TRANSITION FROM IDEA TO
PROFITABLE PROTECTED
PRODUCTS MEDTRADE-SPRING
May 6, 2008 Long Beach
PATENTAX®
Curtis L. Harrington Kathy E. Harrington
Harrington & Harrington Harrington & Harrington
Suite 250 355 South Mt. Carmel Rd
6300 State University Drive McDonough, GA 30253
Long Beach, CA 90815 (770) 914-1413
(562) 594-9784 kathy@patentax.com
curt@patentax.com http://www.patentax.com
http://www.patentax.com
Disclaimer – Educational Only
This Power Point Presentation is Educational Only
and no part of this presentation can be considered
as federal or state tax advice, opinion, or position
and is not intended or written to be used, and may
not be used, for the purpose of (i) avoiding tax-
related penalties under the internal revenue Code
or (ii) promoting, marketing or recommending to
another party any tax-related matters addressed
herein, nor (iii) constituting guidance on any tax or
intellectual property matter.
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
What does this mean?
You have full blueprints, circuitry, etc
You have a fully developed profitability
spreadsheet
You have included the correct number and
complexity of product options you will offer
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
What will finishing do for me?
If later conditions suggest a change in
direction, you won’t know how to change or
what to change unless you are completely
familiar with your product’s operating
capabilities.
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
What will finishing do for me?
If your competitors see that you will never
leave the “design room” it’s a clear indication
that you will never be able to compete. It
detracts from your apparent readiness to enter
the market.
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
What will finishing do for me?
It “forces” you to think beyond the product.
For every problem, you should be able to
anticipate 10 problems. For every potential
capability, you should be able to think of 10
more. This process makes you “master” the
your product.
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
What will finishing do for me?
It will let you know whether you have a
product you can make for $1 and sell for $100;
instead of the other way around.
Overall Simplified Procedure
FINISH THE PRODUCT COMPLETELY
If the industry is fast changing, and if you don’t
finish the first version, you won’t have a chance
to get to a second version
If the industry is not fast changing, you will have
other things to do than trying to change the
product when you have to worry about logistics,
making deals with distributors, production, and
servicing the product
Bogus Problems & Excuses
BUT ISN’T THE CONCEPT GOOD
ENOUGH?
NO
Concepts are only good for TIME TRAVEL and
ANTI-GRAVITY machines
Bogus Problems & Excuses
BUT ISN’T THE CONCEPT GOOD
ENOUGH?
NO
There is the misconception that every industry
has a Daddy Warbucks JUST WAITING to throw
his arms around you and say “Oh My, I’ve been
waiting for someone like you all my life”
Bogus Problems & Excuses
BUT ISN’T THE CONCEPT GOOD
ENOUGH?
NO
Look at yourself as one of your potential
customers:
“When is the last time you went out and bought a
concept?”
Bogus Problems & Excuses
I have a CONCEPT for a new SATELLITE
CHEMICAL LASER, but I’m a secretary, and
I DON’T KNOW THE DETAILS.
STOP! You don’t have an invention, you have a
mystical dream.
If you don’t know how to build it, you are in
trouble.
Bogus Problems & Excuses
I know, I can PAY someone to take care of
the DETAILS!
STOP! YOU are the BOSS, YOU are supposed
to know how to build it.
No one will put the Quality and Care into the
project if YOU are not involved. Others will
simply take your money and do little.
Bogus Problems & Excuses
I know, I can PAY someone to take care of
the DETAILS!
STOP! WHO are you going to trust to work for
you?
WHAT if you live in a jurisdiction where you
“HELPER” will end up either owning the product
or blocking your enforcement of your rights?
Bogus Problems & Excuses
I know, I can PAY someone to take care of
the DETAILS!
STOP! WHO are you going to trust to work for
you?
WHAT is your relationship to those who are
supposed to be helping you? Are your
confidentiality agreements in place?
Bogus Problems & Excuses
I know, I can PAY someone to take care of
the DETAILS!
HAS your office instituted the proper procedures
and controls so that you can raise the issue of
TRADE SECRET theft?
IF YOU DON’T TREAT IT LIKE A TRADE
SECRET, ITS NOT A TRADE SECRET!
Techniques for Moving Forward
1. Do your homework on the product:
Get onto the Internet, make a list of all similar
products, and their sales price. (This will give
some idea of what your price point might be)
Techniques for Moving Forward
1. Do your homework on the product:
Make a list of products which may not
directly compete, but which may be “an
alternative” in order to get an idea of the size
of the potential market.
Techniques for Moving Forward
1. Do your homework on the product:
Take to account any Safety Considerations,
dangers in purchase or use. Look to see if
Insurance companies charge a premium
related to this product or offer a discount. (Ex:
Good=smoke detector Bad=skateboard
Techniques for Moving Forward
1. Do your homework on the product:
Get a quote from a commercial insurance
company on product liability for production
and ask for some data points on their most
risky and least risky products.
Techniques for Moving Forward
1. Do your homework on the product:
If the product has ANY relationship to
government, begin to explore the possibility
of getting some government endorsements or
approval. Don’t be dissuaded by the “we
don’t endorse” statement.
Techniques for Moving Forward
1. Do your homework on the product:
Along the same lines, is a monopoly possible?
State & Federal use can be protected by either
patents, or by standards which your product
meets where others fail.
Techniques for Moving Forward
1. Do your homework on the product:
Take a careful look at product differentiation
between a deluxe version and a standard
version.
Carefully weigh the options for mix and
match of features
Techniques for Moving Forward
1. Do your homework on the product:
Be aware that the design for the “high speed”
manufactured version will differ from a
manually constructed version. The high speed
version will usually have the most profit, so
your design emphasis and other protections
should focus on this version.
Techniques for Moving Forward
1. Do your homework on the product:
Explore the transition from a low volume
labor intensive start to manufacturing and an
eventually to high speed and high volume.
Techniques for Moving Forward
1. Do your homework on the product:
Get ready to file a patent because:
(a) Sale of the patent is a muniment of title which
can support capital gains.
Techniques for Moving Forward
1. Do your homework on the product:
Get ready to file a patent because:
(b) The patent application may be considered
“insurance AGAINST success”.
Techniques for Moving Forward
1. Do your homework on the product:
Get ready to file a patent because:
(b) You have no idea what will result from the
patent application, no idea whether the product
will “take off” and no idea what your competitors
will do.
Techniques for Moving Forward
1. Do your homework on the product:
Get ready to file a patent because:
(c) Your competitors have no idea as to the level
of protection you will get.
Techniques for Moving Forward
1. Do your homework on the product:
Get ready to file a patent because:
(d) It marks a point in time when you should
consider ALL variants on the product, including
FUTURE variants. Including them in the filing
will constitute a “defensive publication.”
Techniques for Moving Forward
1. Do your homework on the product:
While patent is being written, prepare (but
don’t send) a marketing packet which has:
(a) Long story, Short Story, Medium Story
(b) Photos, drawings, video demonstration
Techniques for Moving Forward
1. Do your homework on the product:
While patent is being written, find ALL of the
TRADE PUBLICATIONS which have any relation
to your product and prepare mailing labels:
(a) Also possibly secure a web site for upload of all your
articles and marketing materials (but leave it empty)
(b) Collect follow up phone numbers to contact these
publishers. (never send anything until patent is filed
Techniques for Moving Forward
1. Do your homework on the product:
FINISH THE PRODUCT IN FINAL-FINAL
FORM
(a) Hint: You should know the manufacturing cost at
different production levels “to the penny”
(b) And you should know (a) for each version
Techniques for Moving Forward
1. Do your homework on the product:
While patent is being written, find YOUR trade
show which is from 3 – 5 months from patent filing:
(a) Which you will attend, possibly exhibit
(b) Note the other Exhibitors, your potential buyers
Techniques for Moving Forward
1. Do your homework on the product:
Don’t plan to produce the product?
NEVER NEVER NEVER TELL THAT TO
ANYONE.
(a) No one will pay top dollar to someone who believes
so little in their product that they refuse to make it.
Techniques for Moving Forward
1. Do your homework on the product:
Don’t plan to produce the product?
YOU SHOULD EITHER MAKE A
LIMITED NUMBER OR BE READY TO
TAKE SOME “LONG TERM” ORDERS
WHICH WON’T BIND YOU.
Techniques for Moving Forward
1. Do your homework on the product:
Why take orders?
(a) It may be the only concrete method to
guage customer acceptance.
Techniques for Moving Forward
1. Do your homework on the product:
Why take orders?
(b) When you completely finish your product
and know the actual production price, you will
ideally be indifferent as to whether you make
it or not.
Techniques for Moving Forward
1. Lets do the math. Your product can be
made for $4. You pay yourself $2, and sell to
the wholesaler for $6. Wholesaler sells to
outlet for $12, and outlet sells retail for $24.95
(reflects a factor of 4)
Techniques for Moving Forward
1. Lets do more math. Your product can be
made for $4. You pay yourself $2, and sell to
the wholesaler for $6. Wholesaler sells to
outlet for $18, and outlet sells retail for $36.95
(reflects a factor of 6)
Techniques for Moving Forward
1. From this scenario you note two things:
(a) First, your $2 gets doubled or tripled
TWICE before the retail amount. (This is why
the major retailers beat you down on price as
it is a multiplier.
Techniques for Moving Forward
1. From this scenario you note two things:
(b) Second, your $2/unit is just the gross.
You have expenses including (a) insurance,
(b) physical overhead (c) sales costs, and once
these are subtracted, you will pay Uncle Sam
40% and the State of California 10%
Techniques for Moving Forward
1. Without thinking about all this:
(a) You wouldn’t know how much to sell for,
even if someone did make an offer to buy.
(b) You need to make an intelligent decision
on manufacture/sell at each point along the
way.
Techniques for Moving Forward
1. Once you are happy with the content and
coverage of the drafted patent (we will talk
about the advantages later) you need to do
several steps in rapid sequence:
(a) Time the filing of the patent about 4
months in advance of YOUR trade show.
Techniques for Moving Forward
1. Once you are happy with the content and
coverage of the drafted patent (we will talk
about the advantages later) you need to do
several steps in rapid sequence:
(b) Purchase Patent Insurance as soon after
you file the patent as possible.
Techniques for Moving Forward
1. Once you are happy with the content and
coverage of the drafted patent (we will talk
about the advantages later) you need to do
several steps in rapid sequence:
(c) After you are CERTAIN that the patent
has been filed, send out the press releases
tauting your “NEW PRODUCT” to pick up as
much free advertising as possible (worldwide)
Techniques for Moving Forward
1. Once you are happy with the content and
coverage of the drafted patent (we will talk
about the advantages later) you need to do
several steps in rapid sequence:
(d) Start follow-up contact with publications,
trade show personnel and others to make
certain that you are “set for the show.”
Techniques for Moving Forward
1. “Set For the Show” Means:
(a) Your product is in the “new product” showcase
(b) All of your follow-up calling, WORLD WIDE
will give you the opportunity to schedule
appointments or remind others you will meet with
them
Techniques for Moving Forward
“Meetings” include:
(1) Foreign market representatives who want
to buy or license the product
(2) Domestic potential buyers
(3) Your Domestic manufacturing customers
Techniques for Moving Forward
“Reasons for Pulling everyone together at once:
(1) Use your 1-year foreign patent right in most
countries, to try to get interested people in the
foreign jurisdictions who want to buy or license the
product to compensate you early and use those
funds to protect the product in those jurisdictions.
(2) Domestic potential buyers will be competing
with each other directly and can “bid up”
Techniques for Moving Forward
Generally, as soon as the patent is filed, you
should start selling –
--Don’t wait for the trade show!!!!
A few words on Manufacturing
Make sure you have an LLC/Corporate
entity in place
Make sure that you have commercial
liability insurance
A few words on Manufacturing
Make certain to follow rules on
compensation for employees
Remember than a single member LLC is
a disregarded tax entity.
A few words on Manufacturing
If you choose a corporation make
CERTAIN that you observe the corporate
formalities
Be cognizant of your tax year, filing
times, and worker’s comp insurance
system
A few words on Manufacturing
Keep copious records of EVERYTHING
and save them for YEARS.
If you have employees, adopt specific
policies and keep them formally,
preferably at the level of corporate
formality
A few words on Manufacturing
Continually evaluate the cash flow
For several products, evaluate
profitability and place efforts and cash
where the best return is to to be obtained.
A few words on the Patent System
Lets start with the biggest miconceptions
on Patents
Biggest Misconceptions - Patents
“If I have a patent I have the right to
manufacture” – NO
“I have to do a search” -NO (but you should
spend $300,000 to be sure)
“Can I get one of those great big
INTERNATIONAL PATENTS”? NO
Biggest Misconceptions - Trademark
“If other companies can pick stupid,
descriptive names, I can too”- NO
If my name isn’t descriptive, how will
anyone know what my product is?
Biggest Misconceptions – Copyright
“I made this clothing by hand, I want to
copyright it”
I want to copyright my idea!
“Send them a really nasty letter, if they
don’t like it, they can lump it”
Overview of Intellectual Property
All Rights are NEGATIVE
NO Positive rights to manufacture/sell
Intellectual Property CAN be an asset
which can attract CAPITAL GAINS
What is a Patent?
Utility: 20 year (potential) certification relating to requests
extending amortization periods
Relating to (1) machine, (2) Process, (3) article of manufacture,
(4) Composition of Matter, (5) non tuber (potato) plant
Design: 14 year monopoly on the 3-Dimensional Design of a
utilitarian item
Seed Variety Registration under section 5, United States code
Why File for a Utility Patent
Up to 35% U.S. Government subsidy (deductible)
Instant (no holding period) Capital Gain - 15%
Makes the Competition Think Twice
Patent Insurance to stop infringers now available
Good for Advertising and Prestige
Utility one-year right to File
Why File for a Design Patent?
Inexpensive (file-issue w/o argument 1 year:
A transfer (but not by gift, inheritance or devise)
Of ALL substantial patent rights (or undivided interest )
By any HOLDER
Regardless of whether payments are
Periodic and associated with use OR
Contingent on productivity, use, or disposition
SELLER OBJECTIVES
Maintain HOLDER status
Case law indicates that a partnership can preserve holder status
Holders include:
Inventors
Investors who invest in the invention before actual RTP
Limited liability from holding a patent!
NO reason to risk unproven forms of ownership (like LLC)
Keep patent in a position to enter business in all markets
Sacrificing all substantial rights precludes 174 expensing
Recall Green Case
Hold back some jurisdictions for potential patent filings there
PATENT: SELLER OBJECTIVES
Capital Gains Treatment (15% Tax Rate)
Avoid any other taxes
Reside in a state with no state income tax at the time of sale
Avoid mixed agreements (sale provisions & personal services)
Reasonably allocate bulk of sale to the items attracting lesser tax
Control risk sharing
Require large initial payment that can be stated in terms
of advance royalties against production.
PATENT: SELLER OBJECTIVES
Maintain control in the event of non-payment
License/sell WITHOUT transfer of title
Clear threshold as to when non-payment occurs
Maximize royalty rate by sharing risk with $/unit rate
Keep mechanism to verify books of producer
Provide indicia in the product to distinguish between licensee cheating
and infringing production
Avoid complicated formulas that include returns or take account of
other deductions.
PATENT: SELLER OBJECTIVES
Avoid Mixing Capital Gains Income with Ordinary Expenses
Expense items under §174 to offset ordinary income
Avoid characterization of inventions and research as a
“business of inventing” with a patent “inventory”
Results in non-expensing of patent procurement costs
Results in “ordinary income” for patent “inventory sold”
Avoid investment or ownership of any interest in the buyer
(not necessary because seller already gets capital gains tax
treatment)
PATENT: SELLER OBJECTIVES
Capture success of buyer
Consider progressive chart in the license/sale agreement
providing for increases in per-unit royalty over the life of
the license / sale. If aggressive, it could force the
licensee to terminate the agreement and re-negotiate in
future.
Jumpstart product/process/service
Insure business development activity is set up to allow:
Further sale of personal patent rights at capital gains rates.
Absolute deductibility of investment $ put into the business entity
PATENT: SELLER OBJECTIVES
Consider shape configured license to get licensee buyer
moving (carrot on a stick):
Front-end royalty rate may cause buyer to hustle faster
No royalty up front may motivate buyer to open market
Yearly reduced royalty rate for annual sales above certain
amount may give buyer/licensee incentive to perform to
reduce average royalty rate.
Require the buyer/licensee to prosecute infringers to maintain
value of the patent or require the buyer/licensee to maintain
patent insurance
PATENT: BUYER OBJECTIVES
Deduction of all royalty/sale money paid (market value worth)
Avoid capitalization to the extent possible
Any advance royalties should be against production
Reasonable amounts for entering into contract should be
administratively justified and minimized
Don’t mix PSCs & technology purchase contracts
You may be unable to work with the seller on a personal basis
You may want to terminate the license & allow the patent to return to
the licensor while still working with the licensor
Separate contracts will result in generally difficult to assail allocations
PATENT: BUYER OBJECTIVES
If the Patent becomes uneconomic, maintain ability to:
Terminate license & return patent to the Licensor/Seller
Re-negotiate patent (& repurchase) upon non-payment
Consider filing a UCC financing statement with the PTO
Obtain yearly sales projection
Maintain control and responsibility for patent litigation
PATENT: BUYER OBJECTIVES
Impossible /impractical for one licensee / purchaser to
effectively take on whole patent:
Consider having an unrelated exploitation company set up to
sublicense the patents on a non-sale basis while passing money back
to the inventor (who gets cap gains) on a sale basis
§1235 exempts siblings from “related taxpayer status” and that a
sibling-owned company would be “unrelated”.
Be wary of sale-leaseback provisions:
Certain sales/lease transactions are IRS “listed transactions”
Ask for reduced royalty rate for unit sales exceeding high target
PATENT: BUYERS & SELLERS
Tax law littered with dead bodies of “pretend inventors” with
“pretend licenses”
If the invention is not real and the transaction is not
reasonable, a real possibility exists that the IRS might re-
write your deal to their liking, send a tax bill and possibly
arrange for some R&R at “Club Fed”.
Avoid putting a patent in any corporation or LLC unless you
are ABSOLUTELY CERTAIN you will not seek to sell it within
a year. Consider carefully that even if the sale will occur
beyond a year, the buyer may not want to buy your whole
corporate organization.
PATENT: BUYERS & SELLERS
Use options
Keep short term (non-sale) licenses to a minimum
Clearly address treatment of SUBSEQUENT
inventions
EXAMPLE
Seller invents Widget, moves to Las Vegas
Seller licenses U.S. Buyer
whole patent for whole patent term
all of the United States as well as Japan
$3 per unit, advance royalty (against the unit rate)
each year by midnight on January 5
(Cap Gains to seller, deductibility to buyer, no capitalization )
Seller can apply for patent and sell same patent in China,
New Zealand, Australia, etc., to other individuals who buy
rights in whole countries (and capital gains result)
If any Licensee / buyer fails to pay, Seller / Licensor can sell
the patent again to someone else.
PATENT TAX DREAM
Top tax bracket (35%) Las Vegas Seller invents Widget on
Friday, spends $10K to build, improve & apply for patent,
sells patent on Monday for $10K
How much did the seller make?
$10K investment written off against ordinary income ($3.5K)
(seller is only out of pocket $6.5K)
The $10K sales price attracts capital gains rate of 15%. ($1.5K)
(seller gets to keep $8.5K)
Seller invested $10K, received $10K, but made 2K in the process!
This is LEGAL! Successful inventors invest less and receive more!
Comments on §1235
Siblings are not treated as “related taxpayers”
Cannot be used to compensate employees with capital gains
This is an election to expense made in the 1 st year of project
Capitalization only make sense where the entity has carry
forward losses against which an offset is possible
Statute specifically includes “productivity based” sales
Comments on § 1235 (cont’d)
May treat some investors as inventors
Good candidates for investment may include
Projects costing greater than $100K
Lead time of greater than one year
The statute “REDUCES” percentage ownership for
related taxpayers from 50% to 25% for the “inventive
entity”
Trade Secrets
All patents start out as ideas or trade secrets
Generally same capital gains tax treatment as patents on sale
Sale of Trade Secret: sales agreement requires promise not to
divulge/exploit to be considered a complete sale.
May be used for inventions/contributions smaller than patent or
for aspects of invention not captured in the patent application
Criminal statute for Trade Secret thieves
SALE OF TRADE SECRET
Sale of a trade secret requires at a minimum:
A promise never to practice the secret
A promise to never reveal the secret
License with “failure to pay” clause can result in multiple
sales
Licensor licenses all rights subject to payment of annual minimum
royalties & per-product royalties , else equitable rights revert to
licensor.
If Licensee does not pay, licensor has trade secret and can “sell” it
again.
Other conditions that give the licensee rights to regain the patent may
Trademark
COMMON MISCONCEPTIONS:
“Other companies have descriptive TMs, why can’t I?”
(NO, if other companies jumped off a cliff would
YOU?)
“If my name isn’t descriptive, how will anyone know
what my product is?”
(NO, that’s not the purpose of TM)
Trademarks
Most misunderstood form of Intellectual Property
Patents are a “2-way” tax street, TM is a “1-way” tax street
TM is an “ID code” for the SOURCE of the goods & services,
NOT for the goods themselves.
Purveyor motivated toward higher quality goods and
services where public uses the TM to do more business with
purveyor
Trademarks (cont’d)
A sale of a naked trademark (no goods/services) is treated
as an abandonment
A trademark can last forever - no defined life term
Infinite life means money spent to create or defend a TM
must be capitalized
(Result: payment for TM with after-tax dollars! Not good.)
Example: You spend $1M defending a trademark.
It will cost you $1.45M in CA
It will cost you $1.41M in GA
Trademarks (cont’d)
TM can help spin off separate lines of business
TM attracts long-term capital gains tax treatment
Being forced to change a TM mid-stream is essentially the
same as having to “start over” in business
Picking a weak mark can potentially cost you millions over
the life of the business - ad dollars spent on a weak mark
boost competitor sales!
Trademark Principles
Self-created TMs are capitalized until sale.
Any litigation to protect TM is capitalized.
If common TM is chosen buyers will be confused.
A common TM can mean increased sales for competitors
Although a capital asset, TMs should not be owned
personally
Per se right to control
Per se right to specify the nature and quality of the goods
Personal liability may (very likely) result
Goodwill is directly proportional to TM UNIQUENESS
Trademark Strategy
US TM Office grants weak marks EVERY DAY!
The 5 Platinum Rules:
Following them helps you to BUY LOW and SELL HIGH.
Breaking them means you BUY HIGH and SELL LOW.
15 year write-off for TM of acquired businesses
Trademark Strategy (cont’d)
You do not own a TM until FIVE YEARS after
REGISTRATION
Incontestability at abut 7 years post-application in reality
Until then the mark CAN BE TAKEN AWAY FROM YOU
To cash in at the end of the day you need BOTH
A TM which can capture MAXIMUM GOODWILL $$
Decades of providing high quality goods & services.
Purchaser of a business with a TM “becomes” the purchased
entity
Selecting a Trademark
Objective is to MAXIMIZE goodwill value (especially when
harvested at capital gains tax rates)
Objective is to MINIMIZE litigation potential (buyers will not
pay for litigation and constant problems with others!)
Objective is to MAXIMIZE singular association of CLIENT
business with the TM.
RESIST the temptation to emulate others who chose poorly!
5 PLATINUM RULES
NOT DESCRIPTIVE
NOT IN THE DICTIONARY
NOT A PERSON’S LAST NAME
NOT A GEOGRAPHIC DESIGNATION
NOT SCANDALOUS OR VULGAR
TRADEMARK DREAM
Seller selects non-descriptive, non-dictionary word mark
Seller applies for TM & TM passes easily due to uniqueness
Seller works hard to maintain high quality product for 30
years, never has any TM lawsuits & generates extreme
goodwill.
TM capitalization account after 30 years includes:
Application cost ($950)
Incontestability filing ($650)
3 renewals ($850 each), totaling $2,450.
Seller moves to LV and sells his CA business
Seller sells the business for cash, attracting the 15% capital
gains rate
Seller subsequently spends days lounging poolside in sunny
SALE OF TM
Sale of a TM requires at least a bare indicia of ability to
maintain continuity of quality
TM theory: buyer may step into the shoes of the seller.
“Bare indicia of continuity” is a low threshold
Non-sale license of a TM requires that the TM owner
continue to exercise some control over goods & services
TRADEMARK NIGHTMARE
Seller adopts common, descriptive TM
Seller makes $10K profit. Seller spent $10K
defending a TM lawsuit to protect his worthless TM.
Did seller break even? NO.
Cannot deduct the $10K paid to his TM litigators
Must come up with additional $3.5K for taxes on
$10K profit!
Copyright
COMMON MISCONCEPTIONS:
“I made this clothing by hand, I want to copyright it”
(NO, can’t CR clothing)
I want to copyright my idea!
(NO, there must be a tangible expression)
Copyright
Minimum level of originality required
Inexpensive Registration
Can be fragmented and sold in parts
Capital gains on sale of purchased CR held >1 year
Long Term: life of the author + 75 years
Minimum statutory damages of up to $10K/copy
Extended division of control of prohibited activities
(copy, perform, distribute, display, etc.)
Criminal Copyright statute helps deter copying
Copyright Problems
Self-created CR NOT capital asset in hands of
creator (except music)
Ordinary income on first sale from creator
Litigation Rule - losers pays winner’s attorney fees
Author’s decedents can take it back from owner
COPYRIGHT TAX
CR (except for music very recently) is NOT asset in
hands of the creator.
Creation of non-music CRs are then:
Form of active self employment
No basis (creator’s time worthless)
Activity in spare time - living expenses are not
business expenses, they are personal expenses
Sale of your CR results in:
Ordinary employment income to Seller
Capital gains to Buyer who holds it for a year
COPYRIGHT TAX DREAM
Buyer finds a starving writer, an orphan with no relatives
(writer’s estate or children can claw back the CR rights after
35 years on a non work made for hire).
Buyer pays starving writer $1K for a novel Buyer knows is a
sure hit for TV, movies, plays.
Writer holds CR, publishes the book and makes $1M in book
royalties, ordinary passive income.
Remembering that CR can be fragmented, and 3 years after
he bought the CR, he sells MGM the movie rights in
perpetuity for $1M attracting capital gains.
COPYRIGHT TAX NIGHTMARE
Writer is convinced that if he can sit in a villa overlooking the
Pacific he can write the novel of a lifetime.
Writer rents a villa for $1M (food included) and does so.
Buyer buys book for $1M
Did writer break even? NO.
cannot deduct the $1M cost of the villa
Owes IRS tax on the $1M income, ordinary rate PLUS
self-employment PLUS social security PLUS state taxes.
Must come up with about $50,000.
Setting it up Right
Tax implications should be considered
BEFORE making IP decisions.
Rewriting an IP deal years after it is done:
tax “badge of fraud”
Possibly no better tax treatment than the
original deal
could attract the attention of the Criminal
Investigation Division if the magnitude of
difference between the two deals is big
enough.
“Tax Avoidance” Defined
“Tax avoidance” is not wrong or unlawful
“[o]ne who avoids tax does not conceal or
misrepresent. He shapes events to reduce
or eliminate tax liability and, upon the
happening of the events, makes a complete
disclosure.” Internal Revenue Manual
9.1.3.3.2.1 (7/29/98)
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