DAVID A. TAPP, Judge.
Before the Court in this partnership-level tax adjustment suit are the parties' cross-motions for summary judgment. On February 26, 2016, Complainant, AT&T Advertising, L.P. ("AT&T"), YP Advertising & Publishing, LLC, Tax Matters Partner (collectively "the Partnership"),
For the reasons set forth below, the Court
During tax years 2005 through 2009, the Partnership was in the business of publishing and distributing "Yellow Pages" telephone directories ("Yellow Pages" or the "Directories"), which are distributed to residents and businesses at no charge. (Cross-Mot. at 8; Compl. at 4). The Directories primarily contained advertisements that the Partnership sold to business customers. (Cross-Mot. at 8). In tax years 2005 to 2009, the Partnership claimed a tax deduction related to advertising revenue pursuant to 26 U.S.C. § 199 (repealed 2017). (Compl. at 7-11).
The process of publishing the Directories involved several steps: pre-press, press, and post-press. (See Cross-Mot. at 8-18). During the pre-press stage, the Partnership sold advertising space in the Directories. (Def.'s Mot. for Summary Judgment, Ex. B at 1718:12-1719:18 (Comfort Dep.), B1839 (pre-printing activities flow-chart)).
The Partnership used two different contract printers for the press and post-press phases: R. R. Donnelley & Sons Co. ("RRD"), and Quebecor World Inc. (USA) ("QWI") (collectively "the Printers"). (C2108; C2130; C2273:18-2274:13; C2301:15-2303:16; C2263:6-20; C2198:14-22; C2344:17-2345:17). The Partnership executed three contracts and amendments with RRD: (1) C282F (B0001-625); (2) 484-A (B0626-1040); and (3) 0504 (B1113-1404); and two contracts and amendments with QWI: (1) 455-A (B1453-1642); and (2) SAL (B1417-1452). The contracts with RRD stated that RRD would provide "Materials and Services" or "Printing Services." (B0004; B0626; B1113). The contracts with QWI provided for "Production (printing, paper, bindery and packaging) of Advertising Tabs," or "Materials and Services" associated with the "Printing of Subscriber Directories." (B1417; B1453).
Pursuant to these contracts, the Printers created printing plates based on the files provided by the Partnership, mounted those plates on presses which transposed the content of those files onto paper, and bound the Directories into individual books. (C2273:18-2274:13, 2276:24-2278:3 (Skwara Dep.); C2439:3-2442:4 (Steinbach Dep.)). The Printers were not permitted to alter any content in the Directories; if there was an error in any of the content, the Partnership corrected the error and provided the contract printers with a new file. (C2266:16-2267:25 (Taylor Dep.)). Under the contracts with RRD, the Partnership was required to provide both the electronic files and a hard copy that "should match information contained on the [electronic] file." (B0717, 831, 1231).
Separately, the Partnership negotiated and executed paper supply contracts with numerous paper mills to supply the paper used in the Directories, which established, inter alia, the amount and price of the paper to be supplied, the specifications of the paper, and delivery locations. (C1895-1982; C1783-1894; C2213:14-2214:7 (Comfort Dep.); C2279:16-2281:10 (Skwara Dep.); C2364:17-2366:3 (Arnold Dep.)). Neither RRD nor QWI were parties to the paper supply contracts but the Partnership designated the Printers as authorized to place paper orders on behalf of the Partnership and to pay the invoices for such orders. (C1786; C1898; C2209:23-2210:21 (Comfort Dep.); C2279:16-2281:10 (Skwara Dep.)).
Under the printing contracts between the Partnership and RRD, title to the paper vested with the Partnership once the paper was delivered to a printer. (C1916; C1809). The Partnership warranted to RRD that the paper would be free from defects in material and workmanship and would conform to the specifications provided by the Partnership to the paper mills. (C862-63; C1288-89). If substandard or defective paper was delivered by a paper mill, RRD was required to provide notice to the Partnership, and the Partnership would determine whether to use the paper and would reimburse RRD for any extra costs resulting from the use of substandard or defective paper. (C862-64; C1288-90; see also B1469 (similar provision in QWI contract 455-A)).
Under the contracts between the Partnership and the Printers, the Partnership retained title to the files that it transmitted to the Printers, all the content in the Directories (including the intellectual property in the Directories), and the copyrights to the Directories and content therein. (C252; C871, 970; C1302; C1614-15; C2124-27; C2128-29; C2209:5-22 (Comfort Dep.)). Thus, the Partnership owned the Directories, the content of the Directories, the electronic files, the paper on which the Directories were printed, the intellectual property contained in the Directories, and the copyrights to the Directories and their content. (C252; C871; C1302; C1614-15).
Under the contracts with the Printers, the Partnership had the sole right to use the Directories. (C252; C871-72, 970; C1302-03; C1614-15). The Printers had no right to use the Directories, make copies of the Directories for their own use, or dispose of the Directories in any manner other than as directed by the Partnership. (C252; C871-72, 970; C1302-03; C1614-15). In addition, the Partnership could modify the production schedule for the Directories and, if it did, the Partnership was required to compensate the Printers for any overtime required to meet the changed schedule, provided that such overtime was approved by the Partnership. (C2358:18-C2363:3 (Arnold Dep.); C246; C861, 865-66; C1287; C1605-06). The Partnership also had the contractual right to send representatives to enter and inspect the Printers' premises and observe their performance to ensure that the Printers adhered to the Partnership's quality standards. (C237; C856; C866-67, 69, 963-64; C1280; C1293, 1297; C1591, C1600-01; C1609; C2203:7-2206:11, 2207:4-2208:10, C2224:25-2228:17 (Comfort Dep.); C2356:8-2357:4 (Arnold Dep.); C2446:13-18 (Steinbach Dep.)).
Pursuant to QWI contract PBD-455-A, the Partnership agreed to reimburse QWI for the cost of the printing presses and binding equipment it purchased in order to perform press and post-press services for the Partnership. (C1595-96, 1614, 1621, 1663-64, 1690, 1706-07, 1710, 1729, 1767; C2284:10-18, C2285:10-2287:16, C2289:6-2290:20, C2296:4-12 (Skwara Dep.); C2447:22-2450:21 (Steinbach Dep.); C2222:6-2223:24 (Comfort Dep.)). There were two components to this reimbursement. One component, the equipment dedication charge, allowed for QWI's recovery of capital costs, which expired at the completion of that recovery. The Partnership was required to pay the full equipment dedication charge even if it terminated the contract. (C1614, 1706-07). The other component, the base dedication charge, covered overhead costs related to the equipment and remained in effect throughout the life of the contract. (C1706-07).
The contracts between the Partnership and the Printers provided that the Partnership was financially responsible for all taxes imposed on the Directories and the paper used to print the Directories. (C250; C870; C968-69; C1074-75; C1300-01; C1613). The contracts with RRD specifically referenced personal property taxes. (C968; C1300-01).
The Printers were required to carry insurance to cover, inter alia, property damage, and were required to provide the Partnership with certificates of insurance showing that insurance was in place. (C238; C856-57, 959-60, 1071-73, 1095-96; C1280-81; C1570, 1576-77, 1583-84, 1586-88; C1601; C1726-27; C1899-1800; C1908-09). Under some of the contracts, the Printers were required to include AT&T as an "additional insured" under the insurance policies. (C959-60; C1072, 1097; C1281; C1577, 1583; 1588; C1693; C1726-27; C1765, 1800, 1908, 1938, 1956).
To the extent the Printers committed an error or omission with respect to the Directories that required the Partnership to reimburse part or all of an advertiser's advertising fees, the Printers were obligated to reimburse the Partnership at fixed amounts: $5,000 in the case of RRD; and $2,000 in the case of QWI. (C237; C871; C1302; C1614).
The contracts provided for monthly or quarterly ink price adjustments to reflect changes in the market price of ink. (C256-262, 276; C855, 958-59; C1279-80; C1598). The fees the Printers received for press and post-press services were subject to an annual labor cost adjustment under which the fees (not including any raw material costs) would be increased by a fixed percentage of the applicable consumer price index measure. (C245-46; C858, 960-61; C1283; C1607).
Between tax years 2005-2009, the Partnership reported almost $10 billion in gross receipts from the sale of advertisements placed in the Directories. (C20, C28, C36, C44, C52, C83; C110; C143; C178; C217). The pre-press printing costs, including overhead allocated pursuant to I.R.C. § 263A, totaled approximately $824 million. (C2153-64; C2165-68; C2169-75). The Partnership spent approximately $638 million on the paper used to print the Directories and paid the Printers approximately $620 million for press and post-press services. (C2153-64; C2165-68; C2169-75).
For tax years 2005 to 2009, the Partnership claimed a § 199 domestic production deduction for its publications. The Partnership reported qualified production activities income (QPAI) of $1,122,369,674 in tax year 2005; $1,223,040,223 in tax year 2006; $1,153,666,254 in tax year 2007; $1,039,335,596 in tax year 2008; and $941,198,318 in tax year 2009. (Compl. at 7-11). During most of that time period, the Printers also claimed the deduction. RRD claimed the § 199 deduction for tax years 2005, 2006, 2007, and 2009, but did not claim the deduction for tax year 2008 because it did not have taxable income. (B2408:7-2416:9, B2461:8-2463:16, B2463:21-2465:6 (Weicher Dep.); B2475-80; B2551-52; B2553-54). QWI's parent company, QWI Printing Holding Company, claimed the deduction for tax years 2005, 2006, and 2007. (B2587:21-2596:9 (Palmisano Dep.); B2629-30; B2648; B2695; B2715; B2758:2-2759:22, B2760:22-2761:3, B2763:8-2766:8 (Lawler Dep.); B2814; B2830).
In November 2015, the IRS issued Notices of Final Partnership Administrative Adjustment (FPAA) concerning the Partnership's tax returns for years 2005 through 2009. The IRS disallowed the § 199 deductions explaining that the Partnership failed to establish that the qualified production property (QPP) — i.e., the Directories — were manufactured, produced, grown and/or extracted by the Partnership within the meaning of I.R.C. § 199. (Redacted Exhibits to Complaint, ECF No. 14 at 9, 17, 25, 33, 41). On February 26, 2016, the Partnership filed the present suit. (Compl. at 1).
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." RCFC 56(a). A "genuine dispute" exists where a reasonable factfinder "could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "Material facts" are those which might significantly alter the outcome of the case; factual disputes which are not outcome-determinative will not preclude summary judgment. Id. The moving party bears the initial burden of proof, but this burden may be discharged by showing the absence of evidence supporting the opposing party's claim. See Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
In determining whether summary judgment is appropriate, the court should not weigh the credibility of the evidence, but simply "determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249. When both parties move for summary judgment, "the court must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Mingus Constructors, Inc. v. United States, 812 F.2d 1387, 1391 (Fed. Cir. 1987). "The fact that both parties have moved for summary judgment does not mean that the court must grant judgment as a matter of law for one side or the other." Id. "To the extent there is a genuine issue of material fact, both motions must be denied." Marriott Int'l Resorts, L.P. v. United States, 586 F.3d 962, 969 (Fed. Cir. 2009).
Congress enacted 26 U.S.C. § 199 in 2004 (Pub. L. No. 108-357, § 102) and repealed it in 2017 (Pub. L. No. 115-97 (2017), Title I, § 13305(a) & (c)). The purpose of § 199 was to encourage investment in domestic manufacturing facilities and the creation and preservation of U.S. manufacturing jobs. See H.R. Rep. No. 108-548 (I), at 115 (2004). In general, § 199 allows a deduction equal to a percentage of the lesser of either a taxpayer's (1) QPAI, or (2) taxable income.
QPAI is a taxpayer's domestic production gross receipts (DPGR), less related costs of goods sold and other expenses, losses, and deductions. See § 199(c)(1). DPGR includes gross receipts derived from any "disposition of qualified personal property (QPP) which was manufactured, produced, grown, or extracted [("MPGE")] by the taxpayer in whole or in significant part within the United States. . . ." § 199(c)(4)(A)(i)(I). QPP is tangible personal property, any computer software, and sound recordings. § 199(c)(5).
Here, the Partnership identified the Directories as QPP. (See Compl. at 4; Cross-Mot. at 1). In its Motion for Summary Judgment, the United States argues that the Partnership did not MPGE the Directories because "[p]ursuant to contracts between [the Partnership] and [the Printers], the Printers MPGE the [D]irectories using electronic files or tangible items (e.g., film) that contained content (e.g., ads) and the layout of directory pages and were provided by [the Partnership]." (Def.'s Mot. for Summary Judgment at 1). According to the United States, because the Partnership's pre-press activities resulted in only the creation of an electronic file, rather than tangible Directories, the Partnership did not MPGE QPP. (Id. at 1, 14-17). In addition, the United States argues that the Printers, rather than the Partnership, had the benefits and burdens of ownership (B&BO) of the Directories such that the Printers are considered to have MPGE'd them. (Id. at 1, 18-50).
The Partnership, on the other hand, argues that the electronic files it provided to the Printers were either tangible personal property or computer software. (Cross-Mot. at 2-3). The Partnership also contends that because its pre-press activities were substantial in nature, it should be deemed to have MPGE'd the Directories in whole or in significant part. (Id. at 22-33). The Partnership moved for summary judgment on this aspect only. (See id. at 57). In addition, the Partnership maintains that it qualifies for the 20% safe harbor test found in I.R.C. § 1.199-3(g)(3) such that it should be deemed to have MPGE'd the Directories in whole or in significant part. (Id. at 33-38). Finally, the Partnership argues that it, not the Printers, had the B&BO of the Directories while the Printers performed press and post-press services. (Id. at 38-60).
As explained below, the Court finds a genuine dispute of material fact as to the classification of the electronic files, which precludes summary judgment in favor of the Partnership. Furthermore, there exists a genuine dispute of material fact as to the B&BO issue, which precludes summary judgment in favor of the United States.
The parties disagree about what was contained in the electronic files the Partnership sent to the Printers and whether those files caused the printing presses to perform any functions such that the files could be considered computer software. The classification of the electronic files as tangible personal property, intangible property, or computer software is essential to the Partnership's argument that it MPGE'd the QPP "in whole or in significant part" through its pre-press activities under either the "substantial in nature" or "safe harbor" provisions in § 1.199-3(g)(2) and (3), and similarly, is essential to the United States' argument that the Partnership did not MPGE QPP at all.
Although the classification of files during an intermediate stage in the production process is relevant to the application of § 1.199-3(g)(2) and (3), it is not relevant to whether the Partnership or the Printers MPGE'd the Directories under subsection (g)(1). Under subsection (g)(1):
I.R.C. § 1.199-3(g)(1); see also § 1.199-3(f)(1).
Here, the relevant QPP was the Directories and the Partnership earned revenue from selling advertisements in those Directories. (See Compl. at 4). There is no dispute that the Partnership entered into contracts with the Printers for the Printers to MPGE the tangible Directories through the Printers' press and post-press activities. (See Def.'s Mot. for Summary Judgment at 2-7, 15; Cross-Mot. at 2, 3 ("AT&T retained title to the QPP while the contract printers further manufactured the QPP into hard-copy Directories")). Accordingly, under § 1.199-3(g)(1), if the Partnership bore the B&BO of the Directories while the Directories were being produced by the Printers, then the Partnership will be considered to have MPGE'd the Directories for purposes of § 199. Thus, the classification of the files that the Printers used to MPGE the Directories during the press and post-press stages is irrelevant, so long as the Printers MPGE'd the Directories for the Partnership pursuant to a contract.
The "Advertising Income" provision set forth in § 1.199-3(i)(5) illustrates and reinforces this conclusion. This section provides, in relevant part:
I.R.C. § 1.199-3(i)(5)(ii)(A) (emphasis added).
§ 1.199-3(i)(5)(iii).
These examples, particularly Example 2, describe the Partnership's activities with respect to the Directories. The Partnership received payments from advertisers to publish advertisements in the Directories, distributed the Directories free of charge to customers, and claimed the gross receipts from the display advertising as DPGR. The only difference between the Partnership's actions and the examples provided in § 1.199-3(i)(5)(iii) is that, in the examples, the taxpayer MPGE'd the QPP itself, rather than contracting with an unrelated person.
That the Partnership contracted with an unrelated person to complete the MPGE of the Directories does not change the analysis or applicability of this section. As explained above, under § 1.199-3(g)(1), if the taxpayer enters into a contract with an unrelated person for the MPGE of QPP and the taxpayer has the B&BO during the MPGE period, then the taxpayer is deemed to have MPGE'd the QPP. Thus, the classification of the electronic files created during the pre-press stage is irrelevant, for purposes of § 1.199-3(g)(1), so long as the Partnership had the B&BO during the MPGE period.
Turning to the B&BO analysis, it should be noted that neither 26 U.S.C. § 199 nor I.R.C. § 1.199-3 provide a method for determining which entity bears the benefits and burdens of ownership, apart from references to "applicable Federal income tax principles during the period the MPGE activity occurs," in § 1.199-3. See 26. U.S.C. § 199; I.R.C. § 1.199-3(f), (g). Both parties, however, rely on the tax court case ADVO, Inc. v. Commissioner, 141 T.C. 298 (2013), which set forth the following factors to consider:
ADVO, 141 T.C. at 324-25; (Def.'s Mot. for Summary Judgment at 19-20; See Cross-Mot. at 42). The Court finds the use of these factors persuasive and will adopt them in conducting the B&BO analysis.
As the Partnership correctly observes, the weighing of these factors in order to determine which entity bore the B&BO is a highly fact intensive inquiry that is rarely appropriate for summary judgment. (See Cross-Mot. at 1, 38-39; Complainant's Reply at 2 n. 2). The ADVO Court acknowledged several times that the B&BO analysis is highly fact intensive and made a determination after trial, rather than at the summary judgment stage. See ADVO, 141 T.C. at 313 n.11, 317, 320 n.17, 323 n.20, 325 n.21. The only other court that has addressed this issue likewise found that a determination of the B&BO was inappropriate at the summary judgment stage. See Meredith Corp. v. United States, 405 F.Supp.3d 795, 806-09 (S.D. Iowa 2019).
In Meredith Corp., a magazine publisher claimed entitlement to a § 199 deduction for its revenue from selling advertising space in its publications and selling the finished publications to customers. 405 F.Supp. 3d at 798. The publisher used contract printers
Here, there is a genuine dispute of material fact as to several ADVO factors, which precludes entry of summary judgment. In particular, there exists a genuine dispute of material fact as to how the parties treated the transaction (i.e., the intention of the parties), whether the contracts between the Partnership and Printers were fixed-price or cost-plus contracts, which party bore the risk of loss, and whether the Partnership actively and extensively participated in the management and operations of the production. (See Def.'s Mot. for Summary Judgment at 5, 20-22, 29-31, 24-37, 39-43, 46-50; Cross-Mot. at 4-7, 10-11, 13-17, 47-50, 51-56; Complainant's Reply at 21-24, 26-30, 32-40). As a determination of which party these factors weigh in favor of would require the weighing of evidence and credibility, this inquiry is inappropriate for resolution at the summary judgment stage. See Meredith Corp., 405 F.Supp. 3d at 806-09; Anderson, 477 U.S. at 249 (1986). Accordingly, the United States is not entitled to summary judgment on the B&BO issue.
In sum, the Court finds that a genuine dispute of material fact precludes summary judgment on the issue of whether the electronic files the Partnership provided to the Printers were tangible personal property, intangible property, or computer software, for purposes of I.R.C. § 1.199-3(g)(2) and (3). Although the classification of these files is irrelevant to the section (g)(1) analysis, the Court must undertake a B&BO analysis to determine whether the Partnership's contracts with the Printers satisfy that provision. However, because there exists a genuine dispute of material fact as to certain ADVO factors relevant to the B&BO analysis, the Court cannot grant summary judgment on that issue. Accordingly, the United States' Motion for Summary Judgment and the Partnership's Cross-Motion for Summary Judgment are hereby
I.R.C. § 1.199-3(g)(2). Subsection (3) of paragraph (g), the "safe harbor" provision, provides in relevant part:
§ 1.199-3(g)(3).
Thus, if the taxpayer is deemed to have MPGE'd the QPP pursuant to a contract with an unrelated person under section (f)(1) and bears the B&BO of the QPP, thereby satisfing section (g)(1), there is no need to separately analyze subsections (g)(2) and (g)(3).
