QUESTION: Are there any tax strategies for copyright ownership? Such
as owning the copyright in one corp. and producing and distributing
the book/manual in another corp? Could I get any tax benefits by
setting up a foreign corporation to market my books?

REPLY: Even though I'm an author and own a publishing company, I'm not
aware of any "hidden" tax breaks that would allow me to pay less tax
on the sale of my books, newsletters or access to the Offshore Press
online Library unless I would change my residence to a foreign
country. And, although I'm a tax professional, I have not spent much
time delving into the intricacies of the numerous tax code sections
that have some bearing on the subject.

But, if I were to change my residence from the U.S. to a low tax
foreign country, and then set up a publishing business in that
country, I should be able to benefit from the foreign earned income
exclusion of up to $85,700 per year (for 2007) plus an equal amount
that might be paid to my wife if she also worked for our publishing
company. In addition, I should be able to legally defer taxes on any
undistributed profits until they were distributed.

The general rule is that copyrights are not capital assets that
qualify for capital gain tax treatment if the owner of the copyright
is either (1) the author or creator of the property through his or her
own personal efforts, or (2) the donee (recipient) of the author or
creator, or (3) one who otherwise has a tax cost (basis) for the
property that is determined by reference to the basis in the hands of
that donor. However, after May 17, 2006, musical compositions are not
subject to this rule and are treated as capital assets that are
eligible for capital gains treatment. (The following comments do not
apply to musical compositions.)

This means that the sale or transfer of a copyright by the creator of
the property is treated as ordinary income, except for the sale of
musical compositions.

A transfer of a copyrighted work to a domestic corporation controlled
by the copyright holder would normally be a tax free exchange, and the
tax cost (basis) by the corporation would be determined by reference
to the basis in the hands of the shareholder if that shareholder is
the creator of the copyrighted property. Income derived from the sale
of the copyrighted work (such as a book) is treated as ordinary income
by the owner – whether the owner is the creator of the work or a
corporation owned by the creator.

However, profits from the sale of copies of a copyrighted work by a
taxable corporation would be treated as the income of the corporation.
The after tax income of the corporation would be taxed again when
distributed to the owner of the corporation. In the event of a sale of
the stock of a domestic corporation, any gain would usually be treated
as a capital gain.

The transfer of a copyrighted work to a foreign corporation is subject
to the deemed sale or deemed royalty rules of tax section 367(d). This
tax code section basically requires the owner of an intangible asset
(including a copyright) to pay tax on an amount that reflects an
annual royalty based on the economic value of the intangible asset. If
the corporation was otherwise able to avoid having income that is
subject to the subpart F rules on taxing certain kinds of income of a
controlled foreign corporation to the U.S. shareholders, profits from
the sale of copies of the copyrighted work could be tax deferred until
distributed to the shareholders. However, any gain on the sale of the
stock of the foreign corporation would be ordinary income to the
extent of any undistributed (and tax deferred) earnings and profits of
the foreign corporation.


Vern

The comments in this memorandum are not intended to constitute an
opinion regarding any specific tax issues because additional tax
issues may exist that could affect the tax treatment of the tax issues
addressed in this memo. This memorandum does not consider or reach a
conclusion with respect to those additional issues and was not written
and cannot be used for the purpose of avoiding penalties under code
section 6662(d). For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm