Industry Directive to Withdraw Prior IDD on FSC IRC § 921-927 Bundle of Rights in Software Issue


LB&I Control No: LB&I -4-1110-032
Impacted IRM 4.51.5

February 4, 2011


Patricia C. Chaback
Industry Director
Communications, Technology, and Media
Large Business & International Division

Industry Director’s Directive (IDD) to Withdraw a Prior IDD on Foreign Sales Corporation (FSC) IRC § 921-927 Bundle of Rights in Software Issue (IDD dated November 14, 2003)

The purpose of this IDD is to withdraw a prior directive (IDD dated November 14, 2003) regarding the Foreign Sales Corporation (“FSC”) IRC § 921-927 Bundle of Rights in Software Issue, (“Bundle of Rights in Software IDD”).  The referenced bundle of rights in software issue relates to IRC § 927 language that intangible property other than “copyrights” in “films, tapes, records, or similar reproductions” cannot qualify as “export property” under the FSC provisions (repealed under the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, Pub. L. No. 106-519, § 2). 

In Microsoft v. Commissioner, 311 F.3d 1178 (2002), rev’ing and remanding 115 T.C. 228 (2000), the Ninth Circuit Court of Appeals reversed the decision of the Tax Court, and held that master copies of computer software licensed for adaptation, reproduction, and distribution abroad are included in “similar reproductions” within the above-quoted IRC § 927(a) (2) (B) exception and can qualify as export property for FSC purposes.  The Ninth Circuit did not address the Commissioner’s alternative “bundle of rights” argument.  The alternative argument asserted that the royalties represented payments for a bundle of rights - the licenses for the export property described above and for other intangible property (such as patents, trademarks, and trade secrets).  Because certain other intangible property did not meet the IRC § 927(a) (2) (B) exception and did not qualify as “export property,” the aggregate royalties paid should be allocated between the license of copyrights in software (i.e., export property under the court’s holding) and the license of other intangible property (i.e., non-export property).  The Court suggested in footnote 6 of its opinion that the issue may be remanded to the Tax Court for further consideration.  The issue was not remanded to, or reconsidered by, the Tax Court.  

For the reasons set forth in the Bundle of Rights IDD, the Service directed examiners generally not to assert the bundle of rights in software issue and attempt to divide export property from non-export property under the FSC provisions.  The Bundle of Rights in Software IDD has been interpreted to limit the ability of examiners to audit emerging issues outside of the repealed IRC §§ 921-927.

In order to ensure that Service’s examiners are not improperly constrained in their ability to examine emerging issues outside of IRC §§ 921-927 by an overly broad application of the language in the previously referenced IDD, I am withdrawing the prior Bundle of Rights in Software IDD, dated November 14, 2003.

For guidance and support in dealing with these issues, please contact the Pre-filing &Technical Guidance (PFTG) High Tech Technical Advisors, the International Business Compliance Technical Advisor for Foreign Sales Corporations, Extraterritorial Income Exclusion and Interest Charge-Domestic International Sales Corporation issues and/or Industry Counsel.

This Directive is not an official pronouncement of law, and cannot be used, cited, or relied upon as such.

Commissioner, LB&I
Deputy Commissioner, Operations
Deputy Commissioner, International
Division Counsel, LB&I
Chief, Appeals
Directors, Field Operations