Office of Chief Counsel Internal Revenue Service Memorandum Number: 20123001F Release Date: 7/27/2012 CC:LB&I: POSTF-101897-10 UILC: 453.09-00, 1221.03-01, 1222.00-00, 1253.02-00 date: January 30, 2012 to: Team Coordinator (Large Business & International) from: Associate Area Counsel (Large Business & International) subject: Taxation of ########## Commercialization Agreement On April 27, 2011 we issued a case specific legal advice memorandum (“April CSLA”) responding to your request for assistance relative to the tax treatment of the Device A transaction reported by Corporation A and Subsidiaries (“Corporation A”) on its Year 1 tax return. See Tax Analysts, 2011 TNT 104-22, April 27, 2011 (redacted advice on the tax treatment of commercialization agreements). Thereafter, in reliance on the April CSLA, you issued the Revenue Agent Report for Corporation A’s tax year ended Date 41 (“Year 1 RAR”). Corporation A then submitted its Protest in response to the Year 1 RAR. This advice responds to your request for assistance in responding to the Protest. This advice may not be used or cited as precedent. LEGEND Corporation A = ------------------------------------------------------ Corporation B = -------------------------------------- Corporation C = -------------------------------------------------------------------- Corporation D = ------------------------------- Corporation E = ---------------------------- Corporation F = -------------------------------------- Corporation G = ------------------------------- Corporation H = --------------------------------------------- POSTF-101897-10 2 Corporation I = ----------------- Corporation J = -------------------------------------- Agreement A = ------------------------------------------------------------------------------ ------------------------------------------------------------- Agreement B = ---------------------------------------------------------------- -------------------------------------------------------------- Agreement C = ------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Agreement D = ----------------------------------------------------------------- Agreement E = -------------------------------------------------------------------------- Agreement F = ---------------------------------------------------------------------------------- Agreement G = --------------------------------------------------------------------------------- --------------------------------------------------- Agreement H = ------------------------------------------------------------------------------------------- ------------ Agreement I = -------------------------------------------------------------------------------- Agreement J = ------------------------------------------------------------- Agreement K = ---------------------------------------------------------------- Agreement L = ------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- ------------------------------------------------- Agreement M = --------------------------------------------------------------------- Agreement N = ------------------------------------------------------------------ ------------------------------------------------------------------------ Agreement O = ------------------------------------------------------------------------------------------- ----------------------------------------- Country A = ----------- Country B = --------------------------------- Country C = ---------- Country D = ---------------- Country E = ------------ Country F = --------------- Country G = ------------ Territory A = ------------------------ Territory B = ----------------------------------- Year 1 = ------- Year 2 = ------- Year 3 = ------- Year 4 = ------- Year 5 = -------------------------------------------------------- Year 6 = ------- Year 7 = ------- Year 8 = ------- Year 9 = ------- Year 10 = ----------- POSTF-101897-10 3 Year 11 = ----------- Date 1 = ----------- Date 2 = ---------------------- Date 3 = ---------------------- Date 4 = ----------------------- Date 5 = ----------------------- Date 6 = ----------------------- Date 7 = ---------------------- Date 8 = ---------------------- Date 9 = ------------------------ Date 10 = ------------------------ Date 11 = ----------------------- Date 12 = ------------------------ Date 13 = --------------------- Date 14 = --------------------- Date 15 = -------------------------- Date 16 = --------------------- Date 17 = --------------------- Date 18 = ------------------- Date 19 = ------------------ Date 20 = -------------- Date 21 = ------------------ Date 22 = ----------------- Date 23 = ------------------ Date 24 = ---------------- Date 25 = ------------------ Date 26 = ------------------ Date 27 = ------------------ Date 28 = ------------------- Date 29 = --------------------------- Date 30 = ----------------------- Date 31 = ------------------------- Date 32 = ------------------------- Date 33 = ------------------- Date 34 = ------------------- Date 35 = ----------------------- Date 36 = ----------------------- Date 37 = ----------------------- Date 38 = ----------------------- Date 39 = -------------------------- Date 40 = -------------------------- Date 41 = -------------------------- Date 42 = -------------------------- Date 43 = -------------------------- Date 44 = -------------------------- POSTF-101897-10 4 Date 45 = -------------------------- Date 46 = -------------------------- Date 47 = --------------------- Date 48 = --------------------- Memo A = ----------------------------------- Memo B = --------------------------------------------- Memo C = ----------------------------------------------- Payment(s) A = ---------------------------- Payment(s) B = -------------------------- Amount 1 = ------------------ Amount 2 = ----------------- Amount 3 = ------------------ Amount 4 = ------ Amount 5 = ------ Amount 6 = --- Amount 7 = ------------------ Amount 8 = -------------- Amount 9 = ----------------- Amount 10 = ----------------- Amount 11 = ----------------- Amount 12 = --------------- Amount 13 = --------------- Amount 14 = --------------- Amount 15 = ----------------- Amount 16 = ----------------- Amount 17 = --------------- Amount 18 = --------------- Amount 19 = --------------- Amount 20 = ------------ Amount 21 = ------------------- Amount 22 = --------------- Amount 23 = --------------- Amount 24 = ------------------ Amount 25 = ------------ Amount 26 = --------------- Amount 27 = --------------- Amount 28 = --------------- Amount 29 = ------------------ Amount 30 = --------------- Amount 31 = --------------- Amount 32 = ------------ Amount 33 = ------------------ Amount 34 = ------------------ Amount 35 = ----------------- Government = ----------------------------------------------- POSTF-101897-10 5 Agency A Industry A = -------------------- Industry B = --------------------------------- Industry C = -------------------------------- Device A = ----------------------------------------------------------------------------------------- Device B = ------------------- Device C = ------------------------------------------------- Product(s) = -------------------------------------------------------------- Territory A = ----------------------------------------------------------------------------- Trademarks --------------- Country B = ---------- Trademark A Country B = ----------- Trademark B Use A = ---------------------------------------------------------- Use B = --------------------------------------------- Use C = ------------------------- All numbers, months, days or single use words without a specific legend abbreviation are replaced with ##. ISSUES 1. Whether, for the Year 1 tax year, Corporation A can treat the Device A ------------- ------------------------Commercialization Agreement (“Agreement A”) as a sale agreement, not a license, when such assertion directly conflicts with a closing agreement entered for the tax year ended Date 15, as well as with Corporation A’s income tax returns for Year 5 and Year 2, SEC filings, and contracts entered after Year 5. 2. Whether Corporation A’s agreements are license agreements based on the language within the four corners of the agreement and, if so, whether the Commissioner can hold Corporation A to the form of its agreements. 3. Whether Corporation A retained any substantial rights. 4. Whether tax law has evolved away from patent law so the agreements at issue would be treated as selling the license established under the License Agreement Concerning Device A between Corporation B and Corporation A (“Agreement C”) or Corporation A’s patents. 5. Whether § 1253 applies and requires the income from the transfer be characterized as ordinary income. 6. Whether, if a sale occurred, Corporation A properly elected and can use the income forecast method to report the gain from such sale. POSTF-101897-10 6 CONCLUSIONS 1. Pursuant to I.R.C. § 7121(b)(2), the closing agreement cannot be disregarded or modified because it included an express agreement concerning the character of the payment made under Agreement A. Thus, Corporation A cannot change the character of the income from the agreement to capital. Additionally, Corporation A’s prior representations constitute very credible evidence of its intent to enter into a licensing agreement with Corporation H (a wholly-owned subsidiary of Corporation J) in Year