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Aba tax aspects of ip detailed analysis 110814


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Tax Aspects of Technology Transactions

Tax Aspects of Technology Transactions

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  • 1. Roger Royse
    Royse Law Firm, PC
    Palo Alto, San Francisco, Los Angeles
    Skype: roger.royse
    Tax Aspects of Technology Transactions – Detailed Analysis
  • 2. Sales vs. Licenses
    Sale or Exchange treatment
    • Substance based analysis – not labels
    • 3. Sec 1221 Capital assets - Outside 1235 (non professional, related parties) or Sec 1231 – depreciable patents
    • 4. Holding Period – reduction to practice for patents
    • 5. Inventory property
    • 6. All substantial rights – may be fields of use or geographical limitations (arguably)
    • 7. Patents – property when reduced to practice, but case law loosens this and only requires that the idea be reduced to written description
    • 8. Tax Consequences to Seller
    • 9. Capital gains treatment if the asset has been held for more than one year (15% rate)
    • 10. Depreciation recapture
    • 11. Self created copyrights
    • 12. Tax Consequences to Buyer
    • 13. 15 year amortization under section 197
    • 14. Knowhow
    • 15. Patents and copyrights if acquired as part of trade or business
    • 16. Software acquired as part of trade or business
    • 17. Depreciable over useful life
    • 18. Contingent payments may be deductible under Associated Patentees
    • All Substantial Rights
    • 19. Non-exclusive rights
    • 20. Remaining useful life
    • 21. Transfer subject to existing license
    • 22. Right to terminate
    • 23. Security interests
    • 24. Right to prevent unauthorized disclosure of trade secret
    • 25. Tax Consequences to Licensor
    • 26. Ordinary income
    • 27. Accrual basis tax payer deferral of advance payments Rev. Proc 2004-34
    • 28. Personal holding company income
    • 29. Tax Consequences to Licensee
    • 30. Royalties are deductible, unless license is used to create an asset with a useful life of more than 1 year. If creates such an asset, depreciate over life of the asset. Comr. v. Idaho Power Co., 418 U.S. 1 (1974), and is also found in Regs. §1.263(a)-4(b)(1)(iii).
    • Farris v. Commissioner true nature of the transaction test
    • 31. Boulez v. Comm – copyright royalty vs services
    • 32. Code section 409A
    • Long-term capital gains treatment for sales of patentable invention
    • 33. No holding period
    • 34. Inventor as professional
    • 35. “Holders” – individual who
    • 36. (1) created the patent (“inventor”) or
    • 37. (2) acquired an interest from inventor (not employer of inventor) for money (not gift) prior to reduction to practice
    • 38. Reduction to practice – 1.1235-2(e) refers to patent standard – tested and operated successfully
    • 39. Must transfer “all substantial rights” – no geographical and field of use limitations
    • 40. Available for partners in a partnership or members of an LLC
    • 41. Not available in
    • 42. (1) transfers to “related parties” (family, 25% threshold) or
    • 43. (2) “hired to invent” scenarios (cannot be employer of creator at time)
    • Investors in partnerships and LLCs must acquire interest prior to reduction to practice
    • 44. Sales to related parties (25% test)
    • 45. Acquired from employer of inventor
    Capital Gains Under Section 1235
  • 46. Property and Non-Recognition
    • Non-Recognition for Transfers of “Property” to Entities
    • 47. Sections 351 and 721 require a transfer of “property” which is broadly defined to include legally protectable know how and secret processes
    • 48. Tax distinction between services that create property or the property itself.
    • 49. Corporations. Code section 351
    • 50. LLCs and partnerships. Code section 721
    • 51. Code section 83
    • 52. United States v. Stafford, 727 F.2d 1043 (11th Cir. 1984) – contribution of letter of intent held to be “property”
    • 53. E.I. DuPont de Nemours v. United States, 471 F.2d 1211 (Ct. Cl. 1973) – grant of non-exclusive patent rights
  • Development Partnerships
    Section 174 Expenses.
    research or experimental expenditures may be amortized over 5 years or expensed in the taxable year they are incurred.
    all "reasonable" expenses incurred for such R&E items as experimental or pilot models, a plant process, a product, formula, invention or other such property, attorney's fees paid to obtain patents.
    excludes expenditures for depreciable property; exception for computer software.
    Financial Backer
    License with Option
    Partnership must have realistic possibility of entering its own business
    Prospect of entering business must be shown at time of expenditure
    Option to acquire exclusive rights for nominal sum
    Lack of Capability to enter business
    realistic prospect" of going into a business related to the R&E
    Developer had significant cost option to acquire IP
    Partnership was capable of developing business if developer did not
  • 54. International Issues
    Withholding Taxes
    License out, payment in – foreign withholding taxes
    Creditable income tax, foreign tax receipt or certificate
    Limitations on foreign tax credit
    Source based or residence based
    License in, payments from US
    Generally 30% withholding tax is imposed on payments of US source FDAP to foreigners
    Treaty rate – exemption must be claimed
    Exemption for effectively connected income
    Allocation of payments to foreign services (e-commerce) or non-ECI product sales
    Anti-Deferral Regimes
    Subpart F taxes foreign personal holding company income of CFC
    More than 50% owned by US shareholders (at least 10%)
    Section 1296(a)(2) average percentage of the assets (by value) held by the corporation during the taxable year which produce passive income or are held for the production of passive income ("passive assets") is at least 50 percent of all assets (by value) held by the corporation during the taxable year.
    75 percent or more of the gross income of the foreign corporation for the taxable year is passive income
    367(d) Super royalty provisions
    Related Company Transactions
    Cost sharing agreements [define] – each affiliate buys in or contributes to the cost of creating intangible and share income
    Cross licensing
    Intercompany license agreements
    Section 482 transfer pricing
  • 55. New Developments
    If a U.S. person transfers (directly or indirectly) an intangible from the United States to a related CFC (a "covered intangible"), then certain excess income from transactions connected with or benefitting from the covered intangible would be treated as subpart F income if the income is subject to a low foreign effective tax rate.
    intangible property under sections 367(d) and 482 to include workforce in place, goodwill and going concern value.
    effective for taxable years beginning after December 31, 2011.
    IRS – Uncertain Tax Positions
    2010 Tax Extender Bill
    Codification of Economic Substance Doctrine
    2010 Small Business Jobs Act
    Capitalization of Sales Based Royalties
    Tax Patents Legislation
  • 56. PALO ALTO
    1717 Embarcadero Road
    Palo Alto, CA 94303
    10900 Wilshire Blvd.
    Suite 300
    Los Angeles, CA 90024
    33 New Montgomery Street
    Suite 1530
    San Francisco, CA 94105
    IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.