In Uncategorized on 08/26/2020 at 16:18

Former Section 199 was a casualty of the 2017 Act, but Judge Paris must deal with the fallout from years gone by in TGS-NOPEC Geophysical Company and Subsidiaries, 155 T. C. 3, filed 8/26/20.

TGS is the onshore sub of a Norwegian corp. TGS acquires, processes and licenses marine seismic data for the oil and gas industry. TGS wants a $1.9 million DPAD. For year at issue, TGS employed over 500 people onshore, contracted for vessels to go to sea, depth-bomb and hoover up raw data, which the employees would process (and maybe reprocess, as the algorithms got more precise) and TGS would lease, on off-the-shelf mag media TGS did not manufacture, to the drillers. TGS’ processing headquarters were in The Bayou City.

TGS claims either the processed data is qualifying production property (Section 199(c)(4)(A(i)(I), or engineering services (Section 199(c)(4)(A)(iii)).

There’s the usual experts’ jumpball, but Judge Paris finds that data is not tangible personal property. The fact that said data dwells on off-the-shelf mag media is irrelevant. Maybe if TGS manufactured the mag media, the package might be tangible, and therefore qualifying. Burt computer programs aren’t…generally. 155 T. C. 3, at p. 21.

“The item licensed by petitioner in this case is the processed seismic data. Data, as such, is inherently intangible. It lacks corporeal form. The intangible nature of this data is not changed by petitioner’s loading the information onto a CD or other tangible medium. Such a medium serves only as the vehicle of transfer for the data; it does not become an embodiment of the data itself. In contrast to the printing of a book, where the physical medium becomes the item itself, the data and the delivery medium remain separate and separable items. Petitioner’s clients are able to transfer the processed data from the tangible medium, copy the information, and share it within their organization.” 155 T. C. 3, at p. 21.

Sorry, Prof. McLuhan, the medium isn’t the message. If the original medium on which the processed data had been licensed to the end-users, or if the data could only be found on the original mag media, like original film negatives that had never been copied, and if destroyed would be gone forever, it might have qualified. But TGS kept the original data, had multiple copies made, and the copies were what was licensed.

And what TGS licensed weren’t sound recordings. Reg. Section 1.199- 3(j)(4)(ii) “…excludes from the definition of sound recordings ‘copyrighted material in a form other than a sound recording, such as lyrics or music composition.’ In other words, representations of sound in a manner other than in an audible format are not themselves ‘sound recordings’.” 155 T. C.3, at p. 28. Besides, TGS asserts no copyright in the raw data.

But the engineers carry the day…partially.

TGS certainly uses scientific principles in its work, high-powered computers and sophisticated software. That fits squarely within Section 199(c)(4)(a)(iii). And they’re in a NAICS 5413 classification, fitting in with Reg. Section 1.199-3(n)(1).

Since oil wells and drilling rigs satisfy the “with respect to construction of real property” condition, TGS is in.

Judge Paris blows off IRS’ arguments, which you can read for yourself.

But as to how much is deductible, there will need to be a Rule 155 beancount.

Where TGS processed its own data for its own clients, that counts. Likewise when TGS subcontracted certain processing services for its own clients, but retained oversight and licensing, that counts. Where it just reprocessed its Norwegian parent’s data for the parent’s clients, that’s too remote, and doesn’t count. And TGS’ overriding royalty interests are out, as there’s no statutory basis for that.






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