On November 13, 2018, US Tax Court Judge Mary Ann Cohen entered stipulated decisions in Vesta Corporation v. Commissioner of Internal Revenue, (see docket numbers 26847-16 and 26503-17). The parties agreed to a settlement of Vesta's Section 199 claims for tax years 2010–2014. Vesta claimed a Section 199 deduction for those years from the disposition of software that its merchant customers used to accept and process transactions, and identify fraudulent transactions. Vesta separately maintained each customer's individual version of the software on its servers, which the customer then accessed and used over the internet to process transactions. Vesta's Section 199 deduction excluded amounts received for non-qualifying services that Vesta provided to its customers in association with the software.

The IRS denied Vesta's claims on the basis that Vesta used the software to provide services, and that Vesta did not derive qualifying gross receipts from the disposition of software.

The decisions entered in these docketed cases, when compared with the amount of deficiencies proposed by the Government in the notice of deficiencies for each tax year, reveal that the Government sustained 55% of its claimed deficiency for each tax year (see chart below). Therefore, Vesta retained 45% of its claimed Section 199 deductions for those tax years.

There are currently three other cases that are pending in the Tax Court that are based on revenue received from online software, as defined under Section 199. Based on entries on the Tax Court dockets for these cases, one is engaged in ongoing discussions with the Government, another has a trial scheduled to begin in March 2019 and another is continuing to file status reports. A more detail Tax Alert is forthcoming.

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