Bloomberg L.P., Bloomberg, Inc., Tax Matters Partner, T. C. Memo. 2024-108, filed 12/11/24, claimed around $10 billion-with-a-B in Domestic Production Gross Receipts (DPGR) over a three (count ’em, three) tax-year span. Judge Goeke allows only some $3.862 billion-with-a-B DPGRs.

This all is of historical interest, as the 2017 Tax Cuts and Jobs Creation Act repealed Section 199.

Mike Bloomberg’s brainchild was his eponymous professional service, an online omniscient that let its high-priced subscribers “access a vast amount of financial data and news. Users could also use included software to manipulate, analyze, and model that data and news.” T. C. Memo. 2024-108, at p. 8.  It was a smash hit, and propelled His Honor the Mayor to stratospheric heights.

Subscription was flat-fee, with some optional add-ons, but the fees were not broken down among data, news, software, and other features. Judge Goeke traces it all.

Bloomberg reported everything as information services. Bloomberg sought a Residual Profit Split Method for transfer pricing in its APA request. This breaks down routine services and residual profit from intangibles. News services were routine, brand recognition and customer loyalty were intangibles. See Reg. Section 1.482-9(g)(2) (example 2 (vii)).

IRS bought most of Bloomberg’s pitch, but assigned more profit to onshore technology and less to offshore customer goodwill. When IRS audited the three years at issue, they disallowed all DPGRs and all deductions therefrom. Bloomberg petitioned.

Software is Qualifying Production Property, and proceeds from leasing same are DPGR, but services are neither. IRS claims Bloomberg provided only services, but Bloomberg claims the self-comparable and third-party comparable software exceptions. For more about this, see my blogpost “Making A Big Production,” 3/31/22*, the BATS case, cited by Judge Goeke here. But Bloomberg’s graphing and analytical software was more than just a service; the subscriber used the software to do more than place and execute securities offers. And Bloomberg’s reporting separated news and data receipts from analytic and graphing.

Both Reuters and an outfit called Charles River provided substantially similar software.

Parenthetically, if Section 199 was intended to increase American employment, it sure did for Bloomberg. But Reg. Section 1.199-3 gets a real bashing from Judge Goeke, who finds ambiguities galore, as a good lawyer should. While not Loper-Brighting it to the curb, there isn’t much left in the software realm.

However, the Reg is good enough for Judge Goeke to find that providing access to Bloomberg’s vast data collection is a service, so fees therefrom aren’t DPGR. Likewise the instant messaging and e-mail functions are telecom, hence barred from DPGR.

But analytics and graphing are different stories. “While other [Bloomberg] software enabled or facilitated Bloomberg’s financial information or communication services, BPS analytical and graphing software did not. Instead, it helped users to draw their own insights from financial information. Whereas users had no control over the underlying financial information that they could access through [Bloomberg], users had a high amount of control over how they could analyze and/or visualize that information. Indeed, users could use analytical and graphing software to overwrite [Bloomberg]-supplied data with other values to test assumptions or hypotheses. Users could also create bespoke visual representations using the extensive number of graphing functions and tools that BPS provided.” T. C. Memo. 2024-108, at p. 53. And it doesn’t matter that these functions are run in conjunction with Bloomberg’s data bases. The subscribers directly used graphing and analytics, and the software for these functions were mostly made in USA.

Merely allowing scraping and reformatting of data doesn’t count as DPGR. That Bloomberg took inconsistent State and foreign sales and withholding tax doesn’t preclude Bloomberg from claiming otherwise in this context; even though providing information on the internet is a service, the Reg. Section 1.199-3(i)(6)(iii) provides an out, treating software that lets the user refine and modify the information as DP-eligible. And the Reg doesn’t mandate that no nonqualifying services can be provided with qualifying services.

But we get (at last) to allocation of gross receipts, which brings in as a matter of course the dueling experts. Clearing the air, Judge Goeke finds that Bloomberg changed its reporting position too many times, and whatever it came up with wasn’t reasonable, or reasonable enough to satisfy Reg. Section 1.199-1(d)(2). So, after slicing, dicing, chopping and changing, and belaboring the experts for their miscues, Judge Goeke comes up with the number first set forth at the head hereof, at page 102 of T. C. Memo. 2024-108.

On the US wages issue, Judge Goeke finally throws in the towel, telling the parties to settle this in the Rule 155 beancount. If they can’t, Judge Goeke will reopen the record and let them put in whatever they have.

* https://taishofflaw.com/2022/03/31/making-a-big-production/