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ARTICLE · 28 FEBRUARY 2024

The Taxman, Technology Litigation And Cavalier Settlement Structures

Gray Reed
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Intellectual property ("IP") is hugely important to businesses. Given that importance, IP owners must occasionally litigate against the unauthorized use of their technology.

United StatesIntellectual Property
Brian A. Clark, CPA
Brian A. Clark, CPA
Joshua D. Smeltzer
Joshua D. Smeltzer
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Intellectual property ("IP") is hugely important to businesses. Given that importance, IP owners must occasionally litigate against the unauthorized use of their technology. The costs of such litigation and appurtenant settlements implicate a host of federal income tax issues. Some IP litigants do not consider those tax issues at all, while others aggressively overplay their hand. This post provides insights regarding federal income tax issues related to IP (mainly patent1) litigation and settlements so that companies can know when they might have a tax issue and seek appropriate advice.

Tax Principles Regarding Patent Litigation Expenses

One of the difficulties with IP litigation is that no particular provision of the Internal Revenue Code (the "Code")2 controls. As such, taxpayers might consider the general business deduction statute (§ 162), production of income deduction (§ 212) and general capitalization rule (§ 263). The use of a particular Code Section is

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