Domestic Production Deduction for
Computer Software and Sound Recordings
Robert Feinschreiber, Attorney and Counselor
Margaret Kent, Attorney and Counselor
ProductionIncentive.com

Do you remember, during your youth, your teacher asking you what items on the list didn’t belong? Consider a film, sound recording, computer software, and a barge. You probably would have picked the barge as the item that didn’t belong. Now that we’ve become tax practitioners, let’s go fast forward and reexamine the same set of facts from a tax perspective.

The qualifying production property (“QPP”) definition in §199(c)(5) describes QPP as:

(A)  tangible personal property, i.e., a barge in this example,
(B)  any computer software, and
(C)  any property described in section 168(f)(4), i.e., sound recordings.

For purposes of claiming the domestic production deduction, section 199(c)(4)(A)(i)(I) includes these three types of qualifying production property within its purview. What about a film that the taxpayer produces? The film might qualify as producing domestic production gross receipts, but under section 199(c)(4)(A)(i)(II), which has different technical requirements than it does for qualifying production property under section 199(c)(4)(A)(i)(I). We’d find that film, not the barge, doesn’t belong in that list. Now we can turn our attention to the remaining items on the list, i.e., computer software and sound recordings.

Cautionary Warnings 

Three simple words can difficulty between taxpayers and the IRS, “any” and “other disposition,” when it comes to computer software and sound recordings.

The taxpayer is forewarned that the IRS and Treasury Department disavow the word “any” in three specific situations within section 199:

• The IRS and Treasury Department disavow the word “any” in the phrase “any computer software” as specified by section 199(c)(5)(B), and
• The IRS and Treasury Department disavow the word “any” in the phrase “any property described in section 168(f)(4)” as specified by section 199(c)(5)(C).
• The IRS and Treasury Department disavow the word “any” in the phrase “any lease, rental, license, sale, exchange, or other disposition” as specified by section 199(c)(4)(i).

Notice 2005-14 and the proposed section 199 regulations treat the word “any” as if that the word “any” means “pre-selected” or as “part of a narrowly-defined category of.” As tax practitioners, it is our view that the IRS and Treasury Department’s definition of “any” far is removed from standard dictionary definitions of that term.