Lease and Rental Source of Income

Under the Software Regulations, income derived from the rental of a copyrighted article is sourced under Section 861(a)(4) and 862(a)(4).  As a general rule, rents and royalties are sourced to the place where the leased or licensed property is located, or where the lessee or licensee uses, or is entitled to use the property.

Leased property is used where it is physically located at the time of its use by the lessee. Therefore a computer program copy that is “rented” under a limited duration license should be considered to be used at the place where the computer that hosts the program is physically located while the lessee uses the program. If the copy resides on the lessee’s Read More

Partial Transfer of a Copyright Article: A Lease

If less than all of the benefits and burdens associated with a copyrighted article have passed to the transferee, the Software Regulations treat the transaction as a lease. Copyright articles can be leased as well as sold. Computer programs do not involve the risk of physical deterioration or physical destruction but they do have the risk of technological obsolescence. If this risk is assumed by the transferee, generally through a transaction in which the transferee makes a single payment in return for the right to use the program copy in perpetuity, then the transferee has assumed the risk of obsolescence and should be treated as the owner of the program copy. Read More

Application of the Title Passage Rule

As described in Part 5, the source of income generated by the sale or exchange of a copyrighted article often depends upon whether the sale took place within or without the United States. The place of sale is determined under the title passage rule. The Software Regulations recognizes that typical license agreements do not refer to a transfer of property and an electronic transfer is generally not accompanied by the usual indicia of the transfer of title.

There are important categories of copyrighted article transfers for DISC purposes: (i) a transfer of tangible property, such as a tangible medium in which the copyrighted article Read More

Source of Income for Sales of Copyrighted Articles

A transfer of intangible property is a sale if the actual facts and circumstances support the fact that the transferor has transferred “all substantial rights” to the computer software property. A perpetual and exclusive license of intangible property is considered to be a transfer of “all substantial rights” is also treated as a sale, rather than as a license, for tax purposes. All the facts and circumstances are reviewed to determine whether the transaction transferred “all substantial rights” to the property in question.

A sale of a copyrighted article occurs if sufficient benefits and burdens of ownership have been transferred to the buyer, taking into account all facts and circumstances. This is the Read More

The Source of Income Analysis

Once it is determined that a computer program is a copyright article and thus “export property” for DISC purposes; then the issue is to determine whether the Software Program is being sold for use, consumption of disposition outside of the U.S. This analysis depends upon the “source of income” rules.

Generally under the current rules, the source of income from sales of property depends to varying extents upon both the type of property and whether the property sold or leased is “inventory property”.

Income from the lease of a copyright article must also fit this definition of non U.S. source Read More

Copyright Rights

The regulations distinguish between transfers of copyright rights and transfers of copyrighted articles based on the type of rights transferred to the transferee. The transfer is classified as a transfer of a copyright if, as a result of a transaction, a person acquires any one or more of the following rights:

1. the right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;
2. the right to prepare derivative computer programs based on the copyrighted computer program; Read More

The Export Property Analysis

Export property is defined to mean, in general, property that is:

1. Manufactured, produced, grown or extracted in the United States by a person other than a DISC,

2. Held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, for direct use, consumption, or disposition outside the United States and

3. Not more than 50 percent of the fair market value of which is attributable to articles imported into the United States. Read More

The Interest Charge Domestic International Sales Corporation

The IC-DISC has been approved as an acceptable tax planning entity for the export of American produced computer software and programs as early as 1985.  In 1998, a very detailed set of Treasury Regulations were issued that have added certainty to this area of the law.

For purposes of determining the applicability of the DISC to computer software exports, two key analyses are often required.  First, (1) is the software “export property” for DISC purposes and (2) is the software product’s source of income “from without the U.S.”?  Is the product for use, consumption or sale without the U.S.? Read More

Since the timing of the theft loss deduction is critical to the real economics of the recovery, this phrase is all important. Therefore, before considering tax planning opportunities, on must study the phrase “a reasonable prospect of recovery” in more depth.

The phrase finds its origin in the early internal revenue codes that permitted a theft loss deduction for losses sustained in a taxable year but did not define the word sustained. Therefore, prior to 1954 the law was unsettled as to when a loss was sustained. This caused taxpayers to often lose their tax deduction for a theft loss when the statute of limitations had run on prior years; and it was later found that a loss had been sustained in one of those prior years that was no longer open for change. Read More

In considering the various options of recovery available for tax losses some fundamental knowledge of the law is important. We are going to cover those fundamentals into the following order.

1. The Amount of the Theft Loss Deduction
2. The Timing of the Theft Loss Deduction
3. Tax Loss Carry Backs and Tax Loss Carry Forwards
4. Deduction in the Year of Loss
5. Deduction in Years Other Than the Year of Loss
6. Other Sources of Tax Recovery
7. Payments Received as a Return of Capital – Not Income Read More

If a Taxpayer is concerned that his or her failure to report income, pay tax and submit required information returns was due to willful conduct and who wants more assurances that they will not be subject to criminal inability and/or substantial monetary penalties, that taxpayer should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax or legal advisers.

This Offshore Voluntary Compliance Program is a separate I.R.S. Program that waives certain serious penalties but asserts a much higher overall penalty than the Streamlined Procedure and it assures taxpayers that they will have a perfectly clean slate.

Coordination With Treatment Under OVDP

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The taxation of Americans and long term green card holders (permanent residents) who expatriate from the United States has gone through many changes over the years. The latest version of these changes with tax expatriating Americans on their accumulated un-taxed wealth prior to their leaving the United States, along with their earned income that has not been paid and will be paid in the future.

In addition, the United States tax laws will tax expatriating Americans at draconian rates, for Americans that die owning United States wealth (the “Estate Tax”) and that make significant gifts (the “Gift Tax”) after they have given up their United States citizenship.

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