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4Ō&  ŌÓ  ÓŌ‡ĀĀĀŌŌW‡,ō\  `*Times New RomanTTWŌŌ  ŌŌ  Ōņ ņó óŌ  ŌŌ  ŌŌ‡ōōōŌŌW‡,ō\  `*Times New RomanTTWŌŌ'  Ō# e37=CIQYag­­1.a.i.(1)(a)(i)1)a)8”‰’’,TitleTitleÓ  ÓŌ‡XXXŌŌW‡,ō\  `*Times New RomanTTWŌŌ  ŌŌ  Ōņ ņó óŌ  ŌŌ  ŌŌ‡ōōōŌŌW‡,ō\  `*Times New RomanTTWŌō\  `*Times New RomanTTH(;³“$““Ō2 eŌŚ  Ś0Ś  Ś.Ō3  Ōą0  ą  333333Ćæ šæ š?  ąd@  .@ ffffffÖæffffffÖæffffffÖæX9“Čv¾æ?X9“Čv¾æ?333333Ćæ333333Ćæš™™™™™¹æC@C@ffffffÖ?333333Ć?333333Ć?)\Āõ(¬?Ż ƒ¤U!ŻÓ  ÓŻ  Ż›ŃĄ°ŃŃĄ°ŃŅ8°ŅŅ8°ŅŌ€¼Ę`¼XXŌÓfęÓÓ  ÓŃ7€XXdéXXdé7ŃņņÓ  ÓPATENTS,€TRADEMARKS,€COPYRIGHTS,€&Š Ą ŠTRADE€SECRETS€&€TAXATIONóóŠ (h ŠÓ×Óą@==:ģąņņbyóóˆŠ Š Šą@w w 1ģąņņCurtis€L.€HarringtonˆŠ ų8 Šą@m m (ģąóóą@@q q (ģąņņ6300€State€University€Drive,€Suite€250ˆŠ Ś  Šą@½½1ģąLong€Beach,€CA€90815óóˆŠ ś : Šą@¶ ¶ *ģąņņ(562)€594„9784,€Fax:€(562)€594„4414óóˆŠ  Z Šą@}}ģąhttp:/www.patentax.com€€€€E„mail:€curt@patentax.com€€€€€€€PATENTAXņņņņššóóóóˆŠ : z  ŠĢņņą@ee;ģą&óóˆŠ "b  Šą@w w 2ģąņņKathy€E.€HarringtonˆŠ ŠŹ  Šą@  .ģąóóą@@q q (ģąņņ355€South€Mount€Carmel€RoadˆŠ l¬  Šą@šš2ģąMcDonough,€GA€30253óóˆŠ ŒĢ  Šą@V V .ģąņņPhone€&€Fax:€(770)€914„1413óóˆŠ ¬ģ  Šą@ģąœhttp:›//www.patentax.com€€€€E„mail:€kathy@patentax.com€€€€€€€PATENTAXņņņņššóóóóˆŠ Ģ  МĢń5ńŌ‡ C¬ ¼¼Ę`Ōń5ńDISCLAIMER:ń5ń€ń5ńń5ńń5ńtń5ńń5ńń5ńń5ńtń5ńń5ńń5ńThis€outlineń5ńń5ńń5ń€ń5ńń5ńŌ‡xū†x¼¼Ę`Ōń5ńń5ńń5ń€ń5ńŌ‡' C¬   C¬Ōis€Educational€Only€and€no€part€of€this€ń5ńoutlineń5ńń5ńpresentationń5ńŠ “ō Šcan€be€considered€as€federal€or€state€tax€advice,€opinion,€or€position€and€isĻnot€intended€or€written€to€be€used,€and€may€not€be€used,€for€the€purpose€ofĻ(i)€avoiding€tax„related€penalties€under€the€internal€revenue€Code€or€(ii)Ļpromoting,€marketing€or€recommending€to€another€party€any€tax„relatedĻmatters€addressed€herein,€nor€(iii)€constituting€guidance€on€any€tax€orĻintellectual€property€matter.€ń5ńŌ#†'¼Ę`¼ ' C¬#Ōń5ńŠ &f Šń5ńń5ńŌ#†'¼Ę`¼x'xū†#Ōń5ńń5ńŌ#†¼Ę`¼¼'¼Ę`Ń#ŌÓC€ % ’’$ *CÓĢĢ›Ģņņ0.ą  ąBIGGEST€MISCONCEPTIONSŠ "U Šóóą  ąA.ą č ąPatentsŠ }#½ Šą  ąą č ąš šIf€I€have€a€patent€I€have€the€right€to€manufacturešš€„€NOĢą  ąą č ąš šI€have€to€do€a€searchšš€„NO€(but€you€should€spend€$300,000€to€be€sure)Ģą  ąą č ąš šCan€I€get€one€of€those€great€big€INTERNATIONAL€PATENTSšš?Ģą  ąB.ą č ąTrademarksŠ M'# Šą  ąą č ąš šIf€other€companies€can€pick€stupid,€descriptive€names,€I€can€œtoošš„NOĢą  ąą0 č ąš šIf€my€trademark€doesnššt€tell€what€my€product€is,€how€will€anyoneĻknow?šš›Š č #č # Šą  ąC.ą č ąCopyrightŠ +]'# Šą  ąą č ąš šI€made€this€clothing€by€hand,€I€want€to€copyright€itššĢą  ąD.ą č ąGeneralŠ -E)% Šą  ąą č ąš šSend€them€a€really€nasty€letter,€if€they€donššt€like€it,€they€can€lump€itššĢ‡ņņI.ą  ąOverview€of€Intellectual€PropertyŠ Ą Šą @ž ąóó(All€IP€is€generally€ņņnegativeóó€with€no€affirmative€rights€associated€withŠ "V Šit)ĢĢCOPYRIGHTĢĢą @ž ąCopyright,€like€all€other€forms€of€intellectual€property,€is€based€onĻnegative€rights.€€A€copyright€registrant€may€exclude€others€fromĻreproducing€a€given€copyrighted€work,€composing€a€derivative€work,Ļperforming€the€work€publicly,€distributing€the€work€(including€sale,Ļlease,€or€rental€of€the€work),€or€displaying€the€work.€€Works€that€may€beĻprotected€by€copyright€include€literary€works;€musical€works€andĻaccompanying€words;€audiovisual€works,€including€motion€pictures;Š ’,Ņ(& Šsculptural€works;€pictorial,€graphic€and€architectural€works;€sound€recordings;€and,Ļpantomimes€and€audiovisual€works.ĢĢą  ąCertain€areas€of€copyright€law€are€rife€with€traps€for€the€unwary€copyrightĻregistrant.€€Problems€include:Ģą  ą(1)€ą č ąminimum€level€of€originalityŠ `   Šą  ą(2)ą č ąworks€for€hireŠ T ”  Šą  ą(3)ą č ąJoint€worksŠ H ˆ  ŠĢĢTRADEMARKĢĢą  ąA€trademark€is€any€word,€name,€symbol,€device,€or€any€combination€thereofĻwhich€is€used€in€connection€with€goods€or€services€to€help€consumers€identify€theĻsource€of€those€goods€and€services€for€the€purpose€of€differentiating€the€goods€andĻservices€from€those€of€competitors.€€ĢĢą  ąTrademark€rights€accrue€as€to€a€given€set€of€goods€or€services€based€upon€theĻtheory€that€successful€name€recognition€will€follow€increasing€quality€and€excellence.ĻTrademark€rights€begin€with€the€use€of€the€trademark.€€For€this€reason,€later€users€of€aĻtrademark€can€potentially€be€foreclosed€from€using€a€name.€€The€scope€of€rights€in€aĻtrademark€depends€upon€how€the€mark€is€used.€€For€example,€the€trademark€EXXONĻis€generally€thought€to€be€a€coined€mark,€such€that€it€would€preclude€any€use€byĻothers,€even€where€the€use€might€be€for€non-petroleum€goods€and€services.€€TheĻscope€of€rights€for€other,€lesser-known€trademarks,€is€usually€narrower€than€the€scopeĻof€rights€for€coined€marks,€such€that€the€use€of€the€mark€in€one€area€will€generally€notĻprevent€the€use€of€the€mark€in€other€goods€and€service€areas.ĢĢą  ąUse€of€a€trademark€is€demonstrated€with€specimens€that€show€how€the€mark€isĻused€with€the€goods.€€The€best€way€to€show€trademark€usage€may€be€to€impress€theĻtrademark€directly€upon€the€goods.€€Tags€and€labels€applied€to€the€goods€are€anotherĻproper€way€to€use€the€trademark.€€However,€it€must€be€kept€in€mind€that€a€use€whichĻis€too€greatly€removed€from€a€direct€association€with€the€goods€may€fail€as€a€properĻuse.ĢĢą  ąBecause€there€are€no€"goods"€upon€which€to€affix€a€service€mark,€anĻadvertisement€is€generally€the€only€way€to€show€a€connection€between€a€service€markĻand€the€services€to€be€associated€with€the€mark.€€Aside€from€the€differences€in€whichĻthe€use€is€shown,€the€application€and€examination€procedure€is€approximately€theĻsame.Ģ€€€€€Š ¼,ü(+ Šą  ąNote€that€there€are€two€basic€mechanisms€for€naming€a€business€which€haveĻnothing€to€do€with€trademarks.€€The€county€designation€"doing€business€as,"€or€DBA,Š ¼,ü(+ Šand€the€state€corporate€filing€are€both€employed€to€insure€that€there€will€be€aĻresponsible€entity€doing€business€in€the€county€or€state,€and€that€the€responsible€entityĻis€distinguishable€from€other€entities.€€These€designations€help€to€be€sure€that€no€twoĻentities€have€the€same€name€either€locally€or€on€a€statewide€level.ĢĢą  ą€The€steps€necessary€for€acquiring€a€federally€registered€trademark€areĻgenerally€as€follows:ĢšHšSelect€the€mark€using€the€following€guidelines:Š l ¬ Ššāšą0  ąPick€a€name€that€is€NOT€in€the€dictionary€(likely€already€used)Š`   # # Ššāšą0  ąPick€a€name€that€is€NOT€similar€to€someone€elseššs€mark€(expensive€to€defend,Š T ”  Šand€nearly€impossible€to€protect)Š  # # Ššāšą0  ąPick€an€UNUSUAL€name€(the€more€unusual€the€name,€the€easier€it€will€be€toŠ <|  Šdefend€it)Š  # # Ššāšą0  ąPick€a€name€that€is€NOT€a€personššs€last€name€(there€is€the€potential€for€lostŠ $d  Šrights€otherwise)Š  # # Ššāšą0  ąPick€a€name€that€is€NOT€descriptive€of€the€goods€or€services€(the€PTO€is€veryŠ  L Šstrict€on€this€point,€and€even€if€you€get€past€the€PTO,€a€descriptive€mark€isĻlikely€to€cost€you€precious€profits€in€the€long-run)Š  # # Ššāšą0  ąPick€a€name€that€does€NOT€end€in€a€noun€(e.g.,š šdot€comšš€remember,€aŠ č( Štrademark€is€an€adjective,€not€a€noun)Š  # # Ššāšą0  ąPick€a€name€that€does€NOT€include€descriptive€words€(for€example,€š šcar,šš€orŠ Š Šš šboatšš)Š  # # ŠšHšą  ąUse€the€mark€properly€in€interstate€commerce€(across€state€lines)Š øų ŠšHšą  ąApply€for€federal€registration€of€the€markŠ ¬ģ ŠšHšą0  ąPTO€will€examine€the€application€about€1€year€after€it€is€submittedŠ ą # # ŠšHšą0  ąPTO€will€publish€the€potential€mark€to€give€an€opportunity€for€members€of€theŠ ”Ō Špublic€to€oppose€registration€of€the€markŠ  # # ŠšHšą0  ąRegistration€of€the€mark€will€occur€in€approximately€6€months€afterŠ |¼ Špublication,€assuming€no€opposition€was€filed€or,€if€an€opposition€was€filed,Ļassuming€it€was€not€successfulŠ  # # ŠšHšą  ąFirst€renewal€is€due€after€5€years€continuous€use€((8)Š X ˜ ŠšHšą  ąThe€mark€becomes€incontestable€after€5€years€of€continuous€use€((15)Š L!Œ ŠšHšą0  ąDuration€of€the€trademark€protection€(i.e.,€actual€ownership)€extends€for€10Š @"€  Šyears€after€first€renewalŠ  # # ŠĢą  ąIn€the€tax€section€of€this€outline,€it€can€be€seen€that€the€above€selection€rulesĻcan€be€critical€in€having€a€successful€outcome.ĢĢą  ąAs€you€can€see,€from€the€first€use,€incontestability€can€be€achieved€in€about€6Ļyears€from€application€(assuming€no€problems€during€the€application€process.€€ManyĻthings€can€stop€the€process,€including€a€rejection€by€the€Examiner,€an€opposition€filedĻby€another€who€believes€he€will€be€damaged€by€your€registration,€a€petition€to€cancelĻthe€registration€from€others,€and€worst€of€all,€forgetting€about€the€trademark€andĻallowing€it€to€lapse€by€failure€to€file€the€šš8€&€šš15€affidavit.Š ¼,ü(+ ЇTRADE€SECRETĢĢą  ąA€trade€secret€is€considered€to€be€any€information€(including€a€formula,Ļpattern,€compilation,€program,€device,€method,€technique€or€process)€which€(1)Ļderives€independent€economic€value€(actual€or€potential)€from€not€being€generallyĻknown€to€the€public€or€to€other€persons€who€could€obtain€economic€value€from€itsĻdisclosure€or€use;€and€(2)€€is€the€subject€of€efforts€that€are€reasonable€under€theĻcircumstances€to€maintain€its€secrecy.€€Trade€Secrets€are€generally€taxed€like€patents.ĢĢĢPATENTĢĢą  ąThere€are€generally€three€kinds€of€patents:€design,€plant,€and€utility.€€DesignĻpatents€protect€the€way€something€looks,€e.g.,€the€look€of€an€automobile,€a€computer,Ļa€pair€of€tennis€shoes,€or€a€vacuum€cleaner.€€Plant€patents€protect€varieties€of€plantsĻsuch€as€orchids,€roses,€flowers,€and€other€agricultural€plants.€€Utility€patents€provideĻprotection€for€things€and€the€way€they€work,€e.g.,€circuits,€machines,€chemicals,€andĻprocesses.ĢĢą  ąPatentable€subject€matter€includes€machines,€processes,€compositions€ofĻmatter,€articles€of€manufacture,€software€and€computer€processes€(currently,€theĻdividing€line€between€software€and€computer€process€is€well€into€the€software€area;Ļhowever,€to€be€certain€oneššs€invention€falls€within€the€confines€of€patentable€subjectĻmatter,€software€should€be€tied€to€spatial,€visual,€electrical€and€mechanical€aspects€ofĻthe€real€world€where€possible).ĢĢą  ąTwo€common€categories€into€which€utility€patents€fall€are€(1)€process€andĻapparatus€for€practicing€a€process,€and€(2)€compositions€of€matter€and€processesĻinvolving€compositions€of€matter.€€A€new,€unexpected€use€for€an€old,€knownĻcomposition€of€matter€can€qualify€for€a€patent.€€An€apparatus€and€process€steps€forĻuse€of€the€apparatus€are€generally€intertwined;€therefore,€new€uses€for€an€old€machineĻare€rarely€patentable.ĢĢSoftware€Patents:€The€Effect€of€the€State€Street€Bank€CaseĢĢą  ąTraditionally,€the€copyrighting€of€software€was€an€accident€resulting€from€anĻerroneous€characterization€of€the€early€programming€as€(language(€and€an€equallyĻerrant€decision€that€copyright€was€the€only€place€in€which€a€language€compositionĻ(program)€could€be€protected.€€ĢĢą  ą€Prior€to€the€summer€of€1998,€patents€and€trade€secrets€were€the€most€taxĻfavored€forms€of€intellectual€property.€€We€contend€that€this€is€still€the€case.€€BothĻpatents€and€trade€secrets€result€in€instant€capital€gains€under€IRC€(1235€for€bothĻcreators€and€those€in€privity€with€creators€before€the€invention€is€proven.€€Likewise,Š ¼,ü(+ Šboth€patents€and€trade€secrets€allow€for€expensing€and€capitalization€under€IRC€(174Ļfor€costs€of€creation€and€patenting€activities.ĢĢą  ąGenerally,€copyrighted€material€and€associated€software€receive€the€mostĻtax-disadvantaged€treatment,€including€denial€of€capital€asset€status€to€creators,Ļnon-deductibility€of€creation€costs,€ordinary€income€on€sale€by€the€creator,€and€onlyĻregular€capital€gains€on€resale€once€the€asset€leaves€the€purchaser(s€hands.ĢĢą  ą€In€State€Street€Bank€&€Trust€v.€Signature€Financial€Group,€Inc.,€149€F.3d€1368Ļ(Fed.€Cir.€1998),€the€U.S.€Court€of€Appeals€for€the€Federal€Circuit€held€that€(1)€ALLĻsoftware€is€patentable€and€(2)€business€methods€are€patentable.€€The€rule€that€methodsĻof€doing€business€were€not€patentable€had€been€in€force€for€100€years€prior€to€thisĻdecision.€€This€ruling€has€been€accepted€by€the€US€Patent€Office,€and€has€beenĻvalidated€and€expanded€in€subsequent€rulings€of€the€CAFC.ĢĢThe€following€results€have€gradually€grown€out€of€the€State€Street€Bank€decision:€ĢĢ1)€€ą  ąThe€public€policy€blunder€of€having€previously€placed€software€under€theŠ ō4 Štax-disadvantaged€copyright€protection€is€somewhat€remedied€by€a€substantialĻremoval€of€software€from€the€tax-disadvantaged€categories.€€Consequently,€softwareĻwhich€embodies€business€methods€and€gaming€software€which€utilizes€newĻengineering€advances€can€both€take€advantage€of€the€patent€arena.€€It€should€be€thatĻthe€only€software€developers€left€in€the€old€domain€are€those€who€create€new€softwareĻwhich€is€not€patentably€distinct€from€their€older€versions.ĢĢ2)ą  ąInstant€capital€gains€are€available€for€software€creators€under€IRC€šš1235€if€theŠ ”Ō Šsoftware€has€a€chance€at€patentability.ĢĢ3)ą  ąMost€software€may€now€be€expensed€under€IRC€šš174.Š p° ŠĢPatent€Enforcement:€Declaratory€Judgement€Trap,€Laches,€Estoppel€&€InsuranceĢĢą  ąThere€are€multiple€considerations€for€the€patentee€who€finds€it€necessary€toĻactively€enforce€patent€rights.€€Careful€thought€must€be€given€to€setting€the€tone€ofĻnegotiations€or€licensing;€crafting€the€notice€of€infringement€since€a€potentialĻinfringer€can€run€into€court€in€a€distant€state€and€mount€a€declaratory€judgementĻaction€ńų4ńagainsńų4ńńų4ńagainstńų4ń€the€patent€if€they€are€strongly€accused€of€infringement.€€Conversely,Ļlaches€and€estoppel€can€operate€against€a€patent€owner€who€eases€off€of€his€demandsĻor€who€states€that€he€will€file€suit€by€a€certain€date€but€fails€to€file.€€Other€strategiesĻinclude€applying€and€maintaining€the€right€pressure€on€infringers;€ITC€actions€forĻimports;€marshalling€infringers€to€finance€the€action;€and,€acquiring€patent€insuranceĻto€cover€suits€against€infringers€as€well€as€to€insure€against€the€possibility€that€aĻpatent€may€be€invalidated.€€It€is€of€note€that€there€are€few€companies€which€provideĻoffensive€patent€insurance€that€may€be€used€to€pursue€infringers.€€IntellectualŠ ¼,ü(+ ŠProperty€Insurances€Services€Corporation€has€recently€made€available€a€policy€for€theĻloss€of€intellectual€property€value,€and€they€may€be€contacted€by€mail€at€Suite€114,Ļ10503€Timberwood€Circle,€Louisville,€Kentucky€40223;€by€phone€atĻ1-800-537-7863;€or€by€e-mail€at€info@infringeins.com.€€ńü4ńńü4ń(Deductńś4ńińś4ńńū4ńańū4ńbility€for€insuranceĻexpenses€may€depend€on€the€š šin€businessšš€status€of€the€inventor€or€his€licensee).ĢĢą  ąValue€may€be€extracted€from€an€issued€patent€by€either€(1)€running€aĻmanufacturing€operation€as€a€monopoly,€or€(2)€licensing€other€manufacturers€to€makeĻthe€patented€product.€€An€exclusive€license€is€a€permission€granted€to€a€singleĻmanufacturer.€€A€non-exclusive€license€may€be€granted€to€one€or€more€manufacturers.ĻThe€central€difference€between€an€exclusive€and€a€non-exclusive€license€may€lie€inĻwhat€actions€are€contractually€assumed€in€the€license€if€the€patent€is€infringed.€€It€isĻmuch€more€likely€that€an€exclusive€licensee€will€undertake€to€sue€to€protect€theĻpatent.€Where€there€are€non-exclusive€licensees,€the€patent€owner€will€generally€beĻthe€one€to€undertake€suit€to€protect€the€patent.Ģ€€€€€Ģą  ąPatent€holders€who€find€themselves€in€the€unfortunate€position€of€accusedĻinfringer€also€have€multiple€considerations.€€Intensive€investigation€and€carefulĻplanning€should€ensue€immediately:€defensive€insurance€status€should€be€determined;Ļan€opinion€on€patentability€should€be€acquired;€economic€analysis€should€beĻperformed€as€a€prelude€to€potential€licensing€agreements;€data€on€other€potentialĻinfringers€should€be€gathered;€information€damaging€to€the€patent€should€beĻdocumented;€and,€a€re-examination€request€may€be€in€order€where€there€is€sufficientĻprinted€matter€to€support€it.ĢĢTAX€TREATMENT€OF€PATENTSĢĢDEDUCTION€OF€DEVELOPMENT€EXPENSESĢĢą  ąIn€general,€IRC€šš174(a)€allows€research€or€experimental€expenditures€to€beĻtreated€as€deductible€expenses€if€they€(1)€are€paid€or€incurred€by€a€taxpayer€during€theĻtaxable€year,€and€(2)€are€in€connection€with€the€taxpayerššs€trade€or€business.€€TheĻterm€"in€connection€with"€is€deliberately€less€stringent€than€the€"ongoing€businessĻconcernšš€requirement€found€in€other€sections€of€the€code.€€For€example,€IRC€šš162Ļallows€deductibility€only€for€(1)€ordinary€&€necessary€expenses€which€are€(2)€paid€orĻincurred€in€carrying€on€a€trade€or€business.€€This€would€seem€to€indicate€that€aĻpresently€functioning€business€is€a€precondition€of€deductibility€under€IRC€šš162.€ĻAlternatively,€IRC€šš174(b)€allows€expenses€to€be€capitalized€and€amortized€over€aĻperiod€of€not€less€than€60€months;€however,€capitalization€is€typically€only€used€toĻavoid€losing€carryover€net€operating€losses€from€prior€years.€€Although€the€š šinĻconnection€withšš€language€loosens€the€operation€of€IRC€šš174€appreciably,€recentĻcases€have€applied€what€we€refer€to€as€an€š šin€business€of€the€inventionšš€test,€rejectingĻIRC€šš174€treatment€for€entities€which€are€not€intimately€concerned€with€exploitingĻthe€technology.€€As€a€result,€the€inventor€should€be€actively€pursuing€business€orŠ ¼,ü(+ Šlicensing€with€respect€to€the€patent€prior€to€taking€advantage€of€deductibility€underĻIRC€šš174.€As€yet€another€alternative,€IRC€šš59(e)€allows€a€taxpayer€to€capitalize€andĻamortize€over€a€10€year€period.€€This€election€can€be€made€for€separate€projects,€andĻregulations€governing€IRC€šš59(e)€can€be€found€at€REG-124405-03.Ģ€Ģą  ą€In€general,€IRC€šš174€enables€a€taxpayer€to€deduct€fees€paid€to€a€patentĻattorney€to€procure€either€a€U.S.€or€a€foreign€patent.€€IRC€šš174€also€allows€aĻdeduction€for€money€spent€on€general€research,€as€well€as€on€product€design,Ļdevelopment,€or€improvement.€€However,€to€take€advantage€of€the€deduction€for€theĻcost€of€procuring€a€foreign€patent,€U.S.€patent€rights€should€already€be€in€place€(Rev.ĻRul.€68-471€1968-2€CB€109).€€Where€a€taxpayer€has€expenditures€related€to€procuringĻforeign€rights€but€does€not€own€corresponding€U.S.€rights,€the€expenditures€for€theĻforeign€patent€are€not€likely€to€be€deductible€(Rev.€Rul.€66-30,€1966-1€CB€55).€€OtherĻnon-deductible€expenses€include€environmental€impact€studies€and€the€cost€ofĻacquiring€the€patent€of€another.€€Also,€relatively€wealthy€non-corporate€taxpayersĻmay€be€subject€to€the€alternative€minimum€tax€computation,€which€requires€theĻexpenditures€to€be€capitalized€and€deducted€ratably€over€10€years€(for€alternativeĻminimum€tax€purposes€only).€€An€exception€to€the€alternative€minimum€taxĻcapitalization€is€made€where€the€taxpayer€(materially€participates(€in€the€research€andĻdevelopment€as€a€business.ĢĢą  ą€Note€that€there€are€dozens€of€tax€cases€relating€to€non-existent€technologyĻwhere€individuals,€particularly€tax€practitioners,€sought€to€set€up€business€models€toĻenable€investors€to€write€off€their€š šinvestment.šš€€In€these€cases,€the€IRC€šš174€writeĻoff€(expensing€treatment)€is€denied.€€In€another€line€of€cases,€the€š šactively€inĻbusinessšš€test€has€been€applied€to€deny€IRC€šš174€treatment€where€the€mainĻinvestment€vehicle€was€not€immediately€able€to€continue€exploiting€the€technology€orĻwas€not€ready€to€take€the€technology€elsewhere.€€€We€view€this€as€a€further€expansionĻof€the€prohibition€on€purely€investment€partnerships,€and€a€discussion€of€this€line€ofĻcases€is€set€forth€after€the€discussion€of€the€Green€case€below.Ģ€€€€€ĢTAX€CREDITSĢĢ€ą  ąIRC€šš41€gives€taxpayers,€typically€large€corporate€taxpayers,€a€credit€€basedŠ 4#t! Šupon€either€(a)€a€regular€credit€for€qualified€research€expenditures€which€exceed€someĻfixed€base€percentage€of€€average€annual€gross€receipts€or€(b)€an€incremental€creditĻbased€upon€(current(€qualified€research€expenditures€which€exceed€research€intensityĻfor€a€given€base€period.€€Although€a€percentage€popularly€stated€with€respect€to€thisĻcredit€is€š š20%šš€there€are€other€limitations€to€both€€credits€which€reduce€the€20%Ļvalue€to€a€much€lower€figure.€€There€are€several€alternatives€(details€are€omitted€forĻbrevity)€but€to€make€matters€worse,€IRC€šš280C(c)€disallows€deduction€of€that€portionĻof€research€expenses€which€are€equivalent€to€the€credit,€while€offering€as€anĻalternative€the€reduction€of€the€credit.€€To€make€this€provision€worth€taking€advantageĻof,€significant€dollars€should€have€been€spent€on€research.Š ¼,ü(+ Ї(Compare€Canadaššs€Federal€35%€refundable€tax€credit€for€research€by€CanadianĻControlled€Private€Corporations€(Internal€Revenue€Act€šš127(10.1)),€along€withĻsupporting€refundable€tax€credits€from€the€provinces:€Ontarioššs€super€allowance€forĻexample€of€from€125%€up€to€152.5%.€€Clearly€the€U.S.€(and€California)ĢĢCAPITAL€GAINS€TREATMENT€ON€THE€SALE€OF€TECHNOLOGYĢ€€€€€Ģ€€€€€Just€as€a€simple€sale€or€exchange€where€the€title€to€a€patent€is€transferred,€aĻdomestic€patent€license€which€transfers€all€substantial€rights€in€a€patent€is€treated€as€aĻsale€or€exchange€of€the€patent€for€tax€purposes.€€Recall€that€capital€gains€are€availableĻunder€IRC€šš1235€(with€both€advantages€and€disadvantages),€outside€IRC€šš1235,€orĻby€sale€of€stock,€etc.,€in€the€unfortunate€circumstance€where€a€patent€has€beenĻassigned€to€a€corporation.€€Although€extremely€ill-advised,€this€may€be€the€caseĻwhere€venture€capitalists€are€involved.€ĢĢSPECIAL€U.S.€FEDERAL€PROVISION€FOR€INDEPENDENT€INVENTORSĢĢAccording€to€IRC€šš1235,€which€addresses€the€sale€or€exchange€of€patents:ĢĢ(a)€GENERAL.-€A€transfer€(other€than€by€gift,€inheritance,€or€devise)€of€propertyĻconsisting€of€all€substantial€rights€to€a€patent,€or€an€undivided€interest€therein€whichĻincludes€a€part€of€all€such€rights,€by€any€holder€shall€be€considered€the€sale€orĻexchange€of€a€capital€asset€held€for€more€than€1€year,€regardless€of€whether€or€notĻpayments€in€consideration€of€such€transfer€are-Ģą  ą(1)€€payable€periodically€over€a€period€generally€coterminous€with€theĻtransfereeššs€use€of€the€patent,€orĢą  ą(2)€€contingent€on€the€productivity,€use,€or€disposition€of€the€propertyĻtransferred.Ģ(b)€€Holder€Defined€-€For€the€purposes€of€this€section,€the€term€š šholderššmeans-Ģą  ą(1)€any€individual€whose€efforts€created€such€property,€orĢą  ą(2)€any€other€individual€who€has€acquired€his€interest€in€such€property€inĻexchange€for€consideration€in€money€or€money(s€worth€paid€to€such€creator€prior€toĻactual€reduction€to€practice€of€the€invention€covered€by€the€patent,€if€such€individualĻis€neither-Ģą  ąą č ą(A)€the€employer€of€such€creator,€norĢą  ąą č ą(B)€related€to€such€creator€(within€the€meaning€of€sub€(d)).*ĢĢ*[members€of€a€family,€individual€&€25%€owned€corporation,€two€corporationsĻwhich€are€members€of€the€same€control€group,€grantor€&€fiduciary€of€a€trust,€andĻmore.€Constructive€ownership€of€stock€is€limited€to€an€individualššs€spouse,€ancestorsĻand€lineal€descendants]€referencing€šš267(b),€&€šš707(b).ĢĢą  ąCapital€gains€rates€for€individuals€are€currently€15%€for€long€term€ratesĻ(generally€for€assets€held€more€than€12€months).€€€For€taxpayers€in€the€15%€incomeŠ ¼,ü(+ Štax€bracket,€the€long€term€gain€is€10%.€IRC€šš1235€now€forces€the€assumption€of€aĻone-year€holding€period€for€patents,€automatically€conferring€the€long€term€capitalĻgain€treatment€of€15%.€Corporate€taxpayers€are€not€eligible€for€capital€gains€rates€andĻdo€not€qualify€for€holder€status€in€any€event.€€A€corporation€which€buys€a€patent€andĻholds€it€for€more€than€a€year€technically€has€a€capital€gain,€but€will€still€be€taxed€atĻcorporate€rates.€€The€characterization€of€the€gain€as€a€capital€gain€is€only€slightlyĻadvantageous€because€it€enables€an€offset€against€long€term€capital€loss.ĢĢą  ąThe€key€to€capital€gains€treatment€is€to€be€a€"holder"€as€defined€in€the€InternalĻRevenue€Code.€€A€holder€can€be€the€inventor€or€one€who€bought€from€the€inventor,Ļbut€not€those€who€are€merely€in€privity€with€the€inventor.€€A€holder€is€further€definedĻas€one€who€obtains€an€interest€in€the€technology€before€it€is€actually€reduced€toĻpractice.€€Investment€partners€and€investment€co-owners€who€contribute€capital€canĻqualify€as€holders,€so€long€as€the€contribution€is€made€before€actual€reduction€toĻpractice.€€(Note€that€constructive€reduction€to€practice,€meaning€that€the€inventor€hasĻfiled€a€patent€application,€does€not€apply€here.€See€Reg€šš1.1235-2(d)(3)).€€€Further,€aĻholder€must€actually€own€a€portion€of€the€invention€rather€than€a€contractual€right€toĻfuture€income€(which€would€constitute€some€form€of€loan€or€option).€€According€toĻReg.€šš1.1234,€an€actual€reduction€to€practice€is€defined€as€follows:ĢĢą  ąFor€the€purposes€of€determining€whether€an€individual€is€a€holder€underĻparagraph€(d)€of€this€section,€the€term€š šactual€reduction€to€practicešš€has€the€sameĻmeaning€as€it€does€under€section€102(g)€of€title€35€of€the€United€States€Code.€ĻGenerally€,€an€invention€is€reduced€to€actual€practice€when€it€has€been€tested€andĻoperated€successfully€under€operating€conditions.€€This€may€occur€either€before€orĻafter€application€for€a€patent€but€cannot€occur€later€than€the€earliest€time€thatĻcommercial€exploitation€of€the€invention€occurs.ĢĢImportant€points€to€remember:ĢĢ*€If€possible,€bring€investors€on€board€before€the€patent€is€reduced€to€practice€so€thatĻthey€can€be€š šholders.ššĢ*€Inventors€and€other€holders€do€not€have€to€wait€the€traditional€year€in€order€to€getĻlong€term€capital€gains€on€the€sale€of€the€technology,€but€instead€have€instant€longĻterm€capital€gain€status.Ģ*€The€term€š ša€patentšš€refers€to€a€patent€in€its€entirety.€€Unlike€copyrights,Ļsubdivisional€portions€of€a€patent€(which,€of€course,€covers€a€single€country)€cannotĻbe€š šsoldšš€(rather€than€licensed)€and€still€have€the€transaction€qualify€for€capital€gainsĻtreatment.€€It€is€our€understanding€that€this€point€has€never€been€litigated.Ģ*€A€transaction€with€a€š šrelated€partyšš€will€destroy€the€capital€gains€treatment€underĻIRC€(1235.Ģ*€Where€an€employee€is€paid€an€amount€of€royalty,€even€over€the€full€term€of€theĻpatent,€this€will€generally€constitute€compensation€for€services€as€ordinary€income,Ļand€capital€gains€are€not€likely€to€be€available.€€However,€some€cases€have€indicatedŠ ¼,ü(+ Šthat€capital€gains€may€be€available€where€(a)€the€employee€was€not€hired€to€invent,Ļ(b)€the€services€are€ancillary€to€the€patent€transfer,€and€(c€)€the€taxpayer€has€anĻarrangement€before€beginning€employment.Ģ*€Since€actual€reduction€to€practice€under€the€regulations€may€occur€later€than€theĻapplication€for€patent,€an€opportunity€exists€for€bringing€in€investor-holders€after€theĻapplication€for€patent€is€submitted.ĢĢą  ą€The€right€to€deduct€research€and€development€expenditures€as€set€forth€inĻabove€is€even€more€critical€to€new€technology€ventures€because€the€tax€advantage€ofĻthese€deductions€are€not€recaptured€if€the€technology€is€later€sold.€€To€illustrate€anĻextreme€example,€assume€that€$1,000,000€of€personal€monies€is€spent€on€research€inĻyear€1€and€is€deducted€as€an€expense€under€šš174.€€(Ignore€ademption€of€personalĻdeductions€and€other€š šhidden€taxšš€for€the€high€income€rate€payer.)€€The€value€of€thisĻtax€deduction€at€a€35%€top€marginal€rate€is€$350,000.€€Although€the€invention€wouldĻusually€be€sold€for€much€more,€if€the€invention€is€sold€for€$1,000,000€under€IRCĻšš1235€on€the€day€after€the€patent€filing€date€and€is€taxed€at€a€current€federal€capitalĻgains€rate€of€15%,€the€tax€burden€would€be€$150,000.€€€In€this€case,€the€taxpayer€willĻhave€netted€(absent€other€considerations)€$200,000€based€upon€the€tax€rateĻdifferential€between€the€ordinary€income€write-off€and€the€long€term€capital€gains€taxĻrate.ĢĢą  ą€IRC€šš174€is€so€disrupts€the€direct€connection€between€general€research€and€aĻpatent€project€that€there€is€no€recapture€(Rev.€Rul.€73-395,€1973-2€CB€87).€ForĻfinancial€illustration€purposes€only,€and€referencing€the€recapture€case€(using€IRCĻšš1245€property)€purely€for€contrast,€assume€that€an€item€costs€$1,000,000€and€hasĻbeen€depreciated€(over€the€greater€than€12€month€holding€period€so€that€the€15%Ļcapital€gains€rate€applies)€so€that€it€has€an€accounting€book€value€(or€basis)€ofĻ$600,000.€€If€the€capital€item€were€to€sell€for€$2,000,000,€the€sales€price€would€beĻtreated€as€follows:€€$600,000€would€represent€a€non-tax€return€of€capital;€$400,000€ofĻthe€gain€over€basis€would€be€š šrecapturedšš€depreciation€and€would€be€taxed€atĻordinary€rates€(since€it€was€previously€depreciated€with€a€savings€based€uponĻordinary€rates);€and,€the€$1,000,000€gain€over€the€purchase€price€would€be€taxed€atĻcapital€gains€rates.€If€recapture€rules€had€applied,€the€$200,000€tax€š šarbitrageššĻsavings€would€not€be€possible€because€the€sale€would€have€been€taxed€at€ordinaryĻrates.ĢĢą  ąMost€inventors€confuse€patent€ownership€with€manufacturing€liability.€€AĻpatent€is€a€negative€right,€i.e.,€the€right€to€prevent€others€from€making,€using€andĻselling€the€invention.€A€license€is€essentially€acceptance€of€money€as€considerationĻfor€not€suing€the€licensee.€€There€is€virtually€no€liability€to€a€patent€owner€for€merelyĻowing€a€patent.€€(However,€abusing€or€misusing€a€patent€can€result€in€liability,€forĻexample,€where€the€owner€attempts€to€enforce€a€patent€he€knows€to€be€invalid.)€€AĻmanufacturer€can€hold€a€patent€passively€while€manufacturing€the€patented€article,Ļbut€is€not€necessarily€subject€to€liability€merely€by€doing€so.€€Consequently,€there€isŠ ¼,ü(+ Šreally€no€advantage€to€be€gained€by€putting€a€patent€into€a€corporation€in€an€IRC€(351Ļtransaction;€doing€so€would€essentially€eliminate€an€inventorššs€tax€advantages€forĻsubsequent€sale€both€under€IRC€šš€1235€š šinstant€capital€gainsšš€and€outside€IRC€šš1235Ļ(one€year€holding€period€requirement),€because€corporations€are€taxed€on€capital€gainĻproperty€at€the€same€rate€as€ordinary€profits.ĢĢą  ąThe€manufacturing€side€of€the€business€should€have€some€liability€shields,€suchĻas€a€corporate€or€LLC€form,€adequate€commercial€liability€insurance,€and€preferably€aĻpatent€rider€in€the€event€that€the€manufactured€product€infringes€someone€elseššsĻpatent.€If€a€corporation€is€an€exclusive€licensee,€it€can€make€its€own€decisions€aboutĻwho€should€be€sued€for€infringement€of€its€patent,€as€well€as€when€and€where€suitĻshould€be€brought.ĢĢą  ą€Patent€rights€may€also€be€divided€with€a€license€agreement€according€toĻgeography,€type€of€product,€time€duration,€and€the€like.€€An€agreement€for€the€sale€ofĻa€patent,€rather€than€a€license,€must€involve€the€sale€of€substantially€all€of€the€rights€inĻthe€patent.€€The€regulations€provide€that€a€license€is€not€a€sale€where:€(a)€the€transferĻis€geographically€limited€to€less€than€all€of€the€geographical€area€of€the€country€ofĻissuance;€(b)€the€transfer€is€limited€to€a€time€period€less€than€the€length€of€the€patentĻprotection€period;€(c€)€the€licensor€limits€the€licensee€to€specific€industries€or€trades;Ļ(d)€the€licensor€attempts€to€license€some€claims€and€exclude€others;€(e)€the€licensorĻprohibits€further€sublicensing;€(f)€€the€right€to€use€or€sell€are€retained€by€the€licensor;Ļ(g)€the€right€to€terminate€the€license€is€unilaterally€retained€and€exercisable€by€theĻtransferor;€and,€(h)€the€licensor€has€the€right€to€terminate€on€a€condition€subsequentĻbeyond€the€control€of€the€licensor.€€Conversely,€note€that€foreign€rights€can€be€soldĻand€retained€individually,€by€country,€with€each€countryššs€rights€constituting€aĻseparate€asset.ĢĢą  ąRetained€rights€which€do€not€prevent€a€holding€that€substantially€all€rights€wereĻtransferred€in€the€license€(i.e.,€retention€of€rights€such€that€a€true€sale€of€the€patent€isĻnot€undermined)€include€(a)€retention€of€an€option€to€sue€on€the€patent,€(b)€anĻagreement€in€the€license€to€jointly€pursue€litigation€with€the€licensee,€(c€)€a€provisionĻwhere€either€the€licensor€or€the€licensee€could€bring€suit€for€infringement,€(d)Ļretention€by€the€licensor€of€a€security€interest,€and€(e)€retention€by€the€transferor€ofĻthe€right€to€use€the€invention.ĢĢą  ąOnly€where€substantially€all€of€the€rights€are€transferred€can€capital€gainsĻtreatment€be€afforded.€€Otherwise,€the€money€received€from€the€purported€sale€will€beĻtreated€as€ordinary€income.€€In€other€instances€the€taxpayer€may€have€divided€theĻpatent€rights€in€a€series€of€non-exclusive€licenses.€€Where€the€taxpayer€is€highlyĻinvolved€in€administering€the€licenses€and€is€involved€sufficiently€to€consider€it€as€aĻbusiness,€self-employment€tax€must€be€paid.ĢĢLEAVING€CALIFORNIAŠ ¼,ü(+ Їą  ąIn€the€preceding€example€which€illustrates€the€advantage€and€the€differentialĻtax€rates€available€from€a€federal€tax€perspective,€it€should€be€kept€in€mind€that€theĻstate€of€California€does€not€offer€any€break€for€capital€gains€income.€€As€a€result,Ļselling€a€zero€basis€patent€for€$1,000,000€would€cause€the€taxpayer€to€pay€about€10%Ļof€that€amount€to€the€state.€€It€might€be€a€good€idea€to€be€a€bona€fide€resident€ofĻNevada€or€Texas€at€the€time€of€sale,€particularly€if€the€net€present€value€of€the€incomeĻstream€tops€one€or€two€million€dollars.€€The€tax€savings€could€potentially€support€theĻpurchase€of€a€modest€house€in€Nevada.ĢĢAVOID€THE€šš351€IMPERMISSIBLE€TYPE€š šAšš€REORGANIZATION€TRAP!ĢĢą  ą€Despite€warnings€by€us€to€avoid€putting€a€patent€into€a€foreign€entity,€weĻcontinue€to€encounter€inventors€who€are€enticed€into€š štax€suicidešš€along€theĻfollowing€lines.€€A€young€start€up€company€(YST)€sees€that€an€inventorššs€patent€isĻvaluable,€but€cries€š špooršš€at€any€mention€that€the€inventor€should€receive€any€moneyĻat€all€for€his€invention.€€The€YST€offers€extremely€restricted€stock€in€exchange€for€theĻpatent,€but€the€inventor€knows€that€the€value€of€such€restricted€stock€is/may€beĻsignificant€and€that€the€IRS€would€value€it€and€then€send€the€inventor€a€bill€forĻš šsellingšš€his€patent.€€Even€a€great€15%€tax€rate€can€be€steep€if€the€inventor€has€noĻother€funds€to€cover€the€tax€bill.€€The€inventor€urges€that€the€invention€is€so€valuableĻthat€the€YST€should€dissolve€and€reorganize€around€the€inventor€in€a€(351€transactionĻin€which€the€inventor€will€receive€15%€of€the€stock€of€the€new€company€and€willĻdepend€upon€stock€growth€to€compensate€him.ĢĢą  ąA€major€indicator€of€how€to€structure€businesses€both€(1)€to€insure€that€theĻdeductibility€of€research€and€development€is€maintained,€and€(2)€to€protect€the€rightsĻof€the€inventors€and€holders€may€be€found€in€the€cases€Green€v.€Commissioner,€83ĻT.C.€667€(1984),€and€Scoggins€v.€Commissioner€95-1€USTC€50,061;€46€F3D€950€(9thĻCir).€€Although€other€strategies€may€work,€these€cases€introduce€a€base€strategyĻwhich€assumes€that€little€or€no€liability€will€be€incurred€from€simply€owning€a€patent.ĢĢProhibition€on€š šnon-technically€activešš€investment€vehicles/partnershipsĢĢą  ą€In€the€Green€case,€the€deductibility€of€research€and€development€expendituresĻwas€denied€where€the€invention€was€placed€in€a€limited€partnership€which€functionedĻonly€as€a€š švehicle€for€injecting€risk€capital€into€the€development€andĻcommercialization€of€inventions.šš€€Thus,€an€entity€which€seeks€to€claim€a€deductionĻshould€be€one€which€is€set€up€so€that€it€has€a€chance€to€enter€the€regular€businessĻrelating€to€the€technology€development€(as€opposed€to€one€whose€only€function€is€toĻinject€investment€and€collect€profits).ĢĢ€€€€€The€š šactive€businessšš€rule€really€translates€into€an€š šactive€technologyšš€rule.€€AsĻthe€Scoggins€case€demonstrates,€the€partnership€vehicle€was€ready,€willing€and€ableĻto€move€on€with€the€technology€had€the€option€holder€not€brought€commercializationŠ ¼,ü(+ Što€the€mark.€€The€Scoggins€case€emphasized€that€after€the€technology€is€sold,€beingĻš šready€to€move€on€with€the€technologyšš€is€impossible€because€one€no€longer€has€theĻtechnology€required€for€moving€on;€however,€several€other€cases€have€more€subtletyĻoutlined€what€is€impermissible.ĢĢScogginsĢĢą  ąIn€Scoggins,€the€inventors€formed€a€partnership€to€hold€rights€in€the€technologyĻand€to€pay€for€the€research.€€At€issue€in€Scoggins€was€whether€the€partnership€couldĻtake€a€deduction€for€the€research€expenditures€it€paid€to€a€research€corporation€inĻwhich€the€inventors,€incidentally,€had€a€majority€shareholder€interest.€€TheĻinventor-partners€granted€to€the€inventor€corporation€(1)€a€limited,€non-exclusiveĻright€to€exploit€the€invention,€and€(2)€an€option€to€buy€the€technology€for€$5€million.€ĻCash€from€the€license€flowed€back€to€the€partnership€as€did€cash€from€expensingĻdevelopment€of€the€corporation.€€Ģą  ąĢą  ąThis€structure€has€several€advantages,€as€well€as€a€few€disadvantages.€€SinceĻthe€patent€is€held€in€a€partnership€of€the€inventors,€the€inventors€continue€their€holderĻstatus,€and€any€sale€of€the€patent€to€an€unrelated€entity€will€result€in€IRC€šš1235Ļcapital€gains€to€the€individual€inventors€at€the€15%€long€term€rate.€€Holding€the€assetsĻfor€longer€than€12€months€results€in€the€15%€long€term€rate€outside€of€IRC€šš1235,Ļincluding€permissible€aspects€of€the€transaction€such€as€the€25%€aggregate€ownershipĻlimitation€on€the€seller-related€persons€in€the€buyer€corporation.€€ĢĢą  ą€If€there€is€little€liability€in€holding€the€patent,€the€flow€through€of€liabilities€toĻthe€inventors€should€not€be€a€concern.€€If€the€corporation€cannot€make€a€success€ofĻthe€technology,€the€partnership€continues€to€exploit€the€technology€elsewhere€and€isĻthus€in€the€business€of€exploitation€of€the€technology,€rather€than€simply€being€aĻvehicle€for€injecting€venture€capital.€This€enables€a€deduction€for€expenditures€toĻflow€through€the€partnership€and€to€the€partners.ĢĢą  ąThe€inventors€here€also€have€a€majority€share€of€the€corporation€and€control€theĢbusiness€exploitation.€€If€the€corporation€begins€to€generate€large€amounts€of€cash,€theĻinventors€can€have€the€corporation€exercise€its€option€from€the€partnership€andĻpurchase€the€technology€outright€for€$5M,€which€will€result€in€taxation€to€theĻinventors€through€the€partnership€at€the€15%€instant€long-term€capital€gains€rate€if€theĻcorporation€is€unrelated.€€The€criticisms€in€this€case€are€that€(1)€the€inventors€ownĻmore€than€50%€of€the€corporation€for€purposes€of€creating€a€sale€outside€of€IRCĻšš1235,€and€(2)€the€inventors€as€an€aggregate€own€more€than€25%€of€the€corporationĻfor€effecting€a€sale€within€IRC€šš1235.€€As€a€result,€it€is€clear€that€the€most€desirableĻaction€would€be€to€secure€long€term€gain€through€stock.€€As€the€corporation€grows,€itĻmay€be€successful€enough€to€go€public,€in€which€case€the€inventorššs€stock€willĻincrease€but€will€not€be€tax-recognized€until€the€sale€of€the€stock,€which€will€againĻinvoke€capital€gains€tax€rates€(assuming€it€is€held€for€more€than€a€year).€€Š ¼,ü(+ Їą  ąIn€the€case€of€a€partnership,€it€is€the€individual€partner€who€can€qualify€a€patentĻholder€rather€than€the€partnership€as€a€whole.€€A€partner€who€does€not€independentlyĻqualify€as€a€patent€holder€does€not€qualify€for€instant€capital€gain€treatment€under€Ģšš1235.€€It€may€be€that€two€inventors€can€arrange€to€have€their€technology€heldĻtogether€so€as€not€to€be€in€partnership,€although€it€is€uncertain€whether€such€anĻendeavor€would€be€successful;€for€example,€a€common€disposition€agreement€couldĻbe€drafted€to€avoid€cumulating€their€interests€as€partners€for€either€the€50%€provisionĻoutside€IRC€šš1235€or€the€25%€provision€within€IRC€šš1235.€ĢĢą  ąBecause€an€the€inventorsšš€ability€to€move€sale€money€through€to€themselves€atĻa€15%€tax€rate€as€holders€within€IRC€šš1235,€or€even€as€owners€outside€of€IRC€šš1235,Ļit€might€have€been€prudent€if€they€(1)€had€severely€limited€inventor€ownership€of€theĻdeveloper€corporation,€and€(2)€had€given€the€holder€corporation€the€option€to€buy€theĻtechnology€from€the€unrelated€inventorššs)€for€a€significant€outlay.€€Without€aĻsignificant€outlay,€the€courts€are€likely€to€hold€that€the€inventors€are€making€a€simpleĻsale€through€an€investment€partnership.€€Only€a€significant€barrier€to€š šbuy€offšš€theĻinventors€will€keep€the€inventors€in€a€position€of€being€š šin€connection€with€its€tradeĻor€business.šš€€Ģą  ąĢą  ąOn€the€other€hand,€if€the€inventors€are€so€committed€to€corporate€growth€thatĻthey€expect€to€derive€all€of€their€income€from€the€accumulated€value€of€stock,€theĻinventors€may€as€well€enter€the€corporation€from€the€outset.€€An€option€to€buy€from€aĻcorporate-related€taxpayer€will€either€have€(1)€a€sales€price€magnitude€large€enoughĻto€meet€the€Kantor€and€LDL€Research€cases€(thereby€producing€a€huge€undesirableĻordinary€taxable€income€stream),€or€(2)€a€negligible€sales€price€magnitude,€such€that€aĻpartnership€will€lose€its€IRC€šš174€deduction,€and€there€will€perhaps€be€a€delay€ofĻmoney€to€the€inventor€where€a€negligible€magnitude€option€is€set€to€trigger€at€a€muchĻlater€time.ĢĢą  ąIt€makes€no€sense€to€split€the€inventor/€inventive€partnership€compensationĻbetween€future€stock€growth€and€the€initial€sale/option€of€the€technology.€€Where€aĻdeveloping€corporation€claims€poverty€in€the€early€years€of€development,€an€initialĻsale€by€license€with€an€escalating€royalty€rate€can€give€the€inventors€the€ability€to€reapĻthe€benefits€of€a€maturing€industry€while€leaving€the€developer€some€leeway€in€theĻearly€years€for€development€which€is€not€substantially€burdened€by€inventor€paymentĻconsiderations.ĢĢą  ąAn€immediate€question€which€arises€from€the€foregoing€is€whether€an€LLC€willĻbe€given€the€same€respect€as€a€partnership.€€Unless€one€wishes€to€try€to€make€newĻlaw,€it€may€be€advisable€to€stay€with€the€established€partnership€precedent,Ļparticularly€since€there€should€be€no€significant€downside€from€simply€holdingĻhonestly€and€truthfully€obtained€patents.€€Moreover,€a€partnership€need€not€beĻregistered€with€the€state€and€will€not€be€taxed,€even€at€the€low€rate€of€an€LLC.ĢŠ ¼,ü(+ ŠTAX€TREATMENT€OF€THE€PURCHASER/LICENSEEĢ€€€€€Ģą  ąIn€general,€€the€purchaser€of€a€capital€asset€is€required€to€capitalize€the€purchaseĻprice€and€depreciate€a€portion€of€the€assetššs€value€each€year,€such€as€for€a€building€orĻa€piece€of€equipment.€€This€is€true€for€lump€sum€purchases€and€usually€true€forĻperiodic€payments€not€based€on€productivity€or€use.€€Where€a€series€of€payments€areĻmade,€the€transaction€is€treated€as€a€sale€subject€to€a€loan,€and€the€IRS€commissionerĻwill€impute€a€reasonable€interest€rate€into€the€transaction.ĢĢą  ąWhere€the€payments€are€dependent€upon€the€patentššs€use€or€production,€it€isĻconsidered€that€the€payments€are€closely€related€enough€to€the€value€of€the€patent€thatĻthey€are€deductible€in€the€year€paid€or€accrued.€€This€rule€is€from€AssociatedĻPatentees,€Inc.€4€T.C.€979€(1945),€and€it€has€clearly€survived€for€over€half€a€century.ĢĢą  ąPurchasers€may€hold€the€patent€as€a€capital€asset€under€IRC€šš1221(where€it€isĻnot€used€in€business)€or€IRC€šš1231€(but€only€where€gains€exceed€losses).€€TheĻholding€period€is€one€year€for€long€term€tax€rates€(15%),€but€court-modified€tax€lawsĻhave€established€that€actual€reduction€to€practice€is€necessary€before€the€holdingĻperiod€will€begin.€€Again,€reduction€to€practice€means€an€actual€reduction€to€practiceĻsufficient€to€demonstrate€that€the€inventorššs€idea€works.ĢĢA€BETTER€ARRANGEMENTĢĢą  ąA€better€arrangement€might€be€where€the€transferee€corporation€has€less€thanĻ25%€of€its€ownership€in€common€with€the€inventor€partnership,€with€the€best€scenarioĻbeing€zero€common€ownership€between€the€transferee€corporation€and€the€inventorĻpartnership.€€The€inventor€partnership€would€optimally€grant€to€the€transfereeĻcorporation€(1)€a€limited,€non-exclusive€right€to€exploit€the€invention,€and€(2)€anĻoption€to€buy€the€technology€for€big€money,€possibly€on€an€escalating€schedule.€ĻConversely,€the€transferee€corporation€would€sell€its€stock€to€the€inventor€partnershipĻfor€a€de€minimis€price€(or€would€simply€give€the€stock€to€the€inventor€partnership).€ĻThe€transferee€corporation€would€ideally€make€an€IRC€šš83(b)€election€so€restrictedĻthat€it€is€ineffective€for€ownership,€or€would€possibly€give€incentive€stock€optionsĻcontingent€upon€purchase.€€Low-level€cash€to€cover€expenses€would€flow€into€theĻinventor€partnership€as€a€result€of€the€license,€as€would€cash€resulting€from€theĻcorporations€expensing€of€development€costs.ĢĢą  ąThe€non-exclusive€limited€license€is€only€necessary€where€it€is€required€that€theĻdeveloping€company€have€an€exclusive€or€non-exclusive€right€to€exploit.€€Normally,Ļwhere€no€š šexploitation€testingšš€is€necessary,€a€simple€license/sale€with€an€initial€lowĻroyalty€followed€by€escalating€royalties€can€achieve€the€same€result€as€the€non-saleĻfollowed€by€sale€treatment,€at€least€from€an€economic€standpoint;€additionally,€thisĻapproach€affords€early€tax€breaks€on€the€initial€royalty€dollar.ĢŠ ¼,ü(+ Šą  ąIn€the€proposed€scheme,€the€grant€option€to€buy€the€technology€for€big€moneyĻon€a€potentially€escalating€schedule€will€be€necessary€keep€the€investment€partnershipĢš šactive.šš€The€use€of€use€of€the€option€will€leave€the€partnership€active€while€puttingĻthe€buyer€to€the€test€in€terms€of€exercising€the€option.€€Much€of€the€mix€of€theseĻoptions€will€depend€upon€product€development€in€terms€of€funds€required,€timeĻrequired,€and€funds€expected.ĢĢą  ąEven€where€corporate€profit€participation€is€sought,€insure€that€true€ownershipĻonly€begins€when€the€option€and€sale€finally€occurs.€€Note€that€before€the€sale,€it€is€aĻgood€idea€to€set€any€cash€flow€approximately€equal€to€any€expenditure€by€theĻpartnership€for€research€under€IRC€šš174.€€Allocations€of€this€nature€should€always€beĻused€to€avoid€generating€funds€which€would€be€taxed€at€40%€while€using€money€forĻexpenses€which€would€be€taxed€at€15%.€€Warning:€if€an€entity€or€person€begins€toĻgenerate€patents,€there€is€a€danger€that€the€patents€might€begin€to€be€treated€asĻinventory.€€In€this€event,€many€of€the€tax€advantages€will€be€lost.ĢĢWHAT€IS€IT€WORTH?ĢĢą  ąToday,€so€many€pro-big-government€taxaholics€relate€tax€issues€toĻš šgovernmental€loss€of€income,šš€when€in€reality€the€citizen€and€business€that€fundsĻgovernment€should€look€to€government€as€a€service€rather€than€as€a€master.€€TheĻcapitalization€and€subsequent€amortization€or€deduction€of€funds€invested€representĻinterest€free€loans€of€an€advance€of€tax€revenue€to€the€government.€€€As€anĻillustration,€where€an€investor€spends€$1000€on€a€project€and€makes€the€$1000€backĻbefore€the€end€of€the€year,€he€has€broken€even€and€should€report€no€profit€for€thatĻyear€and€pay€no€tax.€€Real€cash€flow€profits€will€be€made€in€the€future,€not€during€theĻbreak-even€year.€€Where€the€$1000€must€be€capitalized€and€written€off€at€10%€perĻyear,€the€government€is€in€effect€causing€the€payment€of€tax€on€$900€profit€in€the€firstĻyear,€and€will€repay€the€š šadvancešš€taxes€paid€on€the€$900€profit€to€the€taxpayer€inĻnine€increments€in€the€future,€with€no€adjustment€to€the€taxpayer€for€the€loss€of€theĻtime€value€of€the€10€year€€loan€to€the€government.ĢĢą  ą€The€value€to€the€individual€licensor-inventor/holder€with€a€high€tax€rate€isĻstraightforward€at€the€20%€differential€between€the€top€ordinary€rate€of€35%€and€theĻ15%€long€term€capital€gains€rate€(patents€instantly€and€other€capital€assets€if€held€forĻmore€than€12€months€before€sale).€€This€differential€may€rise€and€fall€slightly€whereĻthe€individual€is€in€the€š šsurtaxšš€or€š šademption€of€allowancesšš€region€of€incomeĻwhere€his€standard€or€schedule€A€deductions€and€his€personal€exemptions€are€beingĻrecaptured.ĢĢą  ąTo€assess€value€to€the€licensee,€we€can€begin€by€assuming€that€the€purchaseĻprice€for€the€patent€is€the€same€as€the€stream€of€income€associated€with€theĻproductivity€of€the€patent.€€This€ignores€any€additional€royalty€which€should€be€dueĻfrom€eliminating€the€risk€of€new€technology€on€the€part€of€the€licensee,€because€aŠ ¼,ü(+ Šseries€of€payments€based€upon€actual€use€of€the€patent€should€equate€to€greaterĻbusiness€gains€associated€with€the€risk.€€In€other€words,€where€a€licensee€buys€aĻpatent€outright€and€the€technology€changes,€permitting€the€patented€item€to€be€madeĻmuch€better€by€a€different€method,€the€patent€will€become€worthless.€€This€is€what€isĻmeant€by€š šrisk€of€change€in€technology.ššĢĢą  ąNext,€we€can€compare€20€year€straight€line€amortization€versus€expensing€ofĻthe€patent€based€on€a€license€where€the€licensee€pays€a€flat€rate€per€patented€itemĻproduced.€€The€full€20€years€can€be€used€where€the€patent€application€is€soldĻimmediately€after€filing,€because€IRC€šš1239(e)€enables€depreciation€of€the€patentĻapplication€(as€well€as€an€issued€patent),€but€only€in€the€hands€of€a€transferee.€€ĻRemember€that€the€case€of€a€5€year€amortization€under€IRC€šš174(b)€is€only€forĻdevelopment€costs€and€is€not€related€to€the€purchase€of€a€patent€application.ĢĢą  ąWhere€a€patent€is€sold€having€a€life€of€less€than€20€years€the€difference€betweenĻthe€sale€and€expense€cases€begins€to€diminish.€€For€simplicity,€a€shorter€period€thanĻ20€years€is€not€considered€because€the€effects€are€less€pronounced.€€The€regulationsĻunder€šš1.167(a)-3€provide€that€a€patent€is€depreciable€over€the€shorter€of€its€legal€lifeĻ(the€portion€of€the€remaining€20€year€period)€or€its€useful€life,€and€this€comparisonĻassumes€that€there€is€no€special€excuse€justifying€a€life€of€less€than€20€years.€ĻCorporate€and€individual€rates€are€now€the€same€at€35%.€ĢĢą  ąThe€Tax€on€an€Unexpensed€Portion€is€an€amount€of€present€tax€Lent€toĻGovernment€to€be€repaid€over€19€years.€€I€used€a€net€present€value€of€return€over€timeĻof€5.5%.€€For€a€$1000€price,€and€where€5%€of€this€amount€can€be€currently€deductedĻ(as€1/20th€of€the€value€of€the€patent€written€off€this€year),€the€$950€portion€whichĻcould€not€be€written€off€results€in€a€tax€of€€$950€x€35%€=€$332.50.€€€The€amount€ofĻ$332.50€would€be€paid€back€to€the€taxpayer€in€19€payments€of€$332.50€or€$17.50€perĻyear.€€Using€the€5.5%€discount€rate,€this€has€a€net€present€value€of€$203.13.€€ĻSubtracting€this€amount€from€the€amount€the€taxpayer€loaned€the€government,Ļ$332.50„€$203.13€=€€$129.36.€€This€is€the€amount€the€taxpayer€š šlostšš€by€his€interestĻfree€loan€to€the€government.€€Of€the€initial€$1000€investment,€the€š šlossšš€is€12.9%.ĢSimilarly,€a€15€year€payback€attainable€under€šš197€would€yield€10.3%.€€Thus,Ļignoring€all€other€factors,€a€buyer€would€give€at€least€an€additional€12.9%€to€aboutĻ10.3%€to€avoid€having€to€capitalize.ĢĢą  ąA€flat€sale€may€be€disadvantageous€for€the€licensor€where€the€licensee€mightĻhave€paid€10.3%€more€if€the€licensee€did€not€have€to€amortize.€€A€flat€sale€might€beĻdisadvantageous€for€the€licensee€because€he€risks€his€entire€investment€over€the€termĻof€the€patent€for€everything€from€a€general€business€downturn€to€the€arrival€of€new,Ļsubstitute€technology.€€Because€of€this€risk,€the€licensee€might€offer€to€pay€less;€this,Ļin€turn,€can€harm€the€licensor.€€Ģ€€€€€Ģą  ąA€license€based€on€productivity€will€potentially€yield€more€profit€to€theŠ ¼,ü(+ Šlicensor€and€less€risk€to€the€licensee.€€However,€because€the€licensee€can€switchĻproduction€to€a€non-infringing€technology,€or€can€simply€stop€production€andĻpayments€to€the€licensor,€the€licenseeššs€risk€is€now€minimal.€€The€licensor€has€theĻability€to€make€more€money€if€the€product€does€well,€but€the€licensor€now€bears€theĻrisk€of€change€in€technology€and€business€downturns.€€From€a€tax€standpoint,€theĻmoney€received€by€the€licensor€is€the€same,€whether€received€as€a€lump€sum€or€as€aĻperiodic€stream€of€income€on€which€the€licensor€will€pay€tax€based€on€long€termĻcapital€gain.€€The€licensor€pay€tax€based€on€long€term€capital€gains€regardless€ofĻwhether€the€sale€price€is€received€as€lump€sum€or€periodic€or€both.ĢĢą  ąThe€even€treatment€normally€afforded€cash€flow€problems€is€distorted€whenĻone€attempts€to€analyze€an€annuity€stream€based€upon€productivity€of€the€patent.€€TheĻdistortions€are€due€to€(1)€spreading€of€risk€which€is€higher€to€the€purchaser€at€sale,€yetĻwhich€yields€higher€returns€as€more€sales€are€made,€(2)€product€life€cycle,€which€mayĻyield€high€productivity€in€later€years,€thus€diminishing€or€back-loading€theĻcomparison€of€an€associated€repayment€of€a€loan€by€the€government€in€the€case€of€aĻpurchase,€and€(3)€the€fact€that€a€purchaser€would€probably€pay€less€of€a€lump€sumĻpayment€for€the€patent€where€he€bears€the€risk€of€performance€or€where€he€is€aware€ofĻthe€negative€tax€consequences€of€a€straight€sale.€€It€is€also€worthy€of€note€thatĻlicensing€fees€not€tied€to€productivity€(such€as€a€minimum€license€fee€which€cannotĻbe€applied€against€a€unit€cost)€will€probably€be€required€to€be€capitalized,€even€whereĻother€productivity€based€consideration€is€present.ĢĢą  ąIn€summary,€the€primary€benefits€that€patent€practitioners€can€give€to€theirĻclients€are€to:€(1)€preserve€the€clientššs€(holder(€status,€either€by€keeping€title€in€theĻinventors,€or€at€by€holding€the€title€in€a€partnership;€(2)€ensure€that€all€entities€will€beĻentitled€to€take€their€IRC€šš174€deductions€by€keeping€any€partnership€(in€the€game(Ļof€further€exploiting€the€patents€(intent€and€ability€per€the€Kantor€and€LDL€ResearchĻcases)€in€the€event€that€the€first€license€does€not€work€out;€(3)€ensure€that€the€licensorĻwill€have€capital€gains€treatment€by€using€€IRC€šš1235€to€make€sure€that€an€exclusiveĻlicense€amounts€to€a€sale,€(4)€ensure€that€the€licensee€will€be€able€to€expense€patentĻpayments€by€using€the€€Associated€Patentees€case€to€associate€the€purchase€price€withĻthe€productivity€and€use€of€the€œpatentńž4ń,€ńž4ńń5ń›ń5ńńž4ńandńž4ńń’4ń›€ńż4ń›ńż4ńšEšń’4ń€this€will€also€likely€result€in€a€greaterĻpercentage€for€the€licensor€since€the€licensee€risk€of€loss€will€have€been€reduced;€(5)Ļadvise€the€clients€that€if€the€invention€has€not€yet€been€reduced€to€practice,€theĻinvestors€still€have€time€to€acquire€holder€status€by€investing€in€the€project€beforeĻactual€reduction€to€practice,€and€(6)€load€the€benefit€to€the€inventor(s)€using€either€aĻsale€by€the€inventor(s)€as€a€group€with€less€than€25%€cumulative€stock€ownership€inĻthe€buyer,€or€using€stock€appreciation€in€a€corporation€formed€under€IRC€(351€whereĻthe€inventors€cumulatively€own€more€than€50%€of€the€stock.ĢĢTAX€TREATMENT€OF€COPYRIGHTSĢĢDEDUCTION€OF€DEVELOPMENT€EXPENSESŠ ¼,ü(+ Їą  ąAlthough€IRC€šš174€is€drafted€broadly€to€enable€current€expensing€of€researchĻand€experimentation,€most€copyrightable€property€will€not€qualify.€€CurrentĻregulations€prohibit€the€deduction€of€expenditures€for€"literary,€historical€or€similarĻprojects."€€IRC€šš174,€when€read€in€conjunction€with€IRC€šš263A,€requiresĻcapitalization€of€expenditures€in€connection€with€copyrightable€subject€matter.ĢĢą  ąIn€general,€the€first€question€to€be€asked€in€copyright€is€whether€theĻcopyrightable€work€is€the€pursuit€of€a€hobby€or€non-business€nature.€€If€it€is,€IRCĻšš183€can€eliminate€deductions€related€to€production€costs€for€the€activity€altogether,Ļsubject€to€deductions€not€in€excess€of€the€income€from€the€project,€if€any.€€OtherĻinstances€of€deductibility€are€couched€in€terms€of€whether€the€taxpayer€is€activelyĻengaged€in€business,€even€where€amortization€is€required.€€Where€the€project€isĻabandoned,€a€deduction€under€IRC€šš165€is€available.ĢĢą  ąWorse€still€for€creators€of€copyright€property,€IRC€šš1221€excludes€copyrightsĻfrom€capital€asset€status€for€taxpayers€(1)€whose€personal€efforts€created€theĻcopyright€property,€(2)€for€whom€such€property€was€prepared€or€produced,€and€(3)€inĻwhose€hands€the€basis€of€such€property€is€determined€for€the€purposes€of€determiningĻgain€from€sale€or€exchange.Ģ€€€€€Ģą  ąHowever,€there€has€been€a€recent€change€to€this€statute€forņņ€music€copyrightsŠ Š Šń5ńń5ńœń5ńń5ńń5ńonlyŠ Š Šń5ńonlyóó.€(Details€omitted)€Š Ä ŠĢą  ąOne€provision€upon€which€some€single-project€taxpayers€have€attempted€toĻrely€is€IRC€šš195.€€IRC€šš195€denies€deductibility€of€start-up€expenditures€(i.e.,Ļexpenditures€incurred€before€business€actually€begins),€but€allows€amortization€ofĻstart-up€expenditures€over€a€60-month€period.€€€The€fact€that€the€costs€amortizedĻunder€this€provision€would€have€been€currently€deductible€for€an€ongoing€businessĻeliminates€a€majority€of€those€who€use€copyrights.€€Under€IRC€šš195(d),€the€taxpayerĻmust€elect€to€use€the€IRC€šš195€amortization€at€the€time€of€filing€of€the€first€tax€returnĻafter€business€begins.€€It€is€thus€recommended€that€the€taxpayer€make€a€prophylacticĻIRC€šš195€election€in€the€event€that€the€IRS€finds€any€of€the€expenditures€to€haveĻoccurred€before€business€actually€begins.ĢĢą  ąPrecedents€in€which€IRC€šš195€have€been€most€effective€involve€entities€thatĻare€entering€the€publishing€business€and€have€paid€the€salaries€or€other€service€costsĻin€the€creation€of€books€and€articles.€€The€passage€of€IRC€šš263A,€which€requires€theĻcapitalization€of€non-inventory€costs€but€which€usually€relates€to€pre€business€startĻinventory,€has€created€a€presumption€that€most€items€of€pre-business€expense€shouldĻbe€capitalized€on€their€own€account€rather€than€amortized€under€IRC€šš195.ĢĢą  ąOf€course,€where€the€taxpayer€is€in€the€business€of€creating€copyright€property,Ļand€where€the€copyright€property€is€inventory€for€sale,€and€the€taxpayer€is€already€inĻbusiness€and€current€expenses€of€running€the€business€are€deductible.€€Even€when€theŠ ¼,ü(+ Štaxpayer€is€in€business,€specific€project€expenditures€relating€to€the€acquisition€ofĻcopyrightable€property€have€been€held€to€be€capitalizable€rather€than€expensible.€€TheĻdividing€line€would€seem€to€be€the€relationship€of€the€copyrighted€work€to€the€normalĻoperation€of€the€business.€Where€the€business€involves€the€operation€of€a€copyrightedĻnewsletter,€it€is€doubtful€that€capitalization€would€be€required.€€Where€the€businessĻrevolves€about€the€creation€of€one€or€two€major€works€requiring€significantĻexpenditures€of€time€or€money,€capitalization€would€seem€to€be€necessary.€€Most€taxĻpractitioners€push€the€line€as€far€as€possible€toward€an€inventory€treatment,Ļirrespective€of€a€balanced€inquiry€as€to€the€size€of€the€business€and€relative€size€andĻimportance€of€specific€copyrightable€projects.ĢĢą  ąFragmentation€by€medium€enables€a€copyright€owner€author€to€sell€a€copyrightĻwork€in€a€single€medium,€while€retaining€rights€in€other€separately€identifiable€media,Ļeven€though€such€separately€identifiable€media€are€related€to€the€medium€sold.€€TheĻcopyright€of€an€earlier€version€of€a€computer€program€can€be€retained€while€theĻcopyright€to€a€later€version€of€a€computer€program€can€be€sold€in€its€entirety.€€AnĻauthor€of€a€novel€can€also€create€a€screenplay€based€upon€the€novel€and€then€sell€bothĻto€a€buyer.€€The€buyer€holds€both€as€capital€assets.€€Subsequently,€the€buyer€can€sellĻone€without€the€other,€and€the€sale€will€not€be€treated€as€a€license€even€though€the€twoĻare€creatively€related.ĢĢą  ą€IRC€šš197,€which€became€law€in€1993,€has€provided€some€relief€to€trademarkĻowners€and€also€a€measure€of€relief€to€certain€patent€and€copyright€owners.€€IRC€(197Ļallows€the€amortization€of€any€intangible€acquired€by€the€taxpayer€after€August€9,Ļ1993€and€held€in€the€conduct€of€a€trade€or€business€within€the€meaning€of€IRC€(212Ļ(expenses€incurred€in€the€production€of€income).€€€The€period€of€amortization€underĻIRC€šš197€is€15€years.ĢĢą  ąIRC€šš197€intangibles€includes€(1)€goodwill;€(2)€going€concern€value;€(3)€workĻforce€in€place,€including€composition€and€terms€and€conditions€of€employment;€(4)Ļbusiness€books€and€records,€operating€systems,€or€any€other€information€base;€(5)€anyĻpatent,€copyright,€formula,€process,€design,€pattern,€know-how,€format,€or€similarĻitem;€(6)€any€customer€based€intangible;€(7)€any€supplier€based€intangible;€(8)€anyĻother€similar€item;€(9)€any€covenant€not€to€compete;€and,€(10)€any€franchise,Ļtrademark,€or€trade€name.ĢĢą  ąIRC€šš197€is€intended€to€relate€to€software€because€IRC€šš197€excludes€twoĻtypes€of€computer€software:€(1)€computer€software€which€is€readily€available€forĻpurchase€by€the€general€public,€is€subject€to€a€nonexclusive€license,€and€has€not€beenĻsubstantially€modified;€and,€(2)€other€computer€software€which€is€not€acquired€in€aĻtransaction€involving€acquisition€of€assets€constituting€a€trade€or€business.€€IRC€šš197Ļalso€excludes€computer€software€which€is€not€owned€by€virtue€of€an€exclusive€licenseĻfor€the€full€term€of€the€copyright€(which€would€constitute€a€sale€of€the€copyright€or€itsĻfragment).Š ¼,ü(+ Їą  ąA€further€provision€may€also€offer€software€developers€relief.€€This€provisionĻhas€previously€appeared€in€the€statutes€as€IRC€(167(f),€but€was€repealed€and€is€nowĻreinstated€as€current€IRC€(167(f):ĢĢTreatment€of€certain€property€excluded€from€šš197:Ģą  ą(1)Computer€Software.€€Ģą8  ą(A)€In€general.€€If€a€depreciation€deduction€is€allowable€under€subsectionĻ(a)*€with€respect€to€any€computer€software,€such€deduction€shall€beĻcomputed€by€using€the€straight€line€method€and€a€useful€life€of€36Ļmonths.€€Š H!H! Šą8  ą(B)€Computer€Software.€€For€purposes€of€this€section,€the€termĻ(computer€software(€has€the€meaning€given€to€such€term€by€sectionĻ197(e)(3)(B)€(non-data€type€software);€except€that€such€term€shall€notĻinclude€any€software€which€is€an€amortizable€šššš197€intangible.Š H!H! Š*šš167(a)€requires€the€property€to€be€used€in€a€trade€or€business€or€held€for€theĻproduction€of€income.ĢĢą  ąClearly,€if€the€software€is€not€excludable€from€IRC€šš197,€the€15€yearĻamortization€schedule€of€IRC€šš197€controls.€€IRC€šš167(f)€is€available€where€IRCĻšš197€is€not€available.€€In€some€instances,€neither€IRC€šš167(f)€nor€IRC€šš197€isĻavailable.€€Where€a€custom€piece€of€software€is€intended€only€for€highly€controlledĻlicensing€and€use,€and€where€the€software€was€not€obtained€in€a€transaction€involvingĻthe€sale€of€a€business,€neither€IRC€šš167(f)€nor€IRC€šš197€was€previously€available.ĻWhere€software€is€š šoff€the€shelf,šš€its€product€life€is€generally€much€shorter€andĻtherefore€deserving€of€a€shorter€amortization€period.€€Where€a€single€product€willĻundergo€significant€change€each€year,€IRC€šš167€will€enable€a€period€of€amortizationĻmost€closely€approximating€a€yearly€expensing€of€the€development€costs.€ĻConsequently,€developers€of€the€shelf€software€are€expected€to€rely€more€heavilyĻupon€IRC€šš167(f).ĢĢą  ąWhere€a€copyright€is€purchased€by€itself,€it€may€be€depreciated€over€the€shorterĻof€its€legal€or€useful€life.€€€Since€the€legal€life€of€a€work€made€for€hire€is€120€yearsĻfrom€creation,€this€represents€the€longest€legal€life€for€a€work.€€In€the€case€of€anĻordinary€copyright€(rather€than€a€work€made€for€hire),€the€amortization€period€shouldĻinitially€be€only€35€years€because€this€is€the€time€after€publication€at€which€the€authorĻor€his€successors€can€unilaterally€terminate€the€transfer.€€The€Associated€PatenteesĻcase€should€also€work€for€copyrights€licensed€based€upon€their€productivity.ĢĢWHAT€IS€IT€WORTH?ĢĢą  ąFor€copyright,€there€are€several€alternative€methods€to€compare,€including€aĻstraight€line,€120€year€amortization€for€works€made€for€hire€for€straight€purchases;€aĻstraight€line,€35€year€amortization€for€non-work€made€for€hire€copyrights€for€straightĻpurchases€(as€well€as€a€period€after€the€first€35€years€when€it€can€be€safely€relied€uponŠ ¼,ü(+ Šthat€heirs€will€not€take€the€rights€back);€the€15€year€amortization€under€IRC€šš197€forĻpurchasers€of€software;€the€3€year€amortization€under€IRC€šš167(f)€for€developers€ofĻoff-the-shelf€software;€expensing€of€the€copyright€purchase€royalties€where€theĻlicense€is€based€upon€productivity;€and,€finally,€expensing€copyright€developedĻinternally.ĢĢą  ąAgain,€the€value€to€the€individual€licensor-inventor/holder€is€straightforward€atĻthe€differential€between€the€top€ordinary€rate€of€35%€and€the€15%€long€term€capitalĻgains€rate.€€Remember€that€this€differential€rises€slightly€where€the€individual€is€in€theĻsurtax€region€of€income€where€his€standard€or€schedule-A€deductions€and€personalĻexemptions€are€being€recaptured.ĢĢą  ąThe€risk€of€sale€versus€license€value€to€the€licensee€is€identical€to€that€whichĻwas€set€forth€for€patents.€€However,€since€fragmentation€is€available,€there€should€beĻless€risk€to€a€purchaser€of€a€smaller€portion€of€the€copyright.€€€There€is€also€less€riskĻto€the€licensor/seller€because€he€is€spreading€the€risk€of€performance€among€severalĻpeople.€The€only€comparison€to€be€made€here€is€straight€purchase€versus€licenseĻbased€upon€use,€and€this€comparison€considers€that€the€seller€is€NOT€the€creator.€ĢĢą  ąUsing€the€analysis€previously€stated,€it€can€be€readily€computed€that€the€projectĻcost€for€the€15€year€writeoff€under€IRC€Ō% €- Ōšš197€has€a€cost€of€an€additional€10.2%€of€theĻcost€of€the€asset,€whereas€a€writeoff€under€IRC€šš167(f)€has€a€cost€of€an€additionalĻ2.0%€of€the€cost€of€the€asset.€€This€computation€would€takes€to€account€the€1/15,€ń5ń1/3ń5ńń5ńš@šń5ńŠ øų Športion€written€off€in€first€year€as€having€no€discounted€value,€and€ń5ńœń5ńNPVń5ń›ń5ń€includes€theĻfirst€years€payment.€€€These€additional€costs€represent€the€additional€cost€to€the€buyerĻof€having€to€capitalize€the€sale€price.€€Where€the€license€sets€forth€payments€basedĻupon€current€use€or€productivity,€the€provisions€of€Associated€Patentees€enables€theĻbuyer/licensee€to€expense€his€yearly€royalty€payments.€€Thus€there€is€roughly€an€8%Ļdifferential€in€project€cost€between€classifying€a€piece€of€software€as€an€off-the-shelfĻitem€under€IRC€šš167(f)€versus€a€specialty€software€item€under€IRC€šš197.ĢĢą  ą€The€even€treatment€normally€afforded€cash€flow€problems€is€distorted€whenĻone€analyzes€an€annuity€stream€based€upon€productivity€of€the€patent.€€The€distortionsĻare€due€to€(1)€spreading€of€risk€which€is€higher€to€the€purchaser€at€sale€yet€yieldsĻhigher€returns€as€more€sales€are€made,€(2)€product€life€cycle,€which€may€yield€highĻproductivity€in€later€years,€thus€diminishing€or€back-loading€the€comparison€of€anĻassociated€€repayment€by€the€government€of€a€loan€in€the€case€of€a€purchase,€and€(3)Ļthe€fact€that€a€purchaser€would€probably€pay€less€of€a€lump€sum€payment€for€theĻpatent€where€he€bears€the€risk€of€performance€or€where€he€is€aware€of€the€negative€taxĻconsequences€of€a€straight€sale.ĢĢą  ąAssuming€for€a€moment€that€minimum€royalties€could€be€used€to€approximateĻa€flat€cash€flow€to€the€seller/licensor,€the€above€math€should€also€be€effective€for€aĻdifferential€to€be€applied€in€the€case€of€a€straight€sale€versus€a€license€agreementŠ ¼,ü(+ Šbased€upon€performance.€However,€the€above€differential€will€mean€more€profit€toĻthe€licensor€(for€which€the€individual€licensor€will€pay€less€tax€based€on€long€termĻcapital€gain)€subject€to€the€licensorššs€assumption€of€the€additional€risk.ĢĢĢPATENTABILITY/COPYRIGHTABILITY€OVERLAPĢĢą  ąRegulation€šš1.1221-1(c)(1),€which€defines€the€exclusion€from€capital€assetĻstatus,€states€that€"for€purposes€of€this€subparagraph,€the€phrase€'similar€property'Ļdoes€not€include€a€patent€or€an€invention,€or€a€design€which€may€be€protected€onlyĻunder€the€patent€law€and€not€under€the€copyright€law."€€Thus,€property€which€is€onlyĻpatentable€is€exempted€from€the€exclusions€of€IRC€šš1221€and€is€treated€as€a€capitalĻasset€in€the€hands€of€the€creator.€€Copyrights€are€excluded€from€capital€asset€statusĻwhere€created€by€the€taxpayer.€€The€State€Street€Bank€case€and€Rev.€Proc.€2000-50Ļhas€made€the€outcome€favorable€for€developers€who€expend€funds€to€get€the€softwareĻdeveloped,€but€excludes€asset€treatment€where€the€developer€is€the€creator.€€TheĻoverlap€occurs€mostly€for€software€and€three€dimensional€designs.ĢĢĢTAX€TREATMENT€OF€TRADEMARKSĢĢDEDUCTION€OF€DEVELOPMENT€AND€OTHER€EXPENSESĢĢą  ąExpenditures€to€develop,€acquire€and€defend€a€Trademark€cannot€be€properlyĻexpensed.€€Since€a€trademark€can€last€forever,€it€has€no€determined€life€period€overĻwhich€to€depreciate€or€amortize€its€cost.€€Costs€of€advertising€which,€in€fact,€developĻthe€trademark€are€expensible,€as€is€any€other€form€of€advertising€under€IRC€šš162.ĢĢą  ąFurther,€IRC€šš195,€which€allows€the€amortization€of€start-up€costs,€does€notĻapply€to€expenditures€for€trademark€development€and€acquisition.€€Even€payments€toĻa€competitor€to€buy€out€their€use€of€a€name€or€to€get€them€to€contractually€agree€toĻavoid€using€a€name€are€capitalizable.ĢĢą  ą€Expenditures€for€trademark€development€can€be€recovered€when€the€trademarkĻceases€to€be€used€or€when€the€trademark€rights€are€sold.€€However,€expenditures€toĻchallenge€another's€right€to€a€trademark€using€litigation€have€occasionally€been€heldĻto€be€expensible.€€Money€expended€to€defend€a€trademark€is€capitalizable.€€FundsĻspent€in€challenging€the€trademark€of€another€have€sometimes€been€held€to€beĻdeductible€where€it€is€shown€that€the€main€questions€involved€in€the€suit€do€not€relateĻto€either€acquisition€of€a€mark€or€an€attempt€to€force€someone€else€into€abandonmentĻso€that€the€mark€could€be€obtained.ĢĢSALE€AND€LICENSE€TRANSACTIONSĢ€€€€€Š ¼,ü(+ Šą  ąLicensing€revenues€represent€ordinary€income€to€the€recipient€and€areĻdeductible€to€the€payor.€€The€sale€of€a€trademark€is€treated€as€the€sale€of€a€capitalĻasset€by€the€seller.€€Payments€to€purchase€a€trademark€are€capitalized.ĢĢą  ą€In€some€close€situations,€the€grant€of€a€perpetual€right€to€exploit€and€use€aĻtrademark€can€be€considered€a€sale.€€IRC€šš1253€was€enacted€to€clearly€distinguish€aĻsale€from€a€license.€€IRC€šš1253€states€that€"a€transfer€of€a€franchise,€trademark€orĻtrade€name€shall€not€be€treated€as€a€sale€or€exchange€of€a€capital€asset€if€the€transferorĻretains€any€significant€power,€right,€or€continuing€interest€with€respect€to€the€subjectĻmatter€of€the€franchise,€trademark,€or€trade€name."ĢĢą  ąSignificant€rights€include€(1)€the€right€to€disapprove€of€any€[further]Ļassignment€of€such€interest;€(2)€the€right€to€terminate€at€will;€(3)€the€right€to€prescribeĻthe€standards€of€quality€of€products€used€or€sold€(or€of€services€furnished)€and€theĻquality€of€equipment€and€facilities€used€to€promote€such€products€or€services;€(4)€theĻright€to€require€that€the€transferee€sell€or€advertise€only€the€product€or€services€of€theĻtransferor;€(5)€the€right€to€require€that€the€transferee€purchase€substantially€all€of€hisĻsupplies€and€equipment€from€the€transferor;€and,€(6)€the€right€to€payments€contingentĻon€the€productivity,€use,€or€disposition€of€the€subject€matter€of€the€interest€transferred,Ļif€such€payments€constitute€a€substantial€element€under€the€transfer€agreement€(IRCĻšš1253(b)(2)).€€Any€of€the€foregoing€retained€rights€will€be€sufficient€toĻre-characterize€the€payment€as€a€license€payment€rather€than€a€sale.€€A€licenseĻpayment€is€deductible€by€the€licensee€and€includible€as€ordinary€income€of€theĻlicensor.ĢĢą  ąWith€respect€to€current€deductions,€the€rule€available€in€copyright€and€patentĻcases€and€derived€from€Associated€Patentees€has€been€codified€as€IRC€šš1253(d)(1),Ļwhich€provides€that€payments€made€during€the€year€for€trademark€rights€contingentĻon€productivity,€use€or€disposition€of€the€trademark,€or€any€amount€which€is€paid€asĻpart€of€a€series€of€equal€payments€no€less€frequently€than€annually,€may€be€currentlyĻdeducted.€€This€is€the€only€exception€to€the€exclusivity€of€IRC€(197€in€allowingĻamortization€of€a€trademark€capital€account.ĢĢĢą  ąIRC€šš197€has€the€greatest€impact€on€trademarks€because€the€capitalizedĻamounts€cannot€be€amortized€outside€of€IRC€šš197€(except€under€IRC€šš1253(d)(1)).€ĻCopyrights€can€be€amortized€under€IRC€šš197,€but€only€where€the€copyrights€were€notĻcreated€by€the€author€or€created€as€a€work€for€hire€for€the€taxpayer,€or€where€theĻcopyright€is€acquired€in€a€transaction€for€the€acquisition€of€assets€constituting€a€tradeĻor€business.€€For€patents,€the€more€lucrative€treatment€under€IRC€šš174,€which€allowsĻthe€alternatives€of€(1)€expensing€the€development€costs,€(2)€amortizing€over€60Ļmonths,€or€(3)€depreciating€under€IRC€šš167,€are€preferable€to€the€15€yearĻamortization€provided€under€IRC€šš197.€€Again,€see€T.D.€8865€for€changes€affectingĻtrademarks.Š ¼,ü(+ ЇEFFECTS€OF€SELECTING€A€WEAK€MARKĢĢą  ąAll€of€the€above€information€indicates€that€a€mark€should€be€acquired€so€as€toĻavoid€both€litigation€and€anotherššs€ability€to€use€the€mark€legitimately.€€When€aĻdictionary€word€is€selected,€the€chances€are€relatively€high€that€(1)€someone€else€hasĻchosen€the€same€mark,€or€(2)€if€the€trademark-related€business€is€successful,€othersĻwill€have€an€incentive€to€imitate€the€mark€using€look-alike,€sound-alike,€or€spell-alikeĻvariants.ĢĢą  ąThere€are€many€ways€that€the€owner€of€a€weak€trademark€can€(and€almostĻinvariably€will)€lose€money.€€For€example,€if€the€mark€is€descriptive,€money€spentĻadvertising€will€boost€competitorsšš€sales€more€than€oneššs€own€sales.€€If€the€mark€isĻpopular,€a€lawsuit€will€almost€surely€ensue,€and€costs€to€defend€the€mark€are€notĻdeductible.€€€It€should€be€clear€that€where€a€weak€mark€is€selected,€there€may€be€noĻfunds€left€available€upon€which€to€sail€into€the€sunset€at€a€15%€tax€rate€at€the€end€ofĻoneššs€working€life.€€As€a€more€detailed€example,€assume€that€a€business€earnsĻ$1,000,000€in€profits€but€has€to€spend€$1,000,000€on€attorneysšš€fees€to€defend€itsĻtrademark.€€Does€the€company€break€even?€Absolutely€not!€€The€company€will€haveĻto€borrow€$340,000€to€pay€the€tax€on€the€$1,000,000€in€profit€that€it€earned,€and€theĻ$1,000,000€it€spent€on€legal€fees€will€have€to€be€š šcapitalized.ššĢĢĢTAXATION€OF€TRADE€SECRETS€AND€KNOW-HOWĢĢą  ąTrade€secrets€appear€to€have€characteristics€which€are€patent-like,€yet€whichĻcan€also€be€treated€like€property€under€general€principles€of€exchange€of€property.€€InĻsome€cases,€the€sale€of€property€with€potential€patentability€may€come€within€IRCĻšš1235,€enabling€the€owner€to€realize€capital€gains€on€the€sale€of€the€property€evenĻwhen€the€property€is€held€for€less€than€a€year.ĢŃŠĄŃŃŠĄŃŅŠ8ŅŅŠ8ŅŠ t¤ ŠŃTRPŲ'3 Letter Landscape3Ų'Ų'3 Letter Landscape’3Ų'TŃŃ7€7mXXdéXXdé7Ńą@zz8ČąINTELLECTUAL€PROPERTY€TAX€TREATMENT€TABLEˆŠ Š Šą@ČąCurt€Harrington,€Harrington€&€Harrington,€Suite€250,€6300€State€University€Drive,€Long€Beach,€CA€90815;€(562)€594„9784ˆĢŌ*wƒ  ddd Xdd Xdd XŠĄ0ŠĄ0wŌŌ,dd ŌŌ,§ dd ŌŌ,« dd ŌŌ,¦dd ŌŌ+  ŌŠ  øč „„ŠProperty€TypeŠ 'L „„'ŠWrite€Off€MethodŠ 'L „„'ŠCapital€GainŠ L Šņ ņCommentsó óŠ  L ŠPatent€or€TradeĻSecretŠ  µå ŠExpense€Immediately€šš174Š  Įń  ŠInst.€ņ ņlong€term€(15%)ó óŠ Įń  ŠCapital€gains€underĻšš1235€for€inventors€andĻholders€(€or€outsideĻšš1235€if€held€>12€mos.)Š  • Å ŠBest€possible€treatment.€€šš174Ļexpense€is€NOT€RELATED€to€theĻpatent€asset,€so€ņ ņno€recaptureó ó.€SaleŠ ©Ł Šoutside€šš1235€has€relaxed€buyerĻownership€percentage€rules.Š  • Å ŠCopyrightĢGeneral„Š  - ]  ŠCapitalize€Identifiable€Projects:Ģ(1)€15€year€write€off€if€acquired€inĻa€business€(šš197).€€(2)€otherwiseĻwrite€off€over€useful€life.Š  E  ŠNot€available€to€creatorĻor€creator€employer;€OkĻto€others€if€held€for€>1Ļyr.(15%)Š  E  ŠWhere€you€create€or€employ€someoneĻto€create€a€copyrighted€work,€you€areĻthe€author€and€the€sale€will€beĻordinary€income.€(Except€music)Š  E ! ŠSoftware,€nonĻPatentableŠ  ­Ż# ŠIf€held€in€trade€or€business€for€theĻproduction€of€income€(šš167(a))€okĻto€depreciate€over€36€months,Ļstraight€line,€typically€an€off„the„¼shelf€sale.€Specialty€software€notĻheld€for€production€of€income,Ļdepreciate€over€the€shorter€ofĻcopyright€life€or€useful€life.Š  e•+ ŠNo€capital€gains€inĻhands€of€creator€orĻcreatorššs€employer.ĢIf€purchased,€owner€hasĻfragmentation€byĻmedium€right€to€sell€offĻdifferent€media€portionsĻand€keep€othersŠ  e•3 ŠIf€truly€non„patentable,€you€shouldĻregister€within€3€months€ofĻpublication€in€order€to€get€valuableĻlitigation€rights€such€as€statutoryĻminimum€damages€and€attorney€fees.Š  ‰¹8 ŠPatentableĻSoftwareŠ  ż-: ŠExpense€under€šš174Š   9; ŠSame€as€for€PatentsŠ   9< ŠIRS€may€want€to€characterize€asĻsoftware,€but€should€be€patent,Ļespecially€if€patent€application€exists.Š  ń!? ŠTrademarksŠ  •Å@ ŠCap.€acquisition€&€costs€ofĻdefending.€€Amortize€over€15Ļyears€if€acquired€after€9/9/93€(withĻsome€piece€of€€business)Š  q”D ŠCapital€gains€if€held€forĻmore€than€one€year.Š  ‰¹F ŠSale€of€trademark€name€without€moreĻis€an€abandonment,€everyĻpurchase/sale€should€includeĻsomething€else€from€the€business.Š q”J  ŠĢŠ „!ÕK Šą@//@ČąPATENT€FEDERAL€TAX€CHARTˆĢą@ČąCurt€Harrington,€Harrington€&€Harrington,€Suite€250,€6300€State€University€Drive,€Long€Beach,€CA€90815;€(562)€594„9784ˆĢŌ*ˆƒ# dddd § dd « dd ¦dd  ŠĄ0ŠĄ0ˆŌŌ, dd ŌŌ,dd ŌŌ,« dd ŌŌ,édd ŌŌ,` dd ŌŌ,4dd ŌŌ+  ŌŠ  øč ŠŠ  L ŠHold€for€IncomeĻProductionŠ  @ ŠLicense,€NonĻExclusivelyŠ  @ ŠLicenseĻExclusively(butĻnot€a€sale)Š  4  ŠSale€by€ExclusiveĻLicense,€Lump€sumŠ  @  ŠSale€by€ExclusiveĻLic.ń5ń›ń5ń€ProductivityĻBased€*Š  4 ŠOrdinaryĻIncomeŠ  œ Ģ ŠOrdinary€IncomeĻafter€depreciationĻof€patent€(35%)Š   Ą ŠOrdinary€Income,Ļdepreciate€if€purchasedĢ(35%)Š   Ą ŠOrdinary€IncomeĻafter€depreciationĻ(35%)Š   Ą ŠNoneŠ  ØŲ ŠNoneŠ  ØŲ ŠSelfĻEmplmt.ĻTaxŠ  L  ŠIf€Matššl€Particip.Ļ12.4%€to€limit;Ģ2.9%€unlimitedŠ  L " ŠIf€Matššl€Particip.€12.4%Ļto€limit;Ģ2.9%€unlimitedŠ  L % ŠNo,€If€no€MaterialĻParticipationŠ  ( X ' ŠNoneŠ  4 d ( ŠNoneŠ  4 d ) ŠCapitalĻGainsŠ  “ä + ŠNoneŠ  Ąš , ŠNoneŠ  Ąš - ŠNoneŠ  Ąš . Š(15%)€under€šš1235€Ļ(15%€if€held€>€1yrĻoutside€of€šš1235Š  ØŲ1 Šń5ńœń5ń(15%)ń5ń›ń5ń€under€šš1235€Ļń5ńœń5ń(15%ń5ń›ń5ń€if€held€>€1yrĻoutside€of€šš1235Š  ØŲ4 ŠAddedĻcosts€toĻbuyerŠ  4d7 ŠBuyer€ExpensesĻProducts€BoughtĻfor€re„sale.Š  4d: Š€Buyer€ExpensesĻRoyalty€paid.Š  @p< ŠBuyer€ExpensesĻRoyalty€paid.Š  @p> ŠCapitalization€Cost€ofĻroyalty€paid,ņ ņ€addsŠ @p@ Šń5ńœń5ń(10%)ń5ń›ń5ń€to€buyers€costó óŠ  8hA ŠUnder€ņņAssociatedŠ L|B ŠPatenteesóó,€buyerŠ @pC Šexpenses€royaltyĻpd.Š  (XE ŠTotal€FedĻTax/CostŠ  ĄšG „„Š38„40%Š 'ĢüH „„'Š38„40%Š 'ĢüI „„'Š35%Š 'ĢüJ „„'Š15%Š 'ĢüK „„'Šń5ńœń5ń15%ń5ń›ń5ńŠ ĢüL ŠCommentŠ  d”M ŠThis€is€the€onlyĻcase€whereĻcorporateĻownership€of€aĻpatent€€isĻacceptableŠ  (XS ŠOwner€is€š šin€businessššĻand€is€responsible€forĻpolicing€the€market,€andĻbringing€suit.€MaterialĻParticipation€is€easy€toĻestablish€by€IRSŠ  (XY ŠPassive€activity,Ļesp€where€LicenseeĻmust€police,€sue,Ļetc.€Not€a€saleĻwhere€significantĻrights€retainedŠ  (X_ ŠAt€5.5%€interest€rate,€aĻlump€sum€paymentĻincreases€licenseeĻproject€cost€by€ń5ńœń5ń10%.ń5ń›ń5ń€ĻSome/all€could€haveĻgone€to€licensor.Š  (Xe ŠLicensor€can€stillĻhold€title,€but€has€toĻlicense€substantiallyĻall€rights€for€fullĻterm€of€patent.Š 4dj  Š*Other€Advantages:€Where€the€license€gives€up€enough€of€the€ownerššs€rights€to€be€considered€a€sale,€the€patent€need€not€beĻassigned,€and€the€inventor€owner€keeps€title€and€is€thus€more€secure€if€there€is€a€breach€by€the€ń5ńœń5ńlicensee.Ō‡,¼¬ē¼¼¼fVŌń5ńŌ‡,ō Žō¼,¼ĘŌŌ#†,¼Ę¼ō,ō Ž\#Ōń5ńŌ‡,X­kX¼,¼¬ēŌń5ń›ń5ń