Online software access fails the comparable exception

Plain-English summary

Chief Counsel reviewed the section 199 regulation file while developing the primary position for an online-software taxpayer. The email states that the regulatory history offered no additional insight into the elements of the third-party comparable exception, but made clearer that the exception was not intended for this taxpayer or similar taxpayers. Counsel also states that, even if the taxpayer had gross receipts from providing online access to computer software, it did not meet every element of the exception. The author questioned whether a separate secondary position was needed and planned further review with the National Office and Division Counsel. The released PDF refers to an attached primary-argument document, but that attachment is not included, so the detailed analysis is unavailable in this release.

Ruling snapshot

• Question: Could the taxpayer’s online access to computer software qualify under section 199’s third-party comparable exception?
• Outcome: Advice given
• Key authorities: IRC § 199 and its final regulations

Full text (IRS public release)

ID: CCA-01280221-15 [Third Party Communication:

UILC: 199.03-07 Date of Communication: Month DD, YYYY]

Number: 201545021
Release Date: 11/6/2015
From: -------------------------
Sent: January 28, 2015 2:21 PM
To: --------------------------------
Cc: -----------------
Bcc:
Subject: Analysis of primary issue

Hello,

Please see the attached document for what I think should be the analysis of the primary
issue. Of course, the facts of ------- need to be appropriately incorporated into this
(somewhat generic analysis). As I mentioned, I went through the section 199 reg file. I
found nothing in the file that provides any additional insight into each element under the
third party comparable exception. One thing has become even clearer for me, however,
is that these exceptions were not intended to apply to ------- (and such similar
taxpayers). It was clearly intended that under the final regs, ------- and such – would
not be entitled to section 199 benefits.

After the reg file review and completing this analysis, I am questioning the need for the
secondary position, beyond explaining that even if ------- has any gross receipts from
providing access to computer software online, it does not meet each element of the
exception and explaining why and distinguishing the CCA.
I think we may want to re-visit the merits of taking a secondary position at all. I will
circulate my take on the analysis for the secondary position in ------- separately.

Once we have the facts and this analysis is incorporated, we need to run the document
by the NO. In the meantime, I will share a generic version of this analysis with the NO
and the Division Counsel. There is absolutely nothing in my analysis of the primary
position that should be subject to a dispute between ----- and our office (and really,
should not be disputed by taxpayers). I stuck to the language of the regs and to the
explanations in the preamble. But we will find out for sure soon.

Attachment:
------- (primary argument).docx