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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)

WANT A COPY OF THIS POWER POINT?



 Please visit:



http://www.patentax.com



And click on “LIBRARY“



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