg’s Expert: Dr. Meenan ..................................... 90

Allocation Issue: Analysis and Conclusions ............................... 94

Jurisdiction Regarding Expenses Allocable to

DPGR ................................................................................ 94

Reasonableness of Bloomberg’s Allocation Method......... 94

Discussion of Expert Reports ........................................... 95

Total BPS Plus OMS Gross Receipts and Expenses ....... 98

OMS Gross Receipts and Expenses ................................. 99

OMS Gross Receipts That Qualify as DPGR ........ 99

OMS Expenses Attributable to DPGR ................ 100

BPS Gross Receipts and Expenses................................. 101

BPS Gross Receipts That Qualify as DPGR ....... 101

[*7]

XI.

XII.

BPS Expenses Attributable to DPGR ................. 103

U.S. Wages Issue ....................................................................... 105

Conclusion ................................................................................. 108

MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: These consolidated cases concern Notices of Final

Partnership Administrative Adjustment (FPAAs) pertaining to tax

years 2008–10 (years at issue). The primary issue is the amounts, if any,

of Bloomberg’s 1 gross receipts that qualify as domestic production gross

receipts (DPGR) used to calculate section 199 deductions. 2 The amount

of DPGR in dispute totals approximately $10 billion for the years at

issue. We hold that Bloomberg’s DPGR are $1.231 billion for 2008,

$1.272 billion for 2009, and $1.359 billion for 2010. 3

We issued a protective order to prevent disclosure of proprietary

and confidential information. The protective order allows protected

information to be included in this Opinion at the Court’s discretion. We

deem all protected information included in this Opinion to be necessary.

1 Unless otherwise specified, “Bloomberg” refers to Bloomberg, L.P., and its

subsidiaries and branches. Bloomberg was treated as a partnership under the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401–407,

96 Stat. 324, 648–71. Before its repeal, TEFRA governed the tax treatment and audit

procedures for many partnerships.

2 Unless otherwise indicated, facts discussed in this Opinion pertain to the

years at issue, statutory references are to the Internal Revenue Code, Title 26 U.S.C.,

in effect at all relevant times, regulation references are to Code of Federal Regulations,

Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax

Court Rules of Practice and Procedure. We round all monetary amounts to the nearest

dollar or nearest million (for large amounts). We round all percentages to the nearest

percent. Certain sums and products have been slightly adjusted to account for the use

of rounding.

3 We are not ruling on the amounts of section 199 deductions for the years at

issue. The parties agree that calculating those deductions requires partner-level

determinations that we have no jurisdiction over in this partnership-level proceeding.

[*8]

FINDINGS OF FACT

History and Overview of Bloomberg

Bloomberg is a well-known financial technology, information, and

news business with offices and operations around the world. It is a

Delaware limited partnership that maintains its headquarters and

principal place of business in New York, New York.

Future mayor of New York City Michael Bloomberg founded

Bloomberg in 1981 to create and market what became the Bloomberg

Professional Service (BPS), commonly referred to as a “Bloomberg

Terminal” or a “Bloomberg.” BPS was an interactive financial

information/analysis product that customers 4 paid a subscription fee to

access. Through BPS, users (mostly employees of institutional investors,

central banks, and other large entities) could access a vast amount of

financial data and news. Users could also use included software to

manipulate, analyze, and model that data and news.

Although financial data companies existed before and during the

1980s, the combination of data, analytical software, and news found in

BPS was lacking in the marketplace. BPS was successful shortly after

its release in 1982 and continued to gain market share. BPS revenue,

over $5 billion for each year at issue, constituted over 80% of

Bloomberg’s gross receipts. Bloomberg spent billions of dollars each year

to maintain and improve BPS software, data, and news. By the end of

2010, Bloomberg employed approximately 12,600 people around the

world, in departments including news, research and development

(R&D), data processing, sales, etc.

In December 2008 Bloomberg employed approximately 2,200

people in its R&D department. These employees included 1,500 software

programmers, as well as engineers, managers, administrators,

researchers, and support personnel. Over 85% of the software

programmers worked in the United States, as did over 85% of all R&D

department employees. Unsurprisingly, BPS software programming

was concentrated in the United States.

In the years at issue, the number of employees in Bloomberg’s

R&D department increased by approximately 35%, mostly because of

hires in the United States. Bloomberg paid U.S. wages of $806 million

4 Although there is not a perfect overlap, we will use the terms “customer” and

“user” largely interchangeably in this Opinion.

[*9] for 2008, $812 million for 2009, and $968 million for 2010.

Bloomberg’s U.S. wages increased even though the economy was

generally poor in the years at issue.

II.

BPS User Agreements and Fees

Customers accessed BPS through the internet or a dedicated

private line, using their own computers or computers leased from

Bloomberg. To gain access to BPS, a customer had to enter into a

subscription agreement with Bloomberg (BPS Subscription Agreement).

BPS Subscription Agreements entered into in the years at issue

identified Bloomberg as a “service provider” and the customer as a

“service recipient.” BPS Subscription Agreements stated that

Bloomberg would provide “services described in” the BPS Subscription

Agreement and that the service recipient “subscribes to such services in

accordance with this Agreement.”

BPS Subscription Agreements entered into in the years at issue

provided that “Services” consisted of “a nonexclusive and

nontransferable right to use the BLOOMBERG PROFESSIONAL

service information, data, software, and equipment.” BPS Subscription

Agreements from prior years that had been renewed were also in effect

in the years at issue and provided that “Services” consisted of “a

nonexclusive and nontransferable license and lease to use the

BLOOMBERG PROFESSIONAL service software, data and

equipment.”

Bloomberg charged customers a BPS subscription fee of $1,700–

$1,975 per month for a single BPS subscription. If a customer had

multiple subscriptions, Bloomberg charged $1,425–$1,655 per month,

per subscription. BPS subscription fees did not vary with how customers

used BPS, how much they used BPS, or the results they achieved. All

customers paying a BPS subscription fee received access to the core BPS

functionality, as well as an optional keyboard developed by Bloomberg

that included speakers, a fingerprint scanner, and keys not found on

standard keyboards. BPS subscription fees were not broken down

among data, software, news, and other BPS features.

Customers could pay additional fees to rent displays and/or

computers from Bloomberg. Customers could also pay additional fees for

certain items related to BPS, such as real-time data (discussed infra).

[*10] III.

BPS Hardware and Software Architecture

BPS used a server-client architecture comprising software,

networking, and computing infrastructure. A server-client architecture

describes a computer system where computer components are separated

between a “client” and a “server.” A client is typically software that sits

on a user’s computer and a server is software that runs on a remote

system (often itself called a “server”) from the client. The client interacts

with the server over the internet or other network, with each server

usually providing functionality to multiple clients. Aside from a

requirement to maintain a connection to a server, from a user’s

perspective there was typically little or no discernable distinction

between programs run using a server-client architecture and programs

run entirely on the user’s hardware. BPS’s server-client architecture

allowed it to accept, process, and return results for most user requests

in less than one-tenth of a second.

Bloomberg’s physical technology infrastructure comprised 2 data

centers, over 100 “node sites,” and Bloomberg’s equipment installed on

a user’s premises (such as computers leased by users). Data centers are

centralized spaces that house hardware such as servers, storage, and

networking equipment. Bloomberg’s data centers included thousands of

servers that stored, processed, created, routed, integrated, and

disseminated data. Both data centers were in the United States and

performed almost all the computing work that kept BPS operational.

Consequently, BPS would not function if a user did not have an active

connection to Bloomberg’s data centers.

Bloomberg’s node sites were located throughout the world; they

routed user requests to data centers for processing and then routed the

results back to the user’s computer for display. Node sites are of little

relevance in these cases.

There were two BPS-related software applications installed on

user computers, (1) “WINTRV” and (2) a Microsoft Excel (Excel) plug-in.

The principal purposes of WINTRV were to transmit user requests to

node sites, display the BPS graphical user interface, and complete some

charting functions. The Excel plug-in allowed users to download data

from BPS into Excel spreadsheets and analyze that data using BPS

software functionality that then appeared within Excel.

When a user made a request using BPS software installed on its

computers, it was transmitted through a node site and received by

[*11] “Loader” software at a data center. Loader software operated like

a map, routing user requests to an appropriate “BIG” for processing. A

BIG was a collection of server software that generated responses to user

requests. There were different types of BIGs which responded to

different user requests. BIGs would query and extract relevant

information from BPS data center systems (including “Ticker Plants,”

“Reference Databases,” and “News Servers”), perform the user’s

requested calculation or function, and send the completed request back

to the Loader to be returned to a node site and then on to the user.

Ticker Plants were used to monitor and access securities

information from exchanges and other sources. They received data from

thousands of sources so that users could access prices and other

information. For example, if a user set up a list of securities to monitor,

Ticker Plants pushed price updates to the user throughout the day.

Ticker Plants were assisted by “feed handlers” that ingested streaming

data from external sources, then converted that data into a common

format that Ticker Plants could process.

Reference Databases stored various types of information,

including historical asset prices, user preferences and work, economic

data, and archived news articles. Database management software was

used to store and retrieve information from Reference Databases as

needed.

News Servers aggregated, stored, and distributed news from

Bloomberg and other sources. These servers supported various BPS

functions, including displaying “top” news articles to users who had

requested them and overlaying news articles on graphs of securities so

that users could see what news might have caused price changes.

IV.

BPS Features and Functions

Bloomberg has described BPS as a “service [that] seamlessly

integrates data, news, analytics, multimedia reports, and email into a

single platform.” One witness gave a helpful analogy at trial, likening

BPS to a three-legged stool with data, news, and software being the legs.

As the witness testified, “the stool would not stand without those three

legs.” We will discuss data, news, software, and certain other BPS

features in this Findings of Fact (FoF) Part IV.

[*12] A.

Data

BPS collected, categorized, and stored vast amounts of data

across all asset classes that users could retrieve almost instantaneously.

BPS users could use only the BPS information feed; 5 they could not use

other information feeds with BPS. However, when using BPS analytical

tools, users could often overwrite BPS data with other values to test

different assumptions or hypotheses, discussed further infra FoF Part

IV.C.

BPS provided coverage of approximately (1) 246,000 securities in

129 countries; (2) 153,000 companies; (3) 530,000 corporate bonds;

(4) 53,700 government bonds; (5) 10,180 preferred securities; (6) 256,000

mortgages; (7) 21,000 money market programs; (8) 30,100 syndicated

loans; (9) 3,490,000 municipal bonds; (10) 80,000 funds in 72 countries;

(11) numerous currencies and commodities; and (12) thousands of

additional sources of contributed exchange, news, pricing, and research

feeds. BPS also stored historical information on approximately 5 million

bonds, equities, commodities, currencies, and funds.

To provide data to users, Bloomberg was a party to approximately

149 contracts with financial exchange operators worldwide. These

contracts allowed BPS to connect to approximately 250 exchanges. By

paying the BPS subscription fee, BPS users received exchange data that

was 15–20 minutes delayed. BPS users could obtain real-time data for

separate fees, most of which were passed through to the exchanges. 6

Some BPS data was submitted by BPS users. Much of this data

pertained to over-the-counter (OTC) products, such as corporate bonds,

that were not traded on an exchange or other centralized marketplace.

BPS users could “broadcast” prices at which they were willing to sell

OTC products and, if they chose to, specify/limit the other users who

could see those prices. Users contributed millions of prices on thousands

of OTC products every day. Users looking to buy OTC products could use

BPS to search for products that were being offered for sale, along with

prices and other information. While users could find trading partners in

this manner, BPS was not an exchange, and trades did not occur on BPS.

Furthermore, users did not pay commissions to Bloomberg when they

5 We will generally refer to a collection of current data and/or news as an

“information feed” and a collection of historical data and/or news as “historical

information.”

6 Bloomberg does not contend that the amounts passed through to exchanges

or the markups that it kept are DPGR.

[*13] found trading partners on BPS; this benefit was part of the BPS

subscription fee.

In addition to financial product data, BPS provided huge amounts

of complementary data. Such data included (1) government and trade

group statistics; (2) industry data points; (3) product line and geographic

performance data; (4) performance/earnings estimates; (5) live cargo

ship tracking; (6) outage and emission data for refineries, power plants,

and natural gas terminals; (7) weather data (including forecasting);

(8) company filings; and (9) other information on almost every publicly

traded company. Some of this data, such as earnings estimates, was

“derived data” that was computed from raw data. BPS also included

biographies of over 1 million people.

Bloomberg worked to increase its data coverage and to close any

gaps in its coverage. Bloomberg was a party to hundreds of contracts

with third-party data providers and vendors that allowed it to procure

data that was sometimes not available from any other source. Contracts

with third-party data providers were nonexclusive, so providers could

still sell their data to other parties.

Bloomberg had both automatic and manual quality controls in

place to ensure that BPS data was accurate. Bloomberg described BPS

data as “the most complete, comprehensive, and accurate in the world.”

The quantity and quality of BPS data was very strong, though one of

Bloomberg’s competitors (Thomson Reuters, discussed infra) offered an

information feed and historical information that included largely

comparable data.

News

Bloomberg News, a department within Bloomberg, developed

original news content that BPS users could access. Bloomberg News had

more than 2,300 reporters and editors in 135 bureaus and published

more than 5,000 stories on an average day. Bloomberg News provided

coverage of companies, markets, industries, economies, governments,

sports, and entertainment.

Bloomberg News was a real-time news service, meaning that

events were reported immediately as they unfolded. This was important

because many financial professionals require timely, high-quality news

to effectively do their jobs. BPS users could view live news broadcasts,

speeches, conferences, meetings, and seminars through BPS. Users

[*14] could also access Bloomberg’s archive of over 15 million stories and

multimedia reports.

As it did with data, Bloomberg took steps to expand its news

coverage. Bloomberg had over 100 nonexclusive contracts with thirdparty news providers that increased news available to BPS users. If a

BPS user wanted access to content that was not already provided

through BPS, the user could request that Bloomberg expand its

coverage, which Bloomberg sometimes did.

Not all of Bloomberg’s news was exclusive to BPS users.

Bloomberg published a significant amount of news online at no cost to

readers. Bloomberg’s news also appeared in approximately 400

publications worldwide, as well as on some radio stations.

Software

Bloomberg built BPS software in house and used very little thirdparty software. This was because Bloomberg viewed BPS software as a

strategic advantage that it wanted to maintain control over.

BPS software enabled the collection and updating of data from

sources around the world. It also enabled users to not only search

through otherwise overwhelming amounts of data and news, but also to

manipulate, analyze, and model that data and news. BPS included tools

for graphing, calculating, screening, pricing, comparing assets,

managing portfolio risk, etc. In short, BPS software enabled the

completion of tasks from the straightforward (e.g., looking up stock

prices) to the extremely complex (e.g., forecasting the behavior of a

portfolio in hypothetical scenarios, such as a terrorist attack).

BPS users could take advantage of thousands of different

software functions, which generally had three- or four-letter codes that

users could enter to run them. Examples of functions include YAS (yield

spread analysis), OAS (option adjust spread), and HGCS (credit default

swap valuation). Most BPS functions were based on industry-accepted

calculators and financial models.

Current and historical information/data was integrated with BPS

software for functions to work. However, many functions allowed users

to overwrite BPS-supplied data with other values to test different

assumptions or hypotheses. For example, when running a currency

[*15] swap analysis, 7 users could overwrite almost all BPS-supplied

data to evaluate potential trades. A picture of a BPS currency swap

analysis follows:

In this picture, fields with orange backgrounds could be altered by users,

with most alterations changing the analysis. Without such tools

providing populated data and nearly instantaneous responses to

alterations, financial professionals would spend more time analyzing

trades and devising strategies. This would put them at a disadvantage

in their jobs.

BPS’s graphing and charting (collectively, graphing) tools allowed

users to produce visual representations of numerous financial products,

portfolios, etc., including those for which users had altered data

populated by BPS. BPS visual representations ranged from the simple

(e.g., graphing the price of a stock over a day) to the complex (e.g.,

allowing users to create three-dimensional volatility surfaces used to

analyze certain assets). A picture of a volatility surface (and associated

graphs) generated in BPS follows:

7 A swap is a type of OTC derivative where parties exchange the value or cash

flows of one asset for another (i.e., swapping U.S. dollars for euro).

[*16]

In this picture, fields with orange backgrounds could be altered by users

to change the visual outputs. Users could also zoom in, rotate, annotate,

and otherwise manipulate the volatility surface.

Once a visual representation had been created, users could save,

copy, and/or share it with other BPS users. Users could also correlate

dates with news and events, add overlays, calculate trendlines, and

make other alterations/additions. The breadth of visual representations

and overlays that could be created and used in BPS was extensive. BPS

allowed users to visualize and glean insights from sophisticated

financial concepts such as Fibonacci retracements, Hurst exponents,

numerous bands and oscillators, etc.

BPS software also allowed users to customize the layout of items

on their BPS “launch screens.” Users could arrange dozens of “tiles” on

their launch screens, such as charts, security lists, news panels,

price/rate monitors, etc. This allowed users to easily see and access data,

news, and functions that they used most often.

Bloomberg frequently added new functions or enhanced existing

functions in response to user suggestions. Bloomberg provided training

courses and materials regarding new/enhanced functions, as well as

training and materials to help newer users familiarize themselves with

[*17] BPS systems and functions. Such updates and training helped to

embed BPS use into users’ daily routines, resulting in higher

subscription renewals. Many customers described specific BPS

analytical and graphing functions that they used as “essential” in their

work.

Email and Instant Messaging

BPS included email and instant messaging (IM) systems, and

customers received a Bloomberg.net email address. These

communications features were integrated into BPS, allowing users to

easily share data, graphs, news, and other information. Email and IM

also helped to create something of a marketplace and community on BPS

that attracted new users and retained existing ones.

Users could use email and IM to request quotes from other users

and broadcast prices at which they were willing to sell products. BPS

software assisted users in creating price lists that could be sent out

automatically. Users could also turn on a “price scraping” option in BPS

that extracted pricing data from emails and messages to make it easier

to view and analyze products that were being offered for sale. While

trades could not be completed on BPS, users could use BPS email and

IM to route proposed trades to brokers. Integrated email and IM allowed

users to quickly agree on trades, which was important in the fast-moving

business of finance.

Helpdesks and Sales Support

Bloomberg provided BPS users with support services known as

“Helpdesks” to answer questions about BPS. The two types of Helpdesks

were support and analytics. The support Helpdesk handled technical

questions, such as those pertaining to issues logging into BPS. The

analytics Helpdesk handled questions about BPS functions and data,

such as how to create certain graphs.

Bloomberg also employed “application specialists” with

significant prior experience in the financial industry. Application

specialists did not provide user support; they trained Bloomberg’s

salespeople and provided other sales assistance.

Order Management System

The Order Management System (OMS) was a computer program

created by Bloomberg that was integrated with BPS. There were

[*18] multiple versions of OMS that were intended to be used by

different types of customers (e.g., buy-side and sell-side customers).

OMS helped customers keep track of their transactions and investments

(for both performance and accounting purposes) and to comply with

company, client, and regulatory requirements.

One version of OMS, Sell Side Equity Order Management System

(SSEOMS), was an integrated market access and order management

system with tools to book trades, receive and route order flow to various

markets, and directly participate in select markets, among other

features. SSEOMS also provided connectivity to numerous exchanges,

dark pools, 8 other trading venues, and broker algorithms over

Bloomberg’s network that were not otherwise provided with a BPS

subscription.

OMS required BPS data (such as current asset prices) to function.

OMS was available only to BPS customers, who accessed OMS through

BPS. To subscribe to OMS, a BPS customer paid an OMS subscription

fee (in addition to a BPS subscription fee) and executed an addendum to

its BPS Subscription Agreement as well as a separate schedule of

services and service-level agreements. These documents reflected that

the BPS customer would receive “[a]dditional [s]ervices,” with

“[s]ervices” having the same definition as in a BPS Subscription

Agreement.

Bloomberg charged varying prices for subscriptions to different

versions of OMS. Subscriptions ranged from $25,000 to $600,000 per

year. Bloomberg’s total OMS gross receipts were $84 million for 2008,

$100 million for 2009, and $133 million for 2010. Many BPS customers

did not subscribe to OMS because they did not need such a program at

all, or because they used in-house programs/tools, or because they

subscribed to a competing offering (discussed further infra FoF Part

VIII.D).

VI.

Tax and Other Representations

Promotional Materials

Bloomberg’s promotional materials generally focused on BPS

data, news, and analytical/graphing tools (and, to a lesser extent,

communication features). For example, on its website Bloomberg

8 Dark pools are marketplaces that allow users to place orders without publicly

displaying the sizes and prices of their orders to other participants in the pool.

[*19] described BPS as “providing the most comprehensive and

advanced set of financial data, real time market coverage, news, analytic

tools, portfolio solutions and research.” Regarding derivatives,

Bloomberg stated that BPS “offers a suite of intraday data, marketstandard models, flexible idea generation analytics, and independent

valuation tools.” Regarding fixed income products, Bloomberg claimed

that BPS “weds the most timely and accurate fixed income data

available with industry standard analytics in order to provide the most

comprehensive platform for analyzing investment opportunities.”

Regarding commodities, Bloomberg emphasized “market-moving news,”

“critical pricing and statistical data,” and “all the [analytical] tools you

need to pull it together.” In short, Bloomberg promoted BPS as an

integrated package that was greater than the sum of its parts.

Income Tax Returns and Financial Statements

On Bloomberg’s federal returns for the years at issue, it reported

its principal business activity as business services and its principal

product or services as information services. On the same returns,

Bloomberg claimed section 199 deductions based on gross receipts that

it determined were derived from providing software to BPS users.

Bloomberg filed Massachusetts and New York state income tax

returns for the years at issue that reported business activity and/or

principal product information similar to Bloomberg’s federal tax

returns.

On Bloomberg’s consolidated financial statements for the years at

issue, it identified BPS revenue as being from “[f]inancial information

services.”

Massachusetts Sales Tax Returns

Bloomberg filed Massachusetts sales tax returns for the years at

issue. Bloomberg took the position that its gross receipts from BPS and

OMS subscription fees were exempt from Massachusetts sales tax.

Letters Regarding Foreign Withholding Taxes

Bloomberg received BPS subscription fees from customers in

numerous countries. Bloomberg issued letters to customers in

Singapore, the Philippines, and India advising them of their foreign tax

withholding obligations. Letters issued to customers in (1) Singapore

described BPS subscription payments as being for “financial

[*20] information;” (2) the Philippines described BPS subscription

payments as being for “an information service;” and (3) India described

BPS subscription payments as being for a “subscription to [a] database.”

In the letters, Bloomberg concluded that BPS subscription fees paid

were not subject to foreign tax withholding. In letters issued to

customers in Singapore, Bloomberg also stated that “withholding tax

obligations . . . apply only to” payments for the rental of equipment from

Bloomberg.

Advance Pricing Agreements

Bloomberg requested respondent’s assistance in obtaining

advance pricing agreements (APAs) covering the years at issue that

would allocate its profits among the United States, the United Kingdom,

and Japan. In December 2008 Bloomberg submitted a “Request for

Bilateral Advance Pricing Agreements Between the United States and

Japan and the United States and the United Kingdom” (APA request). 9

Bloomberg also submitted a required statement signed under penalties

of perjury affirming that “the APA request contains all the relevant facts

relating to the APA request, and such facts are true, correct and

complete.” See Rev. Proc. 2006-9, § 4.09(1), 2006-2 I.R.B. 278, 284. In the

APA request, Bloomberg stated that it had a 24% market share of the

credit and financial information industry segment of the information

services industry. Bloomberg defined BPS as “an electronic information

service that combines news, market data, analytics, email and order

routing into a single interactive package.”

Bloomberg’s APA request includes a lengthy and intricate sevenstep process for allocating profits. In short, Bloomberg proposed using a

modified Residual Profit Split Method (RPSM) 10 as its transfer pricing

method (TPM). As Bloomberg described it in the APA request, “there is

a routine return earned for the service-provider functions performed and

a residual profit earned that reflects the value of the Bloomberg

intangibles.”

In its APA request, Bloomberg proposed that “activities

undertaken by the News Reporting department” be considered routine

9 The discussion in this Opinion pertains only to the first of three transactions

discussed in the APA request. The two other transactions are not relevant.

10 An RPSM involves two steps. First, arm’s-length returns for routine

activities performed by entities in different countries are determined. Second, residual

profits that remain are allocated according to the relative value of the nonroutine

contributions made by each entity. See Treas. Reg. § 1.482-9(g)(2) (example 2 (vii)).

[*21] activities. Such activities included writing “articles/stories on . . .

economic data or other topics” that would be posted on BPS. Bloomberg

also proposed that “data collections and processing group” activities be

considered routine activities. Such activities included “data gathering,

entry, and/or editing functions.”

After allocations to routine activities, Bloomberg proposed

allocating residual profits to three intangible assets: (1) Technology

Intangible Property (IP); (2) Customer Relationship (CR) IP; and

(3) Marketing IP. Bloomberg defined the Technology IP as its “software

intangible asset” and described it as Bloomberg’s “single most valuable

intangible asset without which the business would not exist.” Bloomberg

defined the CR IP as its “intangible asset related to the significant effort

and investment undertaken by Bloomberg to enhance the value of the

BPS to existing customers by making the product familiar, customers’

knowledge of the features current, and customizing/tailoring the BPS to

meet specific customer requests.” Bloomberg defined the Marketing IP

as its “brand and trademark intangible asset” and later described it as

being enhanced “through media ventures and by syndicating Bloomberg

news content.”

Bloomberg proposed (1) “a Marketing IP return equal to 5% of

[Bloomberg’s] customer revenue from the BPS;” (2) “a CR IP [return]

equal to 10% of revenue for” Bloomberg; and (3) that “remaining

[Bloomberg] residual profit after the CR IP and Marketing IP have been

compensated” be assigned to the Technology IP. These amounts would

be assigned to Bloomberg subsidiaries in various countries “based on . . .

[their] contributions to the development and maintenance of the

relevant intangibles.” Because most software was created in the United

States, about 90% of Technology IP residual profits were assigned to the

United States. A lower percentage of CR IP, Marketing IP, and routine

returns was assigned to the United States. Using a five-year average of

profit allocations, Bloomberg proposed that 71% of profits be allocated

to the United States, 18% of profits be allocated to the United Kingdom,

and 3% of profits be allocated to Japan. 11

After Bloomberg submitted its APA request, its agent met with

tax authorities to discuss the APA request, and IRS employees met with

Bloomberg employees in various departments. In December 2010 the

Commissioner provided Bloomberg with a 68-page draft of his

11 Bloomberg’s proposed profit allocation to Japan was a placeholder, as

Bloomberg was waiting for certain “actual results.”

[*22] recommended negotiating position (draft RNP) for the “U.S.-U.K.

Bilateral APA.” In the draft RNP, respondent accepted most of the

premises and methods in Bloomberg’s APA request. However,

respondent proposed to eliminate CR IP as a separate intangible asset,

effectively combining it with the Technology IP and “attribut[ing] this

total return in the same manner that Taxpayer proposed to attribute

the Technology IP Return.” This resulted in an increased percentage of

Bloomberg’s profits being allocated to the Technology IP, which meant

a higher share of profits being assigned to the United States and subject

to U.S. income tax.

An APA regarding the United Kingdom (United Kingdom APA)

was executed by Bloomberg in September 2014 and by respondent in

October 2014. 12 The United Kingdom APA substantially comports with

the terms set forth in respondent’s draft RNP. It also follows the APA

request by defining “Technology IP” as “Bloomberg’s software intangible

asset.” Neither Bloomberg’s APA request, respondent’s draft RNP, nor

the United Kingdom APA discusses section 199.

VII.

McKinsey & Co. Survey of BPS Users

Bloomberg paid McKinsey & Co. (McKinsey), a management

consulting firm, to conduct a survey of BPS users (McKinsey Survey) in

2008. The principal purposes of the McKinsey Survey were to (1) gather

information about the BPS user base, such as what specific businesses

users worked in and what assets they traded; and (2) find out what BPS

functions were most used by, and most important to, BPS users. 13

McKinsey sent the survey questionnaire to about 190,000 BPS users and

received 14,660 responses. McKinsey then removed “‘straight-line’

respondents” and other unreliable responses to reach 13,426 usable

responses. McKinsey determined that the “responses were

representative of the [BPS] user base.”

The McKinsey Survey showed that more general BPS features

(such as news, email, security descriptive/pricing, and graphing

12 The parties later executed APAs regarding Japan and Germany. The APA

regarding Japan was significantly different from Bloomberg’s APA request; it did not

explicitly address Technology IP or many other elements of the APA request. The APA

regarding Germany was similar to the APA regarding the United Kingdom, though

there were some material differences that were not well explained in other evidence or

by the parties. We will not discuss the APAs regarding Japan and Germany further.

13 While Bloomberg had access to some BPS usage statistics, it wanted more

in-depth information that a survey could ideally provide.

[*23] features) were the most used BPS features. However, more

specific features tended to be highly used by BPS users in certain jobs.

For example, portfolio analytical features were not commonly used by

most BPS users but were frequently used by BPS users who were

portfolio managers.

To adjust for the fact that certain functions were commonly used

by almost all BPS users, McKinsey ranked groups of features by how

“critical” they were. To do this, McKinsey first asked users to identify

what features they regularly used. Users were then asked to rate how

important the features they regularly used were “to doing [their] job

well” on a scale with five options. If a user chose one of the top two

options (“Absolutely Essential” and “Very Important”) the feature was

considered critical to that user. McKinsey divided the number of users

who considered a feature to be critical by the number of users who

regularly used the feature to determine overall “criticality.” McKinsey

then sorted specific features into groups and determined that the 12

most critical groups of BPS features were, in order: (1) security

descriptive and pricing functions; (2) downloads into Excel; (3) news

stories; (4) graphing tools; (5) OMS; (6) economic monitors and analysis;

(7) email; (8) quote histories and recaps; (9) technical analysis tools;

(10) launch screen functionality; (11) portfolio analytics; and

(12) instant messaging.

Bloomberg referenced the McKinsey Survey in its 2009 business

plans, though whether/the extent to which Bloomberg made any specific

decisions based on the McKinsey Survey was not established.

VIII. Competing Systems

3000 Xtra

Thomson Reuters Corp. (Reuters) 14 was Bloomberg’s chief

competitor. Reuters offered a subscription product called 3000 Xtra that

Reuters described as “a high-performance information service for

financial professionals.” Like BPS, 3000 Xtra was a system designed to

integrate news, data, analysis, and messaging. The 3000 Xtra system

included server software, graphing software installed on a user’s

14 Reuters Group, PLC (Reuters Group), and Thomson Corp. merged on April

17, 2008. Before the merger, Reuters Group sold the competing systems discussed in

FoF Part VIII.A through C. References to “Reuters” in this Opinion include Reuters

Group.

[*24] desktop computer, and an Excel plug-in like the BPS Excel plugin (also installed on a user’s desktop computer).

BPS and 3000 Xtra were competing products and had

substantially overlapping purposes and sets of features. Bloomberg and

Reuters fought to procure subscriptions/renewals from the same pool of

potential users. Some larger institutions even subscribed to both BPS

and 3000 Xtra and let their employees use the product they preferred.

When Bloomberg or Reuters introduced a new or improved feature on

BPS or 3000 Xtra, the opposing company worked to match or exceed that

feature to avoid its product’s losing market share.

BPS and 3000 Xtra (using Reuters’s consolidated information

feed) 15 included similar data for major asset classes. However, there

were certain types of assets for which one product had better data. For

example, 3000 Xtra had better overall currency data, while BPS had

better overall fixed-income data. Bloomberg’s and Reuters’s (on its

consolidated information feed) news products were both strong.

Though they were largely similar, there were two notable

differences between 3000 Xtra and BPS. First, users could pay a

monthly fee to license most 3000 Xtra desktop software components

without subscribing to other components of 3000 Xtra, such as an

information feed. Second, users could use 3000 Xtra desktop computer

software in combination with Reuters Market Data System (RMDS)

software to achieve outcomes relevant to these cases, discussed infra

FoF parts VIII.B and VIII.C.

RMDS

Reuters also offered RMDS, a software product that was often

used in conjunction with 3000 Xtra (though 3000 Xtra was not required

to use RMDS or vice versa). RMDS was generally licensed by larger

institutions, where it would be installed on an institution’s servers. Once

installed, RMDS sat between desktop software (usually 3000 Xtra

desktop software) and one or more information feeds.

15 Unlike BPS, 3000 Xtra used no one specific information feed, though Reuters

offered a consolidated information feed called “Reuters Data Feed Plus.” Reuters

offered 3000 Xtra users the option to receive limited portions of Reuters’s consolidated

information feed for a reduced fee. For example, a user who traded only in commodities

and/or energy markets could subscribe to a Reuters information feed that focused on

commodities and energy information, for a lower price than Reuters’s consolidated

information feed.

[*25] RMDS required an information feed to function. Customers could

connect one or more information feeds to RMDS. These feeds could be

from Reuters, a third party (e.g., broker or exchange feeds), the customer

itself, or any combination thereof. Once an information feed was

connected, RMDS could collect, normalize, store, analyze, and distribute

data and/or news from that feed to users connected to the server(s) on

which RMDS was installed. In short, once connected to one or more

information feeds, RMDS software on a customer’s server(s) could

effectively act like 3000 Xtra software that was found on Reuters’s

servers, discussed further infra FoF Part VIII.C.

All of Reuters’s largest 3000 Xtra subscribers also licensed

RMDS. Customers had two options to pay for an RMDS license: (1) a

one-time fee plus a monthly maintenance fee for updates and support;

or (2) a monthly fee.

Combination of 3000 Xtra and RMDS

Reuters designed RMDS to work with 3000 Xtra desktop software

and enhance the 3000 Xtra system. Once RMDS was connected to an

information feed, RMDS and 3000 Xtra desktop computer software

worked together; RMDS collected, analyzed, and distributed large

volumes of information, which users could further manipulate, perform

calculations on, model, and share using 3000 Xtra desktop software

components. This allowed the combination of RMDS and 3000 Xtra

desktop computer software (once an information feed was connected to

RMDS) to act much like the complete 3000 Xtra system (with an

information feed). Unlike the complete 3000 Xtra system though (which

used software installed on Reuters’s servers), the RMDS plus 3000 Xtra

desktop computer software combination was installed completely on a

customer’s hardware.

3000 Xtra users, even those with RMDS, primarily used data from

Reuters’s consolidated information feed. However, these users were not

required to use Reuters’s consolidated information feed and could use

(1) their own information feed; (2) a different Reuters information feed;

and/or (3) a third-party information feed.

Charles River Investment Management System

Charles River Development (Charles River) offered Charles River

Investment Management System (IMS) software that competed with

[*26] OMS. 16 OMS and Charles River IMS had overlapping

functionality and largely similar features. Charles River derived gross

receipts from licensing Charles River IMS to customers, who could

download Charles River IMS and install it on their own hardware.

Like OMS, Charles River IMS needed up-to-date information

from a customer and/or third party to function as intended. Information

could be imported into Charles River IMS from numerous information

feeds and other sources, such as customer data sets. As a result, Charles

River IMS could be used with BPS, 3000 Xtra, customer-developed

software, etc., whereas OMS could be used only with BPS.

IX.

Miscellaneous

Bloomberg timely filed a federal return for each year at issue. It

reported DPGR of $2.121 billion for 2008, $1.773 billion for 2009, and

$4.077 billion for 2010. Bloomberg also reported expenses allocable to

DPGR 17 (for purposes of computing section 199 deductions) of $1.377

billion for 2008, $1.002 billion for 2009, and $2.084 billion for 2010.

Using these amounts, Bloomberg calculated and reported section 199

deductions of $45 million for 2008, $46 million for 2009, and $179 million

for 2010.

Respondent timely issued FPAAs to Bloomberg’s tax matters

partner, Bloomberg, Inc., regarding the years at issue. In the FPAAs

respondent determined that DPGR, expenses allocable to DPGR, and

section 199 deductions were all zero for each year. Respondent

determined Bloomberg’s DPGR to be zero because receipts Bloomberg

reported did not qualify as DPGR pursuant to section 199 and related

regulations. Respondent determined that expenses allocable to DPGR

were zero “because of [respondent’s] adjustments to Bloomberg’s

DPGR.” Respondent disallowed Bloomberg’s claimed section 199

deductions because of the other adjustments, as well as respondent’s

determination that “[t]he section 199 deduction is determined at the

partner level and not at the partnership level.”

Respondent also determined that Bloomberg’s U.S. wages paid

($806 million for 2008, $812 million for 2009, and $968 million for 2010)

16 At least one company other than Charles River offered software that also

competed with OMS. For purposes of this Opinion, it is sufficient to discuss only

Charles River IMS.

17 References to “expenses allocable to DPGR” in this Opinion include both

directly allocable expenses and other apportionable expenses.

[*27] were zero for purposes of section 199. This adjustment pertained

only to section 199; respondent did not adjust Bloomberg’s claimed total

deductions or net income. Respondent stated that adjustments to U.S.

wages were made “because Bloomberg was not eligible to determine . . .

W-2 wages that are properly allocable to DPGR at the partnership level”

and such wages “are computed at the partner level and not at the

partnership level.”

Bloomberg, by petitioner, its tax matters partner, timely filed

Petitions with this Court in response to the FPAAs, and the cases were

consolidated in June 2017. In August 2021 Bloomberg filed Amended

Petitions in which it claimed: (1) additional DPGR for 2008 of $1.766

billion; (2) additional expenses allocable to DPGR for 2008 of $614

million; (3) additional DPGR for 2009 of $2.031 billion; and (4) additional

expenses allocable to DPGR for 2009 of $1.014 billion. 18

After Bloomberg filed its Amended Petitions, the total amounts of

DPGR in dispute were $3.887 billion for 2008, $3.804 billion for 2009,

and $4.077 billion for 2010. The total amounts of expenses allocable to

DPGR in dispute were $1.990 billion for 2008, $2.016 billion for 2009,

and $2.084 billion for 2010. An expert witness for Bloomberg later

calculated lower DPGR and allocable expenses than Bloomberg claimed

in its Amended Petitions. See infra OPINION Part IX.B.

OPINION

Burden of Proof and Issues Presented

Generally, taxpayers bear the burden of proving, by a

preponderance of the evidence, that the Commissioner’s determinations

are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Bloomberg does not contest that it bears the burden of proof regarding

the issues ruled on in this Opinion. 19

We must first decide whether any portion of Bloomberg’s gross

receipts from BPS and/or OMS subscriptions qualify as DPGR

18 In its Amended Petitions, Bloomberg also claimed that it was entitled to

additional foreign tax credits for the years at issue. Respondent almost entirely agreed,

and the issue was resolved by stipulation.

19 As discussed infra OPINION Part XI, there is a dispute regarding U.S. wages

allocable to DPGR. Bloomberg argued that “in any . . . proceedings to establish the W-2

wages allocable to DPGR, Respondent would bear the burden of proof, since the issue

plainly constitutes a ‘new matter.’” Because we decline to rule on the U.S. wages issue

in this Opinion, we need not decide whether Bloomberg is correct.

[*28] (qualification issue). To prevail, Bloomberg must show that (1) it

derived receipts from providing customers access to computer software

that it manufactured, produced, grew, or extracted (MPGE) in whole or

in significant part within the United States for customers’ direct use

while connected to the internet or any other public or private

communications network; and (2) that a third party derived gross

receipts from the lease, rental, license, sale, exchange, or other

disposition of substantially identical software. See Treas. Reg. § 1.1993(i)(6)(iii)(B). 20 Because we rule for Bloomberg in part on the

qualification issue, we must proceed to determine the allocation of gross

receipts between DPGR and non-DPGR and determine expenses

allocable to DPGR (allocation issue).

II.

Evidentiary Matters Regarding APAs

In June 2022 respondent filed a Motion in Limine seeking to

exclude the United Kingdom APA from evidence. Respondent’s Motion

in Limine was primarily based on Rev. Proc. 2006-9, § 10.03 and 10.04,

2006-2 I.R.B. at 289, which reads, in part:

.03 An APA will have no legal effect except with

respect to the taxpayer, taxable years, and transactions to

which the APA specifically relates.

.04 Unless provided otherwise by written agreement

or regulations, the Service and the taxpayer may not

introduce the APA or non-factual oral and written

representations made in conjunction with the APA request

as evidence in any judicial or administrative proceeding

regarding any tax year, transaction, or person not covered

by the APA. . . .

Bloomberg objected to respondent’s Motion in Limine, arguing that “the

[United Kingdom] APA is relevant evidence that will assist the Court in

its valuation decision, and Rev. Proc 2006-9 does not bar [Bloomberg’s]

proposed use of it.” 21 Bloomberg also stated that it sought “to introduce

the [United Kingdom APA] solely for valuation,” and that it did not

intend to use the United Kingdom APA with respect to the qualification

issue.

20 Bloomberg does not argue that gross receipts at issue qualify as DPGR

pursuant to any other provision of Treasury Regulation § 1.199-3(i)(6).

21 Bloomberg’ reference to “valuation” is to the allocation issue.

[*29] By Order issued October 13, 2022, we agreed with Bloomberg that

the United Kingdom APA was admissible with respect to the allocation

issue. 22 We noted that Bloomberg did “not intend to use the APA with

respect to the qualification issue.”

After the issuance of our October 13, 2022, Order, the parties

stipulated Bloomberg’s APA Request, respondent’s draft RNP, and

various related documents, such as annual reports that Bloomberg

submitted to respondent pursuant to the United Kingdom APA (APArelated documents). Neither Bloomberg nor respondent objected to the

admission of the APA-related documents and did not limit use of the

documents to the allocation issue. 23

In its opening brief, Bloomberg did not make arguments

regarding the United Kingdom APA or the APA-related documents with

respect to the qualification issue. Bloomberg limited its opening brief

arguments regarding those documents to the allocation issue. In his

opening brief, respondent made arguments regarding the United

Kingdom APA and the APA-related documents with respect to the

qualification issue. Bloomberg addressed respondent’s arguments in its

reply brief. Like Bloomberg, we will discuss only the United Kingdom

APA and the APA-related documents with respect to the qualification

issue when addressing respondent’s arguments.

III.

Section 199, Treasury Regulation § 1.199-3, and Computer

Software

General Information

Congress enacted section 199 as part of the American Jobs

Creation Act of 2004, Pub. L. No. 108-357, § 102(a), 118 Stat. 1418, 1424,

to provide a tax deduction for certain domestic production activities.

Section 199 was intended to stimulate job creation in the United States

and strengthen the economy by reducing the tax burden on domestic

22 As discussed further infra OPINION Part IX.A, one of respondent’s expert

witnesses relied on the United Kingdom APA and Bloomberg’s APA request to

complete calculations regarding the allocation issue, which respondent supported. The

fact that respondent based arguments on the United Kingdom APA and related

documents supports our decision to admit the United Kingdom APA with respect to

the allocation issue.

23 The parties also stipulated APAs regarding Japan and Germany, though

respondent reserved objections to the admission of those documents based on Rev.

Proc. 2006-9, § 10.03 and 10.04. We admitted both APAs into evidence over

respondent’s objection during the trial.

[*30] manufacturers. See ADVO, Inc. & Subs. v. Commissioner, 141 T.C.

298, 311–12 (2013) (citing Gibson & Assocs., Inc. v. Commissioner, 136

T.C. 195, 223 (2011)). Section 199 was repealed for tax years beginning

after December 31, 2017. Tax Cuts and Jobs Act of 2017, Pub. L. No.

115-97, § 13305(a), (c), 131 Stat. 2054, 2126.

As in effect for the years at issue, section 199(a) allows a

deduction equal to 6% (for 2008 and 2009) or 9% (for 2010) of the lesser

of (1) the qualified production activities income (QPAI) of the taxpayer

for the tax year or (2) taxable income (determined without regard to

section 199) for the tax year. The amount of the deduction is limited to

50% of the wages of the taxpayer reported on Form W–2, Wage and Tax

Statement, for the taxable year that are properly allocable to DPGR.

§ 199(b). QPAI for any taxable year is an amount equal to the excess, if

any, of (A) the taxpayer’s DPGR for such taxable year, over (B) the sum

of (i) the cost of goods sold allocable to such receipts and (ii) other

expenses, losses, or deductions (other than the deduction under section

199) that are properly allocable to such receipts. § 199(c)(1). In the case

of a partnership, section 199 applies at the partner level, though certain

partnership-level items are necessary to compute the partner-level

deduction. § 199(d)(1)(A); Treas. Reg. § 1.199-5(b).

DPGR includes gross receipts derived from any lease, rental,

license, sale, exchange, or other disposition of qualifying production

property (QPP) that was MPGE by the taxpayer in whole or in

significant part within the United States. § 199(c)(4)(A)(i)(I). The

regulations specify that the term “derived from the lease, rental, license,

sale, exchange, or other disposition” (collectively, disposition) is limited

to the gross receipts directly derived from the disposition of QPP and

note that federal income tax principles apply to determine whether a

transaction is a disposition, a service, or some combination thereof.

Treas. Reg. § 1.199-3(i)(1)(i).

The definition of DPGR does not include gross receipts derived

from services. The regulations clarify that gross receipts derived from

the performance of services generally do not qualify as DPGR, though

there are exceptions included in both the regulations and section 199.

§ 199(c)(4)(A)(ii) and (iii); Treas. Reg. § 1.199-3(i)(4)(i). In the case of an

embedded service, that is, a service for which the price, in the normal

course of the taxpayer’s business, is not separately stated from the

amount charged for the disposition of QPP, DPGR includes only the

gross receipts derived from the disposition of QPP and not any receipts

attributable to the embedded service. Treas. Reg. § 1.199-3(i)(4)(i)(A).

[*31] B.

Computer Software

QPP includes “any computer software.” § 199(c)(5)(B). 24 DPGR

includes gross receipts derived from the disposition of computer

software MPGE by the taxpayer in whole or in significant part within

the United States. Treas. Reg. § 1.199-3(i)(6)(i). “Such gross receipts

qualify as DPGR even if the customer provides the computer software to

its employees or others over the Internet.” Id. Consistent with the

general treatment of services under section 199, “[g]ross receipts derived

from customer and technical support, telephone and other

telecommunication services, online services (such as Internet access

services, online banking services, providing access to online electronic

books, newspapers, and journals), and other similar services do not

constitute gross receipts derived from a . . . disposition of computer

software.” Treas. Reg. § 1.199-3(i)(6)(ii).

The regulations provide narrow exceptions to the general rule

stated in Treasury Regulation § 1.199-3(i)(6)(ii) excluding “online

services” and other services from DPGR. Treas. Reg. § 1.199-3(i)(6)(iii);

accord BATS Glob. Mkts. Holdings, Inc. & Subs. v. Commissioner (BATS

Global I), 158 T.C. 118, 140 (2022) (describing the exceptions as

“narrow”), aff’d, BATS Glob. Mkts. Holdings, Inc. & Subs. v.

Commissioner (BATS Global II), No. 22-9002, 2023 U.S. App. LEXIS

17608 (10th Cir. July 12, 2023). Treasury Regulation § 1.199-3(i)(6)(iii)

provides:

Notwithstanding paragraph (i)(6)(ii) of this section, if a

taxpayer derives gross receipts from providing customers

access to computer software MPGE in whole or in

significant part by the taxpayer within the United States

for the customers’ direct use while connected to the

Internet or any other public or private communications

network (online software), then such gross receipts will be

treated as being derived from the lease, rental, license,

sale, exchange, or other disposition of computer software

only if—

(A) The taxpayer also derives, on a regular

and ongoing basis in the taxpayer’s business, gross

receipts from the lease, rental, license, sale,

exchange, or other disposition to customers that are

24 We will discuss the definition of “computer software” in Treasury Regulation

§ 1.199-3(j)(3)(i) infra OPINION Part VII.B.2.

not related persons (as defined in paragraph (b)(1) of

this section) of computer software that—

(1) Has only minor or immaterial

differences from the online software;

(2) Has been MPGE by the taxpayer in

whole or in significant part within the United

States; and

(3) Has been provided to such

customers either affixed to a tangible medium

(for example, a disk or DVD) or by allowing

them to download the computer software from

the Internet; or

(B) Another person derives, on a regular and

ongoing basis in its business, gross receipts from the

lease, rental, license, sale, exchange, or other

disposition of substantially identical software (as

described in paragraph (i)(6)(iv)(A) of this section)

(as compared to the taxpayer’s online software) to its

customers pursuant to an activity described in

paragraph (i)(6)(iii)(A)(3) of this section.

[*32]

We refer to Treasury Regulation § 1.199-3(i)(6)(iii)(A) as the selfcomparable exception. Cf., e.g., I.R.S. Chief Couns. Adv. Mem.

201603028 (Jan. 15, 2016). Bloomberg does not assert that it meets the

requirements of the self-comparable exception, but the exception is still

of minor relevance in these cases.

We refer to Treasury Regulation § 1.199-3(i)(6)(iii)(B) as the

third-party comparable exception. Cf., e.g., I.R.S. Chief Couns. Adv.

Mem. 201603028. For purposes of the third-party comparable exception

substantially identical software is computer 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).

Background on the Self-Comparable and Third-Party

Comparable Exceptions

On January 19, 2005, the Department of the Treasury (Treasury)

issued I.R.S. Notice 2005-14, 2005-1 C.B. 498, to provide “interim

guidance” on section 199. The notice stated: “Except as provided in the

[*33] safe harbor [for embedded services 25], gross receipts derived by a

taxpayer from software that is merely offered for use to customers online

for a fee are not DPGR.” Notice 2005-14, § 3.04(7)(d), 2005-1 C.B. at 508.

This general rule, that the provision of access to online software

constituted a service, was reflected in proposed regulations published

November 4, 2005. REG-105847-05, 70 Fed. Reg. 67,220, 67,226 (Nov. 4,

2005); see also id. at 67,250. A preamble accompanying the proposed

regulations read, in part: “[T]he use of online computer software does

not rise to the level of a lease, rental, license, sale, exchange, or other

disposition as required under section 199 but is instead a service.” Id. at

67,226. Treasury requested comments “concerning whether gross

receipts derived from the provision of certain types of online software

should qualify under section 199 as being derived from a lease, rental,

license, sale, exchange, or other disposition of the software and, if so,

how to distinguish between such types of online software.” Id. at 67,239.

In June 2006 Treasury issued temporary regulations regarding

section 199. The supplementary information to the temporary

regulations noted that on July 21, 2005, the Chairman and the Ranking

Member of the Senate Finance Committee and the Chairman of the

House Ways and Means Committee sent a letter to Treasury regarding

the treatment of online access to computer software. T.D. 9262, 2006-1

C.B. 1040, 1040–41. The letter requested that Treasury consider

whether the treatment of computer software accessed online should be

similar to the treatment of computer software distributed by other

means, such as by physical delivery or delivery via internet download.

Id., 2006-1 C.B. at 1041. The letter also noted that “gross receipts from

the provision of services are not treated as DPGR, regardless of the fact

that computer software may be used to facilitate such service

transactions.” Id.

The supplementary information to the temporary regulations also

summarized comments regarding the treatment of online software.

Comments “suggested that a customer’s use of computer software is

tantamount to a license of the computer software.” Id. Other

commentators suggested that “other disposition” in section 199(c)(4)(A)

“is broad enough to include the provision of computer software for online

use.” Id. These comments were not incorporated into the temporary

regulations. Id. Instead, the temporary regulations introduced the

25 The safe harbor for embedded services set forth in the interim guidance was

later altered. Compare Notice 2005-14, § 3.04(7)(b), 2005-1 C.B. at 508, with Treas.

Reg. § 1.199-3(i)(4)(i)(A).

[*34] self-comparable and third-party comparable exceptions. The

supplementary information noted that these exceptions were added “as

a matter of administrative convenience” to provide “two exceptions

under which gross receipts derived by a taxpayer from providing

computer software to customers for the customers’ direct use while

connected to the Internet will be treated as being derived from the lease,

rental, license, sale, exchange, or other disposition of such computer

software.” Id.

On April 16, 2007, Treasury promulgated final regulations under

section 199. The supplementary information to the final regulations

reiterates first the general rule that gross receipts derived from online

services are excluded from DPGR, and second, the two exceptions from

the general rule, under which gross receipts derived from online

software are treated as DPGR. T.D. 9317, 2007-1 C.B. 957, 958.

IV.

Job Creation in the United States

As stated supra OPINION Part III.A, Congress enacted section

199 with the intent to stimulate job creation in the United States and

strengthen the economy by reducing the tax burden on domestic

manufacturers. While it is not legally determinative, Bloomberg hired

employees in the United States in the years at issue to produce BPS

software, which is the outcome that Congress sought to promote. 26

In the years at issue, the number of employees in Bloomberg’s

R&D department (which comprised mostly programmers) increased by

about 35%, largely because of hires in the United States. Over 85% of

Bloomberg’s software programmers worked in the United States, as did

over 85% of all R&D department employees. Testimony suggested that

There were (and are) other economic and national security benefits to

producing software domestically. See Tax Reform Options: Incentives for Capital

Investment and Manufacturing: Hearing Before the S. Comm. on Finance, 112th Cong.

47–50 (2012) (Statement of Robert D. Atkinson, President and Founder, Information

Technology and Innovation Foundation) (discussing section 199 and “economic

rationales for designing a tax code that favors traded technology industries”); see also

David A. Kessler, Protection and Protectionism: The Practicalities of Offshore Software

Development in Government Procurement, 38 Pub. Cont. L.J. 1, 26–38 (2008)

(discussing federal government scrutiny of “foreign origin software”); Off. of Mgmt. &

Budget, Exec. Off. of the President, Memorandum M-22-18: Enhancing the Security of

the Software Supply Chain Through Secure Software Development Practices 1 (2022)

(noting that the global information technology supply chain “faces relentless threats

from nation state and criminal actors seeking to steal sensitive information and

intellectual property, compromise the integrity of Government systems, and conduct

other [harmful] acts”).

[*35] R&D department employees were well paid. For example, one

witness testified that an entry-level data department “analyst would

have cost [Bloomberg] about half what an [entry-level] engineer would

have cost.”

Working predominantly in the United States, Bloomberg’s R&D

department employees maintained, updated, and improved BPS,

including the software that enabled it. Jobs created from BPS software

production contributed to U.S. wages paid by Bloomberg that increased

from $806 million in 2008 to $968 million in 2010. It is noteworthy that

this 20% increase in two years occurred at a time when the economy was

generally poor.

BATS Global and Direct Supply

BATS Global I and Direct Supply, Inc. v. United States (Direct

Supply I), 635 F. Supp. 3d 685 (E.D. Wis. 2022), aff’d, Direct Supply, Inc.

v. United States (Direct Supply II), 96 F.4th 1031 (7th Cir. 2024), are the

only cases with published opinions that substantively address Treasury

Regulation § 1.199-3 as it relates to computer software. We will discuss

these cases and why they are distinguishable.

BATS Global I and II

BATS Global I

BATS Global Markets Holdings, Inc. (BATS), operated securities

exchanges that used software BATS developed. BATS Global I, 158 T.C.

at 120, 146. BATS charged its customers three types of fees: (1) logical

port fees, (2) routing fees, and (3) transaction fees. Id. at 132. We

considered whether each type of fee was derived from providing

customers access to software for their direct use, concluding that no fees

were so derived. Id. at 143.

Logical port fees were connectivity fees for access to BATS’s

private communications network, which enabled customers to interact

with BATS’s exchanges. Id. We ruled that “[c]onnection to the logical

ports is akin to internet access rather than direct use” of software. Id. at

144. Accordingly, we held that the logical port fees were fees for the

service of “provid[ing] the customer with a connection” and were not

DPGR. Id.

Routing fees were charged when a customer’s order was executed

on an external exchange. Id. On the basis of a “securities routing

[*36] agreement” between BATS and its customers, we found that

customers “could only submit orders with instructions as to routing

strategy” and BATS then “acted as the customers’ agent for the purpose

of providing these routing services.” Id. at 144–45. We also stated that

“varying prices customers paid for routing strategies reflected the

different services [BATS] provided, such as routing orders to particular

types of external markets.” Id. at 145. Accordingly, we held that the

routing fees were fees for “routing and trade execution services” and

were not DPGR. Id.

Transaction fees were charged when a customer’s order was

executed, but only if the order removed liquidity from one of BATS’s

exchanges. 27 Id. at 133–34, 145–46. In part because “transaction fees

were charged to customers according to how much they accessed or

removed liquidity,” we ruled that transaction fees “reflected the trade

execution services [BATS] provided.” Id. at 145–46. In addition, BATS

charged varying transaction fees for different order types. Id. at 146. We

ruled that “[t]he different prices of the transaction fees reflected the

different services [BATS] performed for customers, such as hiding their

orders from being displayed in market data or adjusting the order prices

using display price sliding. Customers paid for different services, not

different uses of the trading software.” Id. Accordingly, we held that the

transaction fees were fees for “trade execution services” and were not

DPGR. Id.

With respect to the fees as a whole, we stated that “[t]he fact that

[BATS’s] Exchanges use software to operate does not convert [BATS’s]

trade execution services into the provision of software for customers’

direct use.” Id. We further held that, even if any fees were derived from

providing customers access to software for their direct use, other

requirements of the third-party comparable exception were not

satisfied. Id. at 148. Though third parties sold software that allowed

their customers to operate electronic exchanges, we noted that BATS’s

customers did not license BATS’s software, and could not use it, to

operate their own exchanges. Id. at 151–52. Rather, BATS “itself

operated the Exchanges” and BATS’s “customers could only submit,

cancel, and modify orders to trade securities.” Id. at 151. We ruled that

“[t]rading securities and operating a securities exchange are two distinct

activities and are not the same functional result from a customer’s

perspective.” Id. at 152. Accordingly, we held that “third-party vendors’

27 BATS also offered rebates (equal to 79% of transaction fees charged) to entice

customers to add liquidity to BATS’s exchanges. BATS Global I, 158 T.C. at 145.

[*37] software is not substantially identical to [BATS’s] software within

the meaning of Treasury Regulation § 1.199-3(i)(6)(iv)(A), and therefore

[BATS] does not meet the requirements of the third-party comparable

exception.” Id. at 152–53 (citing Treas. Reg. § 1.199-3(i)(6)(iii)(B)).

BATS Global II

The U.S. Court of Appeals for the Tenth Circuit affirmed BATS

Global I. In its short order and judgment in BATS Global II, 28 2023 U.S.

App. LEXIS 17608, at *2, the Tenth Circuit did not address whether

BATS derived gross receipts from providing customers’ access to

software for their direct use. Instead, the Tenth Circuit affirmed BATS

Global I because BATS “failed to demonstrate that a third party derived

revenue from licenses or other dispositions of software that was

substantially identical to [BATS’s] software, as required by the so-called

third-party comparable exception.” Id.

Direct Supply I and II

Direct Supply I

Direct Supply, Inc. (Direct Supply), was in the business of

supplying nursing home chains. Direct Supply I, 635 F. Supp. 3d at 686.

In one of its lines of business, Direct Supply created software that

nursing home chains used to order products over the Internet. Id. Direct

Supply used the software to create and operate an electronic

marketplace of goods available from suppliers, which was called DSSI.

Id. Using DSSI, a nursing home chain could browse and order products

available from all the suppliers with which that chain had procurement

contracts. Id. at 686–87. Direct Supply owned, hosted, maintained, and

updated the DSSI software, with nursing home chains “access[ing] the

software by entering login credentials into web portals.” Id. at 689.

If a nursing home chain wanted to use DSSI, it and its suppliers

first had to sign agreements with Direct Supply. Id. at 687–88. The

agreements generally described Direct Supply’s provision of services

other than the provision of access to software to nursing home chains

and suppliers. Id. The agreements provided that Direct Supply would be

compensated in three ways. Id. First, the nursing home chain would pay

Direct Supply a “[m]aintenance [f]ee” based on the chain’s number of

beds and facilities using DSSI. Id. at 687. This was a fee for creating an

28 The Tenth Circuit’s order and judgment is not binding precedent but may be

cited for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.

[*38] electronic catalog with information from the chain’s suppliers,

operating DSSI, maintaining transaction information, and otherwise

developing the chain’s “e-procurement system.” Id. Second, each

supplier was obligated to pay a one-time “[i]mplementation [f]ee” for

integrating into DSSI, though this fee was almost always waived. Id.

at 688. Third, “[t]ransaction [f]ee[s]” paid by suppliers were based on

“amount[s] invoiced by a supplier for goods sold through” DSSI. Id.

Transaction fees constituted about 95% of the fees paid to Direct Supply

in the years before the Court. Id. at 689. Maintenance and certain

miscellaneous fees made up the remaining 5%; Direct Supply did not

receive any implementation fees in the years before the Court. Id.

at 689–90.

Direct Supply argued that it was entitled to a section 199

deduction pursuant to either Treasury Regulation § 1.199-3(i)(6)(i) or

(iii). Id. at 692–96. Much of the analysis in Direct Supply I pertains to

the Treasury Regulation § 1.199-3(i)(6)(i) issue. Id. Because Bloomberg

claimed only that it was entitled to a section 199 deduction pursuant to

Treasury Regulation § 1.199-3(i)(6)(iii), some of the analysis in Direct

Supply I is inapplicable to Bloomberg’s case.

In granting summary judgment in favor of the Government in

Direct Supply I, the court held that neither the transaction nor the

maintenance fees constituted DPGR pursuant to Treasury Regulation

§ 1.199-3(i)(6)(i) because the fees

were derived from the provision of a service rather than

from a license or rental of software. Direct Supply did not

simply rent or license software to a nursing-home chain or

supplier and then leave the customers to use the software

as they saw fit. Instead, Direct Supply created and

maintained a customized online marketplace for the chain

and its suppliers. Services were involved in every step of

this process. . . . In short, Direct [S]upply derived revenue

from creating and maintaining customized online

marketplaces for its customers, not from renting or

licensing software to them.

Direct Supply I, 635 F. Supp. 3d at 693. Addressing Treasury Regulation

§ 1.199-3(i)(6)(iii), the court stated:

A threshold requirement for [the third-party comparable

exception] is that the taxpayer “derive[] gross receipts from

[*39] providing customers access to computer software . . . for the

customers’ direct use while connected to the Internet.”

[Treas. Reg. § 1.199-3(i)(6)(iii).] Direct Supply’s customers

do access DSSI while connected to the Internet. However,

as explained above, Direct Supply does not derive gross

receipts from providing access to DSSI over the Internet.

Instead, Direct Supply derives revenue from providing the

services involved in creating and maintaining customized

online marketplaces for nursing-home chains and their

suppliers. . . . [T]he mere fact that customers access Direct

Supply’s online software while using these services does

not convert the services into a provision of software for the

customers’ direct use, just like a bank customer’s accessing

the bank’s online software to complete an online banking

transaction does not convert the banking transaction into

a provision of software to the customer. See also [BATS

Global I, 158 T.C. at 146] (“Petitioner is an operator of

securities exchanges. The fact that the Exchanges use

software to operate does not convert petitioner’s trade

execution services into the provision of software for

customers’ direct use.”). Thus, the Treasury exceptions

that treat software accessed over the Internet equivalently

to software provided on physical media or by download do

not apply to DSSI. No matter how DSSI is provided to or

accessed by customers, the customers are not paying fees

for the software itself. They are paying fees for Direct

Supply’s services involved in creating and maintaining the

customized online marketplace.

Id. at 695–96. The court declined to address other requirements of the

third-party comparable exception “[b]ecause Direct Supply [did not]

meet the threshold requirement.” Id. at 696.

Direct Supply II

The U.S. Court of Appeals for the Seventh Circuit affirmed Direct

Supply I. The Seventh Circuit stated that “Direct Supply’s receipts were

not ‘directly derived’ from software.” Direct Supply II, 96 F.4th at 1033

(citing Treas. Reg. § 1.199-3(i)(6)(i)). The Seventh Circuit also stated

that Direct Supply did not satisfy Treasury Regulation § 1.199-3(i)(6)(iii)

because “it did not provide ‘direct use’ of the software underlying DSSI

or establish that DSSI is ‘substantially identical’ from consumers’

perspective to” third-party software. Direct Supply II, 96 F.4th at 1033.

[*40] In the section of its opinion addressing Treasury Regulation

§ 1.199-3(i)(6)(i), the Seventh Circuit stated:

Things might be more complex if Direct Supply had

attempted to determine how much of the revenue from

DSSI could be traced to the value of software and how

much to the efforts of its staff (and the efforts of both

vendors and customers) to make ordering work, but it has

not attempted any such partition. It treated the whole

gross revenue from DSSI as eligible for the § 199 deduction,

which has to be the one impossible outcome.[29]

Direct Supply II, 96 F.4th at 1033. The Seventh Circuit also stated,

directly after discussing Treasury Regulation § 1.199-3(i)(6)(iii):

As Direct Supply sees things, “if Direct Supply had

chosen a different pricing model and its contracts had said,

‘Direct Supply hereby grants licensee a non-exclusive

license to use DSSI for one year for $X . . .’ there would be

much less controversy on this aspect of the deduction.”

Maybe—though as we’ve remarked DSSI is more than just

software. Direct Supply would have needed to license

something comparable to the packages licensed or sold by

[third parties]. Even then, all Direct Supply could have

deducted would have been the fees received from its

customers. What it actually deducted were [mostly] fees

received from the vendors—and even with the pricing

model that Direct Supply now wishes it had used, it would

be impossible to picture the vendors as acquiring any

software from Direct Supply.

Id. at 1033–34 (citation of the record omitted).

Distinguishing Bloomberg’s Cases

While the facts are complex, the BATS Global and Direct Supply

opinions involve relatively straightforward applications of Treasury

29 While this statement is part of the opinion pertaining to Treasury Regulation

§ 1.199-3(i)(6)(i), there appears to be some overlap in the Seventh Circuit’s analysis

pertaining to that regulation and its analysis pertaining to Treasury Regulation

§ 1.199-3(i)(6)(iii). Similar overlap occurred in Direct Supply I. See Direct Supply I, 635

F. Supp. 3d at 695–96 (referring back to Treas. Reg. § 1.199-3(i)(6)(i) analysis during

analysis of Treas. Reg. § 1.199-3(i)(6)(iii)). We believe the Seventh Circuit’s statement

is relevant to Bloomberg’s cases.

[*41] Regulation § 1.199-3(i)(6). BATS’s logical port fees were derived

from providing access to BATS’s private communications network, and

the routing and transaction fees were charged per executed order (not

submitted order) and varied for different order types and routing

strategies. BATS Global I, 158 T.C. at 143–48. Direct Supply derived

receipts from setting up, maintaining, and selling products on DSSI.

Direct Supply I, 635 F. Supp. 3d at 693–96. Clearly, none of these

network-access, setup, maintenance, or transaction-based fees were

derived from the provision of access to software. Agreements between

BATS/Direct Supply and third parties also strongly supported the

position that BATS and Direct Supply did not derive fees from the

provision of access to software. Rather, each company derived fees only

from the provision of other services.

Unlike BATS and Directly Supply, Bloomberg charged customers

flat subscription fees to use BPS and OMS, no matter how, or how much,

they used BPS and OMS. Furthermore, subscription agreements

support Bloomberg’s position that a portion of the fees was derived from

Bloomberg’s provision of access to software. Bloomberg has consistently

recognized that a portion of the fees was not DPGR because it was

attributable to the provision of other services (data, news, etc.). Though

we do not adopt Bloomberg’s position with respect to all software at issue

in these cases, we believe that this is the pricing model and general

effort to partition fees between “the value of [the provision of access to]

software” and other services that the Seventh Circuit contemplated in

Direct Supply II, 96 F.4th at 1033–34.

Portions of the BPS subscription fees allocable to the provision of

data and news (financial information services) and email and instant

messaging (communication services), and the software that enabled

those services, are similar to fees charged by BATS and/or Direct

Supply. However, the portion of the BPS subscription fees attributable

to BPS analytical and graphing software (used to manipulate, analyze,

visualize, and otherwise draw insights from data and news) is different

from any fees charged by BATS or Direct Supply. As discussed infra

OPINION Part VII.B.1.c, although BPS analytical and graphing

software operates in conjunction with financial information services, a

portion of the BPS subscription fees is attributable to Bloomberg’s

provision of access to the analytical and graphing software to customers.

As discussed infra OPINION Part VIII.B, Bloomberg also derived gross

receipts from the provision of access to OMS software to customers.

[*42] In BATS Global I and II it was clear that the third-party

comparable exception was not satisfied. The third-party software at

issue was not remotely close to being “substantially identical to [BATS’s]

software within the meaning of Treasury Regulation § 1.1993(i)(6)(iv)(A).” See BATS Global I, 158 T.C. at 152–53; see also BATS

Global II, 2023 U.S. App. LEXIS 17608 (issuing an order and judgment

with almost no analysis because the issue was clear cut). However,

Reuters’s RMDS and 3000 Xtra programs, running together, use

analytical and graphing software that is substantially identical to BPS

analytical and graphing software, discussed further infra OPINION

Part VII.C.3. In addition, Charles River IMS software is substantially

identical to Bloomberg’s OMS software, discussed further infra

OPINION Part VIII.C.

VI.

Issues with Treasury Regulation § 1.199-3

General Issues

Though application of Treasury Regulation § 1.199-3 is

straightforward in less complex matters involving computer software,

such as the BATS Global and Direct Supply cases, we often found the

regulation to be deficient as applied to the facts in these cases. While we

recognize the challenges of drafting regulations regarding the quickly

evolving field of computer software, Treasury Regulation § 1.199-3

provisions regarding/relevant to computer software often read more as

a collection of parts forced together than as a seamless whole.

Inadequacies of Treasury Regulation § 1.199-3 will be addressed

throughout this Opinion, and largely fall into three categories:

(1) imprecisely written examples and provisions; (2) poor incorporation

of computer software provisions into the rest of the regulation; and

(3) inadequate descriptions and definitions, especially regarding

modular software.

Interpreting Treasury Regulation § 1.199-3

We find Treasury Regulation § 1.199-3 to be ambiguous with

respect to many of the questions presented in these cases. There are

several instances in which we must interpret ambiguities in the

regulation.

In matters of regulatory construction, the rules of statutory

construction apply. Caltex Oil Venture v. Commissioner, 138 T.C. 18, 34

(2012) (citing Estate of Schwartz v. Commissioner, 83 T.C. 943, 952–53

[*43] (1984)). The starting point for interpreting a statute or a

regulation is its plain and ordinary meaning unless that “would produce

absurd or unreasonable results.” Union Carbide Corp. & Subs. v.

Commissioner, 110 T.C. 375, 384 (1998). Furthermore, “we do not just

look at the words or phrases in isolation, but rather we read th[o]se

words and phrases in their context.” See Shea Homes, Inc. v.

Commissioner, 142 T.C. 60, 100 (2014) (citing FDA v. Brown &

Williamson Tobacco Corp., 529 U.S. 120, 133 (2000)), aff’d, 834 F.3d

1061 (9th Cir. 2016). That context includes the governing statute and

the entire scheme of regulations issued thereunder. See id. at 100–01.

Respondent argued for an extremely restrictive interpretation of

Treasury Regulation § 1.199-3 that would eliminate favorable treatment

under section 199 for all of Bloomberg’s software. Indeed, it seems that

the provision of access to almost any complex software would not qualify

for a section 199 deduction if we adopted respondent’s interpretation of

the regulation. Such a result cannot be reconciled with the statute.

Bloomberg did not argue that any part of Treasury Regulation

§ 1.199-3 is invalid, even after the release of Loper Bright Enterprises v.

Raimondo, 144 S. Ct. 2244 (2024) (overruling Chevron, U.S.A., Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)). While we

recognize that implementing section 199 without some administrative

guidance is not a tenable position, see Loper Bright Enters., 144 S. Ct. at

2262 (“[C]ourts may . . . seek aid from the interpretations of those

responsible for implementing particular statutes.”), we generally agree

with Bloomberg that respondent’s interpretation of Treasury Regulation

§ 1.199-3 is overly restrictive. However, we need not invalidate any

portion of Treasury Regulation § 1.199-3 at issue because our

interpretation of the regulation differs from respondent’s. Our reading

represents the best interpretation of both section 199 and the regulation

text itself. See Loper Bright Enters., 144 S. Ct. at 2266 (stating that if a

government agency’s interpretation of a statute “is not the best, it is not

permissible”).

In enacting section 199, Congress generally treated computer

software like any other QPP. See § 199(c)(5)(B) (defining “qualifying

production property” as including “any computer software”). In Treasury

Regulation § 1.199-3(i)(6), the Commissioner limited the disposition of

computer software by not including the provision of access to software

over the internet. As discussed supra OPINION Part III, the

Commissioner later added exceptions to this limitation that (in short)

treat gross receipts derived from the provision of access to software as

[*44] DPGR in certain instances. See Treas. Reg. § 1.199-3(i)(6)(iii).

However, the Commissioner failed to draft Treasury Regulation § 1.1993(i)(6) in an unambiguous manner.

Implicitly recognizing that Treasury Regulation § 1.199-3(i)(6) is

not clearly written, respondent argued that we should interpret

Treasury Regulation § 1.199-3(i)(6)(iii) in his favor because “exceptions

are narrowly construed in order to preserve the contours of the general

rule (in this case § 1.199-3(i)(6)(ii)). See Maracich v. Spears, 570 U.S. 48,

60 (2013); Commissioner v. Clark, 489 U.S. 726, 739 (1989).” But as we

have long recognized, we interpret regulations so as to avoid conflict

with the corresponding statute. See Austin v. Commissioner, 141 T.C.

551, 563 (2013) (“In the end, a regulation will be interpreted to avoid

conflict with a statute.” (citing Phillips Petroleum Co. & Affiliated Subs.

v. Commissioner, 97 T.C. 30, 35 (1991), aff’d, 70 F.3d 1282 (10th Cir.

1995) (unpublished table decision))); see also Liberty Glob., Inc. v.

Commissioner, No. 341-21, 161 T.C., slip op. at 20–21 (Nov. 8, 2023). The

statute Congress drafted shows that it intended for “any computer

software” (meeting other general requirements stated in the statute) to

qualify for the section 199 deduction. See § 199(c)(5)(B). The statute

itself draws no distinction between computer software used while

connected to the Internet or computer software used otherwise. The

distinction is drawn only in the Commissioner’s regulations. Thus, the

“general rule” that respondent asks us to preserve is a creature of the

Commissioner’s own making. In this circumstance, there is no warrant

for construing the exception to the general rule more narrowly than it is

written, and the cases respondent cites (which pertain to general rules

found in statutes) are not on point.

We decline respondent’s request to interpret in his favor the

ambiguity that he created. Throughout this Opinion we interpret the

ambiguous provisions of Treasury Regulation § 1.199-3 consistently

with the statute and congressional intent, rather than reward the

Commissioner for drafting an ambiguous regulation. The result we

reach is consistent with the best reading of both section 199 and

Treasury Regulation § 1.199-3.

Treatment of Gross Receipts as Derived from the

Disposition of Computer Software

We will address one ambiguous provision of Treasury Regulation

§ 1.199-3 in this OPINION Part VI.C. Other ambiguous provisions will

be addressed throughout the remainder of this Opinion.

[*45] The parties agree that the provision of online software is a service

pursuant to Treasury Regulation § 1.199-3(i)(6)(ii). If satisfied, Treasury

Regulation § 1.199-3(i)(6)(iii) does not on its face treat the provision of

online software as a disposition of property. Instead, that subsection

only “treat[s]” gross receipts from the provision of qualifying online

software “as being derived from the lease, rental, license, sale, exchange,

or other disposition of computer software.” Id.

There is a subtle but important distinction here: By its terms

Treasury Regulation § 1.199-3(i)(6)(iii) affects only gross receipts

derived from the provision of access to software. The regulation does not

explicitly treat the underlying provision of access to software as a

disposition of property (instead of a service) for purposes of section 199.

Our interpretation of Treasury Regulation § 1.199-3(i)(6)(iii) is

that, if it is satisfied, the provision of access to software is treated as a

disposition of property for purposes of the section 199 deduction. This

makes substantially more sense than merely treating the gross receipts

derived from such a transaction as being derived from a disposition of

property, while leaving the transaction itself a service. We note that

Treasury Regulation § 1.199-3(i)(1)(i) defines “[t]he term derived from

the lease, rental, license, sale, exchange, or other disposition . . . as, and

limited to, the gross receipts directly derived from the lease, rental,

license, sale, exchange, or other disposition of QPP.” In addition, certain

other general provisions in Treasury Regulations § 1.199-3 apply only

when there has been a disposition of property. Id. paras. (d)(1),

(i)(4)(i)(A). Our interpretation of Treasury Regulation § 1.199-3 is that

such general provisions were meant to apply in conjunction with the

specific rules for computer software in Treasury Regulation § 1.1993(i)(6). 30 Relevant general provisions of Treasury Regulation § 1.199-3

will be discussed further infra OPINION Part VII.B.6.g.

VII.

BPS Software Qualification Issue

In this OPINION Part VII, we will address whether gross receipts

derived from the provision of access to BPS software satisfy the

requirements of Treasury Regulation § 1.199-3(i)(6)(iii) and qualify as

DPGR. We rule that only gross receipts derived from the provision of

access to BPS analytical and graphing software qualify as DPGR. We

30 Though the parties differ on many specifics, they largely agree that general

provisions of Treasury Regulation § 1.199-3 apply or are relevant in these cases.

[*46] will determine the amounts of those gross receipts infra OPINION

Part X.

The Parties’ Use of Certain Evidence

The parties submitted lengthy briefs setting forth numerous

arguments regarding whether a portion of the BPS subscription fees

constitutes DPGR. We will address most of those arguments in depth in

this OPINION Part VII but will first generally address the parties’ use

of certain evidence.

Many of the parties’ arguments in these cases pertain to whether

BPS, BPS components, and/or other items (such as 3000 Xtra) are

mostly or entirely software products or services. The extensive record in

these cases has provided the parties with ample opportunities to

cherry-pick discrete descriptions from various documents that the

parties claim support their respective positions. We mostly found such

evidence to be of little relevance. There are numerous occasions in which

Bloomberg or another person/entity describes BPS or another item as

either “a service,” “software,” “a program,” or another such term simply

as a matter of convenience. In addition, a given person might consider

BPS (or 3000 Xtra) software to be “software as a service” (SaaS) and

describe it as either software or a service. 31

The Treasury Regulation § 1.199-3(i)(6)(iii) Threshold

Requirement

Before we address the third-party comparable exception, we must

determine whether Bloomberg derived gross receipts from providing

customers access to software MPGE in whole or in significant part by

31 As stated in Direct Supply I, 635 F. Supp. 3d at 694, SaaS

is a way of obtaining access to software. To access SaaS software, a

customer does not purchase the software on tangible media (such as a

disk) or download it to his or her own computer hardware over the

Internet. Instead, the customer accesses the software by connecting to

the SaaS provider’s servers over the Internet. At all times, the software

is hosted on the SaaS provider’s servers rather than on the customer’s

computer hardware.

(Citation omitted.)

Bloomberg and respondent dispute whether BPS software qualifies as SaaS;

Bloomberg claims it does and respondent claims it does not. We need not decide which

party is correct because BPS software is certainly close enough to SaaS that a given

person might easily consider BPS software to be SaaS. The same is true of 3000 Xtra

software.

[*47] Bloomberg within the United States for customers’ direct use

while connected to the internet or any other public or private

communications network. See Treas. Reg. § 1.199-3(i)(6)(iii). This is the

threshold requirement of Treasury Regulation § 1.199-3(i)(6)(iii)

(threshold requirement). Direct Supply I, 635 F. Supp. 3d at 695; see also

BATS Global I, 158 T.C. at 148 (holding that taxpayer “did not meet the

threshold requirements of Treasury Regulation § 1.199-3(i)(6)(iii) with

respect to the Fees” at issue).

The threshold requirement can be broken up into four elements:

(1) the taxpayer must derive gross receipts from providing customers

access to computer software, (2) the software must be MPGE in whole

or in significant part by the taxpayer within the United States,

(3) customers must directly use the software, and (4) customers must

use the software while connected to the internet or any other public or

private communications network. The parties made numerous

arguments relating to the threshold requirement. After we have

addressed each element (and whether BPS analytical and graphing

software can be considered alone), we will address more specific

arguments.

Element One: Deriving Gross Receipts

Providing Customers with Access to Software

from

The parties disagree whether Bloomberg derived any gross

receipts from providing customers with access to BPS software. We

conclude that (1) Bloomberg derived a portion of the BPS subscription

fees from providing customers with access to BPS analytical and

graphing software and (2) Bloomberg did not derive fees from the

provision of access to other software.

BPS Subscription Agreements entered into in the years at issue

identified Bloomberg as a “service provider” and the customer as a

“service recipient.” The agreements read that Bloomberg would provide

“services described in” the agreements and that the service recipient

“subscribe[d] to such services in accordance with this Agreement.” The

agreements provided that the services consist of “a nonexclusive and

nontransferable right to use the BLOOMBERG PROFESSIONAL

service information, data, software, and equipment . . . in accordance

with this Agreement.” BPS Subscription Agreements from prior years

that had automatically renewed were in effect in the years at issue and

provided that the services “consist of a nonexclusive and

nontransferable license and lease to use the BLOOMBERG

[*48] PROFESSIONAL service software, data and equipment . . . in

accordance with this Agreement.” These BPS Subscription Agreements

generally favor Bloomberg’s position that portions of the BPS

subscription fees were derived from the provision of access to software.

Although the BPS Subscription Agreements do not set forth specific

portions of the BPS subscription fees attributable to software, they

identify the provision of access to software as one of the services being

provided by Bloomberg. 32

Bloomberg built BPS software in house because it viewed BPS

software as a strategic advantage that it wanted to maintain control

over. Bloomberg employed thousands of people in its R&D department,

including 1,500 software programmers as of December 2008. Such

programmers were vital in maintaining and improving BPS software;

they allowed Bloomberg to frequently add new functions or enhance

existing functions in response to user suggestions or advances by

competitors. Such updates (and associated user training) helped to

(1) embed BPS use into users’ daily routines and (2) fend off competitive

threats to Bloomberg’s market share. In the years at issue the number

of employees in Bloomberg’s R&D department increased by about 35%,

significantly expanding its software programming capabilities even at a

time when the economy was generally poor. Bloomberg’s actions to

strengthen its R&D department (especially in difficult economic times)

indicate that it viewed software as integral to improving BPS and

increasing BPS revenue.

While the facts discussed in the prior two paragraphs favor

Bloomberg’s position with respect to software in general, facts regarding

many of the specific BPS software components do not favor Bloomberg.

The evidence shows that, much as in BATS Global I and Direct Supply I

and II, significant portions of BPS software merely enabled the provision

of Bloomberg’s financial information and communication services. We

will proceed to discuss various BPS software components.

Collection and Search Software

A portion of BPS software enabled BPS to collect, categorize, and

store vast amounts of financial information. Such software likewise

32 Obviously, we would not accept unsupported statements in agreements

between a taxpayer and its customers as satisfying the “derived fees from providing

customers access to computer software” element. In these cases, other evidence

confirms that portions of the BPS subscription fees were derived from the provision of

access to software.

[*49] enabled users to search, sort, and generally access that financial

information, as well as receive updated information throughout the day.

Bloomberg argued that “BPS software helped [users] make sense of an

otherwise unmanageable amount of information.” That is true, but the

collection and search software did this only by facilitating/enabling

Bloomberg’s financial information service. Customers were not paying

for access to the BPS collection and search software that they used to

find and view financial information; they were paying for the provision

of the underlying financial information that such software enabled.

BPS collection and search software is similar to software at issue

in BATS Global I that enabled BATS’s exchanges to operate. Discussing

the transaction fees in that case, we stated:

The regulations provide an analogous example of a

company that uses computer software to provide online

services to customers. Example 2 describes M, an internet

auction company that produces computer software within

the United States that enables its customers to participate

in internet auctions for a fee. Treas. Reg. § 1.199-3(i)(6)(v)

(example 2). The example does not elaborate on how M’s

auction software enabled customers to participate in

internet auctions or how M’s customers participated in

internet auctions; it focuses only on the fact that M’s

activities constituted the provision of online services. The

example concludes that M’s gross receipts derived from the

internet auction services are non-DPGR because Treasury

Regulation § 1.199-3(i)(6)(ii) excludes gross receipts

derived from online services from gross receipts derived

from a disposition of computer software.

[BATS’s] transaction fees are analogous to

Example 2. Both [BATS] and M, the company in the

example, charged their customers fees for participation in

electronic markets and facilitated this service with

computer software. [BATS’s] provision of trade execution

services was an online service within the meaning of

Treasury Regulation § 1.199-3(i)(6)(ii).

BATS Global I, 158 T.C. at 146. We also cited Treasury Regulation

§ 1.199-3(i)(6)(v) (example 1), which reads:

[*50] L is a bank and produces computer software within the

United States that enables its customers to receive online

banking services for a fee. Under paragraph (i)(6)(ii) of this

section, gross receipts derived from online banking services

are attributable to a service and do not constitute gross

receipts derived from a lease, rental, license, sale,

exchange, or other disposition of computer software.

Therefore, L’s gross receipts derived from the online

banking services are non-DPGR.

BATS Global I, 158 T.C. at 147. We found that BATS was “more like the

companies described in regulatory Examples 1 and 2, which produce

computer software that they use as part of their business.” Id. Similarly,

Bloomberg provided a financial information service as part of its

business that BPS collection and search software enabled.

Bloomberg argued that Examples 1 and 2 in Treasury Regulation

§ 1.199-3(i)(6)(v) are inapplicable in these cases, stating:

Examples 1 and 2 illustrate the “online services” rule [in

Treasury Regulation § 1.199-3(i)(6)(ii)]. But those

examples plainly do not address the online software

exceptions [in Treasury Regulation § 1.199-3(i)(6)(iii)].

They do not state, for example, that the bank or auction

company charges fees for access to their software (such as

a subscription fee or license, as with the BPS), that their

customers directly use it, or that third parties license

substantially identical software provided by disk or

download. Thus, those examples do not address the online

software exception of § 1.199-3(i)(6)(iii).

Importantly, Examples 1 and 2 illustrate a point the

IRS overlooks: what the taxpayer charges money for

matters. Respondent argues that “use of online software by

customers is insufficient to satisfy the threshold

requirement.” Fair enough. What matters is whether the

vendor “derives gross receipts from providing access” to the

software for that use. Examples 1 and 2 state explicitly

that gross receipts from services do not qualify. But if the

facts were different, the results would differ too. If a bank

charged fees for access to domestically-produced online

banking software (satisfying the online software

exceptions’ threshold requirement), and if competing banks

[*51] licensed substantially identical software delivered by disk

or download, receipts from online banking software would

qualify under (iii). Likewise, in Example 2, if the online

auction company charged customers fees to access and use

American-made auction software (rather than charging

commissions on transactions, as is often the case), and if

third parties licensed competing auction software delivered

by disk or download, the results would be different too.

(Citations of the record omitted.) Bloomberg goes on to argue that it

derived gross receipts from the provision of access to software.

Bloomberg is correct that Examples 1 and 2 in Treasury

Regulation § 1.199-3(i)(6)(v) could have been more thorough by

discussing Treasury Regulation § 1.199-3(i)(6)(iii). However, those

examples clearly show that when software simply enables or facilitates

a service such as online banking, receipts are attributable to the

provision of that service rather than the provision of access to software.

BPS collection and search software has one overarching purpose:

to enable the provision of Bloomberg’s financial information service.

Customers did not pay Bloomberg for access to such software. Rather,

customers paid for the financial information service that the software

enabled. Accordingly, we rule that Bloomberg did not derive gross

receipts from the provision of access to BPS collection and search

software.

Email and IM Software

A portion of BPS software enabled BPS users to send and receive

emails and instant messages through BPS. This allowed users to easily

share data, graphs, news, and other information, as well as to find

trading partners. Email and IM software helped to create something of

a marketplace and community on BPS that attracted new users and

retained existing ones.

Treasury Regulation § 1.199-3(i)(6)(ii) provides that “[g]ross

receipts derived from . . . telecommunication services . . . do not

constitute gross receipts derived from a lease, rental, license, sale,

exchange, or other disposition of computer software.” In BATS Global I,

we cited this and Treasury Regulation § 1.199-3(i)(6)(v) (example 3) in

support of our conclusion that BATS’s logical port fees were for

communications services, not the provision of access to software.

Example 3 reads:

[*52] N provides telephone services, voicemail services, and

e-mail services. N produces computer software within the

United States that runs all of these services. Under

paragraph (i)(6)(ii) of this section, gross receipts derived

from telephone and related telecommunication services are

attributable to a service and do not constitute gross

receipts derived from a lease, rental, license, sale,

exchange, or other disposition of computer software.

Therefore, N’s gross receipts derived from the telephone

and other telecommunication services are non-DPGR.

Bloomberg argued that “BPS communications functions were

software functions,” comparing them to Microsoft Outlook. Bloomberg

described Treasury Regulation § 1.199-3(i)(6)(v) (example 3) as one of

several examples where, unlike the case here, companies

collect fees for rendering services online and use software

merely to enable customers to receive those services. But

these are cases where software facilitates the provision of

a service and where there is no third party comparable.

And, critically, these examples concern situations where

companies derive gross receipts from online services under

paragraph (i)(6)(ii) . . . and not, as in the case of the BPS,

from providing access to software for a customer’s direct

use.

(Citation omitted.)

Like other examples in Treasury Regulation § 1.199-3(i)(6)(v),

Example 3 could have been more thorough by discussing Treasury

Regulation § 1.199-3(i)(6)(iii). However, the example clearly stands for

the general proposition that when a company produces software to run

communication services, gross receipts derived are attributable to the

communication services rather than the software that enabled those

services. The facts of these cases indicate that the general proposition

should apply. There is no indication that the BPS email and IM software

had any value separate from Bloomberg’s communication services that

the software enabled. We rule that Bloomberg did not derive gross

receipts from the provision of access to email and IM software. Rather,

any gross receipts attributable to email and instant messaging were

derived from Bloomberg’s provision of communication services.

[*53]

Analytical and Graphing Software

A portion of BPS software enabled BPS users to analyze,

manipulate, and model the financial information that was available

through BPS. This portion of software included tools for graphing,

calculating, managing portfolio risk, etc. Unlike other BPS software

discussed in this OPINION Part VII.B.1, the analytical and graphing

software did not merely enable or facilitate the provision of Bloomberg’s

financial information or any other service. Considering the facts and

law, we rule that Bloomberg derived a portion of the BPS subscription

fees for providing customers with access to the analytical and graphing

software.

While other BPS software enabled or facilitated Bloomberg’s

financial information or communication services, BPS analytical and

graphing software did not. Instead, it helped users to draw their own

insights from financial information. Whereas users had no control over

the underlying financial information that they could access through

BPS, users had a high amount of control over how they could analyze

and/or visualize that information. Indeed, users could use analytical and

graphing software to overwrite BPS-supplied data with other values to

test assumptions or hypotheses. Users could also create bespoke visual

representations using the extensive number of graphing functions and

tools that BPS provided.

Largely because of the rise of the internet and other information

technologies, by the years at issue the amount of financial information

available to financial professionals (much of it for free) was enormous.

BPS analytical and graphing software helped those users to find signals

in the noise; to manipulate, analyze, model, and generally make data

and news actionable. In the fast-moving business of finance, such

software (especially operating in conjunction with data and news 33) was

valuable, which partially explains why Bloomberg could charge well

over $1,000 per month for each BPS subscription.

Testimony also showed that BPS analytical and graphing

software was valuable to BPS customers. Bloomberg’s employees

credibly testified to the importance of analytical and graphing software

in obtaining new customers and retaining existing customers. One

33 While BPS analytical and graphing software operated in conjunction with

financial information, it did not enable the provision of Bloomberg’s financial

information service (as BPS collection and search software did). Respondent makes

many arguments related to this point, which we address infra.

[*54] employee testified that “what we find is the more that [customers]

engage with [BPS], the more functions[34] that they find value in, the

more that they become loyal to Bloomberg as a product.” Such testimony

was supported by BPS users. One BPS user testified that BPS was

“essential” in his everyday work, going on to explain the importance of

various BPS software tools, including graphing, computational, and

other analytical functions. The user testified that certain analytical

tools were available outside of BPS but using those tools “was far less

convenient” than using similar BPS tools because on BPS “it was kind

of all right there at my fingertips.”

was

Respondent argued that BPS analytical and graphing software

part of [Bloomberg’s financial] information service;

customers were not given [the] software to use as they saw

fit without the need for constant other services from

[Bloomberg]. Customers’ use of these functions was

integrated with, and reliant upon, [Bloomberg’s] ongoing

service of providing data, news, and other content through

the BPS.

Respondent further claimed that BPS analytical and graphing software

was “useless” without Bloomberg’s financial information service.

However, nothing in Treasury Regulation § 1.199-3 provides that gross

receipts cannot be derived from the provision of software if that software

merely operates in conjunction with other services.

Respondent attempted to draw inferences from regulatory

examples that pertain to software that “enables” or “runs” a service. See

Treas. Reg. § 1.199-3(i)(6)(v) (examples 1–3). However, BPS analytical

and graphing software did not enable or run a service. Rather, it

operated in conjunction with Bloomberg’s financial information service.

Furthermore, Example 6 in Treasury Regulation § 1.199-3(i)(6)(v) favors

Bloomberg. Example 6 reads:

Q produces payroll management computer software within

the United States. For a fee, Q provides customers access

to the payroll management computer software for the

customers’ direct use while connected to the Internet. This

34 Although some functions did not relate to BPS analytical and graphing

software, this and similar testimony largely pertained to customers’ use of BPS

analytical and graphing software.

[*55] is Q’s sole method of providing access to its payroll

management computer software to customers. In

conjunction with the payroll management computer

software, Q provides storage of customers’ data and

telephone support. One of Q’s competitors, R, derives, on a

regular and ongoing basis in its business, gross receipts

from the sale to customers of R’s substantially identical

payroll management software that has been affixed to a

compact disc as well as from the sale to customers of R’s

substantially identical payroll management software that

customers have downloaded from the Internet. Under

paragraph (i)(6)(iii)(B) of this section, Q’s gross receipts

derived from providing access to its payroll management

online software will be treated as derived from the lease,

rental, license, sale, exchange, or other disposition of

computer software and are DPGR (assuming all the other

requirements of this section are met). However, Q’s gross

receipts derived from the fees that are properly allocable to

the storage of customers’ data and telephone support are

non-DPGR.

(Emphasis added.) The software in Example 6 runs “[i]n conjunction

with” the service of data storage. While not directly on point, this

example is certainly more analogous to the BPS analytical and graphing

software that runs in conjunction with Bloomberg’s financial

information service than the examples that respondent points to.

We rule that Bloomberg derived gross receipts from providing

customers with access to BPS analytical and graphing software. The

amounts of the gross receipts so derived will be addressed infra

OPINION Part X.

Other BPS Software

BPS included other, less significant software, such as (1) feed

handler software that converted data from external sources into a

common format, (2) price scraping software that extracted information

from user emails and instant messages, and (3) software that allowed

users to arrange tiles on their launch screens (launch screen software).

We rule that Bloomberg did not derive any gross receipts from the

provision of access to such software.

[*56] Bloomberg admits that the feed handler software does not satisfy

the Treasury Regulation § 1.199-3(i)(6)(iii) threshold requirement.

The price scraping software enabled and facilitated the delivery

of certain pricing data, which was part of Bloomberg’s financial

information service. The price scraping software is akin to the BPS

collection and search software that we have already addressed at length.

For the same reasons discussed supra OPINION Part VII.B.1.a, we rule

Bloomberg did not derive gross receipts from the provision of access to

the price scraping software.

Whether Bloomberg derived gross receipts from the launch screen

software is a close call. On one hand, the software helped users to easily

see and access data and news that they used most often. In that sense,

the software facilitated Bloomberg’s financial information service.

However, the software also allowed users to customize their launch

screens and to see and access analytical and graphing functions that

they commonly used. Ultimately, the launch screen software is a tiny

portion of BPS software; analysis in both parties’ allocation issue expert

reports (discussed infra OPINION Part IX) indicates that less than 1%

of R&D employee hours worked were on launch screen software. We do

not believe that any portion of the BPS subscription fees is allocable to

Bloomberg’s provision of access to launch screen software, which was

incidental to the substantive BPS features that customers paid for.

Conclusion Regarding Element One

We rule that only BPS analytical and graphing software satisfies

the first element of the threshold requirement. Before addressing the

other elements of the threshold requirement, we will address whether

BPS analytical and graphing software can be considered alone for

purposes of the threshold requirement and third-party comparable

exception.

Considering BPS Analytical and Graphing Software

Alone

BPS is a modular software system, meaning that it “comprise[s]

numerous software components, each of which performs independent

functions, but all of which operate as a single system.” Pearl Invs., LLC

v. Standard I/O, Inc., 257 F. Supp. 2d 326, 334 (D. Me. 2003). Treasury

Regulation § 1.199-3 does not precisely describe how to evaluate

modular software system components. Considering the facts and law,

we rule that BPS analytical and graphing software may be considered

[*57] alone for purposes of the threshold requirement and third-party

comparable exception.

The computer software provisions found in Treasury Regulation

§ 1.199-3(i)(6) do not explicitly provide for the division of software

systems into separate components. However, they do provide that only

gross receipts derived from the disposition of, or provision of access to,

software may qualify as DPGR. See Treas. Reg. § 1.199-3(i)(6)(i), (iii). 35

In general, if a taxpayer derives gross receipts from the provision of

access to software, Treasury Regulation § 1.199-3(i)(6)(iii)(B) directs one

to compare “the taxpayer’s online software” to software which a third

party derived gross receipts from the disposition of. Neither Treasury

Regulation § 1.199-3(i)(6)(iii) nor (iii)(B) clearly states whether the

comparison pertains to the entirety of the taxpayer’s online software or

only the portion of the online software from which the taxpayer derived

gross receipts.

On the basis of the definition of “computer software” in Treasury

Regulation § 1.199-3(j)(3)(i), we rule that the comparison pertains only

to the portion of the online software from which a taxpayer derives gross

receipts. Treasury Regulation § 1.199-3(j)(3)(i) reads in part:

The term computer software means any program or routine

or any sequence of machine-readable code that is designed

to cause a computer to perform a desired function or set of

functions, and the documentation required to describe and

maintain that program or routine. Thus, for example, an

electronic book available online or for download is not

computer software. For purposes of this paragraph (j)(3),

computer software also includes the machine-readable

code for video games and similar programs, for equipment

that is an integral part of other property, and for

typewriters, calculators, adding and accounting machines,

copiers, duplicating equipment, and similar equipment,

35 As previously stated, Bloomberg did not argue that a disposition of software

pursuant to Treasury Regulation § 1.199-3(i)(6)(i) occurred, only that it derived gross

receipts from the provision of access to a portion of the BPS software. However,

Treasury Regulation § 1.199-3(i)(6)(i) is still relevant. Treasury Regulation § 1.1993(i)(6)(iii) treats gross receipts that satisfy the threshold requirement and third-party

comparable exception “as being derived from the lease, rental, license, sale, exchange,

or other disposition of computer software.” Treasury Regulation § 1.199-3(i)(6)(i) then

provides that “DPGR include the gross receipts of the taxpayer that are derived from

the lease, rental, license, sale, exchange, or other disposition of computer software

MPGE by the taxpayer in whole or in significant part within the United States.”

[*58] regardless of whether the code is designed to operate on a

computer . . . . Computer programs of all classes, for

example, operating systems, executive systems, monitors,

compilers and translators, assembly routines, and utility

programs, as well as application programs, are included.

This is an expansive definition. “[C]omputer software” is not limited to

an entire program but may also include a “routine or any sequence” of

“code . . . designed to cause a computer to perform a desired function or

set of functions.” Treas. Reg. § 1.199-3(j)(3)(i) (emphasis added).

The evidence shows that BPS analytical and graphing software is

a set of routines or sequences of code that cause computers to perform

desired functions. Thus, it is computer software and, pursuant to the

most straightforward reading of Treasury Regulation § 1.199-3(i)(6)(iii),

especially (iii)(B), may be considered alone for purposes of the threshold

requirement and third-party comparable exception.

Element Two: Software MPGE in Whole or in

Significant Part Within the U.S.

The evidence in these cases shows that BPS software as a whole

was MPGE in significant part within the United States. Respondent has

not argued otherwise in his briefs. The evidence also strongly suggests

that, like BPS software as a whole, BPS analytical and graphing

software was MPGE in significant part within the United States. BPS

analytical and graphing software therefore satisfies the second element

of the threshold requirement.

Element Three: Direct Use of Software by Customers

Treasury Regulation § 1.199-3(i)(6)(iii) does not define “direct

use” or specify the degree of direct use and/or access required to satisfy

the threshold requirement. In BATS Global I and Direct Supply I and II,

questions of “direct use” were addressed alongside other elements of

Treasury Regulation § 1.199-3(i)(6)(ii) and (iii), especially whether the

taxpayers derived fees from providing their customers with access to

software or other services. For example, in BATS Global I, 158 T.C.

at 153, we ruled that all fees “at issue . . . were derived from services

[BATS] performed for customers in the course of operating its

Exchanges. The Fees were not derived from providing customers access

to computer software for their direct use, and they therefore do not meet

the requirements of Treasury Regulation § 1.199-3(i)(6)(iii).” Other

quotations regarding direct use from BATS Global I and Direct Supply I

[*59] and II are found supra OPINION Part V. Those opinions do not

squarely address the “direct use” issue presented in Bloomberg’s cases

in which we have already ruled that Bloomberg derived fees from

providing BPS users with access to analytical and graphing software.

Considering the facts, we rule that BPS customers directly used

BPS analytical and graphing software. BPS could perform thousands of

analytical and graphing functions when it was directed to by a BPS user.

The BPS hardware and software architecture discussed supra FoF Part

III shows that (and how) BPS produced results in response to customer

prompts. Treasury Regulation § 1.199-3(j)(3)(i) provides that “[t]he term

computer software means any program or routine or any sequence of

machine-readable code that is designed to cause a computer to perform

a desired function or set of functions.” BPS customers caused BPS to

perform functions by using the analytical and graphing software. This

was not merely BPS customers accessing software to use a service; it

was the direct use of software by customers. Cf. Direct Supply I, 635 F.

Supp. 3d at 696 (“[T]he mere fact that customers access Direct Supply’s

online software while using [its] services does not convert the services

into a provision of software for the customers’ direct use.” (citing BATS

Global I)).

BPS customers directly used BPS analytical and graphing

software to perform desired functions. BPS analytical and graphing

software therefore satisfies the third element of the threshold

requirement.

Element Four: Use of Software While Connected to

the Internet or Any Other Public or Private

Communications Network

There is no dispute that customers used BPS while connected to

BPS via the Internet or a dedicated private line. We have already ruled

that customers used BPS analytical and graphing software. This

element is satisfied.

Other Arguments

Requirement

the

Threshold

The parties (mainly respondent) made numerous arguments

related to the threshold requirement, many of which we have already

addressed. Several of respondent’s arguments were similar to one

another and/or pertained to portions of Treasury Regulation § 1.199-3

outside of Treasury Regulation § 1.199-3(i)(6)(iii).

[*60]

Bloomberg’s APA Request

Respondent noted that, “[i]n its APA Request, [Bloomberg]

characterized the BPS as ‘an electronic information service that

combines news, market data, analytics, email and order routing into a

single interactive package.’” Respondent argued that because

Bloomberg’s software was embedded in BPS, Bloomberg did not derive

receipts from any distinct software product. We disagree.

Bloomberg’s APA request shows the high value that Bloomberg

placed on its software. Bloomberg assigned most BPS profits to

Technology IP, which Bloomberg defined as its “software intangible

asset” and later described as “its single most valuable intangible asset

without which the business would not exist.” Respondent later accepted

most of the premises and methods in Bloomberg’s APA request, though

respondent proposed assigning an even higher percentage of profits to

Bloomberg’s Technology IP. 36 Though respondent raised Bloomberg’s

APA request with respect to the qualification issue in these cases, the

APA request favors Bloomberg’s position.

Massachusetts Sales Tax Returns

Respondent argued that Bloomberg’s Massachusetts sales tax

returns are inconsistent with Bloomberg’s claim that it derived receipts

from the provision of access to software. Massachusetts law in the years

at issue imposed state sales tax on fees charged for the use of software

on remote servers. See 830 Mass. Code Regs. 64H.1.3(3)(a), (14)(a)

(2010). 830 CMR 64H.1.3(14)(a) (2010) provides, in part:

Generally, charges for the access or use of software on a

remote server are subject to tax. However, where there is

no charge for the use of the software and the object of the

transaction is acquiring a good or service other than the

use of the software, sales or use tax does not apply.

Bloomberg took the position that gross receipts from BPS and OMS

subscription fees were exempt from Massachusetts sales tax.

Accordingly, Bloomberg did not collect, report, or remit any sales tax to

Massachusetts with respect to gross receipts from BPS and OMS

36 Because Bloomberg’s software was largely created within the United States,

respondent’s change led to a higher percentage of Bloomberg’s profits’ being subject to

U.S. income tax. Increased profits subject to U.S. income tax represented another

benefit that the country gained from Bloomberg’s domestic production of BPS software.

[*61] subscription fees during the years at issue. This comported with

Bloomberg’s Massachusetts (and New York) state income tax returns for

the years at issue, on which Bloomberg reported its principal product or

services as information services.

Respondent argued that Bloomberg’s Massachusetts sales tax

position makes it “clear that [Bloomberg] reported its gross receipts as

being derived from information services and not from the provision of

software . . . . This shows that even [Bloomberg] did not believe that any

of its fees were derived from disposing of software but is merely taking

an incorrect position herein to gain large section 199 deductions for its

partners.”

Bloomberg argued that respondent failed to prove exactly why

Bloomberg took the Massachusetts sales tax position that it did.

However, Bloomberg made no serious attempt to explain its

Massachusetts sales tax position. Instead, Bloomberg simply argued

that its Massachusetts sales tax position is irrelevant. For example,

Bloomberg pointed to our statement in Maines v. Commissioner, 144

T.C. 123, 132 (2015):

Our precedents establish that a particular label given to a

legal relationship or transaction under state law is not

necessarily controlling for federal tax purposes. Federal

tax law looks instead to the substance (rather than the

form) of the legal interests and relationships established by

state law.

(Citation omitted.)

Bloomberg’s Massachusetts sales tax returns on their face appear

to be inconsistent with Bloomberg’s federal returns on which it claimed

sizable amounts of DPGR and section 199 deductions. Clearly,

Bloomberg was in a better position to explain such inconsistencies,

which it did not do. However, we decline to base our decision on

Bloomberg’s Massachusetts state sales tax position. Though we have

occasionally considered state sales tax return positions as relevant

evidence, see Lambaiso v. Commissioner, T.C. Memo. 1999-343, 1999

Tax Ct. Memo LEXIS 396, at *8–9; Epic Metals Corp. & Subs v.

Commissioner, T.C. Memo. 1984-322, 1984 Tax Ct. Memo. LEXIS 351,

at *6, *18 (1984), aff’d, 770 F.2d 1069 (3d Cir. 1985) (unpublished table

decision), no precedent obligates us to strictly follow such return

positions. In these cases, the weight of the evidence shows that

[*62] Bloomberg derived gross receipts from providing customers access

to BPS analytical and graphing software. To the extent Bloomberg’s

Massachusetts sales tax returns are inconsistent with this, the evidence

shows that they are incorrect.

Foreign Tax Withholding Letters

Respondent argued that Bloomberg’s letters to foreign customers

regarding tax withholding obligations show Bloomberg considered BPS

a financial information service. Respondent focused on Bloomberg’s

letters to BPS customers in Singapore, which referenced “a waiver of

withholding tax on end-user subscriptions to online financial

information providers such as Bloomberg.” 37 These letters cited a speech

from the Singapore Minister for Finance in support of the waiver. See

Lee Hsien Loong, Deputy Prime Minister and Minister for Finance,

Speech to the Parliament of Singapore: Budget Statement 2003: Seizing

Opportunity in Uncertainty (Feb. 28, 2003) (transcript available at

https://www.nas.gov.sg/archivesonline/data/pdfdoc/20030228_Budget

.pdf). In the speech, the Minister for Finance addressed a “[w]ithholding

[t]ax [e]xemption for [p]rovision of [i]nformation and [d]igitised [g]oods.”

Id. For purposes of the Singapore withholding tax exemption, Singapore

defined “information” as “(a) information comprised in any newspaper

or magazine article or report, including financial and business data

(such as foreign exchange, stock, and property data) and other

proprietary data; and (b) information obtained solely for research

purposes.” Income Tax (Exemption of Royalties and Other Payments for

Economic and Technological Development) (No. 2) Notification 2003.

Singapore defined “digitised goods” as “text, images, or sound that are

transferred through any handphone, fixed-line phone, cable network,

satellite, the Internet, or other form of electronic transmission, but does

not include software.” Id.

weak:

Bloomberg’s response to respondent’s argument was short and

Interpreted generously, this is just another label-based

argument like those above, and the Court should reject it

accordingly. Respondent cites no authority for any

proposition related to its argument, whether as to the tax

laws in the relevant jurisdiction, as to how to interpret the

37 Respondent did not allege that the foreign withholding letters were an

attempt by Bloomberg to whipsaw taxing authorities or otherwise reduce its overall

tax obligations.

[*63] letters in light of the law, or even how those foreign laws

relate in any respect to Section 199.

The second sentence is incorrect in that respondent did cite authority

from Singapore that does not favor Bloomberg’s position. Bloomberg did

not cite any foreign authority in favor of its position.

Like the Massachusetts sales tax returns discussed supra

OPINION Part VII.B.6.b, the foreign withholding letters favor

respondent’s position. However, the weight of the evidence still shows

that Bloomberg derived receipts from providing access to BPS analytical

and graphing software. To the extent the foreign withholding letters

issued by Bloomberg are inconsistent with this, the evidence shows that

they are incorrect.

Federal Returns

On Bloomberg’s federal returns for the years at issue, it reported

its principal business activity as business services and its principal

product or services as information services. Respondent argued that

Bloomberg’s identification of its business and principal product as a

service, rather than being related to software, undermines Bloomberg’s

position in these cases. We disagree. The provision of access to software

is a service under federal tax law. See Treas. Reg. § 1.199-3(i)(6)(ii).

Though the provision of access to software may be treated as a

disposition of software if Treasury Regulation § 1.199-3(i)(6)(iii) is

satisfied, see discussion supra OPINION Part VI.C, that treatment is

only for purposes of section 199. There is nothing inconsistent with

Bloomberg’s identification of its business and principal product as a

service and its claimed section 199 deductions.

McKinsey Survey and Customer Testimony

Respondent argued that the McKinsey Survey and BPS customer

testimony showed that “[c]ustomers used the BPS for the provision of

news, data, communications, charting, and to some extent, analytics.”

We have already discussed customer testimony supra OPINION Part

VII.B.1.c. Regarding the McKinsey Survey, we find that it does not favor

respondent’s position. The McKinsey Survey generally showed that

data, news, and analytical and graphing software were all important

parts of BPS.

[*64]

Data Center Connection Requirement

Like his argument about BPS users requiring “constant other

services from” Bloomberg, addressed supra OPINION Part VII.B.1.c,

respondent argued that

it is instructive to inquire whether the activities for which

customers paid a fee in question could have been

accomplished by software delivered offline (on a disk or by

download). If there is no way to accomplish [an] activity

without connectivity, it is a good indicator that customers

received nonqualifying services and the transaction is not

described in section 1.199-3(i)(6)(iii).

We reiterate that there is no requirement in Treasury Regulation

§ 1.199-3(i)(6)(iii) that a customer not receive any nonqualifying services

in exchange for a fee paid in part for access to software. Indeed, Treasury

Regulation § 1.199-3(i)(6)(v), Example 6, supports the opposite

proposition and provides for an allocation of a fee between access to

software and nonqualifying services. We disagree with respondent’s

position.

Treasury Regulation § 1.199-3(d)(1), (i)(1)(i),

and (i)(4)(i)(A)

Respondent argued that Bloomberg “attempt[ed] to shave away

its services of providing non-software items . . . in order to attribute

gross receipts to the software that enabled its financial information

services.” In addition to rehashing some of his other arguments,

respondent made arguments based on Treasury Regulation § 1.1993(d)(1), (i)(1)(i), and (i)(4)(i)(A). Respondent claimed that those

regulations do not allow Bloomberg to “allocate a portion of the gross

receipts attributable to its nonqualifying financial information services

to the software that enabled those services.” Bloomberg made various

counterarguments and stated that “[b]ecause Bloomberg provided the

BPS’s direct-use BPS software together with non-qualifying components

(i.e., data, news, and helpdesk support services) all for a single, nonitemized subscription fee, an allocation to DPGR and non-DPGR must

be made.”

The parties’ arguments regarding Treasury Regulation § 1.1993(d)(1), (i)(1)(i), and (i)(4)(i)(A) were somewhat vague, and we will

discuss and quote many of them at length in this OPINION Part

VII.B.6.g.

[*65]

Treasury Regulation § 1.199-3(i)(1)(i)

Treasury Regulation § 1.199-3(i)(1)(i) reads:

Definition. The term derived from the lease, rental, license,

sale, exchange, or other disposition is defined as, and

limited to, the gross receipts directly derived from the

lease, rental, license, sale, exchange, or other disposition of

QPP, a qualified film, or utilities, even if the taxpayer has

already recognized gross receipts from a previous lease,

rental, license, sale, exchange, or other disposition of the

same QPP, qualified film, or utilities. Applicable Federal

income tax principles apply to determine whether a

transaction is, in substance, a lease, rental, license, sale,

exchange, or other disposition, whether it is a service, or

whether it is some combination thereof.

Respondent claimed that BPS software enabled Bloomberg’s

financial information and communications services and that no portion

of the BPS subscription fees can be allocated to BPS software pursuant

to Treasury Regulation § 1.199-3(i)(1)(i). Respondent argued:

Certainly, taxpayers in the banking industry,

internet auction industry, and telecommunications

industry can hire paid experts to assign value to the

portion of their gross receipts attributable to the software

that enables their services (as [Bloomberg] did). Doing this,

however, would be contrary to the rule in section 1.1993(i)(1)(i) that taxpayers must derive gross receipts directly

from a disposition, and to how section 1.199-3(i)(6)(ii) and

(iii) are intended to work as illustrated by [examples in

Treasury Regulation § 1.199-3(i)(6)(v)]. If taxpayers do not

directly derive their gross receipts from providing access to

online software . . . they simply do not qualify for the

narrow Exceptions and their gross receipts are non-DPGR

for failure to satisfy the statutory disposition requirement.

Bloomberg disputes respondent’s position and notes that the last

sentence of Treasury Regulation § 1.199-3(i)(1)(i) shows that

transactions can comprise both qualifying and nonqualifying elements.

We disagree with respondent’s argument. First, as discussed

supra OPINION Part VII.B.1.c, BPS analytical and graphing software

did not merely enable Bloomberg’s financial information service.

[*66] Instead, that software allowed users to draw their own insights

from financial information.

Second, respondent asserted that Bloomberg must “directly

derive” gross receipts from the provision of access to software. However,

Treasury Regulation § 1.199-3(i)(6)(iii) uses only the terms “derives” and

“derived.” Similarly, Treasury Regulation § 1.199-3(i)(6)(i) uses only the

term “derived,” rather than “directly derived.” Furthermore, Congress

defined “domestic production gross receipts” as “the gross receipts of the

taxpayer which are derived from . . . any lease, rental, license, sale,

exchange, or other disposition of” QPP. § 199(c)(4)(A). The

Commissioner then added “directly” into the definition of “derived from

the lease, rental, license, sale, exchange, or other disposition” in Treasury

Regulation § 1.199-3(i)(1)(i). Respondent now ascribes significant

importance to that addition. Surely though, the word “directly” cannot

be that important if Congress omitted it from section 199(c)(4)(A) and

the Commissioner omitted it from Treasury Regulation § 1.199-3(i)(6),

which provides specific rules for computer software. 38 We rule that

Bloomberg derived gross receipts from the provision of access to the

analytical and graphing software, as part of the BPS subscription fees.

We also agree with Bloomberg that the last sentence of Treasury

Regulation § 1.199-3(i)(1)(i) favors Bloomberg’s position. That sentence

and Treasury Regulation § 1.199-3(d)(1)(ii) and (i)(4)(i)(A) (discussed

infra OPINION Part VII.B.6.g.ii and iii) all support the position that

transactions can be split into qualifying and nonqualifying elements for

purposes of section 199.

ii.

Treasury Regulation § 1.199-3(d)(1)

Treasury Regulation § 1.199-3(d) is titled “[d]etermining domestic

production gross receipts.” Treasury Regulation § 1.199-3(d)(1) reads:

In general. For purposes of §§ 1.199-1 through 1.199-9, a

taxpayer determines, using any reasonable method that is

satisfactory to the Secretary based on all of the facts and

circumstances, whether gross receipts qualify as DPGR on

an item-by-item basis (and not, for example, on a division38 To the extent one agrees with respondent that the word “directly” in

Treasury Regulation § 1.199-3(i)(1)(i) is of significant importance, we question whether

that provision represents the best interpretation of section 199. See Loper Bright

Enters., 144 S. Ct. at 2266 (stating that if a government agency’s interpretation of a

statute “is not the best, it is not permissible”).

[*67] by-division, product line-by-product line, or transaction-bytransaction basis).

(i) The term item means the property offered

by the taxpayer in the normal course of the

taxpayer’s business for lease, rental, license, sale,

exchange, or other disposition (for purposes of this

paragraph (d), collectively referred to as disposition)

to customers, if the gross receipts from the

disposition of such property qualify as DPGR; or

(ii) If paragraph (d)(1)(i) of this section does

not apply to the property, then any component of the

property described in paragraph (d)(1)(i) of this

section is treated as the item, provided that the gross

receipts from the disposition of the property

described in paragraph (d)(1)(i) of this section that

are attributable to such component qualify as

DPGR. Each component that meets the

requirements under this paragraph (d)(1)(ii) must

be treated as a separate item and a component that

meets the requirements under this paragraph

(d)(1)(ii) may not be combined with a component that

does not meet these requirements.

We will refer to Treasury Regulation § 1.199-3(d)(1)(i) as the Item Rule

and Treasury Regulation § 1.199-3(d)(1)(ii) as the Shrink-Back Rule.

Respondent argued that

[a]s a threshold matter, the Item Rule and Shrink-Back

Rule expressly apply only to “the property offered by the

taxpayer in the normal course of the taxpayer’s business”

for disposition. (Emphasis added.) By its express terms

then, these rules do not apply to [Bloomberg’s] information

services, which are not property. To illustrate this point,

section 1.199-3(d)(4) sets forth twelve examples applying

the Item Rule and the Shrink-Back Rule. All of these

examples involve the taxpayers’ disposition of

property . . . . None of these examples illustrates a

provision of services as the “item” or a shrink-back of a

taxpayer’s services to self-produced property enabling

those services. Since [Bloomberg] offered services (not

property) to customers in the normal course of its business,

the unambiguous text of section 1.199-3(d)(1)(ii) does not

[*68] permit [Bloomberg] to shrink-back from its nonqualifying

online information services to the property (software) that

enabled those services.

We disagree with respondent’s claim that Bloomberg offered only

“information services” to its customers. As discussed supra, portions of

the BPS subscription fees were derived from the provision of access to

BPS analytical and graphing software that did not enable a service.

Bloomberg argued that

DPGR is computed on the basis of the “item.” Treas.

Reg. § 1.199-3(d)(1). Section 199 generally defines an

“item” as the property offered by the taxpayer in the

normal course of its business if the gross receipts from the

property’s disposition qualify as DPGR. Id. If the entire

property does not qualify as giving rise to DPGR, “then any

component of the property” that generates DPGR “is

treated as the item.” Treas. Reg. § 1.199-3(d)(1)(ii). The

facts establish that the BPS software . . . [is Bloomberg’s]

“item” for purposes of Section 199.

The shrink back rule recognizes that some but not

all of the gross receipts from a single transaction may be

DPGR, and that a single transaction may be a combination

of qualifying and non-qualifying elements. . . .

. . . [Bloomberg] claims DPGR only for the portion of

BPS gross receipts attributable to the software that

customers access and directly use while connected to the

Internet or other network. Whether under the shrink back

rule or under a carve-out of the non-qualifying elements

from the provision of online software, the answer is the

same: the BPS consists, in part, of access to and use of

online software, and, in part, of non-qualifying news and

data content, as well as non-qualifying helpdesk services.

Since [Bloomberg’s] software meets the requirements of

the Third-Party-Comparable Exception . . . an allocation to

DPGR and non-DPGR is required.

We agree with Bloomberg’s argument that “[t]he shrink back rule

recognizes that some but not all of the gross receipts from a single

transaction may be DPGR.” Treasury Regulation § 1.199-3(i)(1)(i) and

(i)(4)(i)(A) also support this position.

[*69] Neither party attempted to provide a step-by-step outline of how

to apply the Item and Shrink-Back Rules with respect to computer

software. However, respondent argued that

the Shrink-Back Rule in section 1.199-3(d)(1)(ii) expressly

applies only if the gross receipts attributable to an alleged

component qualify as DPGR. The Shrink-Back Rule does

not provide the operative rules for determining if gross

receipts attributable to the component are DPGR. Rather,

the rule only provides a framework for identifying the

property to determine if the gross receipts from such

property qualify as DPGR, such that the component will

qualify as an “item.” Other section 199 regulations provide

the specific rules for determining whether gross receipts

constitute DPGR depending on the nature of the

property. . . . In this case, the controlling rules for software

are found in section 1.199-3(i)(6).

Respondent’s argument lacks specifics, likely because Treasury

Regulation § 1.199-3 is poorly written. The regulation does not specify

whether one should apply Treasury Regulation § 1.199-3(d)(1) before or

after Treasury Regulation § 1.199-3(i)(6). Treasury Regulation § 1.1993(d) is titled “[d]etermining domestic production gross receipts,” but

application of the Item and Shrink-Back Rules requires one to first

consider whether gross receipts attributable to an item or component

“qualify as DPGR.” The rules to determine whether gross receipts from

the provision of access to software qualify as DPGR are found in

Treasury Regulation § 1.199-3(i)(6).

We need not engage in a lengthy “before or after” analysis in these

cases because, as respondent notes, the specific rules governing

computer software are found in Treasury Regulation § 1.199-3(i)(6). See

Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 170 (2007) (noting

that specific regulations “normally” govern general ones); see also TBL

Licensing LLC v. Commissioner, 158 T.C. 1, 55–56 (2022) (applying a

specific regulation over a general one), aff’d, 82 F.4th 12 (1st Cir. 2023).

Applying the rules in Treasury Regulation § 1.199-3(i)(6) (and the

definition of “computer software” in Treasury Regulation § 1.1993(j)(3)(i)) shows that only BPS subscription fees attributable to BPS

analytical and graphing software qualify as DPGR. Because gross

receipts attributable to the analytical and graphing software qualify as

[*70] DPGR, that software is an item under Treasury Regulation

§ 1.199-3(d)(1)(ii). 39

iii.

Treasury

Regulation

3(i)(4)(i)(A)

1.199-

Treasury Regulation § 1.199-3(i)(4) reads, in part:

Allocation of gross receipts. (i) Embedded services and nonqualified property. (A) In general. Except as otherwise

provided in paragraph (i)(4)(i)(B), paragraph (m) (relating

to construction), and paragraph (n) (relating to engineering

and

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