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<strong>Royalties</strong> pany is not subject to capital gains treatment under section 631(c), but is ordinary income subject to percentage depletion. Amounts received by the individual for obtaining coal leases determined by a rate per ton of coal purchased and processed by the coal company are not subject to capital gains treatment, but are ordinary income not subject to depletion. §§1.611-1, 1.631-3. (Secs. 611, 631; ’86 Code.) Rev. Rul. 77–84, 1977–1 C.B. 173. 446.14 Coal; surface lease. Royalty payments received under a lease granting the lessee the right to enter upon, use and/or destroy surface lands in order to prospect for and mine coal, the extraction of which is or will be covered by other leases, are not proceeds from the disposal of coal within the meaning of section 631(c). §1.631–3. (Sec. 631, ’86 Code.) Rev. Rul. 79-144, 1979-1 C.B. 219. 446.15 Coal land; advance; interest v. royalties. A partnership disposed of its working interest in leased coal property by contracting, as part of the same transaction, for a mining company to strip all the overburden from the tract in incremental parcels and for the mining company to sublease each parcel after stripping of the parcel was completed. Advances to the mining company for use in stripping the parcels under the sublease agreement to be repaid to the partnership in an amount equal to the amounts advanced constitute a loan, not development costs, Amounts received by the partnership exceeding repayment of the loan and interest are royalties from the sale of coal; stripping costs incurred by the mining company are operating cost, nondevelopment costs. §§1.616–1, 1.631–3. (Secs. 616, 631; ’86 Code.) Rev. Rul. 77–308, 1977–2 C.B. 208. 446.16 Coal land; exercise of option to purchase. Royalty payments received in exchange for an option to purchase coal land are not subject to capital gains treatment under section 631(c), but are taxable as ordinary income and subject to depletion deductions. §§1.61-8, 1.611-1, 1.613-1, 1.631-3, 1.1231-1. (Secs. 61, 611, 613, 631, 1231; ’86 Code.) Rev. Rul. 73-80, 1973–1 C.B. 308. 446.17 Coal land; lease to joint venture; interest of lessor. Royalty income received by a power company for the lease of its coal lands, held more than six months, to a joint venture that included as a member the company’s wholly owned subsidiary and that sells the coal to the company is subject to the capital gains treatment under section 631. §§1.631-3, 1.1231–1. (Secs. 631, 1231; ’86 Code.) Rev. Rul. 73–33, 1973–1 C.B. 307. 446.18 Coal lease agreement between members of affiliated group; economic interest retained. An arms-length coal lease agreement in 1972 between members of an affiliated group filing consolidated returns, in which the owner-lessor retained an economic interest and the lessee obtained the right to mine and dispose of the coal, does not constitute a deferred intercompany transaction within the meaning of reg. 1.1502–13 (a)(2)(i) or (iii). Section 631(c) applies to the royalty payments received by the owner-lessor. §§1.611-1, 1.631–3, 1.1502-13. (Sec. 611, 631, 1502; ’86 Code.) Rev. Rul. 74-10, 1974-1 C.B. 251. 446.19 Coal or iron ore; bonuses and advanced royalties; rulings. As a condition to issuing a ruling that lessors of coal and iron ore may treat bonuses or advanced royalties as received from a sale of coal or iron ore under section 631(c), the lessors will be required to enter into a closing agreement with respect to their tax liability. §1.631–3. (Sec. 601, 201, S.P.R.; Sec. 631, ’86 Code.) Rev. Proc. 77-11, 1977-1 C.B. 568. 446.20 Contested; accrual basis taxpayer. An accrual-method corporation and another company, under a cross-licensing and royalty agreement, paid each other a 2-percent royalty on the contract price of items covered by the other’s patents. Under the Royalty Adjustment Act of 1942, the Navy Department determined the royalties to be excessive for Navy contracts, and ordered the royalties suspended and the government reimbursed. After appeal, a compromise 1-percent royalty rate was reached. Held, the corporation was entitled to deduct royalties payable at the rate of 2 percent while they remained legally contested but was not required to include the contested royalties receivable in income. (Secs. 41, 43, ’39 Code; Secs. 446, 461, ’86 Code.) Foster Wheeler Corp., 20 T.C. 15, Acq., 1953-2 C.B. 4. 446.21 Escrow account; ownership in dispute. Royalty payments deposited in escrow pending litigation regarding ownership of land are not to be included in the lessor’s income for the years in which they would otherwise have been payable, but should be reported as income for the year in which the litigation is settled or the lessor’s right to the royalties is established in some other way. I.T. 1212 superseded. §1.451–1. (Sec. 451, ’86 Code.) Rev. Rul. 70-66, 1970-1 C.B. 114. 446.22 Exempt organization; beneficial owner of patents. Amounts received from licensees by an exempt organization, the legal and beneficial owner of patents assigned to it by inventors for specified percentages of future royalties, constitute royalty income that is excludable in computing unrelated business taxable income. Rev. Rul. 73-193 distinguished. §1.512(b)-1. (Sec. 512, ’86 Code.) Rev. Rul. 76-297, 1976-2 C.B. 178. 446.23 Exempt organization; patent development deductions. Patent development and management services fees deducted from royalties collected from licensees by an exempt charitable organization for distribution to beneficial owners of the patents is not within the exception for royalties provided by section 512(b) in determining “unrelated business taxable income” of the organization. Distinguished by Rev. Rul. 76–297. §1.512(b)-1. (Sec. 512, ’86 Code.) Rev. Rul. 73-193, 1973-1 C.B. 262. 446.24 Foreign personal holding company income. A nonresident foreign corporation was entitled to a percentage of patent royalties paid by an American licensee to the foreign owner of the patents. Held, nonresident was contractually entitled to a percentage share in the owner’s income, not an interest in the patents or royalties as such; the payments received from the licensee were not received from sources within the U.S. and were not royalty income. (Secs. 119(a), 502, ’39 Code; Secs. 543, 861, ’86 Code.) Hopag S.A. Holding de Participation et de Gestion de-Brevets Industriels, 14 T.C. 38, Acq., 1953-1 C.B. 4. 446.25 Foreign trademark; initial U.S. sale. <strong>Royalties</strong> for the use of a foreign trademark on products that are ultimately used in foreign countries are income from sources without the U.S. even though the initial sale of the articles took place in the U.S. §§1.861-5, 1.862-1. (Secs. 861, 862; ’86 Code.) Rev. Rul. 68-443, 1968-2 C.B. 304. 446.26 Income in respect of decedent; decendent’s contract. Royalty payments received by a taxpayer under a contract executed by her mother (now deceased) as executrix of the estate of her father constitute taxable income to the taxpayer. However, she is entitled to deduct that portion of the estate tax paid which is attributable to the inclusion in the widow’s estate of the right to receive such royalty payments. Clarified and distinguished by Rev. Rul. 60-227. §1.691(a)-2. (Sec. 691, ’86 Code.) Rev. Rul. 57-544, 1957-2 C.B. 361. 446.27 Income in respect of decedent; license arrangement; death of patent-holder. Where a contract between a patent owner and a manufacturer constitutes merely a “license” arrangement to manufacture and sell articles under the patent in return for the payment of royalties, and not a “sale,” royalty payments due and accrued under the contract at the date of the death of the inventor constitutes income in respect of a decedent. Royalty payments accrued after the date of death of the patent owner are ordinary income, includable in the gross income of the recipient. Rev. Rul. 57-544 clarified and distinguished. §§1.61-8, 1.691(a)-1. (Secs. 61, 691; ’86 Code.) Rev. Rul. 60-227, 1960-1 C.B. 262. 446.28 Invention; stockholders paid for use. A corporation was allowed to deduct the cost of royalties paid to its two controlling stockholders for the use of their invention after the stockholders had given the corporation an irrevocable royaltyfree license to use the invention with the understanding that suitable compensation would be agreed upon at a later date. (Sec. 23(a), ’39 Code; Sec. 162, ’86 Code.) Heathbath Corp., 14 T.C. 332, Acq., 1957-2 446.29 Mineral properties; interest retained. A grantor’s retention of a royalty interest payable out of mineral production is a retention of an economic interest, which makes the transaction incompatible with a sale; thus, lump sum payments received by him are ordinary income. Paul White decision not followed. §1.1231–1. (Sec. 1231, ’86 Code.) Rev. Rul. 63-120, 1963–1, C.B. 141. 446.30 Mineral properties; lump sum payment for rights. A lump sum payment received by the owner of land purportedly for fee simple title to all minerals in and under the land, but in conjunction with which he retained a royalty interest in any minerals produced from the land, is ordinary income and not proceeds from the sale of a capital asset. G.C.M. 27322 superseded. §§1.61-1, 1.1231-1. (Secs. 61, 1231; ’86 Code.) Rev. Rul. 69-352, 1969-1 C.B. 34. 446.31 Mineral properties; lump sum payment for rights; interest retained. The lump sum payment received for a 65 percent interest in the minerals in place is not subject to a depletion allowance under section 611. The payment is for the sale of a capital asset defined in section 1221 and entitled to capital gain treatment. §§1.611-1, 1.1221-1. (Secs. 611, 1221; ’86 Code.) Rev. Rul. 82-221 1982–2 C.B. 113. 446.32 Mineral properties; sale and leaseback with subsidiary. Where a parent corporation, for a price equivalent to book value, transfers mineral properties to a wholly owned subsidiary and leases back from the subsidiary for specified royalty payments in order to benefit from the allowance of both cost and percentage depletion, the transaction will be disregarded. §§1.61–3, 1.162-1, 1.611-1, 1.612-1, 1.613–1. (Secs. 61, 162, 611, 612, 613; ’86 Code.) Rev. Rul. 68-430, 1968-2 C.B. 44. 446.33 Nonresident alien; author; withholding. Royalty payments made by a domestic publisher to a nonresident alien author while visiting the U.S., or to his designated domestic bank or resident agent, are subject to income tax withholding.
Further, when payment is to a resident agent and the author’s status is unknown to the publisher the duty of withholding devolves upon the agent. I.T. 2524 superseded. §§1.861-5, 1.871-2, 1.1441-2, 1.6851-2. (Secs. 861, 871, 1441, 6851; ’86 Code.) Rev. Rul. 70-468, 1970-2 C.B. 171. 446.34 Nonresident alien; bank as tax agent; withholding. A domestic corporation is not relieved from the requirement to withhold tax at the rate of 30 percent from royalties paid to a nonresident alien by reason of the fact that the alien has appointed a domestic bank to act as his agent for purposes of paying his taxes in the U.S. O.D. 1087 superseded. §§1.871–1, 1.1441-4. (Secs. 871, 1441; ’86 Code.) Rev. Rul. 69-655, 1969-2 C.B. 168. 446.35 Nonresident alien; books and stories published in U.S. Payment received by a nonresident alien author from a domestic corporation under a contract granting the corporation the first American serial rights in his exclusive output of both long and short stories and the right to publish in the U.S. all his new books, but not prescribing in any manner what or when he is to write, are royalties from sources within the U.S. subject to withholding at the 30 percent tax rate. §1.871-1. (Sec. 871, ’86 Code.) Rev. Rul. 76-555, 1974-2 C.B. 202; Rev. Rul. 76-283, 1976-2 C.B. 222. 446.36 Nonresident alien; books printed in U.S.; withholding. Royalty payments made by a domestic corporation to a nonresident alien for books printed in the U.S. by the corporation and sold exclusively in a foreign country under that country’s copyrights are not taxable as income from sources within the U.S. and, therefore, are not subject to income tax withholding. I.T. 3296 superseded. §§1.861-5, 1.862-1, 1.1441-2. (Secs. 861, 862, 1441; ’86 Code.) Rev. Rul. 72–232, 1972-1 C.B. 276. 446.37 Oil and gas; information returns. Information return, Form 1099, required to be filed by the payers of oil and gas royalties, with respect to royalty payments aggregating $600 or more for a calendar year, must show the gross amounts due the royalty interest owners rather than the net amounts paid to such owners after withholding for various taxes levied by states. §1.6041-1. (Sec. 6041, ’86 Code.) Rev. Rul. 66-198, 1966-2 C.B. 488. 446.38 Oil and gas in place. If a royalty interest in oil and gas in place is used by the owner in his trade or business, it is not a capital asset but will be subject to the provisions of section 1231 if held for more than six months; if the royalty is held for investment, gain or loss on its sale is a capital gain or loss; and if the royalty is held for sale in the ordinary course of business, gain or loss on its sale is ordinary gain or loss. Rev. Rul. 55–526 superseded. §§1.1221–1, 1.1222–1, 1.1231–1. (Secs. 1221, 1222, 1231; ’86 Code.) Rev. Rul. 73-428, 1973-2 C.B. 303. 446.39 Oil and gas lease; interest received for service. A corporate promoter, an attorney, and an employee of a closely held corporation, receive overriding royalty interests for services provided in connection with the acquisition/development of oil and gas leases. Each has received a property interest, the fair market value of which is includible in gross income under section 83. §1.83–1. (Sec. 83, ’86 Code.) Rev. Rul. 83-46, 1983-1 C.B. 16. 446.40 Oil and gas lease; irrevocable trust for minors. Royalty income attributable to an undivided one-half of one-eighth nonparticipating royalty interest in an oil and gas lease, transferred to an irrevocable trust by a husband and wife for the benefit of their minor children, is includable in the trust’s gross income. However, any of the trust income used for the support or maintenance of the minors is included in the grantor’s gross income. §§1.61-1, 1.671-1. (Secs. 61, 671; ’86 Code.) Rev. Rul. 71-130, 1971-1 C.B. 28. 446.41 Oil and gas lease; royalty transferred in trust. The donative assignment to a trust, established for the benefit of a college, of an overriding royalty interest created from an oil and gas leasehold presently owned and retained by the grantor, is not an anticipatory assignment of income. The trust income will not be taxable to the grantor even though the term of the trust is less than the economic life of the overriding royalty, providing the grantor is not considered the owner of the trust. §1.671-1. (Sec. 671, ’86 Code.) Rev. Rul. 67-118, 1967-1 C.B. 163. 446.42 Oil and gas lease; undivided interest. No part of the royalty payments received by the lessor of an undivided interest in oil and gas producing properties, under a lease agreement providing that, from month to month, the royalty percentages could decrease or increase based on average daily gross production for the previous three consecutive month periods, is a production payment. §1.636-3. (Sec. 636, ’86 Code.) Rev. Rul. 76-34, 1976-1 C.B. 177. 446.43 Patent; paid majority stockholderpresident. A royalty paid by a corporation to its majority stockholder-president for the use of a patent on an article manufactured by the corporation is deductible as a business expense, if the amount is reasonable. O.D. 440 superseded. §1.162–11. (Sec. 162, ’86 Code.) Rev. Rul. 69-513, 1969-2 C.B. 29. 446.44 Patent; paid to nonresident alien by foreign corporation. An individual who is a citizen and resident of a foreign country with which the U.S. has no income tax convention licensed the U.S. rights on a patent to a Netherlands corporation that relicensed the rights to a U.S. corporation for use in the U.S. The patent royalties paid to the individual are subject to U.S. tax, and the Netherlands corporation is required to withhold the tax from the royalties. §§1.861-5, 1.871-7, 1.1441-1. (Secs. 861, 871, 1441; ’86 Code.) Rev. Rul. 80-362, 1980-2 C.B. 208. 446.45 Patent; rights assigned to wife. A husband paid Federal gift taxes on an absolute assignment to his wife of his right to receive royalties under a patent sales contract. Held, the transaction was a transfer of ownership, not an assignment of income, and the husband was not taxable on the income received by the wife. (Sec. 22(a), ’39 Code; Sec. 61, ’86 Code.) Franklin A. Reece, 24 T.C. 187, Acq., 1960-2 C.B. 6. 446.46 Patent; rights to trusts. The taxpayer transferred to irrevocable trusts, created for his wife and minor childern, the exclusive right, title, and interest in and to a patent application, receiving from the trusts a license to make, use, and sell the article covered in the application at a graduated royalty rate. The trusts were to continue until the children reached majority. The taxpayer retained no power to change the beneficiaries, direct the accumulation or withholding of income, or change trustees. Held, the trust income was not taxable to the taxpayer, and he could deduct the royalties paid under the license agreement as a business expense. (Secs. 22(a), 23(a), ’39 Code; Secs. 61, 162, ’86 Code.) John T. Potter, 27 T.C. 200, Acq., 1957-2 C.B. 6. 446.47 Patent; transfer; retention of interest. The mere retention of an interest resembling a royalty by an assignor or transferor of a patent, in a transaction which otherwise has the characteristics of a sale but does not come within the purview of section 1235, will not, in and of itself, prevent capital gains treatment. Mim. 6490 and Rev. Rul. 55-58 revoked. §§1.61-1, 1.1222-1, 1.1235-1. (Secs. 22(a), 117(a), ’39 Code; Secs. 61, 1222, 1235, ’86 Code.) Rev. Rul. 58-353, 1958-2 C.B. 408; Edward C. Myers, 6 T.C. 258, Roy J. Champayne, 26 T.C. 634, Leonard Coplan, 28 T.C. 1189, Acqs., 1958-2 C.B. 4, 6. 446.48 Personal holding company; oil and gas lease. Amounts received by a personal holding company under a lease agreement with a drilling company providing for the delivery to the lessor of a one-eighth part of the oil and gas produced and for the sale of such oil and gas to the lessee for a stipulated price are royalties for purposes of computing personal holding company income. §1.543-1. (Sec. 543, ’86 Code.) Rev. Rul. 73-332, 1973-2 C.B. 195. 446.49 Personal holding company; sub-processing contract; secret formula. Payments received by a corporation from a partnership whose three partners are equal owners of the corporation’s stock pursuant to a sub-processing contract containing a secret formula are royalty payments includable as personal holding company income. 1.543–1. (Sec. 543, ’86 Code.) Rev. Rul. 71-596, 1971–2 C.B. 242. 446.50 Publishers and literary agents; information returns. A publisher making royalty payments directly to an author, aggregating $600 or more in a calendar year, must file information returns showing the payments made to the author and the author’s identifying number. If payment is made directly to a literary agent in behalf of the author it must be reported as such, with the agent’s identifying number. In the latter case the agent must file information returns for the royalties received from the publisher showing the gross amount received, commission retained, and net amount paid over to the author, together with the author’s identifying number. Modified to provide that literary agents must report the gross amount or royalties received prior to the deduction of fees, commissions, and expenses. §§1.6041-1, 1.6109-1. (Secs. 6041, 6109; ’86 Code.) Rev. Rul. 65–129, 1965–1 C.B. 519; Rev. Rul. 67-197, 1967-1 C.B. 319. 446.51 Swedish convention; right to distribute motion picture films. A payment to a Swedish resident, corporation, or other entity for the right to distribute motion picture films in the U.S. is considered a royalty under Article VI of the U.S.-Sweden Income Tax Convention for Federal income tax purposes. Rev. Rul. 70-134, 1970-1 C.B. 359. 446.52 Swiss convention; net profits interest in oil and gas mineral property. Payments received by a Swiss corporation from its net profits interest in oil and gas mineral property located in the U.S. are not industrial and commercial profits within the meaning of Article II(1)(h) of the U.S.-Swiss Confederation Income Tax Convention but are rents or royalties taxable by the U.S. pursuant to Article IX(1) of the Convention. Rev. Rul. 73-419, 1973-2 C.B. 436. 446.53 Unpatented invention. Percentage payments the taxpayer received from a corporation to which he had transferred complete ownership of a perfected but unpatented invention were part of its purchase price and reportable as long-term capital gain, not ordinary income. (Sec. 117, ’39 Code; Sec. 1231, ’86 Code.) Franklin S. Speicher, 28 T.C. 938, Acq., 1958-2 C.B. 7.
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