Discussion:Website Sale and 1221(a)(3)(A) - a taxpayer whose personal efforts created such property

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Discussion Forum Index --> Advanced Tax Questions --> Website Sale and 1221(a)(3)(A) - a taxpayer whose personal efforts created such property


Discussion Forum Index --> Tax Questions --> Website Sale and 1221(a)(3)(A) - a taxpayer whose personal efforts created such property

Terry Oraha (talk|edits) said:

8 March 2014
Hi

I'm wondering if client is eligible for capital gain versus ordinary gain on the sale of his website.

A taxpayer created and sold a website that is a forum. Obviously what he authored is the skeleton, but the site gets lots of traffic and most of the content is added by the users. I'm thinking about the sale and how if someone created a movie they usually create the whole movie; it's generally not created in part by the audience. Do you think there is any room to allocate between ordinary the extent self-created and capital gain content provided by users?

The terms and conditions of the site provide that any copyright material put on the website by users becomes the property of the website. Also everything else put on by users copyrighted or not becomes property of the site. This kind of makes me infer that the sale of the site is not entirely self-created.

Or do you think the sale of the site is written computer code that makes it website work. I can follow that argument, but when I think about TA, and the value of any site being linked to the amount of traffic it gets, it seems obvious to me that the value of TA comes from its participants not the author of the computer code. Any thoughts.

Thanks,

Terry

Spell Czech (talk|edits) said:

8 March 2014
Are we trying to say that there's a distinction here between the *property* and the *value* of the property, such that upon sale we need to ascribe *value* to the taxpayer's contribution to the property, and also figure out what part of the value the "contributors" to the forum - i.e. not the taxpayer - created? This could easily lead to a favorable result, but I don't find that distinction in the Code or the related Regs.

Ooh ooh ooooh... [à la Horshack (Horschach?)]: Now's my chance to say what I've always wanted to say, every time I hear a lawyer say it: Are we perhaps entertaining a distinction without a difference?

Terry Oraha (talk|edits) said:

8 March 2014
a distinction without a difference?

You're making me wonder if perhaps you may know something about this and forcing me to look up my own questions.


PLR 9335017

Held, the tapes of interviews by one of petitioners with noted scientists, which he donated to the Bancroft Library of the University of California, are property of a type excluded from the definition of capital assets by sec. 1221(3), I.R.C. 1954, and for this reason, the deduction to which petitioners are entitled because of the donation of these tapes to a charity is limited to petitioners' cost or other basis in the tapes by sec. 170(e)(1)(A).....Although petitioner obtained signed copyright release forms from the interviewees in the tapes, it was his understanding that the copyright laws did not protect either his or the interviewees' interests in the tapes......The noted scientists who are the interviewees generally do not charge for giving their interviews, and the scientists who are the interviewees in the 62 hours of tapes given by petitioner to the Bancroft Library were not paid by petitioner, or anyone else, for the contribution they made to the production of the tapes.


Does that reinforce what you were thinking?

Terry Oraha (talk|edits) said:

8 March 2014
Anyway I'm way too busy and it looks like there is no matter on how the website contributions came about.

Let me know if you think of something. Thanks!

Ckenefick (talk|edits) said:

8 March 2014
What is the nature of the "website?" Did he built it custom for someone? Did he built it for himself, use it for a while, then someone came along and made an offer? Did he ever generate any revenue from it? Is it a porn site?

Nilodop (talk|edits) said:

8 March 2014
If you keep thinking this through, you might even think that the value added to the website by the users becomes income at the time it is added. But that would be over-thinking, because the posts by the users are "contributed". It says so right there in that ruling. Maybe they are capital contributions by non-shareholders, but so what? If 1221(a)(3) is your concern, I'd say the website does not fit. It is a capital asset.

Terry Oraha (talk|edits) said:

8 March 2014
Lenny he is/was a sole proprietor.

Otherwise the site is a lot like TA. He created it, it was used as TB on schedule C for multiple years, it was profitable, He and about three others were moderators, its a discussion forum a lot like TA, someone came along and made him an offer.

I don't see how it can be capital gain after Spell got me to look into the history of "personal efforts" .

Ckenefick (talk|edits) said:

8 March 2014
Do you see how it could be a Sec 1231 asset?

Terry Oraha (talk|edits) said:

8 March 2014
yeah except that its specifically excluded from being a 1231 asset for the same reason its not a capital asset.

Terry Oraha (talk|edits) said:

8 March 2014
What's your angle, if any?

Terry Oraha (talk|edits) said:

8 March 2014
1231(b)(1)(C) doesn't allow anything described in 1221(a)(3)(A) to be a 1231 asset.

Ckenefick (talk|edits) said:

8 March 2014
Why is it specifically excluded from 1221 and 1231. And before you answer, let me tell you what I did a few years ago: I built my own furniture for use in my business. I am depreciating it over 7-years. I just sold some the other day for more than my original basis (and more than my adjusted basis).

Terry Oraha (talk|edits) said:

8 March 2014
1221(a)(3) kicks out of capital asset status what would otherwise be a capital asset; are you saying that a3 does not kick out of capital asset status what would otherwise be a 1231? and if a3 did not apply then 1231 remains?

Terry Oraha (talk|edits) said:

8 March 2014
I think your steering me toward the question "Is a self created intangible a 197 asset?"

Ckenefick (talk|edits) said:

8 March 2014
1221(a)(3)(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—

1221(a)(3)(A)(A) a taxpayer whose personal efforts created such property,

1221(a)(3)(B)(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

1221(a)(3)(C)(C) Law Analysis a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

First, just so I'm clear: Are you suggesting that a website, or this portal/forum, is a "copyright" or is "similar property?"

Terry Oraha (talk|edits) said:

8 March 2014
Yes

Ckenefick (talk|edits) said:

8 March 2014
How were the website development costs treated for tax purposes?

Terry Oraha (talk|edits) said:

8 March 2014
Expensed.

Ckenefick (talk|edits) said:

8 March 2014
http://mcgladrey.com/content/mcgladrey/en_US/what-we-do/services/tax/lead-tax/mergers--acquisitions-and-restructurings/separately-identifiable-intangible-assets-tax-opportunities-and-traps.html

And also see the PLR referenced in Footnote #4.

Nilodop (talk|edits) said:

8 March 2014
I just don't see a website as fitting into the category "...a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property,…". There may be some creativity involved. There may be one or more copyrights involved. But a website is much more than all of that.

Ckenefick (talk|edits) said:

8 March 2014
I agree. But I don't know the copyright law on things like websites all that well. There was a pretty good article on it, on the web somewhere. And, we've batted around the "similar property" language before.

One thing is for use: The website is not inventory and is not held for resale. This is not some guy building websites for customers. It was not produced for a customer. It was produced/developed for in-house use, in the taxpayer's trade or business.

Terry: How does the website make money? Is it a subscription-based service, like TaxAlmanac? (You have paid your dues, right?)

Nilodop (talk|edits) said:

8 March 2014
Discussion:Sale of a website - capital gain or ordinary income? In this thread (2007), Dennis felt it was ordinary income because it was self-created. Complete with the musical notes symbol.

Ckenefick (talk|edits) said:

8 March 2014
I don't have time to look up all of Dennis' cites that led to his conclusion.

Nilodop (talk|edits) said:

8 March 2014
Of which there was none.

Ckenefick (talk|edits) said:

8 March 2014
Was none or were none. Is "none" plural?

Terry Oraha (talk|edits) said:

8 March 2014
I just don't see a website as fitting into the category "...a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property,…".

1221 (a)For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—


1221(a)(3)(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—


1221(a)(3)(A)(A) a taxpayer whose personal efforts created such property,

1221(a)(3)(B)(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

1221(a)(3)(C)(C) Law Analysis a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

what about the bolded item for website?

Terry Oraha (talk|edits) said:

8 March 2014
I think Dennis is right. We're all right, generally, we just don't all have musical notes...

Ckenefick (talk|edits) said:

8 March 2014
Yeah, we get it. We just don't think it's a copyright, per se, or property similar to the other things listed.

Ckenefick (talk|edits) said:

8 March 2014
Here's the article I referred to above.

http://exactcpa.blogspot.com/2013/03/taxation-of-computer-software-sales.html

Terry Oraha (talk|edits) said:

8 March 2014
That 1235 patent idea sounds like a loophole. This guys probably young enough to do this again. I think ordinary income is possible with planning.


Thanks,

Ckenefick (talk|edits) said:

8 March 2014
Not sure I follow, "Ordinary Income is possible with planning."

Ckenefick (talk|edits) said:

8 March 2014
And, keep in mind, that article is dealing with the sale of Software, so I'd be very careful in expanded all of the concepts to your client's website.

Terry Oraha (talk|edits) said:

8 March 2014
ordinary! no wonder, I meant cap gain.

"careful" is one of my many middle names. I'm going to try to get my hands on them IP treatises he was referring.

Terry Oraha (talk|edits) said:

8 March 2014
Lol, Ordinary income is possible when the clients walks in and says guess what I sold my website last month!

Dennis (talk|edits) said:

8 March 2014
I wonder about the position that user created content has added value. Riley certainly added a lot of value here.

Ckenefick (talk|edits) said:

8 March 2014
Ok, now that we've beaten this around, here's what I think: I think the argument you make in the OP is a very good one. First, I don't think the copyright issue is a slam dunk for the IRS, but let's agree for now that we're dealing with a copyright and a copyright only. As such, it would come down to the "whose personal efforts created such property."

Consider TaxAlmanac as copyrighted property. That property expands each and every day as content is added, making it more valuable. Yes, the personal efforts of your client created the property, as that property existed when it was created (i.e. the skeleton), but your client's efforts did not create the property as we know it when it was sold.

Part of the problem here is IP becoming a big part of commerce and the economy. It is new. And, another part of the problem is the word "such" as in "such property" or "such residence."

To me, your argument is persuassive. When it comes to an author and a book, or an artist and a painting, we don't confront the issue that we confront in your client's case. Those examples are clear: The author wrote the book and the painter painted the painting. (Although I will admint, an editor would have been involved in the case of the author).

Ckenefick (talk|edits) said:

8 March 2014
I wonder about the position that user created content has added value.

Me too. The one case that's out there basically says, "If it can be protected under copyright law, it fails as a capital asset."

I think that is somewhat of a quick and easy answer, but maybe not the right one.

Dennis (talk|edits) said:

8 March 2014
The TAXALMANAC.ORG WEBSITE USE AND CONTRIBUTION TERMS state

"You irrevocably grant a non-exclusive, perpetual, worldwide, unlimited, royalty-free, sublicenseable, transferable, assignable license, without a right to ever terminate such license, to Intuit Inc. to copy, modify, distribute, publish and otherwise use and commercialize Your edits and other contributions in any manner now known or in the future discovered. You are free to refrain from ever submitting any contributions. If You decide to submit contributions, You remain free to continue to use them otherwise as if You had never submitted them to the Site. However, You cannot terminate this license once You have submitted contributions to the Site."

Intuit is granted a license, but it absolutely cannot copyright our contributions.

Nilodop (talk|edits) said:

8 March 2014
"None" - if it means "not one" it takes a singular verb; if it means "not any", plural. I think.

Ckenefick (talk|edits) said:

8 March 2014
Thanks Lenny. Wow, that's interesting, Dennis. And, I was laughing quite hard when I read it. It really is funny.

I guess at this point, we distinguish between what's copyrighted and what's not. And that's one reason I'm thinking this copyright issue is not a slam dunk for the IRS (and, it might not even be a lay up).

Certainly, the stuff added by Intuit - the links, the logo, the headers, the tabs - all that stuff that involves printed matter that Intuit put on there is copyrighted, by Intuit. Is that right?

And then, everything users put on there is the "property" of Intuit (in a way, by virtue of the perpetual license), but is not copyrighted material as to Intuit. Is that right?

In my last question, I phrased it that way because Terry's client uses that language on his site: OP says that user contributions become "property" of OP's site. I think Dennis is saying that that is debatable. Not really owned by OP taxpayer, but OP taxpayer may have a perpetual license.

Nilodop (talk|edits) said:

8 March 2014
Copyright.gov says: "Copyright protection subsists from the time the work is cre­ated in fixed form. The copyright in the work of authorship immediately becomes the property of the author who cre­ated the work. Only the author or those deriving their rights through the author can rightfully claim copyright." So the above summary/interpretation by Ck seems right to me.

So, what exactly is being sold when a website of this nature is sold? (I am assuming the OP's client's site is similar to TA). Surely all the design and submissions (if any) by the client are copyrighted and being sold, but that is not the main value. The content may be the main value, and it too is being sold. (The content, while still the contributors' copyrighted property, is under an assignable and perpetual license to the client.) If the content is property, we need to know whether its basis is determined by reference to the basis in the hands of the contributor. (That basis is no doubt zero). I think the content must be property, because that's what the copyright law refers to (assuming copyright.gov is accurate - I did not look at the actual law).

But is anything else being sold? Goodwill? Domain? Trademark? Code? Databases? Customer lists?

Terry Oraha (talk|edits) said:

9 March 2014
The closing documents speak primarily to the website and all rights associated with it. There is a schedule of listed assets included in the sale, but these are things like the a facebook account (to manage the websites facebook presence), there is an assignment of a contract/revenue stream (the website generates ad revenue), a few domain names, but nothing major. I'll have to double check this seems to be the only way to carve-out. Now that I think about it that ad revenue contract is the asset I'm looking for, the thing of value, that is not self created by the taxpayer. And since his revenues are known he should be able to put a number to it. The site and everything was sold for about 350k, all intangibles associated with the website and a noncompete. This is great. Also whether its copyright, or the ad revenue contract, the documents don't really get too specific because it all intangible on the from 8594 thanks for directing me to look at the schedules in the back of the closing.

huh, I think you guys helped me out, thanks.

Now just to confirm I did some research and I don't think my original theory about how the author didn't create the content will work, and I'll tell you why. He reviews and moderates the site content. In a somewhat different context 1.1221-(c)(3) provides that

For purposes of this paragraph, in general, property is created in whole or in part by the personal efforts of a taxpayer if such taxpayer performs literary, theatrical, musical, artistic, or other creative or productive work which affirmatively contributes to the creation of the property, or if such taxpayer directs and guides others in the performance of such work. A taxpayer, such as corporate executive, who merely has administrative control of writers, actors, artists, or personnel and who does not substantially engage in the direction and guidance of such persons in the performance of their work, does not create property by his personal efforts. However, for purposes of subparagraph (2) of this paragraph, a letter or memorandum, or property similar to a letter or memorandum, which is prepared by personnel who are under the administrative control of a taxpayer, such as a corporate executive, shall be deemed to have been prepared or produced for him whether or not such letter, memorandum, or similar property is reviewed by him.


You see he has the administrative controls on the website content, and he and a few others moderate the site. I have to admit I think they are all authors, but only the seller had an ownership interest.

Either way I'm just rambling now, but the key is to determine the identifiable assets. Thanks for all your help!

Ckenefick (talk|edits) said:

9 March 2014
I hear you with your reg citation. The asset in question here is uniquely unique. It's a function of technological advancement, something the Code hasn't quite caught up with yet.

Now, if I may throw in a wrinkle. Do note the Code says this:

1221(a)(3)(A) a taxpayer whose personal efforts created such property

While the Reg says this:

For purposes of this paragraph, in general, property is created in whole or in part by the personal efforts of a taxpayer

There is a difference here, in my view, with the addition of the "in whole or in part" language. And, I don't know what is meant by that word "affirmatively."

And, I'm not sure if the parts you underlined deal with copyrights. I agree with Dennis that your client doesn't have a pure interest in the content submitted by users. But, a perpetual license is tantamount to ownership. If you have a client that purchases a perpetual software license, for example, he's bought the asset for tax purposes and it has to be capped. So, if that is the real value here - the perpetual license to material that is owned by the users - I'm not so sure your underlines apply.

"Copyright protection subsists from the time the work is cre­ated in fixed form. The copyright in the work of authorship immediately becomes the property of the author who cre­ated the work. Only the author or those deriving their rights through the author can rightfully claim copyright."

This is absolutely correct. Very strong law in favor of the artist/writer...immediately, and without even putting the little (c) on something. It is even true with "works for hire." Of course, the artist/writer can legally give up those rights if he so chooses.

Dennis (talk|edits) said:

9 March 2014
I vote for allowing the taxpayer to decide how much of the value added content he takes responsibility for. Moderating is basically a function intended to attract contributors. Reviewing (and perhaps deleting offensive or spam submission) is hardly creating content either in whole or in part. If taxpayer actually edited and changed contributor content you have a point.

Note that under this site's agreement, Intuit is entitled to sell publishing rights for selected contributed content to a third party.

Nilodop (talk|edits) said:

9 March 2014
Maybe I'm reaching too hard, but I think the regs. provide support for the notion that there may be an allocation among the assets sold. I noticed the "in whole or in part" language, too. It does not come from the Code. To me, it opens the door wider to the idea that part of the value of the copyright came from the client, but not al of it; maybe not even most of it...

Ckenefick (talk|edits) said:

9 March 2014
To me it opens the door to the IRS maybe trying to argue that if just 1% of the "property" was "created" by the personal efforts of the taxpayer, or 1% of the value stems from the personal efforts of the taxpayer, then the entire property is tainted. Maybe.

Nilodop (talk|edits) said:

9 March 2014
Any concern regarding 1221(a)(3)(C), to which I alluded above, saying If the content is property, we need to know whether its basis is determined by reference to the basis in the hands of the contributor? My concern would be that the value ascribed to content at the time of sale was created by the contributors of the content, the rights (perpetual license) to that content have been transferred to OP's client, and therefore are part of the copyright property being sold, resulting in ordinary income.

Ckenefick (talk|edits) said:

9 March 2014
I don't know if I'd agree with that. Typically, when you see that language, we're talking about a gift or some other carryover basis transaction like 351, 721, etc. The fact is, the contributor still "owns" his own contributions as he holds the true copyright on said material. The Forum's basis is determine by what it paid for said content: $0.

Nilodop (talk|edits) said:

9 March 2014
The contributors did not sell the content to the website for zero consideration (or did they?). They either made a gift of it, or contributed it to capital (if there was an entity with capital).

Ckenefick (talk|edits) said:

9 March 2014
I don't think they did anything like that. I'm not making a gift as I write. And if I am, it is to all the other users. So, you're all very welcome for that! LOL.

Here's the lingo:

a taxpayer for whom such property was prepared or produced,

I can see your point, Lenny, and you might be right. The Mcveigh papers were subject to this rule.

But, for one thing, we get into the letter, memorandum, similar property issue. It isn't totally clear to me that a forum wherein users contribute content would fit the mold. Again, Tax Code not keeping pace with society.

And second, even though the rights to user contributions might vest in the Forum/Forum owner, I'm not so sure that users intend for their contributions to be a one-way street, going only to the forum/forum owner. I think their intent is to share their content/ideas/thoughts, in real time, with other users. As such, the forum is merely the platform with which to achieve that objective. To hold otherwise would mean we'd have content going from user to Forum/Forum owner and then a dissemination by Forum/Forum owner to all other users. It just doesn't seem to operate that way, despite the moderation involved.

Ckenefick (talk|edits) said:

9 March 2014
From RR 75-342:

A taxpayer, a member of the United States Congress, has accumulated numerous bound volumes of the Congressional Record during his tenure in office. The taxpayer is now considering the disposition of these volumes and desires to ascertain whether they are literary compositions, letters or memorandums, or similar property, within the meaning of section 1221(3) of the Internal Revenue Code of 1954.

Held, the bound volumes of the Congressional Record accumulated by the taxpayer are not literary compositions, letters or memorandums, or similar property, within the meaning of section 1221(3) of the Code.

Spell Czech (talk|edits) said:

9 March 2014
"The contributors did not sell the content to the website for zero consideration (or did they?)."

I'm gonna go with "or did they?": In consideration of the opportunity to post his stuff on the forum, the contributor has agreed to make an assignment of a perpetual license to his material. Quid pro quo: consideration. Yeah, no money changed hands, but since when is money a sine qua non of consideration? Quod erat demonstrandum. IANAL, but you gotta love that Latin stuff.

Ckenefick (talk|edits) said:

9 March 2014
Yeah, a barter if you will. No money changed hands as you say. We each value our individual contributions at $0.

Dennis (talk|edits) said:

9 March 2014
What you cannot get away from is that whatever rights Intuit has to my contributed content, they only restrict my rights with respect to their actions. The copyright is mine.

You can take the position that rather than creating "in whole or in part", costs of moderating, etc. are an addition to basis that cannot be expensed. There really has to be a distinction between actions to create and actions to attract content.

Which brings us to the question of goodwill. You attract a Riley and his presence attracts others.

Nilodop (talk|edits) said:

9 March 2014
OK, a barter of sorts. Quid pro quo. So the content's basis to the OP's client is not determined by reference to its basis in the gads of the contributors. Zero either way, but not within 1221(a)(3)(C). That's a good thing.

Ckenefick (talk|edits) said:

9 March 2014
One of those PLR's I cited (see the McGladrey article) stood for the proposition that, if you could figure it out, an intangible could be divided into two. The situation was customer-based intangibles. Taxpayer said he could prove that he could segregate value between (1) those that were purchased and (2) those that were self created. He wanted a ruling that he could segregate. The context was 1245 recapture. If we lump as one, taxpayer would have had more recapture. If we can separate them, 1245 recapture is minimized.

Terry Oraha (talk|edits) said:

10 March 2014
though the rights to user contributions might vest in the Forum/Forum owner, I'm not so sure that users intend for their contributions to be a one-way street, going only to the forum/forum owner. I think their intent is to share their content/ideas/thoughts, in real time, with other users. As such, the forum is merely the platform with which to achieve that objective. To hold otherwise would mean we'd have content going from user to Forum/Forum owner and then a dissemination by Forum/Forum owner to all other users. It just doesn't seem to operate that way, despite the moderation involved.


Right in a lot of ways the website owner is just recording a conversation among users. Do you guys remember that PLR I posted way at the top after Spell first posted. Its about a guy who interviewed scientists. The scientists gave their interviews free of charge. And that guy was still the creator of copyrightable property. That suggest to me that the website author who wrote a code for a website that records and compiles content and commentary from users could be tantamount to making two copyrightable properties. One the code for the website, and two recording the content and commentary. That's just as if the interviewer were to create the tape recorder and record the interviews, except with the website code we're talking about two copyrightable properties.

Furthermore, I'll tell you this. I need time, and I don't have it right now, but there does seem to be a possibility for allocation. I've come across a lot of very unfavorable stuff though, and some favorable too, but I don't have time to post it all, and I still need to process it. Unfortunately the Senate committee reports and the treasury regulations both seem to point to a history of those who will be deemed to be "creators" being broadly construed. And what Chris writes about the law not being caught up enough is entirely relevant.

Ckenefick (talk|edits) said:

10 March 2014
Isn't a big part of the letters, interviews, memorandums, etc. issue that the "stuff" in question is being prepared for and presented to the person that will do something with it? In the McVey case, the files, documents, etc. were given specifically to the attorney who requested them...and that attorney later donated them.

In your Forum case, I don't see users making contributions to the owner of the Forum. I see the users making direct contributions directly to other users. But, of course, the owner of the Forum reaps all the value from the ever-so-generous user contributions. Quite a business model if you ask me. Does that change things? I don't know.

And, maybe we're getting bogged down in case law, PLR's, etc.

These cases are very tough when we're getting at "what is property," because property is just a bundle of rights. That's what gives it value, the rights.

Nilodop (talk|edits) said:

10 March 2014
Let's fictionalize Facebook. Assume a college student, all alone, came up with the idea and created it and put it out in cyberspace. HIs sole interest in life is being a geek, so legal, accounting, and tax advice have never entered his mind. Instead, he simply owns it as a sole proprietor. It grows to the size and value it is today. He sells it. Is all his gain taxed as ordinary income? Or is there value ascribable to other content? And, if it is all ordinary because of the copyright issue, then why wouldn't the real-life Zuckerberg gain on sale of Facebook stock be ordinary?

Ckenefick (talk|edits) said:

10 March 2014
Everything was good until that last sentence, Lenny. You went overboard a little. Had OP taxpayer contributed the "asset" to a C-corp and then sold the C-corp stock, it's not the same "such property." And, we used to have code section 341, but we do not anymore.


Nilodop (talk|edits) said:

10 March 2014
You are absolutely right, and, as I am sometimes wont to do, I didn't stop to read it carefully.

I miss 341, especially (e).

Terry Oraha (talk|edits) said:

10 March 2014
Ownership of Content
The Site is protected by copyright as a collective work and/or compilation, pursuant to U.S. copyright laws, international conventions, and other copyright laws. You may not modify, publish, transmit, participate in the transfer or sale of, reproduce (except as permitted in this Agreement for the use of Services), create derivative works based on, distribute, perform, display, or in any way exploit, any of the content located on the Site ("Content"), materials, or Services in whole or in part. You may download or copy the Content, and other items displayed on the Site for download, for personal use only, provided that you maintain all copyright and other notices contained in such Content. You will not store any significant portion of any Content in any form. Copying or storing of any Content for other than personal, noncommercial use is expressly prohibited without prior written permission from ...XXXX, or from the copyright holder identified in such Content's copyright notice. By submitting content, which shall include your member name, to any "public area" of Site, including message boards, forums, contests and chat rooms or by submitting content for transmission to a third party, you grant ...XXXX, its affiliates, and the parties to whom such content is addressed a royalty-free, perpetual, irrevocable, non-exclusive right (including any moral rights) and license to use, reproduce, modify, adapt, publish, translate, create derivative works from, distribute, communicate to the public, perform and display the content and any copyright rights, trademark rights, and other intellectual property rights contained therein (collectively, the "Rights") (in whole or in part) worldwide and/or to incorporate it in other works in any form, media, or technology now known or later developed, for the full term of any Rights that may exist in such content. You also warrant that the holder of any Rights, including moral rights in such content, has completely and effectively waived all such Rights and validly and irrevocably granted to you the right to grant the license stated above. You also permit any user to access, display, view, store and reproduce such content for personal use. Subject to the foregoing, the owner of such content placed on Site retains any and all Rights that may exist in such content. 


That's from the site. I'm going with an allocation based on the predominant value of the site coming from the users grant of their royalty-free, perpetual, irrevocable, non-exclusive right to the website via user contributions, and because the sites value derives from the habit of people to frequent the site and add content, which very well could also be self created goodwill.

Nilodop (talk|edits) said:

10 March 2014
"Moral" rights? What are they?

Nilodop (talk|edits) said:

10 March 2014
Here they are http://cyber.law.harvard.edu/property/library/moralprimer.html

Nilodop (talk|edits) said:

11 March 2014
Everything was good until that last sentence, Lenny. You went overboard a little. Had OP taxpayer contributed the "asset" to a C-corp and then sold the C-corp stock, it's not the same "such property." But, continuing my Facebook fiction, if Facebook (the corporation that got the copyright from Zuckerberg, sells its assets (or its stock is sold in a taxable deal with a 338(h)(10) election), then the question we are dealing with in this thread becomes very much on point, as does Terry's above conclusion.

Here is part of Facebook's terms, etc. "For content that is covered by intellectual property rights, like photos and videos (IP content), you specifically give us the following permission, subject to your privacy and application settings: you grant us a non-exclusive, transferable, sub-licensable, royalty-free, worldwide license to use any IP content that you post on or in connection with Facebook (IP License). This IP License ends when you delete your IP content or your account unless your content has been shared with others, and they have not deleted it."

Terry Oraha (talk|edits) said:

11 March 2014
This has been a very good learning experience for me so far. I think Zuckerberg will be okay after his IP attorneys put their heads together. The real hard part for me in this area is not the code and regs it's identifying the property. In the beginning I was thinking of the website as an intangible, as stated above more than once its a bundle of rights, next the important question is, so what's the valuation of what's there. I think Dennis too has pretty much had this stuff thought through pretty early on in the discussion.

And moral rights, I looked that over too, that's interesting, good to know Lenny, Thanks.

Ckenefick (talk|edits) said:

11 March 2014
Dennis is the one that said it was Ordinary Income.

Anyway, I find these intangible property situations to be very complex. You run into this across the board with these things: Self-created, acquired by purchase (197, 263), contributed to entities (351, 721), amortization (197 + other sections), disposition by sale (character of gain, 1245 issues), disposition by distribution, disposition by 1031 exchange (wow), etc. Of course, things are complicated when isolated intangibles are at play and when multiple intangibles are at play. It's across the board.

I think that PLR explained by McGladrey stands for a lot. It stands for the proposition that if you sell a single intangible, that might go by one name, it can nonetheless be bifurcated. But take what you want from that PLR as it dealt with 1245. But if you put some numbers to it, I think it is pretty obvious that the seller had no intention of treating the "self created" stuff, that had been bifurcated off, as ordinary income. If he did, he wouldn't have requested the ruling.

if Facebook (the corporation that got the copyright from Zuckerberg, sells its assets (or its stock is sold in a taxable deal with a 338(h)(10) election), then the question we are dealing with in this thread becomes very much on point, as does Terry's above conclusion.

I agree. Sec 351 would have governed the incorporation transaction, despite Zuckerberg probably having a $0 basis in his intangible. Gain is not recognized. (Makes you wonder though: Should we trigger gain?)

Most of guidance on the contribution issue is with respect to 721, not 351. And, in a lot of cases, these intangibles simply just get ignored. Since they have no tax basis, they typically do not get booked up upon organization, although if were talking about a partnership, they often do get booked up for 704/704c purposes (assuming one guy contributes the intangible and another guy contributes cash).

I can bet you that in the case of Zuckerberg, there was a lot of legal work done with respect to the IP, including the IP contributed by Zuckerberg. Yes, legal work, to convey ownership from him personally to the corp - stuff the IRS might be interested in, actually, along with the cap table. But again, something most of us don't think about in the typical small business setting.

And, these intangibles become much more in the mix when a new partner buys in for cash and we have a revaluation and reverse 704c allocations. But for the most part, in a small business setting, especially with one shareholder, we debit cash and credit capital and that's the end of it...although it is highly likely that intangibles have been contributed...intangibles that would represent "property" under the 721 guidance.

Terry Oraha (talk|edits) said:

11 March 2014
Chris,

You have been very helpful and I always enjoy reading your post. I think I may be ready to take a closer look at that McGladrey post. Right now I was thinking that somebody may have intentionally failed 351 on the Zucherbergs incorporation of the site. Idk, if not it would be a great case to litigate this issue. However, the more I think about it I'm now feeling more comfortable about the notion that these websites have a good amount of goodwill. If 100s of millions of people go to your website everyday, that shouldn't anything to do with your copyrights (unless that's why they go), however, when the site functions as gathering places a lot like bars, for entertainment, and community, I think that sounds more like goodwill.

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