SECTION 5. NET CONSIDERATION

METHOD

.01 Scope . The Net Consideration Method provided in this section 5 may be used for a QPCLA by any taxpayer without regard to whether the taxpayer has made a payment of income subject to withholding with respect to the QPCLA.

.02 Net Consideration . For purposes of this section, “net consideration” is defined as the amount of consideration other than license rights and de minimis other intangible property received in the taxable year by a party pursuant to the arrangement, reduced by the amount of consideration other than license rights and de min- imis other intangible property paid in the taxable year by the party pursuant to the arrangement.

.03 Financial Statement Conformity . A taxpayer may not use the Net Consideration Method discussed in this section for a QPCLA unless the taxpayer takes into account only the “net consideration”, as defined in subsection 5.02 of this revenue procedure, for such arrangement on its audited financial statements (if any), or similar statement in the case of a foreign corporation, for all years ending after February 14, 2007, that the net consideration method is used for tax purposes.

.04 Use of Net Consideration Method . A taxpayer choosing to use the Net Consideration Method must apply the Net Consideration Method as provided in sections 5.05 and 5.06 of this revenue procedure. The use of the Net Consideration Method will be presumed to clearly reflect a taxpayer’s income.

.05 Withholding . Under the Net Consideration Method, only the net consideration transferred between the parties to a QPCLA during a taxable year will be taken into account for withholding purposes. The Net Consideration Method applies whether the QPCLA is entered into in advance of, during, or after a patent dispute.

.06 Capitalization . Under the Net Consideration Method, only the net consideration transferred between the parties to a QPCLA during a taxable year will be taken into account for capitalization purposes under § 263(a) or § 263A of the Code.

.07 Example . X, a domestic corporation, and Y,

a foreign corporation, each hold patents potentially

implicated by the manufacture and sale of product P.

In addition, each actively engages in the manufacture

and sale of product P on a global basis. Y does not

have income effectively connected with a U.S. trade

or business. In 2007, X and Y enter into a QPCLA

with respect to their respective patents. In accordance

with the terms of the QPCLA, $20 million is paid by

X to Y. The only consideration for the QPCLA taken

into account on X’s financial statements is the $20

million payment made by X to Y. X may use the Net

Consideration Method to determine its withholding

obligations and the amount subject to capitalization

for federal income tax purposes.

Under the Net Consideration Method, only the $20 million payment made by X under the QPCLA is treated as income to Y for withholding purposes. Therefore, withholding under § 1442 will apply only with respect to the portion of the $20 million payment by X attributable to U.S. sources under § 861(a)(4). Further, only the $20 million payment by X is subject to capitalization under § 263(a) or § 263A.