IRS Ordered To Help Trademark Licensor Reduce Tax Liability

Rod S. Berman

Jeffer, Mangels, Butler & Marmaro, LLP, Chairman, Intellectual Property Department, Los Angeles, CA, USA

Kristi L. Kirksey

Jeffer, Mangels, Butler & Marmaro, LLP, Associate, Los Angeles, CA, USA

Companies regularly enter into trademark licenses to obtain the right to use a trademark in connection with the production, sale, marketing or distribution of goods. In a typical license agreement, the owner of a trademark, i.e., the licensor, will permit a licensee to use its trademark or “brand” in return for the payment of a royalty. Essentially, licensing a trademark allows the licensee to take advantage of already established goodwill or brand identification created by or for the trademark owner.

Trademark royalties may be assessed and divided in a variety of ways, but are often expressed as a percentage of gross or net sales, as appropriately defined, or as a fixed fee per unit sold or produced. The tax treatment of such payments (i.e., to capitalize or to expense) varies, but usually depends on the terms of the licensing agreement. Many taxpayer licensees will allocate royalty expenses between expenses that can be immediately deducted and expenses that must be capitalized.