SECTION 4. QUALIFIED PATENT

CROSS LICENSING ARRANGEMENT (QPCLA)

A QPCLA is a nonexclusive, nontransferable patent cross licensing arrangement among uncontrolled parties, the subject matter of which is limited to the parties’ present or future patent rights, as specified in the arrangement. If the parties to an arrangement also engage in more than de minimis licensing or other transfer of other intangible property (including copyrights, trademarks, and know how) pursuant to the arrangement, the arrangement is not a QPCLA. The determination of whether the licensing or other transfer of other intangible property is de minimis is determined under all the facts and circumstances.

FDAP. Commissioner v. Wodehouse, 337 U.S. 369, 392 (1949); see also §§ 1.871–7(b)(1) and 1.1441–2(b).

Section 1441(a) provides the general rule that all payors having the control, receipt, custody, disposal or payment of items described in § 1441(b) must deduct and withhold a tax equal to 30 percent on payments of certain items of income to nonresident aliens to the extent that such items constitute gross income from sources within the United States. Section 1441(b) provides that these items of income include interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations and emoluments or other fixed or determinable annual or periodical gains, profits, and income. Section 1442(a) provides that, in the case of foreign corporations subject to taxation under subtitle A of the Code, there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in § 1441 a tax equal to 30 percent thereof.

Section 861(a)(4) provides that rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade marks, trade brands, franchises, and other like property, shall be treated as income from sources within the United States.

Section 862(a)(4) provides that rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade marks, trade brands, franchises, and other like property, shall be treated as income from sources without the United States.

Section 863(a) provides that items of gross income, expenses, losses, and deductions, other than those specified in §§ 861(a) and 862(a), shall be allocated or apportioned to sources within or without the United States, under regulations prescribed by the Secretary.

Section 863(b) provides that, in the case of gross income derived from sources partly within and partly without the Unites States, the taxable income may first be computed by deducting the expenses,

losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The section further provides that the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Secretary.

Sections 871(b) and 882 provide that when a nonresident alien individual or a foreign corporation is engaged in a trade or business within the United States, the individual or corporation is taxable at U.S. graduated tax rates on taxable income which is effectively connected with the conduct of a trade or business within the United States (ECI). Section 864(c) provides specific rules for determining the income, gain, or loss treated as ECI.

Section 1031(a)(1) provides generally that no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. For § 1031 to apply, a taxpayer must have realized gain or loss from a disposition of property, as described in § 1001. While a sale or other disposition of a patent generally gives rise to a gain or loss under § 1001, the mere grant of a patent license does not because it is not a sale or other disposition of property within the meaning of § 1001(a). Similarly, gain or loss under § 1001 does not arise in the case of mutual grants of licenses. Thus, § 1031 has no application to a QPCLA addressed in this revenue procedure.

In general, the foregoing rules regarding inclusion, deduction, sourcing, and withholding operate independently as to each item of gross income and expense.

.04 Administrability Issues . The Treasury Department (Treasury) and the Internal Revenue Service (IRS) recognize that QPCLAs entered into by uncontrolled parties to pursue their businesses free from potential patent infringement claims raise many difficult issues for both taxpayers and the IRS. In light of the large number of patent applications and grants, and the difficulty and cost of resolving patent infringement disputes, it is often very diffi

2007–10 I.R.B. 677 March 5, 2007