Thursday, March 20, 2008

IRS Field Memo provides guidance for drafting trademark sale agreements

Alvarez and Marsal recently sent out a newsletter (link here) that discussed a December 28, 2007 Internal Revenue Service Field Attorney Advice memorandum addressing a taxpayer’s ultimately unsuccessful attempt to recharacterize a license agreement as a sales agreement for tax purposes. See FAA 20075201F (Taxation of License Agreement).

While the intellectual property at issue in the heavily-redacted field memorandum is a patent, the insight provided by the memo is just as applicable to trademarks. And while the memo cannot be used or cited as precedent, it does provide some important lessons for lawyers drafting trademark sales agreements in how such agreements will be interpreted by the IRS for tax purposes.

The most important lessons from this memo (as applied to the trademark realm) are:
  • The plain language of the agreement matters. If it reads like a license agreement and states the parties’ intent that the agreement be a license agreement, then the IRS will not likely accept an argument (or even extrinsic evidence) that it was actually meant to be a sales agreement.

  • Make sure that the transferor has complete rights to the trademarks being transferred. A seller cannot sell what it does not own. If the seller does not have full ownership rights to the trademarks being “sold” (e.g., the trademarks are subject to preexisting license agreements), then how can an agreement which purports to transfer such rights be deemed a sales agreement.

  • A seller must transfer “all substantial rights” in its trademarks for the transfer to be deemed a sale. If any “substantial” rights are retained by the seller, then the agreement looks more like a license rather than a sales agreement, and will be treated as such.

For companies that have entered into trademark or other intellectual property sales agreements that are still within the statute of limitations for federal tax assessments, such agreements may need to be reviewed in light of the above insights provided by the memo to ensure that a company’s characterization of an agreement as a sales agreement can stand up to the FIN 48 “more likely than not” standard that most companies must now contend with regarding their uncertain tax positions.

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