Tax Court in Brief | Bats Global Markets Holdings, Inc. v. Commissioner | Deductibility of Domestic Production Gross Receipts

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Tax Litigation:  The Week of March 28, 2022, through April 1, 2022

Bats Global Markets Holdings, Inc. v. Comm’r, 158 T.C. No. 5 | March 31, 2022 |Kerrigan, J. | Dkt. No. 1068-17

Short Summary: Bats Global, a registered securities exchange, developed a trading platform software that operated electronic markets for trading equity securities. Bats Global was subject to the Securities Exchange Act of 1934 and the Regulation National Market System rules promulgated by the SEC. Bats Global’s customers were organizations that were members of applicable trading exchanges. The customers were required to accept terms of agreement and to agree to abide by the applicable exchange rules, both of which included authority or terms for the prescription of dues, fees, and charges. Bats Global’s software was paired with other open-source software that Bats Global did not develop. Customers used their own hardware to connect with Bats Global’s hardware in its data center. Bats Global charged a monthly, logical port fees for physical wire connections as well as routing fees for routing orders and transaction fees for when securities orders were executed (collectively, Fees). For each of tax years 2011, 2012, and 2013, Bats Global sought to deduct approximately $1,000,000 in Fees. The IRS denied the request and issued deficiencies for the amounts sought as deductions.

Issue: Whether Bats Global’s gross receipts from the Fees are domestic production gross receipts (DPGR)—and are therefore deductible—pursuant to 26 U.S.C. § 199 and related Treasury Regulations (26 C.F.R. § 1.199-1, et. seq.).

Note: 26 U.S.C. § 199 was enacted in 2004 to provide a tax deduction for certain domestic production activities, but the statute and its related regulations were repealed for tax years beginning after December 31, 2017.

Primary Holdings: 

Key Points of Law:

Insights:  As indicated, the key statute—26 U.S.C. § 199—and related Treasury Regulations in issue in Bats Global were repealed for tax years beginning after December 31, 2017. Thus, the applicability of the technical analysis in Bats Global may be limited on a go-forward basis. However, the Internal Revenue Code currently contains section 199A (Qualified business income), and it, together with Treasury Regulations § 1.199A-1, et. seq., may provide a taxpayer with favorable deductibility for certain domestic production gross receipts. See, e.g., 26 C.F.R. § 1.199A-8 (Deduction for income attributable to domestic production activities of specified agricultural or horticultural cooperatives).