Tax Planning for the Development and Licensing of Copyrights, Computer Software, Trademarks and Franchises, written by Charles Edward Falk, Professor of Taxation at Fordham University, reviews, analyzes, and makes tax planning suggestions regarding the creation, licensing, and sale of these intangible assets.
Tax Planning for the Development and Licensing of Copyrights, Computer Software, Trademarks and Franchises focuses on the various tax aspects of copyrights, computer software, trademarks and franchises, and also considers the taxation of their respective creators, licensors, licensees, and holders.
This Portfolio circumscribes the confusing and often uncertain status of the taxation of intellectual property development and licensing. Because of the difference in tax rates between capital gains and ordinary income, tax planning for capital gains is an important part of any tax considerations and is emphasized throughout the Portfolio.
Section 197 generally permits a taxpayer to ratably amortize over 15 years any “§197 intangible.” However, the treatment of copyrights, computer software, and trademarks (including franchises and trade names) under §197 is not consistent. Such inconsistencies remind us that this area is unstable and subject to drastic changes.
Copyrights, computer software, trademarks and franchises are very different forms of intangible property. The tax law has developed rules which are equally applicable to all four, and Congress has promulgated special statutes as to each. Thus, they have a commonality and at the same time are mutually exclusive.
This Portfolio
Tax Planning for the Development and Licensing of Copyrights, Computer Software, Trademarks and Franchises allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offers commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction
A. Overview
B. Patents and Know–how
C. Capital Gains and Losses
D. Research and Development Expenditures
E. Ancillary Matters
II. Copyrights and Computer Software
A. Substantive Law
1. Overview
a. Copyright Law Until 1976
b. The 1976 Act
c. The Berne Convention
2. Subject Matter and Scope of Copyright
a. What is Protected?
b. Duration
c. Formalities
d. Transfers and Ownership
3. Computer Software
4. Infringement
a. Elements of an Infringement
b. Remedies for Infringement
c. Fair Use
B. Developmental Expenditures
2. Applicability of Section 174 to Copyrights
3. Expenditures of Professional Creators
a. Expenditures Before 1976
(1) Why Pre-1976 Law Is Relevant
(2) Background
(3) Rev. Rul. 73-395 and Section 2119 of the Tax Reform Act of 1976
b. Expenditures from 1976-1986
(1) Section 280
(2) Interpreting Section 280
c. Expenditures After 1986
(1) Overview
(2) Capitalization Under Section 263A
(3) Notice 88-62
(4) TAMRA Changes
(5) Regs. 1.263(a)-4 and Regs. 1.167(a)-3
(6) Summary of the Current Status of the Law
d. Section 195-Start-Up Expenses
4. Developmental Expenditures of Amateurs
a. In General
b. Qualifying for Trade or Business Status
c. Expenditures for the Production of Income
d. Activities Not Engaged in for Profit
5. Computer Software Development Costs
6. Purchase Costs of Existing Copyrights
7. Publisher's Costs
a. Acquisition and Prepublication Costs
(1) General
(2) Costs Before 1987
(3) Costs After 1986
b. Circulation Costs
8. Treatment of Capitalized Costs
a. Depreciation in General
b. Creators
(1) In General
(2) Straight-Line Method
(3) The Income Forecast Method
(4) Other Methods
c. Non-Creators
C. Taxation of Licenses of Copyrights
2. Nonexclusive Licenses
3. Exclusive Licenses-Treatment of Licensor
a. Character
(2) Section 1221(a)(1) Property
(3) Section 1221(a)(3) Property
(4) Section 1231 Property
(5) Sales by a Third Party
(6) Compensation, Assignment of Income and Other Payments Distinguished
(7) Overlap of Patent and Copyright Protection
(8) Summary
b. What Constitutes an Exclusive License
(2) Fragmentation by Medium
(3) Geographical Restrictions
(4) Limits on Duration and Reversionary Rights
(5) Right to Defend Against or Sue for Infringement
(6) Right To Terminate
(7) Retention of a Right to Use
(8) Tax Shelter Movie Cases
c. Undivided Interests
d. Tax Treatment of Payments to a Licensor
(1) Creators
(2) Non-Creators
(3) Payment for Infringement
(4) Depreciation Recapture
4. Exclusive Licenses-Treatment of Licensee
a. Nonexclusive Licenses
b. Exclusive Licenses
(1) Lump Sum Payments
(2) Contingent Payments
c. Payments for Infringement
5. Payments to Employees
D. Computer Software
2. Computer Software Purchase Costs and Development Costs
a. Applicability of 174 (Rev. Proc. 2000-50)
b. Tax Credit for Increasing R & D Costs
3. Licenses of Computer Software
a. Patent vs. Copyright vs. Trade Secret
b. Nonexclusive Licenses
(1) Treatment of Licensor
(2) Personal Holding Company Issues
(3) S Corporation Passive Income
(4) Treatment of Licensee
c. Exclusive Licenses
(2) Character of Income
4. Classification of Transactions Involving Computer Programs
a. Transfers of a Copyright Right
b. Transfer of a Copyrighted Article
c. Provision of Services
d. Provision of Know-How
e. Effective Date
III. Trademarks, Service Marks, Trade Names and Franchises
B. Substantive Law
1. What is Protectable?
a. Trademarks
b. Trade Dress
c. Trade Names
d. Service Marks
2. Requirements for Protection
a. Distinctiveness
(1) Arbitrary and Fanciful Marks
(2) Suggestive Marks
(3) Descriptive Marks
(4) Generic Marks
b. Secondary Meaning
c. Functionality
3. Legal Protection
a. Protection Through Use
b. Federal Registration
a. Likelihood of Confusion
C. Costs to Develop, Acquire and Defend a Trademark Prior to the 1993 RRA
2. Currently Deductible Costs
3. Section 174
4. Infringement and Related Expenditures
a. Overview
b. Payments in Settlement of Litigation
c. Payments to Restrain Infringement
d. Payments to Defend
e. Former 177
5. Package Design Costs
D. Transfers of Trademarks, Service Marks, Trade Names and Franchises
a. Historical Background
b. Section 1253
(1) Reasons for Enactment
(2) Overview of the Statute and Regulations
(3) Transfers Outside Section 1253: Sales for Lump Sums with No Retention of Interest
2. Transfers Under Section 1253
a. What Transfers Are Covered
(1) What Is a Franchise, Trademark or Trade Name?
(2) What Is A Transfer?
(3) What Is a Significant Power, Right or Continuing Interest
(4) Transfers from Existing Franchisees
b. Treatment of Payments - Transferor
(1) Fixed Sum
(2) Contingent
c. Treatment of Payments - Transferee
(1) Payments Under the 1993 RRA
(2) Fixed Sum Payments
(3) Contingent Payments
3. Non– 1253 Transfers
a. Treatment by the Transferor
b. Treatment by the Transferee
4. Personal Holding Company Issues
5. Payments for Infringement
a. Payee's Treatment
b. Payor's Treatment
6. Payments to Cancel A Distributor's Agreement - 1241
7. Payments to Acquire or Cancel a Right
IV. Ancillary Considerations
A. Personal Holding Company Issues
1. General
2. Copyrights
4. Trademarks and Franchises
B. Deferred Payment Sales
1. Fixed Sum Payment Sales
2. Contingent Payment Sales
a. Installment vs. Open Transaction Reporting
b. Interest
C. Assignment of Income Issues
D. Size of Retained Royalties on Sales for Contingent Payments
E. Licenses Between Related Parties
2. Arm's Length
3. Section 267 - Losses
4. Sections 1239 and 707-Ordinary Income
F. Foreign Related Transactions
G. Charitable Contributions
V. Amortization Under the 1993 RRA
B. Section 197 Intangibles
1. Amortizable Section 197 Intangibles
4. Franchises, Trademarks and Trade Names
5. Other Assets
C. Period of Amortization
1. Copyrights and Computer Software
2. Franchises, Trademarks and Trade Names
3. Safe Harbor Amortization
D. Dispositions of 197 Intangibles
E. Anti-Churning Rules
1. What Transfers Do Not Qualify
2. Exception Where Gain is Recognized
F. Effective Date
1. General Rule
2. Election to Have Section 197 Apply
3. Elective Binding Contract Exception
Working Papers
Table of Worksheets
Other Resources
Worksheet 1 Revenue Ruling 60-226: Contingent Payment Allowed
Worksheet 2 Revenue Ruling 73-395: Inventory of Publishing Costs
Worksheet 3 Notice 88–62: Uniform Capitalization Rules for Authors of Creative Properties
Worksheet 4 Revenue Ruling 89-23: Package Design Costs
Worksheet 5 Revenue Procedure 97-35: Methods of Accounting for Package Design Costs
Worksheet 6 Revenue Procedure 69-21: Amortization of Software Costs
Worksheet 6A Revenue Procedure 97-50: Year 2000 Conversion Costs
Worksheet 6B Rev. Proc. 2000-50, 2000-52 I.R.B.
Worksheet 7 1986 Blue Book Explanation of Provisions Relating to Active Business Computer Software, Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, P.L. 99–514, 99th Cong., 2d Sess. 371–374 (1987).
Worksheet 8 1993 RRA Conference Report Explanation of the Treatment of Intangibles, H.R. Rep. No. 213, 103d Cong., 1st Sess. 672–698 (1993).
Worksheet 9 [Reserved]
Worksheet 10 Preambles to REG-209709-94, 62 Fed. Reg. 2336 (1/16/97); and T.D. 8865, 65 Fed. Reg. 3820 (1/25/00) (Regs. 1.197-2)
Bibliography