CCA 1210028: Machine-sensible data media as records

Plain-English summary

Chief Counsel advice considers whether certain machine-sensible data media should be treated as records under IRC § 6001 and Treas. Reg. § 1.6001-1. It agrees that the media constitute records because the phrase “within a taxpayer’s automatic data processing system” modifies the accounting transactions and records, not the media themselves, under the advice's reading of Rev. Rul. 71-20. It also concludes that the media qualify even under a reading requiring a connection to an automatic data processing system, because the ruling does not say that media outside such a system are excluded. The advice further states that material machine-sensible records are subject to Rev. Proc. 98-25 and that the taxpayer must produce the requested information.

Ruling snapshot

• Question: Are the machine-sensible data media at issue records subject to the recordkeeping and production requirements of IRC § 6001?
• Outcome: Advice given.
• Key authorities: IRC § 6001; Treas. Reg. § 1.6001-1; Rev. Rul. 71-20; Rev. Proc. 98-25.

Full text (IRS public release)

ID: CCA_2011061016133346 Number: 201210028
Release Date: 3/9/2012
Office: --------------
UILC: 6001.03-00

From: --------------
Sent: Friday, June 10, 2011 4:13:34 PM
To: -------------------------------------------
Cc: -------------
Subject: RE: question regarding machine-sensible data capable of being processed

Hi ---------

I am writing in response to your question of whether the machine-sensible data media at
issue ---------------should be considered records under I.R.C. § 6001 and Treas. Reg. §
1.6001-1. I agree with you that the data should be considered records for two reasons.

First, I agree with your interpretation of Rev. Rul. 71-20. It seems clear that the phrase
“within a taxpayer’s automatic data processing system” is a modifier of “accounting
transactions and records” rather than of “machine-sensible data media.” If the Rev. Rul.
were intended to limit the “punched cards, magnetic tapes, disks, and other machine-
sensible data media” to only that media within the ADP system, then the modifier would
have been placed immediately following the phrase describing such media, rather than
after “accounting transactions and records.” From a grammatical standpoint, the phrase
“punched cards, magnetic tapes, disks, and other machine-sensible data media” stands
as the performer of the actions of “recording, consolidating, and summarizing” which
have as their object the “transactions and records” at issue. The “transactions and
records” at issue are identified by the prepositional phrase “within a taxpayer’s
automatic data processing system” that distinguishes those “transactions and records”
from other transactions and records that are not within the ADP system. And this
reading is further supported by the language in Rev. Proc. 98-25, which states that “The
purpose of this revenue procedure is to specify the basic requirements that the Internal
Revenue Service considers to be essential in cases where a taxpayer’s records are
maintained within an Automatic Data Processing System (ADP).” Rev. Proc. 98-25 § 1
(emphasis supplied). It is the records themselves that, under Rev. Rul. 71-20, must be
within the ADP, and not the media that records, consolidates, and summarizes those
records. Thus, under a plain reading of Rev. Rul. 71-20, the ------------ media constitute
records under I.R.C. § 6001 and Treas. Reg. § 1.6001-1.

Second, even if Rev. Rul. 71-20 did require the “machine-sensible data media” at issue
to be “within the taxpayer’s automatic data processing system,” the ------------ media are
still records under I.R.C. § 6001 and Treas. Reg. § 1.6001-1 because Rev. Rul. 71-20 in
no way states that such media must be within an ADP system. Even under ----------
reading of the ruling, there is no statement requiring all machine-sensible data media to
be within a taxpayer’s ADP in order to fall under I.R.C. § 6001 and Treas. Reg. §
 2

1.6001-1. Rather, the statement (again, even under -------- reading) is that where such
media are within the ADP system, they are under I.R.C. § 6001 and Treas. Reg. §
1.6001-1. But there is no converse statement, i.e. that machine-sensible data outside of
the ADP system is outside the scope of I.R.C. § 6001 and Treas. Reg. § 1.6001-1.

In addition, -------- focus on Rev. Rul. 71-20 is misleading in that it ignores the general
requirements of Rev. Proc. 98-25, which explicitly references Rev. Rul. 71-20 in its
background section but places no requirement that machine-sensible records be within
a taxpayer’s ADP system. Rather, the focus is on the materiality of the records, as
stated: “The taxpayer must retain machine-sensible records so long as their contents
may become material to the administration of the internal revenue laws under § 1.6001-
1(e).” Rev. Proc. 98-25 § 5 (emphasis supplied). There are no additional requirements
stated. Thus, -------- attempt to focus attention on the ADP system is a red herring that
draws attention from the sole requirement of materiality. And consequently, the -----------
media, as machine-sensible data that is material to the administration of the internal
revenue laws, is subject to Rev. Proc. 98-25.

For these reasons, I think that you are interpreting Rev. Rul. 71-20 and Rev. Proc. 98-
25 correctly and that ----- is required to produce the ------------ information.

If you have any questions or need any additional information, please write me back or
give me a call at your convenience.

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