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Under what circumstances will the sale of intellectual property (“IP”) by a controlled foreign corporation (“CFC”) give rise to Subpart F income?

Intellectual Property Controlled Foreign Corporation Subpart F Income
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Chris Haunschild
If the IP is deemed to be “property that does not give rise to income” (i.e., it is used in the CFC’s business or is licensed to a disregarded entity owned by the CFC), the gain from its sale should not constitute Subpart F income.

If the IP is licensed to a related party and generates royalty income, the gain from its sale should constitute Subpart F income.

If the IP is licensed to an unrelated party and generates royalty income, the gain from its sale will constitute Subpart F income unless the IP qualifies under the “developed or added substantial value” test or the “active marketing” test in the regulations.

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Leave a Comment 550 weeks ago

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Michael Smith
You wrote, "If the IP is deemed to be “property that does not give rise to income” (i.e., it is used in the CFC’s business...), the gain from its sale should not constitute Subpart F income."

Why is this so? Based on 26 CFR 1.954-2(e)(3)(iv), I would think that intangible property (including IP, as defined in 936(h)(3)(B)) is excluded from the category of property that does not give rise to income? If so, doesn't the sale of the IP give rise to Subpart F income?
Reply 538 weeks ago
 

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