Sale of intellectual property to family member


R

Robby

I've independently developed a software package on my own,
to which I fully own the copyright. Another company that I
work for as an employee is interested in buying usage rights
to a component of this software for a considerable amount of
money (i.e. greater than $10,000). My brother needs money
for his out-of-state undergraduate education, and I would
like to help him out by giving him this money. However, my
marginal income tax rate is already around 30-35%, so it
would be a waste for me to get the proceeds of this sale,
and then transfer the money to him, where it gets taxed
again at his rate (albeit, a much lower one). Instead, I am
interested in a legal way that allows this company to pay my
brother directly for this work. My thought was that I could
sell the intellectual property rights for this component to
my brother for $1.00 or so, and then the company could buy
the rights to this software from him for the full amount. Am
I being na=EFve, or is might this work? If not, do I have
any alternatives that I can take to get him this money while
paying a minimal amount of taxes on it?

Also, suffice it to say that I am unfamiliar with how
proceeds from sales of goodwill is paid out. Could this
income be payed to either my brother or I via a 1099?

If you reply, please CC (e-mail address removed)

TIA,

Robby
 
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S

Stuart A. Bronstein

Robby said:
I've independently developed a software package on my own,
to which I fully own the copyright. Another company that I
work for as an employee is interested in buying usage rights
to a component of this software for a considerable amount of
money (i.e. greater than $10,000). My brother needs money
for his out-of-state undergraduate education, and I would
like to help him out by giving him this money. However, my
marginal income tax rate is already around 30-35%, so it
would be a waste for me to get the proceeds of this sale,
and then transfer the money to him, where it gets taxed
again at his rate (albeit, a much lower one). Instead, I am
interested in a legal way that allows this company to pay my
brother directly for this work. My thought was that I could
sell the intellectual property rights for this component to
my brother for $1.00 or so, and then the company could buy
the rights to this software from him for the full amount. Am
I being na=EFve, or is might this work? If not, do I have
any alternatives that I can take to get him this money while
paying a minimal amount of taxes on it?
If you did that you'd not only have a potentially taxable
gift (if it's going to be more than $12,000), but you may
also have to declare it all as taxable income for yourself
even though your brother will get the money.

My suggestion would be to hire your brother as your IP
administrator. The buyer pays you, you pay your brother, and
you write it off. The fact that the amount you pay your
brother is the same as the amount you receive is just a wild
coincidence.

Stu
 
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S

Seth Breidbart

Robby said:
I've independently developed a software package on my own,
to which I fully own the copyright. Another company that I
work for as an employee is interested in buying usage rights
to a component of this software for a considerable amount of
money (i.e. greater than $10,000). My brother needs money
for his out-of-state undergraduate education, and I would
like to help him out by giving him this money. However, my
marginal income tax rate is already around 30-35%, so it
would be a waste for me to get the proceeds of this sale,
and then transfer the money to him, where it gets taxed
again at his rate (albeit, a much lower one).
He wouldn't pay tax on a gift. But you can still do better.
Instead, I am interested in a legal way that allows this company to
pay my brother directly for this work.
How much over $10,000? Are either you or your brother
married?

Give the software to your brother. He inherits your basis
($0); you only have to worry about a gift tax if the value
is over $12,000 ($24,000 if either is married, $48,000 if
you both are); even in that case, you just have to file, no
cash tax is due now (you reduce your lifetime exemption of
$1 million by the excess).

Then your brother sells the software. Since his basis is
$0, the full sale price is taxable income, but at his tax
rate.

Seth
 
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H

Han

Stuart A. Bronstein said:
My suggestion would be to hire your brother as your IP
administrator. The buyer pays you, you pay your brother, and
you write it off. The fact that the amount you pay your
brother is the same as the amount you receive is just a wild
coincidence.
I'm not in the situation of the OP <grin>, but wouldn't a
construction as you suggest arouse IRS curiosoity? How
would one "prove" that this was an OK series of
transactions?
 
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S

Stuart A. Bronstein

I'm not in the situation of the OP <grin>, but wouldn't a
construction as you suggest arouse IRS curiosoity? How
would one "prove" that this was an OK series of
transactions?
He'd have to actually do some legitimate work for the
company. Such as receive and log the checks, deposit them,
keep account of them and report to the company.

It would have to be set up as a legitimate transaction, but
I don't see why the OP's object can't be accomplished with
an approach such as this.

Stu
 
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R

Robby

He wouldn't pay tax on a gift. But you can still do better.
How much over $10,000? Are either you or your brother
married?

Give the software to your brother. He inherits your basis
($0); you only have to worry about a gift tax if the value
is over $12,000 ($24,000 if either is married, $48,000 if
you both are); even in that case, you just have to file, no
cash tax is due now (you reduce your lifetime exemption of
$1 million by the excess).

Then your brother sells the software. Since his basis is
$0, the full sale price is taxable income, but at his tax
rate.
The amount is actually around $23,000. So it looks like I
will be paying around $4,000 in gift tax (amount falling in
the 0%, 18%, 20% and 22% buckets), plus my brother will have
to cover the amount on his income tax. Eeek!

Robby
 
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A

AES

Give the software to your brother. He inherits your basis
($0); you only have to worry about a gift tax if the value
is over $12,000 ($24,000 if either is married, $48,000 if
you both are); even in that case, you just have to file, no
cash tax is due now (you reduce your lifetime exemption of
$1 million by the excess).

Then your brother sells the software. Since his basis is
$0, the full sale price is taxable income, but at his tax
rate.
I once proposed giving my children as a capital gift the
existing publishing contract for a book I'd written, so that
future royalty income would be taxed to them

I was told that I should instead have given the book
manuscript (a physical object) to them and helped them
negotiate a contract with the publisher, but that once the
royalty contract with the publisher was in existence, it was
too late.

Warning: I'm an author, not a tax attorney.
 
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S

Seth Breidbart

Then your brother sells the software. Since his basis is
The amount is actually around $23,000. So it looks like I
will be paying around $4,000 in gift tax (amount falling in
the 0%, 18%, 20% and 22% buckets),
No; you have a lifetime $1,000,000 (at least) exemption from
gift tax. You're just going to use up $11,000 of it
(assuming neither of you is married). And the tax, if you
paid it, would be $2,000 ($12,000 at 0%, $10,000 at 18%, and
$1,000 at 20%).
plus my brother will have
to cover the amount on his income tax. Eeek!
For that matter, if you'd paid gift tax, I think that gets
included in his basis.

Seth
 
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H

Herb Smith

The amount is actually around $23,000. So it looks like I
will be paying around $4,000 in gift tax (amount falling in
the 0%, 18%, 20% and 22% buckets)
Unless your lifetime taxable gifts exceed $1,000,000, you
won't be paying any tax. However, your lifetime estate tax
exclusion will be reduced by the amount that your gift
exceeds the annual limit of $12,000. For most people this is
not a major concern.
plus my brother will have
to cover the amount on his income tax. Eeek!
A gift is NOT taxable income to the recipient, but any
subsequent appreciation in that asset will result in taxable
income to your brother.
 
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S

Shyster1040

Question: If the OP is transferring "usage rights" and not
outright ownership, isn't that a license rather than a sale?
 
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Stuart A. Bronstein

AES said:
I once proposed giving my children as a capital gift the
existing publishing contract for a book I'd written, so that
future royalty income would be taxed to them

I was told that I should instead have given the book
manuscript (a physical object) to them and helped them
negotiate a contract with the publisher, but that once the
royalty contract with the publisher was in existence, it was
too late.
From a tax perspective you are allowed to give property but
not allowed to give the right to receive income. When it
comes to intellectual property there can be a fine line
between the two. In your case you only wanted to give your
kids contract rights, which in essence amounted to the right
to receive income. There's no problem with that, but the
income will be taxed to you.

If you had given them all your copyrights in the book that
might have helped. But the contract would have to be drawn
carefully, and the IRS might still have attacked it.

Stu
 
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M

Missy

The amount is actually around $23,000. So it looks like I
will be paying around $4,000 in gift tax (amount falling in
the 0%, 18%, 20% and 22% buckets), plus my brother will have
to cover the amount on his income tax. Eeek!
Robby, You need to reread the paragraph that starts with
"Give the software to your brother". You will only need to
file a gift tax return and pay_nothing_. The rule is: any
one person can gift any other one person up to $12000 per
year (including Christmas, birthday, etc. gifts) without
filing a gift tax return. If you are married and your
brother is married, you and your wife may gift up to $48000
to the brother and his wife per year. If you do need to
file a gift tax return, you will only deduct the amount from
your lifetime limit (I think it is $2 Million starting in
2006).

Missy Doyle
 
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S

Stuart A. Bronstein

No; you have a lifetime $1,000,000 (at least) exemption from
gift tax. You're just going to use up $11,000 of it
(assuming neither of you is married). And the tax, if you
paid it, would be $2,000 ($12,000 at 0%, $10,000 at 18%, and
$1,000 at 20%).
For that matter, if you'd paid gift tax, I think that gets
included in his basis.
If you transfer shares of stock in a transaction that
increases the basis, it does not affect the taxability of
dividends. Same thing here - royalties are separate from
the basis of the underlying intellectual property rights, so
are taxed to the recipient.

If this transaction is not structured very carefully,
though, the biggest negative thing to happen is that the OP
will be taxed on the income rather than his brother.

Stu
 
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Seth Breidbart

Stuart A. Bronstein said:
If you had given them all your copyrights in the book that
might have helped. But the contract would have to be drawn
carefully, and the IRS might still have attacked it.
I believe the way it works is that you should give the
copyrights _before_ there is a contract with a publisher.
Copyrights by themselves don't include the right to receive
income (I own a lot of copyrights, such as on this posting,
which will never produce any income).

I don't know why giving a royalty contract (with future
income) differs from giving a Treasury Bond (with future
income), though. Perhaps including the copyright with the
former makes the cases more similar.

Seth
 
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