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Tax Issues for Patent Attorneys

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The firm offers some advice on tax issues for intellectual property attorneys. The slides cover partnerships, structure, and capital gains. (06/2016)

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Tax Issues for Patent Attorneys

  1. 1. TAX ISSUES FOR PATENT ATTORNEYS Roger Royse Royse Law Firm 149 Commonwealth Drive Suite 1001 Menlo Park, CA 94025 rroyse@rroyselaw.com www.rroyselaw.com 1
  2. 2. PATENT ISSUES 1. Section 1235 Capital Gains 2. R&D Partnerships 3. The Associated Patentees Structure 4. Partnerships with Lawyers 22
  3. 3. Allows patent “holder” to obtain long-term capital gains treatment regardless of holding period, the method of payment, and the status of the inventor as a professional; could potentially apply to trade secrets or other patentable know-how Requirements • Available to “holders” – meaning either the individual who (1) created the patent or (2) acquired an interest therein prior to reduction to practice; look-through for LLC ownership • Must transfer “all substantial rights” • “Patent” means a patent granted under domestic law, or any foreign patent granting rights generally similar to those under a United States patent; not necessary that patent or application be filed • Not available in (1) transfers to “related parties” (25% threshold) or (2) “hired to invent” scenarios CAPITAL GAIN UNDER SECTION 1235 3
  4. 4. Transfer of All Substantial Rights? • Use of the patent limited geographically within the country of issuance • Time period of less than the remaining life of the patent • Limited to specific trades or industries • Rights that are less than all the rights covered by the patent (prior transfers) • Limit on further sublicensing • Grant of less than all the claims or inventions covered by the patent • Retention of a right to terminate the transfer at will or on condition subsequent • Can retain right to use the invention and hold the legal title to the patent for purposes of securing the obligations of the purchaser 4 CAPITAL GAIN UNDER SECTION 1235 “ALL SUBSTANTIAL RIGHTS” Sale / LicenseInventor Company Buyer Company 4
  5. 5. R&D PARTNERSHIPS • LDL Research & Development II, Ltd. – Partnership had no real prospect of exploiting technology – Developer relied on to conduct technology business – Only possibility that partnership would ever act • Kantor v. CIR – 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 • Scoggins v. CIR – Developer had significant cost option to acquire IP – Partnership was capable of developing business if developer did not 55
  6. 6. R&D PARTNERSHIPS SCOGGINS PARTNERSHIP 6 Inventor Shareholders Non-Exclusive License Option to Buy Inventor Partnership Operating Corporation • R&D Deductions • 1235 Capital Gain Treatment • Bankruptcy Remote Patent Holding Partnership • 174/1235 Arbitrage • Section 351 Tax Free Treatment • Is it financeable? 6
  7. 7. ASSOCIATED PATENTEES CHARACTER CONVERTER Associated Patentees, Inc.: current deduction for payments based on patent’s use or production 7 “Sale” of Patent Contingent Payments R&D Partnership Developer Corporation 7
  8. 8. CLIENT PARTNERSHIP WITH ATTORNEY • Generally, plaintiffs who incur legal expenses in a lawsuit but neither link their claim to (1) unlawful discrimination or (2) a necessary business expense, will pay tax on the portion of the recovery paid to their attorneys • Structuring the relationship as a client-attorney partnership may eliminate the client’s tax on the portion paid to the attorney; in a partnership, the client’s gross income will not include legal expenses • Can be useful in prosecution of patent infringement Patent Infringement LLC Inventor Attorney Infringement Claims Legal Services Inventor Attorney X% of Award Y% of Award 8
  9. 9. CLIENT PARTNERSHIP WITH ATTORNEY Partnership Formalities • An Agreement; • Conduct of the parties in execution of its provisions; • Statements of the parties; • Testimony of disinterested persons; • Relationship of the parties; • Respective abilities and capital contributions of the parties; • Actual control of income and purposes for which it is used; and • Other facts showing the true intent of the parties (file partnership return). Other Issues • Federal tax law determines existence of partnership (not State) • State rules of professional conduct (conflicts, partnership with non-attorney) • Control of the case 9
  10. 10. CLIENT PARTNERSHIP WITH ATTORNEY Partnership Formalities • An Agreement; • Conduct of the parties in execution of its provisions; • Statements of the parties; • Testimony of disinterested persons; • Relationship of the parties; • Respective abilities and capital contributions of the parties; • Actual control of income and purposes for which it is used; and • Other facts showing the true intent of the parties (file partnership return). Other Issues • Federal tax law determines existence of partnership (not State) • State rules of professional conduct (conflicts, partnership with non-attorney) • Control of the case 9

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