Tech Law Journal Daily E-Mail Alert
September 3, 2002, 9:00 AM ET, Alert No. 500.
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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.
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.
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.
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.
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.
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."
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."
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.
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.
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.
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.
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.
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.
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.
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.
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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