Roger Royse<br />Royse Law Firm, PC<br />Palo Alto, San Francisco, Los Angeles<br />rroyse@rroyselaw.com<br />www.rroysela...
Sales vs. Licenses<br />Sale or Exchange treatment<br /><ul><li>Substance based analysis – not labels
Sec 1221 Capital assets - Outside 1235 (non professional, related parties) or Sec 1231 – depreciable patents
Holding Period – reduction to practice for patents
Inventory property
All substantial rights – may be fields of use or geographical limitations (arguably)
Patents – property when reduced to practice, but case law loosens this and only requires that the idea be reduced to writt...
Tax Consequences to Seller
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Aba tax aspects of ip detailed analysis 110814

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Tax Aspects of Technology Transactions

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Aba tax aspects of ip detailed analysis 110814

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

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