Direct Supply, Inc. v. U.S.

Dist. Ct. did not err in sustaining IRS’s disallowance of plaintiff-taxpayer’s claim for tax deduction under section 199 of Internal Revenue Code that allowed for deduction equal to nine percent of receipts from certain “domestic production activities,” with cap of 50 percent of wages paid to firm’s workers. Moreover, deduction depended on “disposition” of “qualifying production property,” which was defined to include any computer software, and IRS elaborated on definition of “disposition” to mean that section 199 allowed deduction based on revenue from sales, but not on revenues from services. Dist. Ct. did not err in finding that plaintiff was not eligible for said deduction, where record showed that plaintiff provided services to its customers by devising computer systems that made customer specific catalogs of items available to purchase, where each customer negotiated with vendor price with vendor, and where plaintiff placed products in online catalog that customer could order from. Also, every customer paid flat monthly fee for catalog maintenance and every vendor paid plaintiff fee based on value of goods that customer ordered. As such, while plaintiff’s system depended on software, deduction did not apply, since plaintiff did not dispose of said software for purposes of section 199 deduction.