Thursday March 28, 2024

4.9.4 Royalties from Intellectual Property

Royalties from Intellectual Property

Definition:  A royalty is the right to receive a portion of the income from or share in the profits generated by a copyright, patent or other similar asset.

Tax Deduction:  A person who owns a royalty interest may deduct the full fair market value of royalty interest if he or she gives his or her entire interest to a qualified charity.

Amount Deductible:  If both a royalty interest and the underlying asset are transferred, the rules pertaining to the deductibility of the underlying asset will govern the transaction.

Valuation:  Typically, the value of a royalty interest is one component of the value of the underlying asset.

Transfer Methods:  Royalty interests are generally transferred to charity via an assignment contract that is subsequently recorded with the appropriate authority (e.g., with the United States Patent and Trademark Office if the royalty is with respect to a trademark or patent).

Definition


A royalty is the right to receive a portion of the income from or share in the profits generated by a copyright, patent or other similar asset.

Tax Deduction


A person who owns a royalty interest may deduct the full fair market value of that interest when giving the entire interest to a qualified charity. Reg. 1.170A-7(a)(2)(i). If the person who owns the royalty interest also owns the asset that generates the royalties - such as a copyright, patent or other similar asset - an income tax deduction is permitted only if both the royalty interest and the asset are given to the charity. A gift of only one - but not both - is a nondeductible partial interest gift. Sec. 170(f)(3)

Amount Deductible


If both a royalty interest and the underlying asset are transferred, the rules pertaining to the deductibility of the underlying asset will govern the transaction. For example, a donor giving a patent and the royalty interest relating to that patent may deduct the lesser of his or her basis or the full fair market value of the patent.

A person who owns a royalty interest but does not own the underlying asset may still give the royalty interest to a qualified charity and receive a full fair market value deduction. Reg. 1.170A-7(a)(2)(i), PLR 8144052.

Valuation


Typically, the value of a royalty interest over $5,000 is one component of the value of the underlying asset. As a result, if a donor gives both a royalty interest and its underlying asset, the appraised value of the asset itself dictates the value of the donor's deduction.

The value of a royalty interest when donated by a person who does not own the underlying asset requires an appraisal and is generally based upon the present value of the income stream the royalty is expected to generate.

Transfer Methods


Royalty interests are generally transferred to charity via an assignment contract that is subsequently recorded with the appropriate authority (e.g., with the United States Patent and Trademark Office if the royalty is with respect to a trademark or patent). A charity should investigate the proper way to transfer a royalty interest if that interest is being transferred separately from the underlying asset.

Private Letter Rulings

PLR 200136025 No Unrelated Business Taxable Income (UBTI) When Limited Partnership (LP) Gives Royalty Interest to Charitable Trust:   M is a tax-exempt charitable trust, which is classified as a private foundation under Sec. 509(a). B is a substantial contributor to M. B owns almost all of the interests in N, a limited partnership, which owns and operates a ski resort. N now wishes to make a contribution to M of a royalty interest in N's taxable income.


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