Attention Focused on Taxation of Intellectual Property

Can a tax strategy qualify as a patentable invention? A recent district court decision is of particular note because it both involves a tax strategy patent and it extends the holding in In re Bilski. In H-R Block v. Jackson Hewitt Tax Services Inc., the United States District Court for the Eastern District of Texas held that even though Bilski dealt with a method claim, the system claim in this case was similarly held to not be patentable subject matter. Citing Nuijten, the Court held that Bilski controls both system and method claims, and that the system claim in this case failed to meet the machine-or-transformation test.

LEXIS users can access Taxation of Intellectual Property and Technology § 1.04[1] for additional insights by authors Kenneth Appleby and Marvin Petry.

Qualifying Types of Activities. An open issue exists as to what is meant by the term "held for sale." Does this mean that it applies only to products held as inventory? Or can custom products also qualify? The IRS took the position in Trinity Industries, Inc. v. US that the sale of custom ordered ships did not constitute a business component on the grounds that the taxpayer did not maintain a regular inventory. The District Court held that it could not find any support for the idea of a narrow reading of the statute and that the holding of a ship from the period of completion until delivery of the customer was enough to meet the "held for sale" threshold.

For additional insights, see Taxation of Intellectual Property and Technology § 9.04[1].

Supplies and Rental Payments for Right to Use Computers. Determining whether supplies are "of a character subject to an allowance for depreciation" is made by looking at the particular items in the hands of the specific taxpayer rather than by looking at the particular item in the hands of a typical taxpayer. In MG Missouri Corporation v. Commissioner, the Tax Court embraced this view, examining particular items in the possession of a specific taxpayer to identify qualified research expenditures that are capitalized in inventory or are expensable.

See Taxation of Intellectual Property and Technology § 9.05[1][b] for a more detailed discussion.

Taxation of Property in State. There are a few states that specifically provide that maintenance of inventory does create nexus; it is likely that the respective state tax authorities in these states will take the position that the sotrage of advertising copy and materials creates nexus.

For analysis, see Taxation of Intellectual Property and Technology § 11.04[3].


Taxation of Intellectual Property and Technology is also available in print at the LexisNexis® Store.  The work fully integrates the latest legislative, administrative, and judicial changes in the tax law as well as the patent, trademark, and copyright and trade secret laws. In addition, the book covers Internet taxation and international taxation. It is a comprehensive guide to the federal tax consequences of the development, purchase, sale and licensing of intellectual properties, including inventions (whether or not patentable), trade secrets, trademarks, trade names, copyrights and computer software.