Microsoft Argues Computer Software Masters are Export Property

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

Brecht v. Abrahamson, 507 U.S. 619 (1993)

Brower v. Evans, 257 F.3d 1058 (9th Cir. 2001)

Caruso v. Blockbuster, 193 F.3d 730 (3d Cir. 1999)

Farrell v. Commissioner, 136 F.3d 889 (2d Cir. 1998)

Fullilove v. Klutznick, 448 U.S. 448 (1980) (Powell, J., concurring)

Garcia v. United States, 469 U.S. 70 (1984)

Gardner v. Nike, Inc., 279 F.3d 774 (9th Cir. 2002)

Hanover Bank v. Commissioner, 369 U.S. 672 (1962)

Huebner v. United States, 731 F. Supp. 1441 (D. Ariz. 1990)

In re Cybernetic Servs., Inc., 252 F.3d 1039 (9th Cir. 2001) cert denied, 122 S. Ct. 1069 (2002)

Kikalos v. Commissioner, 190 F.3d 791 (7th Cir. 1999)

LeCroy Research Sys. Corp. v. Commissioner, 751 F.2d 123 (2d Cir. 1984)

MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993)

National Ass'n of Radiation Survivors v. Derwinski, 994 F.2d 583 (9th Cir. 1993)

National Fed'n of Fed. Employees v. Devine, 671 F.2d 607 (D.C. Cir. 1982)

National Muffler Dealers Ass'n v. United States, 440 U.S. 472 (1979)

Neal v. Board of Trustees, 198 F.3d 763 (9th Cir. 1999)

Quileute Indian Tribe v. Babbitt, 18 F.3d 1456 (9th Cir. 1994)

Regan v. Wald, 468 U.S. 222 (1984)

Rocky Mountain Oil & Gas Ass'n v. Watt, 696 F.2d 734 (10th Cir. 1982)

Russello v. United States, 464 U.S. 16 (1983)

SEC v. Board of Governors, 468 U.S. 137 (1984)

Skidmore v. Swift, 323 U.S. 134 (1944)

Suzy's Zoo v. Commissioner, 273 F.3d 875 (9th Cir. 2001)

Tedori v. United States, 211 F.3d 488 (9th Cir. 2000)

U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001)

U.S. v. American Bldg. Maint. Indus., 422 U.S. 271 (1975)

United States v. Fellows, 157 F.3d 1197 (9th Cir. 1998)

United States v. Lacy, 119 F.3d 742 (9th Cir. 1997)

United States v. Symington, 195 F.3d 1080 (9th Cir. 1999)

United States v. Van Winrow, 951 F.2d 1069 (9th Cir. 1991)

United States v. Whitten, 706 F.2d 1000 (9th Cir. 1983)

Varner v. Illinois State Univ., 226 F.3d 927 (7th Cir. 2000), cert. denied, 533 U.S. 902 (2001)

Walters v. National Ass'n of Radiation Survivors, 473 U.S. 305 (1985)

Warren v. Stone, 751 F. Supp. 1302 (N.D. Ill. 1990)

Wells Fargo v. Commissioner, 224 F.3d 874 (8th Cir. 2000)

Whitman v. American Trucking Ass'n, 531 U.S. 457(2001)

Statutes:

1 U.S.C. § 1

17 U.S.C. § 101

26 U.S.C. § 927(a)(1)(A)

26 U.S.C.A. § 927(a)(2)(B) (West Supp. 2000)

Other Authorities:

Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts, ¶ 110.4.1 (1981)

Gen Couns. Mem. 39,449 (Feb. 17, 1983)

H.R. 18392, 91st Cong. § 2 (1970)

H.R. 18970, 91st Cong. § 402 (1970)

H.R. Rep. No. 533, at 69 (1971)

National Commission on New Technological Uses of Copyrighted Works, Final Report (1979)

S. Rep. No. 437, at 102 (1971)

Sound Recording Act of 1971, Pub. L. 92-140, 1971 U.S.C.C.A.N. (85 Stat. 391) 417

Tech. Adv. Mem. 86-52-001 (July 31, 1986)

Treas. Reg. § 1.458-1(b)(3) (1992)

Webster's Third New International Dictionary (1966, 1986 ed.)

[3] The Commissioner's brief does not mention, let alone respond to, Microsoft's argument. Instead, the Commissioner insists repeatedly that, in using the words "films, tapes, [and] records," Congress really meant to cover just motion pictures and sound recordings. Red Br. 24, 26-27, 48, 53 & 58. Repetition does not strengthen the argument. The Commissioner also cannot explain what work the words "or similar reproductions" do if "films, tapes, [and] records" already reference motion pictures and sound recordings. Motion pictures are motion pictures, and sound recordings are sound recordings, regardless of the media on which they are stored. 17 U.S.C. § 101.

[4] The Commissioner's construction necessarily entails redundancy and violates noscitur a sociis, despite his concession that both principles must guide this Court's construction of the statute (Red Br. 24, 28-29). By contrast, treating "films, tapes, [and] records" as three different kinds of media on which copyrighted works are fixed and "similar reproductions" as media with similar fundamental attributes comports with both canons of construction.

[6] According to the Commissioner's brief, Congress replaced "films, tapes, or records for commercial showing of motion pictures or used for radio or television broadcasting or to provide background music" (H.R. 18970), and "motion picture films or films or tapes used for radio or television broadcasting" (H.R. 18392), with the language of the Similar Reproductions Parenthetical merely to resolve uncertainty as to whether consumer sound recordings would be covered. Red Br. 30-32. This assertion is unsupported by any citations to the record, legislative history, or contemporaneous interpretations of the text.

[7] In addition to being wholly speculative, the Commissioner's argument fails to explain why Congress added the critical phrase "or similar reproductions." Nor does it explain why Congress deleted "motion pictures" and "music." Congress's elimination of content-specific language signals its rejection of such limitations on the scope of the Similar Reproductions Parenthetical. Russello v. United States, 464 U.S. 16, 23-24 (1983) ("Where Congress includes limiting language in an earlier version of a bill but deletes it prior to enactment, it may be presumed that the limitation was not intended.").

[8] The Commissioner ignores not only the words Congress changed but also what these changes signify about the words Congress retained. The evolution from "films, tapes, or records for commercial showing of motion pictures or used for radio or television broadcasting or to provide background music" to "films, tapes, records, or similar reproductions, for commercial or home use" reveals a great deal about the function of the words "films, tapes, [or] records." In H.R. 18970, those words necessarily referenced recorded media rather than pure content. After all, one does not "use" a motion picture for the "commercial showing of motion pictures." Rather, one "uses" a film or DVD for such showings. ¹ By keeping the "films, tapes, or records" language of H.R. 18970 in the finally enacted bill, Congress evidenced its media- specific understanding of these words.

[9] The Commissioner also asserts that the use of copyrighted works is not at issue here. Red Br. 32. But he has recognized shrink- wrapped computer software products as export property, even though such products are accompanied by a copyright license, while seeking to exclude precisely the same products if the licensee is authorized to reproduce them for external use. ² This distinction not only belies the Commissioner's purported reliance upon content as "the line that Congress saw fit to draw" (Red Br. 33) but also resurrects the kind of use-based limitation that Congress eschewed in enacting the Similar Reproductions Parenthetical.

[11] The definition of "reproductions" is no less media- specific. Webster's Third defines a reproduction as "something reproduced: as a: a representation in another form or medium <printed of the great masters>." Id. at 1928 (1966 and 1986 eds.). Consider also Congress's definition of the word "reproductions" in the Sound Recording Act of 1971, Pub. L. 92-140, 1971 U.S.C.C.A.N. (85 Stat. 391) 417, which it enacted contemporaneously with DISC. The Sound Recording Act defined "reproductions of sound recordings" as "material objects . . . from which sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device, and include . . . discs or tapes." 1971 U.S.C.C.A.N. at 418 (emphasis added). Where Congress explicitly defines a term in one statute dealing with a particular subject, but leaves the same word undefined in another statute enacted the same year, courts presume that the word possesses the same meaning in both statutes. SEC v. Board of Governors, 468 U.S. 137, 150-52 (1984); U.S. v. American Bldg. Maint., Indus., 422 U.S. 271, 277 (1975).

[12] "Films" and "tapes," unlike "records" or "reproductions," can reference either content or media. The Commissioner relies on the seventh definition of "tape" (a tape recording), but neglects to mention the fourth definition: "A narrow limp or flexible strip or band (as of paper, plastic, or metal): as . . . magnetic tape <record a program on magnetic >." Webster's Third at 2339. Similarly, the Commissioner invokes the fourth definition of "film" (a motion picture), but ignores the third definition ("A thin flexible-transparent sheet of cellulose acetate, cellulose nitrate, or other plastic material that is used for taking photographs and that is coated with a light-sensitive emulsion which when exposed and developed contains negative or positive images in black silver or in color."). Id. at 850. Revealingly, the Commissioner's own brief refers to both "films" and "records" as media. Red Br. 50.

[13] Among the critical words in the Similar Reproductions Parenthetical, two (records and reproductions) refer solely to media. The other two (films and tapes) can refer to media or content. Reading the words in context leads inescapably to the conclusion that Congress had media, not content, limitations in mind when it drafted the phrase "films, tapes, records, or similar reproductions." Whitman v. American Trucking Ass'n, 531 U.S. 457, 466 (2001) ("Words that can have more than one meaning are given content, however, by their surroundings.").

[14] To rescue his interpretation, the Commissioner reaches for unorthodox sources of meaning of the word "films," referring to a colloquy among legislators and statements made at trial by an expert witness. Red Br. 29-30, 25. The question here is not what "film" means in a conversation among legislators or experts, but rather what it means in the context of "films, tapes, records, or similar reproductions, for commercial or home use."³ A colloquy among legislators reveals nothing about what Congress meant by particular words in a given statute. Regan v. Wald, 468 U.S. 222, 237 (1984).

[15] The Commissioner also suggests that Congress's use of "films" as opposed to "film" indicates a reference to motion pictures, because the grammatically correct plural reference to celluloid is "film." Red Br. 25. This Court, however, has twice held that "films," when surrounded by terms such as "tapes" and "books," references plural copies of celluloid reproductions. United States v. Lacy, 119 F.3d 742, 748 (9th Cir. 1997); United States v. Fellows, 157 F.3d 1197, 1201 n.2 (9th Cir. 1998). Lacy's and Fellows' interpretations of "films" are mandated by Congress itself: "In determining the meaning of any Act of Congress, unless the context indicates otherwise -- words importing the singular include and apply to several persons, parties, or things; words importing the plural include the singular." 1 U.S.C. § 1. See Rocky Mountain Oil & Gas Ass'n v. Watt, 696 F.2d 734, 748 (10th Cir. 1982).

[16] The words that Congress chose for the Similar Reproductions Parenthetical -- "films, tapes, records, or similar reproductions" -- plainly denote physical media. The drafting history shows that Congress pondered, and rejected, content-limiting language. Its choice should be respected.

[18] The Commissioner suggests that the rights Microsoft granted to its foreign licensees -- the night to adapt a certain product, to reproduce it, and to distribute it -- are troubling. "The sole question before the Court," the Commissioner intones, "is whether those rights [of adaptation, reproduction, and distribution abroad] belong in the class of copyrights in 'films, tapes, records, or similar reproductions."' Red Br. 23. Insofar as this is a sensible question to ask, the answer must be "yes." The same rights are granted in the export license agreements employed in the motion picture and sound recording industries. ER 476.

[19] The license agreements in this case make plain that Microsoft granted to Controlled Foreign Corporations ("CFCs") and foreign Original Equipment Manufacturers ("OEMs") specific nonexclusive license rights with respect to identified software products, reserving all rights not expressly granted to itself. SSER 27, 31.⁴ Copyright law is the basis of Microsoft's rights in those products and the regime under which they were licensed. SSER 45-54. But Microsoft never transferred its copyrights. See 17 U.S.C. § 101 ("transfer of copyright ownership" does not include a nonexclusive license); Gardner v. Nike, Inc., 279 F.3d 774, 778 (9th Cir. 2002) (discussing the distinction between granting a license and assigning a copyright).

[20] The Commissioner distorts the foreign job creation associated with Microsoft's activities. Contrary to his claim, MS- Ireland performed few localization activities during the years at issue. SSER 6-7. MS-Ireland's 75,000 square-foot facility was less than 6% the size of the 1.3 million square feet on which Microsoft operated in the United States. SER 91. The Commissioner's comparison of U.S. and foreign employment figures, Red Br. 63, is misleading, because the vast majority of foreign employees were engaged in marketing, sales, and service. ER 348. Even if Microsoft had exported only shrink-wrapped software, these foreign jobs still would have been created; somebody had to market, sell, and service Microsoft's products around the world.

[21] The Commissioner also exaggerates the significance of the functions performed by foreign OEMs. Red Br. 37. None localized Microsoft's products, and many performed no adaptation. SSER 4. Those that did so did not change the source code of Microsoft's products, but simply enabled them to communicate with the OEMs' proprietary software and hardware. SSER 5. The principal activity of the foreign OEMs was to duplicate diskettes or preload the software on their hardware.

[22] The Commissioner asserts that the foreign OEMs' jobs should be performed in the United States as a prerequisite to Microsoft's qualification for FSC benefits. Red Br. 37. That suggestion is absurd. Can one imagine an OEM that manufactures desktop computers in Germany shipping its machines to the United States for the sake of preloading Microsoft's software before selling the systems to customers in Europe? Congress was not blind to practical realities. It wanted to encourage export-led growth, not stagnation through economic autarky. It created a special rule for films, tapes, records, and similar reproductions in recognition that the efficient distribution of these items required licensing masters for adaptation, reproduction, and distribution overseas.

[24] In actuality, the Similar Reproductions Parenthetical substantially furthers the job-creation, export-promotion, and economic modernization purposes that underlie both DISC and FSC. Blue Br. 30-34. It provides an important incentive to those creative firms whose exports are particularly likely to boost domestic employment. Although Congress in 1971 could not have foreseen the growth of the computer software industry, it did understand that copyright industries employing magnetic or optical media had the potential to create a great number of desirable Jobs in the United States even if they duplicated their products overseas.⁶

[25] Software companies use the same business model for international distribution of their products as the motion picture and sound recording industries, because that is the only one that makes sense. Nor should that model be viewed as contrary to the purposes of DISC and FSC. When Microsoft, Oracle, and other software companies licensed their software masters to foreign customers, those transactions created thousands of jobs in the United States. Foreign revenues flowing to domestic software makers substantially improved the United States' balance of payments. ER 414.

[26] U.S.-made software, like motion pictures and recorded music, competes successfully in world markets because it is distributed efficiently. The Similar Reproductions Parenthetical furthers that success. It should not be interpreted, as the Commissioner urges, to hinder it. Faced with a choice between the Commissioner's interpretation of the Similar Reproductions Parenthetical, which views it as contrary to the statutory purpose, and Microsoft's, which views it as consistent with that purpose, this Court should adopt the latter. Brower v. Evans, 257 F.3d 1058, 1065 (9th Cir. 2001); In re Cybernetic Servs., Inc., 252 F.3d 1039, 1055 (9th Cir. 2001), cert denied, 122 S. Ct. 1069 (2002).

[29] To be sure, minor differences exist between films and records and among different kinds of tapes. Red Br. 50. But when films, tapes, and records are grouped together, and one is asked to discern whether a CD-ROM, for example, is is a similar reproduction, it is natural to ask what fundamental features films, tapes, and records share. Cf. Lacy, 119 F.3d at 748. If the CD-ROM shares those characteristics, then it is a similar reproduction.⁸

[30] The similarities between films, tapes, records, CDs, and DVDs, on the one hand, and tapes, floppy diskettes, CD-ROMs, and DVD-ROMs, on the other, are substantial. The record unequivocally establishes that the media used for computer software:

[34] Although the CONTU Report's factual findings do not reveal what Congress was thinking when it enacted DISC in 1971, they do indicate the factual premises that Congress held when it enacted FSC in 1984. Where language from an older statute is reenacted without change, developments occurring between the enactment of the older statute and the newer statute can reveal or clarify the meaning of the old words in the new act. American Bldg. Maint. Indus., 422 U.S. at 279-80. By the time Congress re-enacted the Similar Reproductions Parenthetical in 1984, it was experienced in legislating on matters concerning computer software and other copyrighted works.

[35] The Commissioner's second argument suggests that Congress can find that the sky is blue for the purposes of copyright legislation and that the sky is green for the purposes of tax legislation. A factual finding, however, is a determination that certain statements are true. When Congress reaches particular factual conclusions, courts presume that the same factual conclusions apply to subsequent legislation dealing with the same subject matter. See, e.g., Fullilove v. Klutznick, 448 U.S. 448, 502-03 (1980) (Powell, J., concurring); Varner v. Illinois State Univ., 226 F.3d 927, 935 (7th Cir. 2000), cert. denied, 533 U.S. 902 (2001). What is true in the copyright context can be no less true in the tax context, particularly where the issue in dispute concerns copyrights.

[36] Apart from what CONTU taught Congress, there remains the issue of what it teaches the courts. The Tax Court ignored its lessons. Even in those instances where Congress fails to enact legislation, any factual findings reached by Congress as part of the process of considering legislation are entitled to a "great deal of deference" by the courts. Walters v. National Ass'n of Radiation Survivors, 473 U.S. 305, 330 n.12 (1985). Under Walters, the timing of CONTU, DISC, and FSC become irrelevant. The Tax Court reached a conclusion diametrically opposed to the conclusion reached by Congress, "an institution better equipped to amass and evaluate . . . vast amounts of data." Id.

[38] Book manuscripts are different from films, tapes, records, or similar reproductions. For two reasons, they do not qualify for export property treatment: (1) the words of the Similar Reproductions Parenthetical (paper is not a medium similar to films, tapes, and records); and (2) the purpose underlying DISC and FSC (printing books is relatively labor-intensive, unlike duplicating films, tapes, records, and similar reproductions).

[39] The Commissioner offers a contrived example of a license coupled with an undifferentiated advance that, he says, would present administrative difficulties under Microsoft's interpretation of the Similar Reproductions Parenthetical. Red Br. 64. Nothing in the record suggests that any author has ever licensed a literary work in the manner described by the Commissioner. ⁹

[40] Unlike this hypothetical problem, the Commissioner's attempts to distinguish between content that qualifies for export- property treatment and content that does not qualify raise a host of difficulties.¹⁰ Multimedia products and enhanced CDs defy ready classification of content. At trial the Commissioner suggested that an enhanced CD, such as Sarah McLachlan's Surfacing (ER 542), which contains both music and computer instructions, would not qualify as export property, whereas an ordinary CD would. SSER 8-10. Now, the Commissioner flatly refuses to say whether an enhanced CD qualifies. Red Br. 43 n.9.¹¹ Surely the export-property status of Surfacing should not hinge on whether a consumer intends to insert it into his CD player or personal computer. The Commissioner must draw a similarly meaningless line between Tomb Raider and South Park the movies (which qualify) and Tomb Raider and South Park the video games (which, on his logic, do not). Finally, the Commissioner must justify his determination that "Books on Tape" qualify as export property because they are not books. ER 253-55. The Commissioner's content- based interpretation is unworkable.

[42] A close reading of the legislative history casts significant doubt on the Commissioner's reinterpretation of it. Quoting the testimony of the principal industry witness, Gerald K. Howard, at the 1984 FSC hearings, the Tax Court erroneously inferred that Congress's failure to reference computer software expressly in Section 927(a)(2)(B) meant that Congress intended to deny FSC benefits to the export of software masters. ER 517 & 530-31. For his part, the Commissioner relies on the testimony of A. Jason Mirabito to suggest that the 1984 hearings focused on software masters, rather than shrink-wrapped software diskettes. Red Br. 34-37. Both the Tax Court and the Commissioner are wrong.

[43] Mirabito was the only one of five industry witnesses to even mention computer software masters and he, like the others, testified that U.S. companies "usually exported [computer software] abroad in the form of tapes, floppy disks, cartridges, etc., together with the documentation." SSER 35.

[44] The industry in 1984 was particularly concerned about the eligibility of shrink-wrapped computer software for DISC and FSC benefits, because Treasury's statements in a 1977 Technical Memorandum raised uncertainty. Blue Br. 40; ER 409. Although all of the industry witnesses testified in 1984 that the Similar Reproductions Parenthetical could be interpreted to cover computer software, Howard asked Congress or Treasury to clarify that computer software was eligible for export tax incentives. SSER 34.

[45] Congress refrained from taking a position on computer software in 1984 because Ronald Pearlman, Deputy Assistant Secretary for Tax Policy, was unprepared to articulate Treasury's view. Senator Chafee asked Pearlman to comment on Mr. Howard's testimony. SER 96-97. Pearlman demurred:

[46] The Commissioner nevertheless argues that Treasury must have "followed up" with Congress, that Treasury must have advised Congress that computer software was not qualified export property, and accordingly that Congress intentionally excluded computer software in enacting Section 927(a)(2)(B). Red Br. 41, n. 8. The 1984 legislative history offers no support for this argument. The Commissioner also asserts that "[t]he notion that [Pearlmann's statement] can explain the nine-year hiatus until the next FSC hearing (in 1993) is absurd." Id. This assertion conveniently overlooks the fact that Treasury actually did respond -- positively -- to the industry's concerns in 1985. At that time Treasury published several administrative pronouncements, all of which concluded for the first time that shrink-wrapped computer software qualified as export property. See Blue Br. 40-41. Treasury also said that, because the Similar Reproductions Parenthetical "does not seem to be solely limited to the entertainment industry, such provision should not be interpreted in a restrictive manner.". See, eg., Tech. Adv. Mem. 8652-001. That reasoning indicated that Treasury would rule favorably when asked to determine computer software masters' eligibility under the Similar Reproductions Parenthetical.

[47] When IRS agents began asserting in audits of computer software companies in the early 1990s that the temporary regulation implicitly denied FSC benefits to computer software masters, the industry sought clarification of Treasury's position at the 1993 legislative hearings. Treasury again demurred. When Treasury announced after the 1993 legislative hearings that the Similar Reproductions Parenthetical covered only "the entertainment industry," the computer software industry sought the clarifying legislative amendment that was enacted in 1997.

[48] The Commissioner states that "[i]nferences drawn from Congress' failure to act before 1997 are entirely proper." Red Br. 40. On the contrary, they violate Congress's 1997 "no inference" directive as well as the Supreme Court's admonition to trial courts not to "draw inferences from Congress' failure to act." See, eg., Brecht v. Abrahamson, 507 U.S. 619, 632 (1993).

[51] The Commissioner insists that his administrative position has been consistent. Red Br. 77-78. But he initially refused to consider software because of concerns about "services." ER 409. In 1985 he publicly stated that retail packages of computer software are export property. At the same time, he said that computer software "marketed on magnetic tapes for commercial use . . . seem to specifically qualify" for export property treatment under the Similar Reproductions Parenthetical. Gen Couns. Mem. 39,449 (Feb. 17, 1983). In Tech. Adv. Mem. 86-52-001 (July 31, 1986), the Commissioner concluded that the Similar Reproductions Parenthetical covers more than just those copyrighted products made by the motion picture and sound recording industries. The temporary regulation was enacted shortly thereafter. Oracle argues persuasively that the temporary regulation conferred export property status upon computer software masters and that the Commissioner did not suggest otherwise until several years later. Although the Commissioner disagrees, it is incontestable that he reversed course after 1986.

[52] The Commissioner tries several strategies to avoid the consequences of his about-face. First, he states that it is a good thing for administrative agencies to change their minds. Red Br. 77. Perhaps that is true in some contexts, but courts have consistently held that, when agencies change their minds about the meaning of words, their current position is accorded less deference. Eg., U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137, 1144-45 (7th Cir. 2001); Caruso v. Blockbuster, 193 F.3d 730, 736 (3d Cir. 1999).

[53] Second, the Commissioner asserts that, because IRS Technical Advice and General Counsel Memoranda are not precedent, evidence culled from them about the Commissioner's wavering positions should be disregarded. Red Br. 77. Although these IRS determinations might not carry the weight of precedent, they do provide guidance as to whether the Commissioner's interpretation of the Similar Reproductions Parenthetical has been consistent over the years. Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962); Wells Fargo v. Commissioner, 224 F.3d 874, 886 (8th Cir. 2000).

[54] Third, the Commissioner responds to the extensive discussion of his various interpretations in the Note by David J. Kastanis, not by disagreeing with anything that the author wrote, but by emphasizing that he was a law student. Red Br. 77. This Court has frequently adopted or cited with approval student-written notes. See, eg., Neal v. Board of Trustees, 198 F.3d 763, 768 n.4 & 769 (9th Cir. 1999); United States v. Symington, 195 F.3d 1080, 1086 (9th Cir. 1999). The Seventh Circuit has specifically cited the Kastanis Note. Kikalos v. Commissioner, 190 F.3d 791, 796 (7th Cir. 1999).

[56] The notion that temporary regulations merit deference equal to that accorded final regulations derives from dicta in LeCro Research Sys. Corp. v. Commissioner, 751 F.2d 123 (2d Cir. 1984). Addressing a proposed regulation, the court there stated: "If the Commissioner wanted this regulation to have binding effect, it could have been issued as a temporary regulation." Id. at 127. For this proposition, LeCroy cited Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts, ¶ 110.4.1 at 110-26 (198 1), which opined that "[t]he 'impracticable' exception [of the Administrative Procedure Act] is used most commonly by the IRS to dispense with notice and hearing when issuing temporary regulations under new legislation, on the theory that taxpayers and revenue agents. require immediate guidance, although in practice these rules remain in force for many years." Bittker & Lokken did not endorse the IRS's practice. Under the "impracticable" exception, the deference accorded a temporary regulation "is conditioned on expeditious conduct of notice and comment procedures in good faith." National Fed'n of Fed. Employees v. Devine, 671 F.2d 607, 613 (D.C. Cir. 1982) (emphasis added). Later cases adopted LeCro's dicta without examination.

[58] Oracle's interpretation of the temporary regulation harmonizes with the legislative history from which it is derived. The introductory clause of the second sentence of the temporary regulation simply restates the general rule denying qualified export property status to sales or licenses of copyrights, while the main clause recognizes that copyrighted articles may qualify as export property. The general rule is subject to the Similar Reproductions Parenthetical, which deems masters of copyrighted "films, tapes, records or similar reproductions, for commercial or home use" to be qualified export property.

[59] The Commissioner interprets the second sentence of the temporary regulation as "conversely" establishing that a copyrighted article licensed with the right to reproduce for external use is disqualified. Red Br. 68. As the Commissioner concedes, however, the second sentence is derived from the following legislative history:

[60] Actually, the Similar Reproductions Parenthetical is picked up in the fourth sentence of the temporary regulation, concerning "master recording tapes." The Commissioner claims that "master recording tape" is a term of art in the music industry and that it refers exclusively to "the tape from which other recordings were made on the first complete tape made." Red Br. 70-71. Not so. Courts have referred to computer software media as "recording tapes." E.g., Warren v. Stone, 751 F. Supp. 1302, 1302 (N.D. Ill. 1990); Huebner v. United States, 731 F. Supp. 1441, 1448 (D. Ariz. 1990). In any case, the Commissioner's argument proves too much. If "master recording tape" has a narrow term-of-art meaning, then it does not cover film negatives, metal masters or stampers, CDs, and other media commonly used for masters in both the motion picture and sound recording industries. The critical word in the fourth sentence is "master", and that term clearly encompasses the computer software masters at issue here.

DATED this 5th day of April, 2002.

April 5, 2002

²Use of a computer software product entails copying it within the computer and may constitute infringement if not authorized by copyright license. MAI Systems Com. v. Peak Computer, Inc., 991 F.2d 511, 517-19 (9th Cir. 1993). "External use" means copying for use in another computer. The Tax Court misunderstood the phrase as referring to reproduction abroad. ER 524.

³The Commissioner's discussion of section 993(d)(4)'s "domestic film maker" language is equally beside the point. Red Br. 25. The question before this Court is not the meaning of "film" in the phrase "domestic film maker," but the meaning of "films" in "films, tapes, records, or similar reproductions."

⁴"SSER" refers to Microsoft's Second Supplemental Excerpts of Record.

⁵There is no evidence that the sound recording industry lobbied for the Similar Reproductions Parenthetical. The products of that industry are covered because the language of the statute is broad enough to encompass them.

⁶Congress identified its reasons for enacting DISC explicitly in the Committee Report accompanying DISC. S. Rep. 92-437, at 1 (1971), reprinted in 1971 U.S.C.C.A.N. 1918. Nowhere in this report is aiding the motion picture and sound recording industries mentioned as a factor behind congressional intent. The Commissioner cites no legislative history to support his assertion that Congress wanted to aid the sound recording industry and only an isolated colloquy among three legislators to argue that Congress wanted to aid the motion picture industry. Committee reports, unlike colloquies, floor debates, or statements by individual legislators at hearings are "the authoritative source for finding the Legislature's intent." Garcia v. United States, 469 U.S. 70, 76 (1984).

⁷To determine the applicable standard of review, this Court must examine the Tax Court's determination in context. Here the "fundamentally different" conclusion is followed by a statement that "[w]ithin the purview of the parenthetical, (1) 'films, tapes, and records' are content specific, and (2) 'similar reproductions' refers to 'films, tapes, and records' on media that might be invented in the future." ER 524. The Tax Court's conclusion evidently was based on its supposition that content is the relevant basis for determining similarity. The "fundamentally different" determination would therefore be, at best, a mixed question of law and fact, subject to de novo review. Suzy's Zoo v. Commissioner, 273 F.3d 875, 878 (9th Cir. 2001). The Tax Court made no findings with respect to whether the media on which computer software is stored are similar to films, tapes, and records. Even as a finding of fact, the Tax Court's statement would be clearly erroneous under National Ass'n of Radiation Survivors v. Derwinski, 994 F.2d 583, 592-94 (9th Cir. 1993).

⁸If, as the Commissioner concedes, Red. Br. 28, audio CDs are "similar reproductions" to films, tapes, and records, and audio CDs and CD-ROMs are, in the words of the Commissioner's expert, "essentially identical," SSER 15, then CD-ROMs must also be similar reproductions. See also Treas. Reg. § 1.4581(b)(3) (1992), available in 1992 WL 204800 ("[T]he definition of 'record' was expanded to include video cassettes in response to commentators' concerns that the definition of 'record' was unduly restrictive by its exclusion of items that also contain a visual recording. There is no evidence of any Congressional intent to exclude videocassettes at the time of the enactment of section 458 and commentators indicated that the distribution of recordings with visual content is the same as for recordings without visual content.").

⁹The Commissioner suggests that the documentation accompanying Microsoft's software products should not qualify as export property. Red Br. 62 n. 12. Microsoft's documentation functioned the same way as the packaging and liner notes accompanying sound recordings distributed on tapes, records, and CDs.

¹⁰In addition, disqualifying software masters while recognizing shrink-wrapped software products as export property requires the Commissioner to focus on the uses to which both may be put under the terms of their respective copyright licenses, which is a non-content based distinction.

¹¹Though the Commissioner chastises Microsoft for referring to enhanced CDs that post-date the tax years at issue in this case, Red Br. 43 n.9, he refers to other technological developments that post-date 1991 when it serves his purposes. Id. at 61, 64. Because this Court's decision will affect software makers' tax liability for 1990 to 1997, post-1991 developments are relevant.

¹²The Commissioner attempts to cast the temporary regulation as "just over three years old." Red Br. 79. But using his calendar, the regulation considered in Tedori v. United States, 211 F.3d 488 (9th Cir. 2000), was just two years old. Id. at 490. Tedori properly characterized that regulation as "13 years" old and viewed Treasury's failure to finalize it or subject it to notice and comment in those intervening years as highly problematic. Id. at 491 n.9 & 492 n. 13.

¹³TEI's argument is properly before this Court. See United States v. Whitten, 706 F.2d 1000, 10 12 (9th Cir. 1983). Because no case has squarely considered and reached the question raised by TEI, that issue remains one of first impression to be decided here. Quileute Indian Tribe v. Babbitt, 18 F.3d 1456, 1459 (9th Cir. 1994).

¹⁴Microsoft took this position before the Tax Court, which rejected it. ER 526.