...arrangements (QPCLA). The revenue procedure is welcomed relief for the multinational business community, which had expressed great concern about the potential treatment of cross licensing arrangements. The procedure provides guidance that generally validates the tax treatment asserted by the tax adviser and tax executive communities concerning these arrangements notably that--

(i) only the cash payments made with respect to these arrangements should result in withholding tax or tax accounting consequences, and

(ii) the in-kind exchange of intellectual property (IP) rights should have no tax consequences.

Background

Cross-licensing arrangements (CLAs) are common where parties to a prospective licensing agreement have patent rights that the other party wants, or where there is a cluster of patents in a field in which no individual holder of patents can be certain of not infringing on another's patent rights. By entering into a cross-licensing arrangement, each patent holder may operate without fear of being charged with infringement of the rights of the other and operate without the threat of litigation. Depending on the relative value of patent rights, the exchange of a license and cross-license may be accomplished with or without an actual cash payment. (2)

By June 2005, conversations in the tax community and comments by senior government officials on the tax seminar circuit prompted industry groups to express concerns over the potential tax treatment of CLAs. Letters to the Treasury Department from industry and professional associations, together with letters from members of Congress, stressed the importance of these arrangements to the business community and US competitiveness. (3)

Notice 2006-34: Raising Controversy over Potential Taxation

In March 2006, the Treasury Department and IRS issued Notice 2006-34, (4) requesting information across a broad range of issues, including the commercial circumstances that underpin the decision for companies to enter into CLAs, the scope and limitations of CLAs, other agreements to which CLAs might be analogized, the methods by which industry sets values on the rights to CLAs, and the appropriate U.S. federal tax treatment and consequences of CLAs.

The notice also posited three theories by which CLAs may be characterized and briefly discussed the significant tax consequences that may flow from each characterization. The consequences identified in the notice included tax accounting income and deductions, and withholding, under the U.S. statutory regime for taxing foreign persons on certain items of U.S....

NOTE: All illustrations and photos have been removed from this article.



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