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1. IP TAXATION –PRESENTATION HANDOUTS – CHRIS RINALDI
263A
263A(b) includes films produced by the taxpayer as tangible property which must be capitalized under
263A(a), unless considered inventory. There is a “qualified creative expense” exception under 263A(h)
(2), which would allow film expenses to be deductible but “motion picture films”, amongst other types
of similar items, do not fit into this exception. Therefore, without 181, these expenses could not be
deducted and only capitalized by the taxpayer. See Technical Advice Memorandum 9643003.
SUBPART F AND CFC REGULATION
Subpart F of the Internal Revenue Code, consisting of Sections 951-965, defines and regulates CFCs.
CONSEQUENCES OF CFC CLASSIFICATION: If a company is categorized as a CFC for more than 30 days of
the taxable year, any US shareholder holding such company’s stock on the last day of the taxable year
will be deemed to receive distributions from the CFC. 951(a). The distributions will represent the pro
rata portion of the US shareholder’s ownership rights in respect of their stock. But, the distributions will
only come out of Subpart F income. Royalties are included in Subpart F income.
WHAT IS A CFC? : Any corporation that has more than 50% of the voting power OR value owned by US
shareholders. US shareholder is a term of art. (951(a))
WHAT IS A US SHAREHOLDER?: A US person who owns “10 percent or more of the total combined
voting power of all classes of stock entitled to vote” of a foreign corporation. 951(b). But, this includes
indirect ownership under the unique attribution rules of 958.
958(a)(2) – If US person owns stock in a foreign corporation (FCo) , directly or indirectly, which owns
stock in (NewFCo), the proportion of the US person’s ownership in FCo will be attributed to them.
-US person owns 20% of FCo; US person buys 5% of NewFCo and FCo purchases 25% of NewFCo. Under
958(a)(2), 1/5 (5%) of FCo.’s 80% ownership is attributed to the US person, therefore making them a US
shareholder under 951(b).
The following tests are drawn and modified from 318, which supplied the attribution rules for domestic
stock ownership. Stock ownership is measured through value unless stated otherwise.
OWNER TO ENTITY
318(a)(3) – Stock owned by a partner, directly or indirectly, will be attributable to the partnership.
318(a)(3) – If one person, directly or indirectly, owns more than 50% of the value of stock in a
corporation, such corporation will be considered to own the stock owned by such person, whether
directly or indirectly.
-958(b)(4) -- This should not be applied to consider a United States person as owning stock which is owned by
foreign persons.

2. IP TAXATION –PRESENTATION HANDOUTS – CHRIS RINALDI
ENTITY TO OWNER
958(b)(3) – The same rule above applies to ownership in US Corporations, direct or indirect, except
attribution will not occur until the US person owns 10% of the US corporation. Under 318(a)(2)(C) its
50%, therefore, 958(b)(3) applies a stricter attribution rules than 318(a)(2).
-So, take the same example as above, but make FCo a domestic corporation. And, attribute 8% ownership to the
US person--- In this situation, no attribution will apply because the US person only owns 8%. But, if US person
stillowns 20% of FCo (as a domestic corporation) then the US person will be attributed 5% ownership of NewFCo,
in addition to their direct 5% ownership.
318(a)(2) – Stock owned, directly or indirectly, by a partnership will be attributed proportionally to
the partners.
958(b)(2) – If a partnership, trust, or estate owns, directly or indirectly, more than 50% of the voting power of a
corporation then they are deemed to own all of the voting power.
-If stock is attributed to a partnership under 318(a)(3), then it will not be attributed under 318(a)(2). 318(a)(5)(C)
FAMILY ATTRIBUTION
958(b)(1) – A US person will be attributed the corporate ownership of their spouse, children,
grandchildren, and parents, directly or indirectly. But, no stock owned by a non-US resident will be
attributed to a US resident.
-The family attribution rules may only be applied once., therefore if US person has 5% constructive ownership from
their parents, then their spouse cannot have 5% constructive ownership from US person. 318(a)(5)(B).
TRANSFER PRICING – 482
Section 482 allows the IRS to adjust the terms of a contract involving an international property
transfer between two related parties if the terms set by the parties are unreasonable. There
are three standards to determine reasonableness (1.482-4(a)):
1) The Comparable Uncontrolled Transaction Method – are the terms arms-length
when looking at what the market would have paid?
See: 1.482-4(c); Ciba-Geigy Corp. v. Commissioner
2) The Comparable Profits Method -- are the terms arms-length when looking at the
profits the IP will reduce?
See: 1.482-5;
3) The Profit Split Method – do the terms try to payout each party in regard to the
value they have added to the IP?
See: 1.482-6.

3. IP TAXATION –PRESENTATION HANDOUTS – CHRIS RINALDI