# United States Tax Court

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A412e08a2b364248a

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

United States Tax Court
T.C. Memo. 2024-108
BLOOMBERG L.P., BLOOMBERG, INC., TAX MATTERS PARTNER,
Petitioner
v.
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
[*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
by
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
[*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
I.
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
A.
B.
C.
D.
E.
V.

Data ................................................................................... 12
News .................................................................................. 13
Software ............................................................................ 14
Email and Instant Messaging .......................................... 17
Helpdesks and Sales Support .......................................... 17

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

4
[*4] VI.

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

A.
B.
C.
D.
E.

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
A.
B.
C.
D.
IX.

3000 Xtra........................................................................... 23
RMDS ................................................................................ 24
Combination of 3000 Xtra and RMDS ............................. 25
Charles River Investment Management System ............ 25

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

OPINION ................................................................................................ 27
I.
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
A.
B.
C.
IV.
V.

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
A.

BATS Global I and II ........................................................ 35
1.
BATS Global I ........................................................ 35
2.
BATS Global II ....................................................... 37

B.

Direct Supply I and II....................................................... 37
1.
Direct Supply I ....................................................... 37
2.
Direct Supply II...................................................... 39

C.

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

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

5
[*5]

A.
B.
C.

VII.

BPS Software Qualification Issue .............................................. 45
A.
B.

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
1.
Element One: Deriving Gross Receipts from
Providing Customers with Access to
Software ................................................................. 47
a.
Collection and Search Software .................. 48
b.
Email and IM Software ............................... 51
c.
Analytical and Graphing Software ............. 53
d.
Other BPS Software .................................... 55
e.
Conclusion Regarding Element One .......... 56
2.
3.
4.
5.
6.

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
a.
Bloomberg’s APA Request........................... 60
b.
Massachusetts Sales Tax Returns.............. 60
c.
Foreign Tax Withholding Letters ............... 62
d.
Federal Returns .......................................... 63
e.
McKinsey Survey and Customer
Testimony .................................................... 63
f.
Data Center Connection Requirement ....... 64
g.
Treasury Regulation § 1.199-3(d)(1),
(i)(1)(i), and (i)(4)(i)(A)................................. 64
i.
Treasury Regulation § 1.1993(i)(1)(i) ............................................. 65
ii.
Treasury Regulation § 1.1993(d)(1) ................................................ 66

6
iii.

[*6]

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

C.

The Third-Party Comparable Exception ......................... 72
1.
Reuters Derived Gross Receipts from the
Disposition of 3000 Xtra and RMDS
Analytical and Graphing Software. ...................... 73
2.
3000 Xtra and RMDS Analytical and
Graphing Software Was Provided by Disk or
Download. ............................................................... 73
3.
Reuters’s Analytical and Graphing Software
Was Substantially Identical to BPS
Analytical and Graphing Software. ...................... 74
a.
Aggregating RMDS and Portions of
3000 Xtra Software ..................................... 75
b.
Substantially Identical Software ................ 77

D.

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

VIII. OMS Software Qualification Issue ............................................. 80
A.
B.
C.
IX.

Allocation Issue: Expert Reports ................................................ 84
A.
B.

X.

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
A.
B.
C.
D.
E.

F.

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
1.
OMS Gross Receipts That Qualify as DPGR ........ 99
2.
OMS Expenses Attributable to DPGR ................ 100
BPS Gross Receipts and Expenses................................. 101
1.
BPS Gross Receipts That Qualify as DPGR ....... 101

7
[*7]
XI.
XII.

2.

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
[*8]
I.

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
[*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
[*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
[*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
[*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
[*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.
B.

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
[*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.
C.

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
[*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
[*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
[*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.
D.

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.
E.

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.
V.

Order Management System

The Order Management System (OMS) was a computer program
created by Bloomberg that was integrated with BPS. There were

18
[*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
A.

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
[*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.
B.

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.”
C.

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.
D.

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
[*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.
E.

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
[*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
[*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
[*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
A.

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
[*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.
B.

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
[*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.
C.

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.
D.

Charles River Investment Management System

Charles River Development (Charles River) offered Charles River
Investment Management System (IMS) software that competed with

26
[*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
[*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
I.

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
[*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
[*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
A.

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
[*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
[*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.

32
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).
C.

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
[*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
[*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”).
26

35
[*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.
V.

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.
A.

BATS Global I and II
1.

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
[*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
[*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)).
2.

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.
B.

Direct Supply I and II
1.

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
[*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
[*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.
2.

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
[*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).
C.

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
[*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
[*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
A.

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.
B.

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
[*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
[*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.
C.

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
[*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
[*46] will determine the amounts of those gross receipts infra OPINION
Part X.
A.

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
B.

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
[*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.
1.

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
[*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.
a.

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
[*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
[*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
[*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.
b.

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
[*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
[*53]

c.

Analytical and Graphing Software

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A412e08a2b364248a. Public record. Not legal advice.