Section of Taxation Publications
 VOL. 55
NO. 4
Contents | TTL Home

Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
(It's All in a Parenthetical)
An Analysis of the FSC Provisions as Applied in Microsoft v. Commissioner

Eric D. Hayes

In Microsoft v. Commissioner, the Tax Court held that domestically-produced copyrighted computer software transferred abroad on a master, then reproduced and sold, does not constitute export property. Therefore, the profits generated from its sale do not receive the favorable tax treatment available under the Foreign Sales Corporation (FSC) provisions. The court held that the phrase "films, tapes, records, or similar reproductions" in section 927(a)(2)(b) does not include computer software and rejected the taxpayer's argument that "films, tapes, [and] records" refers to the media on which the copyrighted material (computer software) was stored, not the actual content of the copyrighted material. The court found that Congress used the phrase "films, tapes, [and] records" to mean sound recordings and motion pictures and interpreted "similar reproductions" to mean the yet-to-be-developed media on which sound recordings and motion pictures could be fixed in the future. Accordingly, the court determined deficiencies in income tax for the taxable years 1990 and 1991.

Part I of this Note discusses the development of the Domestic International Sales Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions. Part II details the facts of the present case. Part III summarizes the taxpayer's and the government's arguments. Part IV discusses the decision of the Tax Court. Part V analyzes the Tax Court's holding and Part VI provides a going-forward view of the tax practice implications of the decision.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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