Microsoft Corporation v. Commissioner of Internal Revenue

On Appeal from a Decision of the United States Tax Court, No. 16878-96.

Microsoft Corporation appeals the tax court’s deficiency judgment in favor of the Commissioner of Internal Revenue (the “Commissioner”). In 1990 and 1991, Microsoft claimed “export property” deductions for certain commissions it paid to Microsoft Foreign Sales Corporation. These commissions were for royalty income subsidiaries earned from the international distribution of master copies of Microsoft computer software. The Commissioner disallowed the deductions because it concluded that master copies of computer software were not deductible “export property” under now repealed I.R.C. § 927(a)(2)(B). During the applicable period, that section provided, in relevant part:

§ 927(a)(2)(B). Because we interpret this section’s phrase “copyrights (other than films, tapes, records, or similar reproductions, for commercial or home use)” to include computer software masters, we reverse the tax court’s judgment.

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Statutory Background

In 1970, in response to a troubled economy, Congress twice tried but faded to enact legislation that would have exempted export property from tax liability in certain circumstances. Both…