Tax Bill Would Eliminate Capital Gains Treatment for IP Sales

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By Malathi Nayak

House Republicans’ tax plan would strip away favorable capital gains treatment of intellectual property sales to generate half a billion dollars revenue for the U.S. government.

Under current U.S. tax rules, patented and unpatented inventions and designs can be treated as capital assets. That means buyers and sellers of patents—prior to actual commercial use of the patent—can treat the profits from those sales as capital gains that are taxed at a lower rate than ordinary income. Under the GOP proposal, IP sales would be treated as normal income and would not qualify for tax savings from capital gains.

Musical compositions and copyrights in musical works would no longer be eligible to be treated as capital assets, according to the bill unveiled Nov. 2 called the Tax Cuts and Reform Act of 2017.

“Many inventors and other creators rely on the notion that a sale of substantially all of their rights can produce capital gain, nor ordinary income,” Robert W. Wood, a managing partner at Wood LLP who advises clients on IP-related tax issues, said. “These provisions would inject a big change.”

The change could hurt small inventors, but the stakeholder community needs more clarity from lawmakers on the IP tax provisions, Todd Dickinson, a senior partner at Polsinelli P.C. in Washington and former director of the Patent and Trademark Office, said. He also questioned if the provisions were targeted at non-practicing entities— companies that acquire patents to make money solely from licensing or litigating them.

“On first reading, it looks like this is going to reduce patent value overall and make patents less desirable to transfer at a certain stage by removing what appears to be preferential tax treatment,” Dickinson said.

Impact on Patent Sales and LitigationThe new provisions would impact all intellectual property transacted after 2017 and increase government revenues from 2018-2027, the bill states.

Those negotiating a patent sale now could push to close deals in 2017, Wood said. Also in certain lawsuits, some settlements could qualify for capital gains treatment and be more lucrative in 2017 than in 2018, he said.

The tax provisions are likely to have no effect on companies transacting in the secondary patent market, as tax policy does not drive decisions to buy or sell patents, Kent Richardson, a partner at Richardson Oliver Law Group LLP that advises clients on patent deals, said.

“When putting together a transaction, you look at the underlying technology risk, market risk and legal risk,” Richardson said. “Those drive major business decisions and tax is an important part, but it is not what drives the transactions.”The tax change could also chip away at research and development budgets for companies that rely on savings from favorable IP tax treatment, he said.

To contact the reporter on this story: Malathi Nayak in Washington at mnayak@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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