dissenting: The majority ruling today overturns this Court’s firmly established jurisprudence by holding that computer software is tangible personal property, eligible for the investment tax credit. I believe the majority is wrong; therefore, I dissent.1
I. Preliminary Matters
A. Software’s Encoded Information Is Intellectual Property, Which Is Intangible
Preliminarily, computer software possesses both tangible and intangible characteristics. Computer programs like the ones in issue are configurations of executable code that instruct a computer to process data in a specified manner. The encoded information is intangible property; the computer tapes and disks on which the information is embodied are tangible property. Comshare, Inc. v. United States, 27 F.3d 1142, 1145 (6th Cir. 1994). Although a program may be perfectly reproduced onto numerous tangible residences, the program itself is inherently intellectual property. And intellectual property is intangible property.
B. Purchaser of Software Only Interested in Using the Intellectual Property Contained on Tapes and Disks
When one acquires computer software, the item desired is the intellectual property stored on the tangible disk or tape, i.e., the computer program, not the disk or tape itself. See Bank of Vermont v. United States, 61 AFTR 2d 88-788, 88-1 USTC par. 9169 (D. Vt. 1988). One would not pay thousands, or even tens of thousands, of dollars for the disk or tape without the software’s intellectual property placed thereon.
The software here acquired was sold subject to nonexclusive, nontransferable license agreements. Pursuant to those agreements, petitioner was entitled to use the software it purchased in its banking and related activities but was not permitted to reproduce or resell the software to others. It is clear from the license agreements that petitioner was interested only in using the intangible programs contained on the tapes and disks. This point is demonstrated by the description provided in a license agreement entered into in conjunction with the purchase of “ESTIMATICS” software from Management and Computer Services, Inc.:
The intangible knowledge, information and know-how to be made available hereunder shall be provided on 5Vi” diskette for the IBM personal computer.
C. A Computer Program Is Not Inextricably Bound to a Single Tangible Medium
Software’s intellectual property is fluid. The intellectual property was placed on a tangible medium simply for ease of transmission. The initial housing of the intellectual property on a tangible medium is temporary, and ultimately, the program’s intellectual property is mirror-image transferred onto a computer. And it is this mirror-image transfer that the purchaser of the computer software desires when acquiring the software. Upon the subsequent transfer to the computer, the intellectual property becomes dually housed: (1) On the disk or tape, and (2) on the computer. Moreover, an unlimited number of mirror-image transfers of the computer program can occur; the computer program can even be mirror-image transferred from one disk or tape to another.
A computer program can be transferred electronically over telephone lines, although during the years in issue, telephonic transmission was slow and unreliable. A computer program can be erased from the disk or tape and typed in exactly anew by programmers from written documentation of the source code without destroying the underlying intellectual property. Clearly, a computer program is not inextricably bound to any single tangible medium.
II. Case Law
Beginning in 1988, this Court held in Ronnen v. Commissioner, 90 T.C. 74, that computer software is intangible personal property. We have steadfastly applied this characterization in other cases. See Kansas City S. Indus., Inc. v. Commissioner, 98 T.C. 242, 262 (1992); Alexander v. Commissioner, 95 T.C. 467, 470 (1990), affd. without published opinion sub nom. Stell v. Commissioner, 999 F.2d 544 (9th Cir. 1993); Gantner v. Commissioner, 91 T.C. 713, 728 (1988), affd. on other grounds 905 F.2d 241 (8th Cir. 1990); B.D. Morgan & Co. v. Commissioner, T.C. Memo. 1988-569; Smith v. Commissioner, T.C. Memo. 1988-420; Salzman v. Commissioner, T.C. Memo. 1988-86.
The Court of Appeals for the Sixth Circuit in Comshare, Inc. v. United States, supra, reached a result different from ours in Ronnen and its progeny. The court in Comshare held that tapes and disks containing computer program master source codes are tangible personal property; consequently, the purchaser of the tapes and disks was entitled to investment tax credits and accelerated depreciation deductions calculated on the full investment.
A discussion of the case law in this area is set forth in the majority opinion pp. 365-370; no useful purpose would be served by repeating it here.
III. Intrinsic Value Test
The intrinsic value test, which the majority criticizes, is a facts and circumstances test first enunciated by the U.S. Court of Appeals for the Fifth Circuit in Texas Instruments, Inc. v. United States, 551 F.2d 599 (5th Cir. 1977). In applying the intrinsic value test, one compares the investment in the intangible aspects of the property being characterized (here, the software program; in Texas Instruments, the seismic data) with the investment in the tangible embodiments (here, the tapes and disks; in Texas Instruments, the film and tapes). After making the comparison, if the property’s “intrinsic value is attributable to its intangible elements rather than to any of its specific tangible embodiments”, the property is considered intangible. Id. at 609.
We adopted the intrinsic value test in Ronnen v. Commissioner, supra, and held that computer software is intangible property because “the intrinsic value of the * * * [taxpayer’s] software is attributable to its intangible elements rather than to its tangible embodiments.” Id. at 99-100. I believe this interpretation of law is correct; thus, I would continue to follow it, notwithstanding Comshare.
IV. Computer Software Is Different From Master Film Negatives and Seismic Data Tapes .
As noted in Ronnen v. Commissioner, supra, and as it appears clear to me today, computer software is distinguishable from the master film negatives in Walt Disney Prods. v. United States, 480 F.2d 66 (9th Cir. 1973), and 549 F.2d 576 (9th Cir. 1976), and the seismic data tapes and films in Texas Instruments. In those cases, the tapes and films contained original recordings of physical events that could never be perfectly duplicated or repeated. As noted by the Court of Appeals for the Fifth Circuit in Texas Instruments, if the original recordings were destroyed prior to reproduction, the information stored thereon would also be lost. Because the seismic data recordings (in Texas Instruments) and the motion picture negatives (in Disney) could never be perfectly recreated if the originals were destroyed or lost, those courts held the intangible information was inextricably bound to its tangible medium. But as preliminarily noted, no such relationship exists between a computer program and the magnetic tape or disks upon which the computer program is stored.
The court in Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir. 1994), emphasized that the taxpayer therein would not have purchased the master source code unless it was on tapes or disks. But the intrinsic value test is not dependent upon whether the property must appear on a tangible medium to be usable. Rather, the test rests upon whether the software exists separate and apart from the tangible tapes and disks. Such an interpretation of the intrinsic value test is consistent with the Court of Appeals for the Fifth Circuit’s application of that test in Texas Instruments. See Texas Instruments, Inc. v. United States, supra at 611 (“the seismic information * * * [on the tapes and film] does not exist as property separate from the physical manifestation” (emphasis added)). Hence, because computer software can exist separate and apart from the tangible tapes and disks, it differs from the seismic information and should be characterized as intangible property.
V. Majority Misreads Statement in Committee Reports
The majority, as well as the court in Comshare, Inc. v. United States, supra, relies upon a statement (related to the type of property eligible for the investment tax credit) made in the Senate Finance Committee report that accompanied H.R. 10650 (which became the Revenue Act of 1962) to support their conclusion. The Senate Finance Committee report states, in pertinent part:
Section 38 property.—
Section 38 property (defined in sec. 48(a)), is the only property (either new or used) which is treated as “qualified investment.” Except for the exclusions noted below, all tangible personal property qualifies as section 38 property. Except for buildings and their structural components, real property which is used as an integral part of manufacturing, production or extraction or of furnishing transportation, communications, electrical energy, gas, water or sewage disposal services also qualifies as section 38 property. This is also true of real property (other than buildings and structural components) used for research or storage facilities with respect to any of the above categories. Tangible personal property is not intended to be defined narrowly here, nor to necessarily follow the rules of State law. It is intended that assets accessory to a business such as grocery store counters, printing presses, individual air-conditioning units, etc., even though fixtures under local law, are to qualify for the credit. Similarly, assets of a mechanical nature, even though located outside a building, such as gasoline pumps, are to qualify for the credit. Real property (other than buildings and structural components) which qualifies as integral parts of categories referred to above includes such assets as blast furnaces, oil and gas pipelines, railroad track and signals, and fences used in connection with raising cattle. [S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 703, 722.]
As I read the majority opinion, the sole stated reason for holding that the computer software at issue is tangible personal property, qualifying for the investment tax credit, is as follows:
In light of the legislative directive to construe the term “tangible personal property” broadly and “The objective of the investment credit * * * to encourage modernization and expansion of the Nation’s productive facilities and thereby improve the economic potential of the country”, S. Rept. 1881, supra, 1962-3 C.B. at 717, we believe that petitioner’s acquisition of the operating and applications software without any associated, exclusive, intangible intellectual property rights is precisely the type of investment Congress intended to encourage in enacting the ITC. * * * [Majority op. p 375.]
The majority, as well as the court in Comshare, have expanded the Senate Finance Committee’s statement “Tangible personal property is not intended to be defined narrowly here” in a manner I believe not intended by Congress. Both the majority and the court in Comshare have taken the Senate Finance Committee’s statement out of the context in which the Senate Finance Committee carefully placed it. Unlike the majority and the court in Comshare, I am unable to conclude that when enacting the investment tax credit provisions Congress contemplated a situation in which property containing both tangible and intangible qualities (such as computer software) qualifies for the credit, or that the investment tax credit was intended to cover property whose value derives substantially from its intangible components. In my opinion, the committee report statement “Tangible personal property is not intended to be defined narrowly here” has reference in relationship to fixtures, components, or other items which under State law would be characterized as real property. The majority has in effect conceded as much in note 9. Although the majority may be correct that the context of the Senate Finance Committee statement does “not foreclose a broad interpretation of the adjective ‘tangible’”, majority op. note 9, it is also correct that the context shows that the Senate Finance Committee report does not require the “broad interpretation” that the majority and the court in Comshare give to the term “tangible”. Further, to me, it is clear from other parts of the Senate Finance Committee and the Committee of Conference reports that Congress intended a distinction between tangible and intangible property by declaring that “Intangible property, such as patents and copyrights, does not qualify as section 38 property.” S. Rept. 1881, supra, 1962-3 C.B. at 858; H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 402, 516.
Thus, the legislative history does not clarify the narrow problem we deal with herein.
VI. Majority Sets Forth No Test or Standard To Determine the Characterization of Property That Has Both Intangible and Tangible Aspects
The majority’s holding destabilizes existing law without substituting or improving the intrinsic value test with a coherent standard to fill the vacuum. Further, the majority finds fault with the court’s interpretation in Comshare, Inc. v. United States, 27 F.3d 1142 (6th Cir. 1994), of the tangibility test by stating:
By focusing on whether a taxpayer’s investment can be put to productive use in the absence of the tangible medium, the Sixth Circuit’s approach would conceivably characterize both the information underlying a complex patent that could only be conveyed to and used by a purchaser if embodied in some tangible medium and the associated intellectual property rights of that patent as tangible personal property for purposes of the ITC. Arguably, however, that result would be different under the Sixth Circuit’s test if the Government could prove that the information underlying the complex patent could be transferred via electronic transmission over telephone lines and that the purchaser could use the information in that form without receiving a disk, tape, or document. We believe that the characterization of property for purposes of the ITC should not depend on the capacity or reliability of “ ‘affordable communications technology’ ” at the time of transfer. Cf. Comshare, Inc. v. United States, supra at 1143-1144 (suggesting the contrary conclusion). [Majority op. p. 373.]
Only in this regard, I agree with the majority.
VII. Apply Doctrine of Stare Decisis
To conclude, I would apply the doctrine of stare decisis in this case. Except for the court in Comshare, no other court has found that computer software is eligible for the investment tax credit and/or accelerated depreciation deduction. I find no compelling reason in the instant setting to depart from the view that computer software does not qualify for the investment tax credit, especially when because of firmly established jurisprudence taxpayers (other than petitioner) have refrained from claiming an investment tax credit with respect to computer software purchases.
Cohen, Chabot, Gerber, and Laro, JJ., agree with this dissent.I was the trial Judge in this case. The majority opinion adopted my findings of fact. The adopted findings of fact are accurate.