| 10th Circuit Disallows
R&D Tax Credit for Software Development Costs |
8/30. The U.S.
Court of Appeals (10thCir) issued its opinion
in Tax
and Accounting Software Corp. v. IRS, a case
regarding when expenses of a software company may qualify for
the research and development tax credit.
Background. Tim and Sheryl Kloehr are the sole owners
of a Subchapter S corporation, Tax and Accounting
Software Corporation (TAASC), that develops and markets
software for use by tax and accounting professionals. In 1993
and 1994 TAASC incurred a total of $1,838,756 and $2,444,938
in research and development expenses for the development of
these software products. TAASC claimed a portion of these
expenses as research and development tax credits under 26 U.S.C.
§ 41. The Internal Revenue Service (IRS) disallowed these
tax credits. The Kloehrs paid the deficiencies.
District Court. TAASC and the Kloehrs filed a complaint
in U.S. District Court (NDOkla) against the USA seeking a
refund. The District Court granted summary judgment to TAASC
and the Kloehrs. It held that Section 41(d)(1) does not
require the taxpayer to expand or refine principles of science
or engineering in order to qualify for the tax credit. It
wrote that the "emphasis should be on whether the
information qualifies as being 'technological in nature' ... ,
not whether the work could be considered a revolutionary
discovery in the scientific sense." See, 111 F. Supp. 2d
1153, at 1158. The IRS appealed.
Statute. Section 41(d)(1) provides as follows:
Qualified research defined
For purposes of this section --
(1) In general
The term ''qualified research'' means research --
(A) with respect to which expenditures may be treated as
expenses under section 174,
(B) which is undertaken for the purpose of discovering
information (i) which is technological in nature, and (ii) the
application of which is intended to be useful in the
development of a new or improved business component of the
taxpayer, and
(C) substantially all of the activities of which constitute
elements of a process of experimentation for a purpose
described in paragraph (3).
Appeals Court. The Appeals Court reversed. The dispute
was over application of the "qualified research"
requirement.
The IRS conceded that the Kloehrs' expenses were expenses
within the meaning of 41(d)(1)(A), that the expenses were
"intended to be useful in the development of a new or
improved business component of the taxpayer" within the
meaning of 41(d)(1)(B)(ii), and that expenses were for
research that was "technological in nature" within
the meaning of 41(d)(1)(B)(i).
However, the IRS disputed that the expenses were
"undertaken for the purpose of discovering
information" within the meaning of 41(d)(1)(B), and that
the expenses met the requirement of 41(d)(1)(C)
("substantially all of the activities of which constitute
elements of a process of experimentation"). The IRS
argued that the research must expand or refine the principles
of computer science to qualify.
The Appeals Court wrote that "the statute requires that
the taxpayer's research, in order to qualify, must have
developed new information that is applied towards the
development of a product. This is the "discovery"
requirement of § 41. Contrary to TAASC's arguments, mere
evidence that the taxpayer has developed a new and useful
product in and of itself will not qualify. Contrary to the
government's argument, the new information need not ``expand,
or refine, principles of the physical or biological sciences,
engineering, or computer science.““ In other words, each of
the positions of the parties is incorrect." (Footnote and
citation omitted.)
The Appeals Court concluded that "the ``discovering
information““ language of § 41 establishes a separate
requirement that the taxpayer must meet in order to qualify
for the tax credit. Under that requirement, the taxpayer must
show that he discovered new information and that information
must be separate from the product that is actually
developed." The Court added that "This issue was
never developed by either party below, and thus summary
judgment for TAASC was inappropriate on this issue."
The Appeals Court reversed and remanded.
Congress. The R&D Tax Credit is a perennial issue
in Congress. The credit was first enacted in 1981 as a
temporary measure, and has been extended temporarily on many
occasions since then. Under the current scheme, corporations
receive a 20% tax credit for qualified research and
development expenditures (QREs) in excess of a calculated base
amount. The Congress passed, and President Clinton signed, a
bill which extends the R&D tax credit for another five
years at the end of 1999. However, efforts to make the credit
permanent continue. |
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| Federal Circuit Rules in
Patent and Trade Secrets Case |
8/30. The U.S.
Court of Appeals (FedCir) issued its split opinion
[MS Word] in BBA
Nonwovens v. Superior Nonwovens, a case
involving patent infringement and application of law of the
state of South Carolina regarding trade secret
misappropriation.
BBA Nonwovens Simpleville, Fiberweb France, Reemay, and
Superior Nonwovens are commercial manufacturers of spunbond
nonwoven fabrics used in the production of other products,
such as dryer sheets, filters, and carpet underlay. Superior
was formed in 1998 by former employees of the plaintiff
corporations. It then proceeded to produce competing products.
BBA and Reemay filed a complaint in U.S. District Court (DSCar)
against Superior. Fiberweb France was later added as a
plaintiff. The claims included patent infringement, and trade
secret misappropriation. The jury returned a verdict in favor
of Fiberweb France on its trade secret claim, and in favor of
BBA on its patent infringement claim. It returned a verdict
against Reemay on its trade secret claim. The jury also
awarded damages. The court then denied Superior's motion for
JMOL. This appeal followed. The Appeals Court affirmed. |
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| DOJ Files Brief in USA v.
Visa |
8/30. The Antitrust
Division of the U.S. Department of Justice filed its brief
with the U.S. Court of Appeals (2ndCir) in USA v. VISA,
an antitrust case regarding Visa's Bylaw and MasterCard's
Competitive Programs Policy which prohibit member / owner
banks from issuing general purpose cards on the only networks
not controlled by banks.
In 1998, the United States filed a complaint in U.S. District
Court (SDNY) against Visa USA Inc., Visa International Corp.,
and MasterCard International Inc., alleging two violations of
Section 1 of the Sherman Act, 15 U.S.C. § 1. The
District Court, among other things, ordered Visa and
MasterCard to repeal their exclusionary rules. This appeal
followed. |
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| More Court Opinions |
8/30. The U.S.
District Court (DC) issued an opinion [PDF]
in Linda
Tripp v. DOD, denying the DOD's motion to
dismiss a Privacy Act case brought by a former DOD
employee alleging wrongful disclosure of information to The
New Yorker Magazine and others.
8/30. The U.S.
Court of Appeals (FedCir) issued its opinion in Guttman
v. Kopykake, a patent infringement case
involving cake decoration technology. The District Court
denied Plaintiff's motion for a preliminary injunction. The
Appeals Court vacated and remanded, because of erroneous claim
construction by the District Court. |
|
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| NTIA Seeks Comments on
Exceptions to ESIGN Act |
8/30. The National
Telecommunications and Information Administration (NTIA)
announced that it is requesting comments on two of the nine
exceptions to the Electronic Signatures in Global and National
Commerce (ESIGN) Act. The ESIGN Act provides for the
acceptance of electronic signatures in interstate commerce,
with certain enumerated exceptions. The two categories of
exempt documents that are the subject of this request for
comments are court records and hazardous materials notices.
The Act tasks the NTIA with studying these exemptions, and
providing reports to Congress. See also, NTIA
release.
Comments are due by November 4, 2002. See, notice
in Federal Register, September 3, 2002, Vol. 67, No. 170, at
Pages 56277 - 56279, regarding court records, and notice
in Federal Register, September 3, 2002, Vol. 67, No. 170, at
Pages 56279 - 56281, regarding hazardous materials notices. |
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| WorldCom Accountants
Indicted |
8/27. A grand jury of the U.S. District Court (SDNY)
returned an indictment
[24 pages in PDF] of Scott Sullivan and Buford Yates charging
one count of conspiracy to commit securities fraud, one count
of securities fraud, and five counts of false filings with the
Securities and Exchange
Commission (SEC). Until June of this year Sullivan was CFO
of WorldCom. Yates was
WorldCom's Director of General Accounting.
The indictment also identifies several "co-conspirators
not named as defendants" -- Betty Vinson, Troy Normand,
and David Myers.
The indictment alleges that "from in or about October
2000 through in or about June 2002, SCOTT D. SULLIVAN and
BUFORD YATES, JR., the defendants, and their co-conspirators,
engaged in an illegal scheme to inflate artificially
WorldCom's publicly reported earnings by falsely and
fraudulently reducing reported line cost expenses. To effect
this illegal scheme, SULLIVAN, YATES, and their
co-conspirators made entries in WorldCom's general ledger,
crediting line costs and debiting, among other accounts,
various reserve and capital accounts. As SULLIVAN, YATES, and
their co-conspirators well knew, there was no justification in
fact, or under Generally Accepted Accounting Principles (``GAAP““),
for these entries. SULLIVAN, YATES, and their co-conspirators
made these false and fraudulent journal entries in WorldCom's
general ledger knowing, and intending (1) that such journal
entries would ultimately be reflected in WorldCom's financial
statements and public filings with the SEC; (2) that
WorldCom's financial statements and public filings would
falsely overstate WorldCom's earnings; and (3) that the
investing public would rely upon such overstated
earnings."
Attorney General John Ashcroft wrote in a statement
that "With each arrest, indictment and prosecution, we
send this clear message: corrupt corporate executives will be
punished. The Department of Justice is committed to ensuring
that corporate executives never profit by victimizing their
own employees and investors." |
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| Coble Writes About Berman
Bill |
8/24. Rep. Howard
Coble (R-NC) wrote an opinion
article for the News & Record, a newspaper and web
site which covers the Piedmont region of North Carolina, in
which he discussed and expressed support for HR 5211,
a bill that would legalize certain self help remedies in
copyright disputes.
The bill is sponsored by Rep. Howard Berman
(D-CA), and cosponsored by Rep. Coble. The two are the
Chairman and ranking Democrat on the House Judiciary
Committee's Courts, Internet and Intellectual Property
Subcommittee. Rep. Coble wrote that his Subcommittee will hold
a hearing on the bill in September, but that the bill will not
be enacted in the current Congress, which is about to end.
Rep. Coble wrote that "The incentive to create copyrights
will quickly dissipate if they are not protected like other
forms of property."
 He continued that "Currently,
the easiest way to steal the latest musical or cinematic
offering is through peer to peer technology, which essentially
allows computer users to swap music and movie files. Millions
upon millions of illegal downloads occur each day at the
expense of songwriters, authors, graphic artists,
photographers and software developers in North Carolina and
the rest of our nation."
"H.R. 5211 is an attempt to control this problem. The
legislation is designed only to prevent thieves from illegally
distributing copyrighted songs, movies and other digital works
over the Internet to millions of computers. The legislation
clarifies that copyright owners may utilize new technologies
or ``self help““ measures to protect their property as it is
distributed on peer to peer networks."
He concluded that "While H.R. 5211 in its current form
may not be the perfect answer to a serious problem, it will
stimulate discussions on finding effective ways to curb
piracy. That is why our subcommittee will conduct a hearing on
the issue of piracy on peer to peer networks in September.
This does not mean that the bill will be voted on prior to
adjournment this fall. It does mean that we are interested in
exploring ways to combat digital theft of copyrighted works,
including music and movies." |
|
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| Greenspan Addresses
Economic Volatility and High Tech |
8/30. Federal
Reserve Board Chairman Alan
Greenspan gave a speech
titled "Economic Volatility". He sought to explain
recent economic activity, with an emphasis on equity premiums
and the development of bubbles. He also discussed the high
tech sector.
Greenspan stated that "The consequent reversal in stock
prices that has occurred over the past couple of years has
been particularly pronounced in the high tech sectors of the
economy. The investment boom in the late 1990s, initially
spurred by significant advances in information technology,
ultimately produced an overhang of installed capacity. Even
though demand for a number of high tech products was doubling
or tripling annually, in many cases new supply was coming on
even faster. Overall, capacity in high tech manufacturing
industries rose more than 40 percent in 2000, well in excess
of its rapid rate of increase over the previous two years. In
light of the burgeoning supply, the pace of increased demand
for the newer technologies, though rapid, fell short of that
needed to sustain the elevated real rate of return for the
whole of the high tech capital stock. Returns on the
securities of high tech firms ultimately collapsed, as did
capital investment."
He spoke at a conference in Jackson Hole, Wyoming, sponsored
by the Federal Reserve Bank of Kansas City. |
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| SBA Comments on FCC
Classification of Wireline Broadband Access to the Internet |
8/27. The Small Business
Administration (SBA) wrote a letter
to the Federal Communications
Commission (FCC) regarding the FCC's Notice of Proposed
Rulemaking (NPRM) regarding classification of services in its
proceeding titled "In the Matter of Appropriate Framework
for Broadband Access to the Internet over Wireline
Facilities". This is CC Docket 02-33. The FCC proposed
that wireline broadband Internet access services -- whether
provided over a third party's facilities or self-provisioned
facilities -- are information services, with a
telecommunications component, rather than telecommunications
services.
The SBA wrote that "Classifying broadband access service
as an information service would remove the requirements set
forth in the Commission's Computer II and Computer III
rulemakings that provide carriage to ISPs. Such an action will
severely hamper the ability of small ISPs to provide broadband
service, stifling competition and slowing down
deployment." (Footnotes omitted.)
Rather, the SBA "recommends that the Commission revisit
its conclusion that broadband Internet access service is an
information service. In fact, we urge the Commission to
classify the transmission of broadband signals as a
telecommunications service, and the provision of Internet
access service as an information service, as originally
determined in Computer II and Computer III. By deciding that
broadband Internet service consists of two distinct services,
the Commission will minimize the disproportionate impact on
small ISPs and will encourage competition in the broadband
market, which will in turn encourage deployment of broadband
as discussed above." (Footnote omitted.)
July 1, 2002, was the deadline to submit reply comments in
this proceeding. See also, article in TLJ
Daily E-Mail Alert No. 463, titled "FCC Receives
Comments on Broadband Internet Access", July 2, 2002. |
|
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| People and Appointments |
8/30. Rep. Greg
Walden (R-OR) was made a member of the House Commerce
Committee's Subcommittee on Telecommunications and the
Internet. He has been a member of the full Committee since
2000. Rep. Billy Tauzin
(R-LA), the Chairman of the Committee, stated in a release
that "With his extensive background in broadcasting, Greg
has a world of experience and expertise in telecommunications
issues ... His knowledge of the issues will help the
Subcommittee address digital television, spectrum management,
broadband deployment and other telecommunications
matters."
8/30. Amazon announced
that Thomas Szkutak will become its SVP and CFO. He is
currently CFO for General Electric's GE Lighting.
8/28. Thomas Gillett was named SVP of corporate
development and strategy at Qwest
Communications. See, Qwest
release. |
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| Tuesday, September 3 |
The Senate will return from its August recess.
9:30 AM. The U.S.
Court of Appeals (DCCir) will hear oral argument in Biltmore
Forest v. FCC, No. 01-1392. Judges Ginsburg, Sentelle and
Randolph will preside. Location: 333 Constitution Ave., NW. |
|
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| Wednesday, September 4 |
The House will return from its Summer District Work Period.
Day one of a three day meeting titled "U.S. Ireland
Business Summit". The only event on September 4 is an
evening reception on Capitol Hill in the Cannon Caucus Room
from 6:30 - 8:30 PM. See, conference web site.
Deadline to submit comments to the National Intellectual
Property Law Enforcement Coordination Council (NIPLECC)
regarding its agenda and mission. The NIPLECC is co-chaired by
the U.S. Patent and Trademark
Office (USPTO) and the Department of Justice (DOJ). See, notice
in Federal Register. See also, the NIPLECC's 2000
report.
Deadline for the Recording
Industry Association of America (RIAA) to file its reply
brief with the U.S.
District Court (DC) in RIAA v. Verizon, an action
to enforce a subpoena pursuant to the Digital Millenium
Copyright Act (DMCA), at 17 U.S.C.
§ 512(h). This is D.C. No. 1:02MS00323. |
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| Thursday, September 5 |
8:30 AM - 6:00 PM. Day one of a two day conference titled
"Symposium on the Role of Scientific and Technical
Data and Information in the Public Domain" hosted by
the National Academy of Sciences.
See, agenda.
Location: National Academy of Sciences Auditorium, 2100 C
Street NW.
9:30 AM. The U.S.
Court of Appeals (DCCir) will hear oral argument in CompTel
v. FCC, No. 00-1272. Judges Edwards, Rogers and Williams
will preside. Location: Courtroom 20, 333 Constitution Ave.,
NW.
10:00 AM. The Senate
Judiciary Committee will hold an executive business
meeting. See, notice.
Location: Room 226, Dirksen Building.
12:00 NOON. William Lash (Assistant Secretary of Commerce for
Market Access and Compliance) will speak on "Trade
Compliance After TPA". Location: Heritage Foundation, 214
Massachusetts Ave NE.
2:00 - 4:00 PM. The Federal
Communications Commission's (FCC) Advisory Committee for
the 2003 World Radiocommunication Conference (WRC-03 Advisory
Committee) will hold a meeting. This meeting was originally
scheduled for August 22. See, original notice
in Federal Register, and rescheduling notice
in Federal Register. Location: Commission Meeting Room
(TW-C305), 445 12th Street, SW.
Day two of a three day meeting titled "U.S. Ireland
Business Summit". Secretary of Commerce Don
Evans is scheduled to speak at 9:30 AM. From 2:30 - 4:30
PM there will be a panel discussion titled "Information
and Communications Technology". The scheduled
panelists include FCC Commissioner Kevin Martin.
See, conference web
site. Location: Ronald Reagan Building.
Deadline to request to testify before the Trade Policy Staff
Committee (TPSC) hearing on China's compliance with the
commitments it made in connection with its accession to the World Trade Organization (WTO).
See, U.S. Trade Representative
(USTR) notice
in the Federal Register. |
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| Friday, September 6 |
9:30 AM. The U.S.
Court of Appeals (DCCir) will hear oral argument in Motion
Picture Association of America v. FCC, No. 01-1149. Judges
Edwards, Henderson and Rogers will preside. Location: 333
Constitution Ave., NW.
8:30 AM - 4:00 PM. Day two of a two day conference titled
"Symposium on the Role of Scientific and Technical
Data and Information in the Public Domain" hosted by
the National Academy of Sciences.
See, agenda.
Location: National Academy of Sciences Auditorium, 2100 C
Street NW.
Day three of a three day meeting titled "U.S. Ireland
Business Summit". See, conference web site.
Location: Ronald Reagan Building. |
|
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| Monday, September 9 |
9:30 AM. The U.S.
Court of Appeals (DCCir) will hear oral argument in WorldCom
v. FCC, No. 01-1198. Judges Tatel, Garland and Williams
will preside. Location: Courtroom 20, 333 Constitution Ave.,
NW.
Day one of a two day conference on patent interference law,
hosted by the Intellectual
Property Owners Association (IPO). For more information,
call 202 466-2396. Location: Ronald Reagan International Trade
Center. |
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| More News |
8/27. The U.S. Attorneys Office (NDCal) filed insider
trading charges against Jonathan Beck and Kevin Clark, former
sales vice presidents of Critical Path, a San Francisco based
e-mail outsourcing firm. The Criminal Information charges
violation of 15 U.S.C. § 78j(b), 15 U.S.C. § 78ff(a)
and 17 CFR 240.10b-5. See, USAO
release. Simultaneously, the Securities
and Exchange Commission (SEC) filed a civil
complaint in U.S.
District Court (NDCal) against Beck, Clark, and William
Rinehart, a former head of Critical Path's North and Latin
America sales forces. See also, SEC
release.
8/30. The Copyright
Office published a notice
in the Federal Register that "directs all claimants to
royalty fees collected for calendar year 2000 under the
section 111 cable statutory license to submit comments as to
whether a Phase I or Phase II controversy exists as to the
distribution of those fees, and a Notice of Intention to
Participate in a royalty distribution proceeding." Both
comments and Notices of Intention to Participate are due by
September 30, 2002. See, Federal Register, August 30, 2002,
Vol. 67, No. 169, at Pages 55885 - 55886.
8/27. The Bureau of Industry
and Security (BIS), formerly known as the Bureau of Export
Administration (BXA), published a notice
in the Federal Register that it has adopted a final rule that
removes references in the Export Administration Regulations
(EAR) to the "Denied Persons List". The rule change
is effective as of August 26, 2002. See, Federal Register,
August 27, 2002, Vol. 67, No. 166, at Pages 54952 - 54953.
8/30. The General Accounting
Office (GAO) released a report [4
pages in PDF] regarding "Federal Reserve Banks: Areas for
Improvement in Computer Controls".
9/3. LG.Phillips
LCD filed a complaint in U.S. District Court (CDCal)
against Tatung alleging
infringement of patents pertaining to thin film transistor
liquid crystal display technology.
8/30. The Securities and
Exchange Commission (SEC) initiated and simultaneous
settled an administrative proceeding against SCB Computer
Technology, Inc. See, SEC
release. |
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