                        T.C. Memo. 2004-53



                      UNITED STATES TAX COURT



        VISION INFORMATION SERVICES, L.L.C., IRENE CORREIA,
               TAX MATTERS PARTNER, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1750-01.              Filed March 8, 2004.



     Joseph Galasso, Jr., for petitioner.

     Greg Okwuosah and Robert Heitmeyer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:   Petitioner petitioned the Court under section

6226 to readjust partnership items adjusted by respondent.

Following the parties’ concessions, we must decide whether Vision

Information Services, L.L.C. (Vision), sold or instead licensed

certain intellectual property to Twentieth Century Fox
                                 -2-

(FoxVideo).    Respondent determined and argues that Vision

licensed the property to FoxVideo and, hence, that payments which

Vision received from FoxVideo as to the transaction are taxable

as ordinary income.    Petitioner argues that Vision sold the

property to FoxVideo and, hence, that the payments qualify for

capital gain treatment.    Petitioner concedes that the payments

are ordinary income if the property was licensed rather than

sold.

     We agree with respondent.    Unless otherwise noted, section

references are to the applicable versions of the Internal Revenue

Code, and Rule references are to the Tax Court Rules of Practice

and Procedure.

                          FINDINGS OF FACT

     Some facts were stipulated.    The stipulated facts and the

exhibits submitted therewith are incorporated herein by this

reference.    We find the stipulated facts accordingly.   Vision is

a limited liability company the headquarters of which was in

Royal Oak, Michigan, when its petition was filed with the Court.

For Federal income tax purposes, it is treated as a partnership,

and its members are treated as its partners.

     Vision was formed on February 3, 1995, to provide certain

services to users of a base software package (Software) developed

by a corporation named Nordic Information Systems, Inc. (Nordic).

The Software helped track the movement of consumer goods between
                                 -3-

manufacturers and retailers.   The certain services to be provided

by Vision were data processing services, referred to as third

party service bureau services, related to the Software.

     Also on February 3, 1995, Vision and Nordic entered into a

“Software license agreement” (license agreement) with respect to

the Software.   The license agreement stated in relevant part:

          2.    LICENSE GRANT AND RESTRICTIONS.

               2.1 License. Subject to the terms and
     conditions of this Agreement, Nordic grants to Vision,
     and Vision accepts, an exclusive perpetual worldwide
     license to use, copy, modify and enhance the Software,
     Source Materials and Manuals: (i) to provide Third-
     Party Service Bureau Services to various third parties
     * * *; and, (ii) to sub-license the Software to
     FoxVideo to enable FoxVideo to use the Software to
     process its own data and the data of its affiliates * *
     *

                *     *    *    *      *   *   *

          4.    OWNERSHIP, CONFIDENTIALITY AND PROTECTION OF
                SOFTWARE AND OTHER TRADE SECRETS.

               4.1 Nordic Ownership of Software. This
     license is not a sale. Except as otherwise provided
     herein, title and all proprietary rights (patents,
     trade secrets, copyrights and trade marks) to the
     Software, and any copy made by Vision are held by
     Nordic. The Software is copyrighted and is protected
     by United States and International Copyright Laws.

Nordic and Vision on the same day also entered into an annual

maintenance agreement under which Nordic agreed “to provide

support and maintenance” for the Software and Vision agreed to

pay to Nordic a fee in exchange for Nordic’s “On-Call Benefits”

and “Time and Material Services”.
                               -4-

     Also on February 3, 1995, Vision and FoxVideo entered into a

“Distribution Information Services Agreement” (Vision agreement).

The Vision agreement entitled Vision to provide data processing

services to FoxVideo in connection with the Software and

described, among other things, the services to be performed, the

territories affected, the terms of the agreement, the scope of

exclusivity, and the prices for the services under the agreement.

The Vision agreement stated in relevant part:

     4. TERM: The Term shall commence as of February 3,
     1995 (“Effective Date”), and unless earlier terminated,
     * * * shall last five years. FoxVideo shall have an
     option to extend the Term for an additional five-year
     period (“Initial Extension Period”) on the following
     basis: the terms in effect at the outset of the Initial
     Extension Period (including the exclusivity terms)
     shall be the same as the terms in effect at the end of
     the first five year period, except that FoxVideo shall
     not be required to pay any additional license fee for
     the Vision Software License with respect to the Initial
     Extension Period, and such terms shall be subject to
     adjustment during the Initial Extension Period on the
     same basis as the initial terms during the first five-
     year period are subject to adjustment as provided
     herein. At the end of the Initial Extension Period (if
     any), the Vision agreement may be extended for
     successive additional five-year periods by mutual
     consent, provided that (a) no additional license fee
     for any such additional extension period shall ever be
     payable by FoxVideo; and (b) Vision’s exclusivity
     commitments for any such extension period shall be
     subject to negotiation by the parties. Each 12-month
     period of the Term shall be referred to as a “Contract
     Year”.

     5.   EXCLUSIVITY:

          (a) By FoxVideo: For so long as the Vision
          agreement is in effect, FoxVideo shall
          procure Information Services for use in
          direct-to-store distribution of
                                 -5-

     videocassettes in the United States and
     Canada exclusively from Vision.

           *    *       *       *       *       *   *

7.   VISION SOFTWARE LICENSE/FEE:

     (a)   Vision Software License:

           (i) Vision’s License from Nordic:
           The continuing existence and
           validity of Vision’s license of the
           Nordic Software from Nordic
           (including all maintenance and
           related agreements) (collectively
           the “Nordic Agreements”) shall be
           of the essence of the Vision
           agreement. * * *

           (ii) Grant of License: Vision
           shall grant or cause to be granted
           to FoxVideo a worldwide, non-
           exclusive, non-transferable license
           (“Vision Software License”) to use,
           on its own hardware or otherwise,
           the Vision Software [i.e., the
           Software as modified by Vision and
           any other software used by Vision
           in providing the information
           services to FoxVideo]. The Vision
           Software License shall have a term
           coextensive with the Term of the
           Vision agreement * * *

                    *   *   *       *   *   *   *

     (b)   License Fee:

           (i) Payment of Fee: Except as
           provided below, FoxVideo shall pay
           a License Fee to Vision in the
           aggregate amount of $10 million,
           payable as follows: (A) $3 million
           payable on signature of the Vision
           agreement; plus (B) $1.75 million
           payable on each of the first four
           anniversary dates of the signing of
           the Vision agreement. * * *
                                -6-

                 (ii) Reimbursement Upon
                 Termination: In the event that the
                 Vision agreement is terminated
                 before the end of the Term as a
                 result of a default by Vision,
                 FoxVideo will receive a
                 reimbursement of a portion of the
                 license fee paid to the date of
                 termination, based upon an
                 amortization of the license fee at
                 the rate of $2 million per year.

     Pursuant to the Vision agreement, FoxVideo paid Vision the

referenced $3 million payment in 1995 and the referenced $1.75

million payment in 1996.   On its 1995 Form 1065, U.S. Partnership

Return of Income, Vision reported its receipt of the $3 million

payment as long-term capital gain income from a $10 million

installment payment sale of “exclusive rights&know how”.   On its

1996 Form 1065, Vision reported its receipt of $1,320,198 of the

$1.75 million payment as long-term capital gain income and

reported the rest ($429,802) as portfolio interest income.

     On November 20, 2000, respondent mailed to petitioner a

notice of final partnership administrative adjustment (FPAA) for

1995 and 1996.   Respondent determined in the FPAA that both

payments were taxable as ordinary income because, respondent

determined, they were received by Vision as a license fee.

                              OPINION

     The parties dispute whether Vision sold or licensed to

FoxVideo the property underlying the $3 million and $1.75 million

payments.   Petitioner argues that Vision sold this property to
                                  -7-

FoxVideo in that, petitioner asserts, Vision transferred to

FoxVideo the exclusive right to use the trade secrets and

know-how embodied in the Software for their useful life of less

than 4 years.    Respondent argues that Vision licensed the

Software to FoxVideo in that, respondent asserts, Vision and

FoxVideo intended at the time of the pertinent agreements that

the property would be licensed in exchange for a set fee and

stated as much in those agreements.

     We agree with respondent.    Our decision turns on the intent

of the parties to the pertinent agreements as ascertained as of

the time that they entered into these agreements.     Pickren v.

United States, 378 F.2d 595, 599-600 (5th Cir. 1967).    We

ascertain this intent primarily by construing the pertinent

agreements.     Id.; see also Redler Conveyor Co. v. Commissioner,

303 F.2d 567, 569 (1st Cir. 1962), affg. T.C. Memo. 1961-82.

Petitioner asserts on brief that respondent bears the burden of

proof for 1996 by virtue of section 7491(a).    The parties,

however, stipulated that petitioner bears the burden of proof as

to both years.    Because petitioner has not asked the Court to

vacate this stipulation, and the record does not otherwise give

us any reason to qualify, change, or contradict it, we treat the

stipulation as a conclusive admission by petitioner that

petitioner bears the burden of proof for both years.    See Rule

91(e).
                                 -8-

     We read the license agreement to provide specifically that

Nordic was licensing the Software to Vision and that Vision could

sublicense the Software to FoxVideo.    The agreement, for example,

granted Vision “an exclusive perpetual worldwide license” to use

the Software and allowed Vision to sublicense the Software to

FoxVideo for its use.    The agreement also stated that the license

to Vision “is not a sale”, that “Except as otherwise provided

herein, title and all proprietary rights (patents, trade secrets,

copyrights and trade marks) to the Software, and any copy made by

Vision are held by Nordic”, and that the “Software is copyrighted

and is protected by United States and International Copyright

Laws.”    Petitioner makes no mention of these quoted statements,

or the fact that the parties to the license agreement went to

great lengths to include them within that agreement.    Nor does

petitioner explain how Vision could have sold the Software to

FoxVideo when the Software was not owned, but merely licensed, by

Vision.    Indeed, petitioner does not even rebut the fact that

Nordic licensed the Software to Vision and specifically

acknowledges this fact when petitioner states that the license

agreement resulted in Vision’s having a license to use the

Software.

     We also read the Vision agreement to provide similarly that

Vision licensed and did not sell the Software to FoxVideo.    This

agreement states that Vision sublicensed the Software to FoxVideo
                                -9-

and that Vision would be receiving the $3 million and $1.75

million payments in dispute as a “License Fee”.    This agreement

also labeled the transaction underlying the payments a “Grant of

License” and referenced the license agreement as an integral part

of the Vision agreement by stating that “The continuing existence

and validity of Vision’s license of the Nordic Software from

Nordic * * * shall be of the essence of the Vision agreement” and

that “The Vision Software License shall have a term coextensive

with the Term of the Vision agreement”.

     We conclude that the transaction was a licensing agreement

and, hence, that the disputed payments are taxable as ordinary

income.1   We have considered all arguments made by the parties as

to this conclusion and have found those arguments not discussed

herein to be irrelevant and/or without merit.    We have not

considered the alternative arguments which respondent made in the

event that we were to conclude that the subject transaction was

not a licensing agreement.   To reflect concessions,


                                           Decision will be entered

                                      under Rule 155.



     1
       We also believe that the reimbursement provision of the
Vision agreement is more consistent with our finding of a
licensing agreement as opposed to a sale. Whereas petitioner
asserts that the useful life of the subject property was less
than 4 years, we find that the parties to the Vision agreement
believed at the time of that agreement that the property’s useful
life was 5 years or more.
