Tax Facts

8162 / What is the character of income received from the licensing of intellectual property?

Under the central “gross income” statute, IRC Section 61, gross income received from the licensing of intellectual property, versus the sale of intellectual property, is treated as a royalty and characterized as ordinary income. The licensee may be entitled to a deduction for the royalty payments, and the licensor entitled to all the tax attributes that come with ownership of the asset.

Planning Point: Due to the difference in tax rates, the IRS may challenge those situations where a licensing arrangement is disguised as an outright sale of the intellectual property.1

1.Watson v. Commissioner, 222 F.2d 689 (10th Cir. 1955).

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