Roger Royse Royse Law Firm, PC Palo Alto, San Francisco, Los Angeles firstname.lastname@example.org www.rroyselaw.com www.rogerroyse.com www.royseuniversity.com Skype: roger.royse Tax Aspects of Technology Transactions – Detailed Analysis
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
Boulez v. Comm – copyright royalty vs services
United States v. Stafford, 727 F.2d 1043 (11th Cir. 1984) – contribution of letter of intent held to be “property”
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 Inventor $ Developer Co. Partnership 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
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%) PFIC 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
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
PALO ALTO 1717 Embarcadero Road Palo Alto, CA 94303 LOS ANGELES 10900 Wilshire Blvd. Suite 300 Los Angeles, CA 90024 SAN FRANCISCO 33 New Montgomery Street Suite 1530 San Francisco, CA 94105 www.rroyselaw.com 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.