Syncsort Inc. v. United States

31 Fed. Cl. 545, 74 A.F.T.R.2d (RIA) 5034, 1994 U.S. Claims LEXIS 116, 1994 WL 283360
CourtUnited States Court of Federal Claims
DecidedJune 24, 1994
DocketNos. 435-89T, 560-89T, and 561-89T
StatusPublished

This text of 31 Fed. Cl. 545 (Syncsort Inc. v. United States) is published on Counsel Stack Legal Research, covering United States Court of Federal Claims primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Syncsort Inc. v. United States, 31 Fed. Cl. 545, 74 A.F.T.R.2d (RIA) 5034, 1994 U.S. Claims LEXIS 116, 1994 WL 283360 (uscfc 1994).

Opinion

OPINION

ANDEWELT, Judge.

In these consolidated tax refund actions, plaintiffs, Syncsort Incorporated (Syncsort) and Assadour O. Tavitian (individually and as “Tax Matters Person” of Syncsort), seek to [546]*546recover income taxes paid for tax years 1979 through 1985 on payments Syncsort received pursuant to licensing agreements it entered with four foreign computer consulting firms. Plaintiffs contend that the Internal Revenue Service (IRS) improperly required plaintiffs to treat these payments as ordinary income for federal income tax purposes instead of permitting the more beneficial tax treatment available for capital gains. These actions are presently before the court on cross-motions for summary judgment. For the reasons set forth below, defendant’s motion for summary judgment is granted and plaintiffs’ cross-motion is denied.

I.

The material facts are not in dispute. During tax years 1979 through 1985, Sync-sort principally was engaged in the business of marketing and leasing or licensing a computer program referred to as “SyncSort” (the Sort Program). The basic function of the Sort Program was to sort unorganized individual data records in a specified sequence, e.g., in alphabetical or chronological order. In the domestic market, Syncsort offered its customers a computer tape of the Sort Program plus support services. The support services included installing the Sort Program, training a customer’s systems programmers to use the Sort Program, fine-tuning the parameters of the Sort Program to the boundaries of the customer’s computer environment, and maintaining the Sort Program by correcting any defects or “bugs” or by referring the customer to the pertinent portions of the operation manuals and/or user guides. In addition, separate from fine-tuning the parameters of the Sort Program, Syncsort apparently also engaged in certain “customized actions” which involved the customer’s individual computer system. Using confidential information about the Sort Program, Syncsort modified the customer’s systems software so as to enable the customer to secure greater efficiencies in the sorting process carried out by the Sort Program. (See infra note 3.)

Four foreign computer consulting firms contacted Syncsort and expressed an interest in Syncsort’s business. After determining not to exploit the relevant foreign markets on its own, Syncsort entered licensing agreements with these four firms, Pandata NV (Pandata), The Shell Company of Australia Limited (Shell), Computing Benefits (Proprietary) Limited (Computing Benefits), and Software Engineering Co., Ltd. (Software Engineering). In the respective agreements, Syncsort granted each of the four licensees, inter alia, an exclusive license in a specified geographic area to promote, advertise, duplicate, use, sublicense, and sublease the Sort Program, and to use the associated Syncsort trademarks.1 The licensing agreements also provided for the transfer to the licensees of “Trade Secrets” and “Licensed Technology,” which apparently correspond to the confidential information Syncsort used in providing the Sort Program and related services to its domestic customers.2 The “Licensed Technology” consisted of technological information and marketing data including charts and diagrams relating to the Sort Program’s “object code,” a master tape of the “object code,” sales promotion information, advertising material, contracts, and brochures. The [547]*547“Trade Secrets” consisted of confidential information about the Sort Program necessary to enable the licensees to “customize” their customers’ systems software so as to permit the Sort Program to operate most efficiently.3

In the respective licensing agreements, plaintiffs granted exclusive marketing rights to Pandata in the Soviet Union, the Middle East, North Africa, Southwest Asia, and various European countries; to Shell in Australia and New Zealand; to Computing Benefits in South Africa; and to Software Engineering in Japan and Korea. Each of the licensees agreed to use its best efforts to market the Sort Program within its exclusive territory. As consideration for the license, rights, and disclosures made by Syncsort under the licensing agreements, each licensee agreed to pay Syncsort a fixed royalty ranging from 25 to 50 percent of the gross revenues the licensee earned from “marketing” the Sort Program, including revenues received for maintaining the Sort Program.4 In the Pandata agreement, Pandata also agreed to pay Sync-sort $200,000 in addition to the fixed royalty.

For each of the tax years in issue, Sync-sort recorded the payments it received from these licensees on its Schedule D tax form under Part II, entitled “Long-Term Capital Gains and Losses — Assets Held More Than One Year.” From 1979 through 1984, Sync-sort described the income source under Part II as “Sale of Franchises.” For 1985, Sync-sort changed the description to “Sale of Know How.” The IRS first disputed plaintiffs’ classification of the income received under the licenses for tax years 1979 through 1983. The IRS alleged that plaintiffs should have treated the payments as ordinary income instead of capital gains. Syncsort paid the additional funds sought by the IRS for these tax years and then filed a refund claim. After the IRS denied Syncsort’s refund request, Syncsort filed two separate suits in this court seeking a refund for tax years 1979 through 1982, and 1983, respectively. Thereafter, for tax years 1984 and 1985, the IRS, on the same grounds as for tax years 1979 through 1983, assessed additional taxes against plaintiff Assadour O. Tavitian, both as “Tax Matters Person” of Syncsort and in his individual capacity. After Syncsort’s shareholders paid these additional assessments, Syncsort and Tavitian filed a third suit seeking a refund for tax years 1984 and 1985. This court consolidated the three actions.

[548]*548In its motion for summary judgment, defendant contends that each of the four licenses in issue constitutes a transfer of a franchise and that pursuant to 26 U.S.C. § 1253, all money received from such transfers must be treated as ordinary income for federal income tax purposes. In their cross-motion, plaintiffs respond with two alternative arguments. First, plaintiffs contend that the licensing agreements do not involve the transfer of a franchise within the scope of Section 1253. Second, plaintiffs argue that even assuming the licensing agreements included in part a transfer of a franchise within the scope of Section 1253, the agreements also transferred other intangible assets to the licensees — the Sort Program, “Licensed Technology,” and “Trade Secrets” — -which are not covered by Section 1253.5 Plaintiffs argue that at a minimum, the revenues attributable to the transfer of these intangible assets should receive capital gains treatment.

A grant of summary judgement is appropriate only where there is no genuine issue of material fact (i.e., a fact that might affect the outcome of the action) and the movant is entitled to judgement as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The moving party bears the burden of establishing the absence of any genuine issue of material fact.

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31 Fed. Cl. 545, 74 A.F.T.R.2d (RIA) 5034, 1994 U.S. Claims LEXIS 116, 1994 WL 283360, Counsel Stack Legal Research, https://law.counselstack.com/opinion/syncsort-inc-v-united-states-uscfc-1994.