IRS favorable developments continue for sales-based royalties

Favourable developments continue with respect to the tax treatment of sales-based royalties under section 263A which has been a significant issue for many pharmaceutical companies that pay sales-based royalties related to the right to make, use, and/or sell products based on patented biological or chemical know-how. As explained in more detail below, the Large Business and International division of the IRS (LB&I) issued field guidance instructing IRS agents not to challenge a taxpayer's treatment of sales-based royalties that is consistent with either current or proposed section 263A regulations.  

In addition, the IRS national office may be willing to grant favourable method changes allowing sales-based royalties to be excluded from ending inventory under the simplified production method, consistent with the proposed regulations.