MONTHLY CHECKLIST SERIES
Techniques to Turn Intellectual Property Into More Profitable Assets
Patents, copyrights, trademarks and trade secrets are legally protected rights referred to collectively as intellectual property (IP), a major component of intellectual capital. As decisions about investment in and commercial exploitation of IP become increasingly critical to a business’s success, CPAs can contribute to a company’s efforts to maximize the value of IP assets. CPAs are trusted business advisers who bring objectivity to the process of quantifying the value of intangible property such as IP.
A thorough understanding of a company’s IP portfolio is critical for the development of a strategic IP management system, and CPAs who understand a company’s business plan are in a good position to help. There are proven techniques for managing IP that will turn knowledge into profits, and CPAs can offer the following IP management service activities to direct a company’s efforts to obtain maximum value of its IP assets:
Prepare a comprehensive assets inventory identifying
each property right in the company’s IP portfolio, the remaining
term of legal protection and its relative value to the enterprise,
such as core vs. noncore technology, use in existing products or
services or anticipated future use.
Consult with a licensing expert to develop a strategy
for licensing selected IP to targeted companies. Wasting patented
technology simply because a company has no immediate product use for
it is unnecessary at best. A strategic IP management system
generally includes a licensing policy and a database/tracking system
for IP and licensing portfolios.
Set up an investment holding company (IHC) in
appropriate state jurisdictions to create state tax savings. Under
this structure the operating units recognize a deduction for
royalties paid to the IHC while the IHC does not recognize income
for the royalty payment for state tax purposes. Thus an IHC
structure allows a company to enjoy state tax deductions in one
jurisdiction that are not offset by income for state tax purposes in
another jurisdiction, thereby leaving a net savings from the state
tax deductions. This independent operation often allows the IHC’s
managers and directors to focus more on IP management and the
measurement of profit and loss from IP activities, greater IP
integration into overall corporate strategy, increased development
of transferable technology and more objective stewardship by outside
directors.
Consider a charitable donation of unused IP assets
under IRS revenue ruling 58-260. A qualified appraisal of the
donation using generally accepted IP valuation techniques (fair
market value of the patent at the time of the contribution) is
required by the IRS and is subject to IRS scrutiny. As an indirect
benefit, an IP donation can strengthen the ties between the company
and the donee research institutions.
Investigate licensees’ royalty payments to determine
whether they conform to the license terms. Underpayment of royalties
historically has been a problem. A well-drafted licensing agreement
should include a provision requiring the licensee to pay for an
audit if the underpayment exceeds a certain threshold.
Assess litigation risk to evaluate probable outcomes
and financial implications of potential disputes over similar
patented technologies. Often the scope and application of relevant
technology cannot be determined by the parties without an agreed
settlement, either through a cross-licensing agreement or a judgment
of contested claims in litigation. It is expensive to litigate IP
matters, thus an effective management tool contains prelitigation
estimates of probable outcomes and associated costs should lawsuits
arise over patent infringements.
Source: V. Walter Bratic, CPA, vice-chairman and managing director, and Nicholas D’Ambrosio, Jr., CPA, JD, director, of Intecap, Inc., Houston, www.intecap.com .
