T.C. Memo. 2004-53
UNITED STATES TAX COURT
VISION INFORMATION SERVICES, L.L.C., IRENE CORREIA,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1750-01. Filed March 8, 2004.
Joseph Galasso, Jr., for petitioner.
Greg Okwuosah and Robert Heitmeyer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioner petitioned the Court under section
6226 to readjust partnership items adjusted by respondent.
Following the parties’ concessions, we must decide whether Vision
Information Services, L.L.C. (Vision), sold or instead licensed
certain intellectual property to Twentieth Century Fox
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(FoxVideo). Respondent determined and argues that Vision
licensed the property to FoxVideo and, hence, that payments which
Vision received from FoxVideo as to the transaction are taxable
as ordinary income. Petitioner argues that Vision sold the
property to FoxVideo and, hence, that the payments qualify for
capital gain treatment. Petitioner concedes that the payments
are ordinary income if the property was licensed rather than
sold.
We agree with respondent. Unless otherwise noted, section
references are to the applicable versions of the Internal Revenue
Code, and Rule references are to the Tax Court Rules of Practice
and Procedure.
FINDINGS OF FACT
Some facts were stipulated. The stipulated facts and the
exhibits submitted therewith are incorporated herein by this
reference. We find the stipulated facts accordingly. Vision is
a limited liability company the headquarters of which was in
Royal Oak, Michigan, when its petition was filed with the Court.
For Federal income tax purposes, it is treated as a partnership,
and its members are treated as its partners.
Vision was formed on February 3, 1995, to provide certain
services to users of a base software package (Software) developed
by a corporation named Nordic Information Systems, Inc. (Nordic).
The Software helped track the movement of consumer goods between
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manufacturers and retailers. The certain services to be provided
by Vision were data processing services, referred to as third
party service bureau services, related to the Software.
Also on February 3, 1995, Vision and Nordic entered into a
“Software license agreement” (license agreement) with respect to
the Software. The license agreement stated in relevant part:
2. LICENSE GRANT AND RESTRICTIONS.
2.1 License. Subject to the terms and
conditions of this Agreement, Nordic grants to Vision,
and Vision accepts, an exclusive perpetual worldwide
license to use, copy, modify and enhance the Software,
Source Materials and Manuals: (i) to provide Third-
Party Service Bureau Services to various third parties
* * *; and, (ii) to sub-license the Software to
FoxVideo to enable FoxVideo to use the Software to
process its own data and the data of its affiliates * *
*
* * * * * * *
4. OWNERSHIP, CONFIDENTIALITY AND PROTECTION OF
SOFTWARE AND OTHER TRADE SECRETS.
4.1 Nordic Ownership of Software. This
license is not a sale. Except as otherwise provided
herein, title and all proprietary rights (patents,
trade secrets, copyrights and trade marks) to the
Software, and any copy made by Vision are held by
Nordic. The Software is copyrighted and is protected
by United States and International Copyright Laws.
Nordic and Vision on the same day also entered into an annual
maintenance agreement under which Nordic agreed “to provide
support and maintenance” for the Software and Vision agreed to
pay to Nordic a fee in exchange for Nordic’s “On-Call Benefits”
and “Time and Material Services”.
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Also on February 3, 1995, Vision and FoxVideo entered into a
“Distribution Information Services Agreement” (Vision agreement).
The Vision agreement entitled Vision to provide data processing
services to FoxVideo in connection with the Software and
described, among other things, the services to be performed, the
territories affected, the terms of the agreement, the scope of
exclusivity, and the prices for the services under the agreement.
The Vision agreement stated in relevant part:
4. TERM: The Term shall commence as of February 3,
1995 (“Effective Date”), and unless earlier terminated,
* * * shall last five years. FoxVideo shall have an
option to extend the Term for an additional five-year
period (“Initial Extension Period”) on the following
basis: the terms in effect at the outset of the Initial
Extension Period (including the exclusivity terms)
shall be the same as the terms in effect at the end of
the first five year period, except that FoxVideo shall
not be required to pay any additional license fee for
the Vision Software License with respect to the Initial
Extension Period, and such terms shall be subject to
adjustment during the Initial Extension Period on the
same basis as the initial terms during the first five-
year period are subject to adjustment as provided
herein. At the end of the Initial Extension Period (if
any), the Vision agreement may be extended for
successive additional five-year periods by mutual
consent, provided that (a) no additional license fee
for any such additional extension period shall ever be
payable by FoxVideo; and (b) Vision’s exclusivity
commitments for any such extension period shall be
subject to negotiation by the parties. Each 12-month
period of the Term shall be referred to as a “Contract
Year”.
5. EXCLUSIVITY:
(a) By FoxVideo: For so long as the Vision
agreement is in effect, FoxVideo shall
procure Information Services for use in
direct-to-store distribution of
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videocassettes in the United States and
Canada exclusively from Vision.
* * * * * * *
7. VISION SOFTWARE LICENSE/FEE:
(a) Vision Software License:
(i) Vision’s License from Nordic:
The continuing existence and
validity of Vision’s license of the
Nordic Software from Nordic
(including all maintenance and
related agreements) (collectively
the “Nordic Agreements”) shall be
of the essence of the Vision
agreement. * * *
(ii) Grant of License: Vision
shall grant or cause to be granted
to FoxVideo a worldwide, non-
exclusive, non-transferable license
(“Vision Software License”) to use,
on its own hardware or otherwise,
the Vision Software [i.e., the
Software as modified by Vision and
any other software used by Vision
in providing the information
services to FoxVideo]. The Vision
Software License shall have a term
coextensive with the Term of the
Vision agreement * * *
* * * * * * *
(b) License Fee:
(i) Payment of Fee: Except as
provided below, FoxVideo shall pay
a License Fee to Vision in the
aggregate amount of $10 million,
payable as follows: (A) $3 million
payable on signature of the Vision
agreement; plus (B) $1.75 million
payable on each of the first four
anniversary dates of the signing of
the Vision agreement. * * *
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(ii) Reimbursement Upon
Termination: In the event that the
Vision agreement is terminated
before the end of the Term as a
result of a default by Vision,
FoxVideo will receive a
reimbursement of a portion of the
license fee paid to the date of
termination, based upon an
amortization of the license fee at
the rate of $2 million per year.
Pursuant to the Vision agreement, FoxVideo paid Vision the
referenced $3 million payment in 1995 and the referenced $1.75
million payment in 1996. On its 1995 Form 1065, U.S. Partnership
Return of Income, Vision reported its receipt of the $3 million
payment as long-term capital gain income from a $10 million
installment payment sale of “exclusive rights&know how”. On its
1996 Form 1065, Vision reported its receipt of $1,320,198 of the
$1.75 million payment as long-term capital gain income and
reported the rest ($429,802) as portfolio interest income.
On November 20, 2000, respondent mailed to petitioner a
notice of final partnership administrative adjustment (FPAA) for
1995 and 1996. Respondent determined in the FPAA that both
payments were taxable as ordinary income because, respondent
determined, they were received by Vision as a license fee.
OPINION
The parties dispute whether Vision sold or licensed to
FoxVideo the property underlying the $3 million and $1.75 million
payments. Petitioner argues that Vision sold this property to
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FoxVideo in that, petitioner asserts, Vision transferred to
FoxVideo the exclusive right to use the trade secrets and
know-how embodied in the Software for their useful life of less
than 4 years. Respondent argues that Vision licensed the
Software to FoxVideo in that, respondent asserts, Vision and
FoxVideo intended at the time of the pertinent agreements that
the property would be licensed in exchange for a set fee and
stated as much in those agreements.
We agree with respondent. Our decision turns on the intent
of the parties to the pertinent agreements as ascertained as of
the time that they entered into these agreements. Pickren v.
United States, 378 F.2d 595, 599-600 (5th Cir. 1967). We
ascertain this intent primarily by construing the pertinent
agreements. Id.; see also Redler Conveyor Co. v. Commissioner,
303 F.2d 567, 569 (1st Cir. 1962), affg. T.C. Memo. 1961-82.
Petitioner asserts on brief that respondent bears the burden of
proof for 1996 by virtue of section 7491(a). The parties,
however, stipulated that petitioner bears the burden of proof as
to both years. Because petitioner has not asked the Court to
vacate this stipulation, and the record does not otherwise give
us any reason to qualify, change, or contradict it, we treat the
stipulation as a conclusive admission by petitioner that
petitioner bears the burden of proof for both years. See Rule
91(e).
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We read the license agreement to provide specifically that
Nordic was licensing the Software to Vision and that Vision could
sublicense the Software to FoxVideo. The agreement, for example,
granted Vision “an exclusive perpetual worldwide license” to use
the Software and allowed Vision to sublicense the Software to
FoxVideo for its use. The agreement also stated that the license
to Vision “is not a sale”, that “Except as otherwise provided
herein, title and all proprietary rights (patents, trade secrets,
copyrights and trade marks) to the Software, and any copy made by
Vision are held by Nordic”, and that the “Software is copyrighted
and is protected by United States and International Copyright
Laws.” Petitioner makes no mention of these quoted statements,
or the fact that the parties to the license agreement went to
great lengths to include them within that agreement. Nor does
petitioner explain how Vision could have sold the Software to
FoxVideo when the Software was not owned, but merely licensed, by
Vision. Indeed, petitioner does not even rebut the fact that
Nordic licensed the Software to Vision and specifically
acknowledges this fact when petitioner states that the license
agreement resulted in Vision’s having a license to use the
Software.
We also read the Vision agreement to provide similarly that
Vision licensed and did not sell the Software to FoxVideo. This
agreement states that Vision sublicensed the Software to FoxVideo
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and that Vision would be receiving the $3 million and $1.75
million payments in dispute as a “License Fee”. This agreement
also labeled the transaction underlying the payments a “Grant of
License” and referenced the license agreement as an integral part
of the Vision agreement by stating that “The continuing existence
and validity of Vision’s license of the Nordic Software from
Nordic * * * shall be of the essence of the Vision agreement” and
that “The Vision Software License shall have a term coextensive
with the Term of the Vision agreement”.
We conclude that the transaction was a licensing agreement
and, hence, that the disputed payments are taxable as ordinary
income.1 We have considered all arguments made by the parties as
to this conclusion and have found those arguments not discussed
herein to be irrelevant and/or without merit. We have not
considered the alternative arguments which respondent made in the
event that we were to conclude that the subject transaction was
not a licensing agreement. To reflect concessions,
Decision will be entered
under Rule 155.
1
We also believe that the reimbursement provision of the
Vision agreement is more consistent with our finding of a
licensing agreement as opposed to a sale. Whereas petitioner
asserts that the useful life of the subject property was less
than 4 years, we find that the parties to the Vision agreement
believed at the time of that agreement that the property’s useful
life was 5 years or more.