The IRS published proposed regulations making tax strategy patent transactions reportable transactions and subject to the material advisor list maintenance requirement dropping the material advisor threshold from $ 50,000 to $250 and from $250,000 to $500. Finalized regulations will be effective retroactive to September 26, 2007.
Under the proposed regulations, a patented transaction is a transaction for which a taxpayer pays a fee (including through in kind consideration, referral fees, fee-sharing arrangements, or license) to a patent holder or the patent holder's agent for the legal right to use a tax-planning method that the taxpayer knows or has reason to know is the subject of the patent. A patented transaction is also a transaction for which a patent holder or the patent holder's agent has the right to payment (including settlement amounts and damage awards) for another person's use of a tax-planning method that is the subject of the patent. The proposed regulations define a tax-planning method as any plan, strategy, technique or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment or excise taxes. Similar to the proposed legislation on tax strategy patents, the proposed regulations exclude patents issued solely for tax-preparation software or other tools used to perform or model mathematical calculations or to provide mechanical assistance in the preparation of tax or information returns.
The proposed regulations provide that a taxpayer has participated in a patented transaction if the taxpayer's tax return reflects a tax benefit from the transaction (including a deduction for fees paid to the patent holder or patent holder's agent). A patent holder or the patent holder’s agent will be considered to be participating in a patented transaction if the patent holder’s tax return reflects a tax benefit (including a deduction for patent application and attorney fees) in relation to obtaining a patent for a tax-planning method or reflects income from a payment received from another person for use of the tax-planning method. The regulations apply to both patents that have been granted and those that have been applied for but not yet granted.