Consumer product companies should analyze their treatment of minimum royalties under Section 263A after new IRS advice

Retail & Consumer Products Quickbrief

The IRS concluded in a recently released field attorney advice (FAA 20124401F) that minimum royalties paid for the use of licensed patents must be capitalized to ending inventory under Section 263A. The conclusions reached in the FAA could impact consumer product companies that incur trademark royalties associated with their products under agreements that require the payment of minimum royalties. As a result, consumer product companies are encouraged to analyze their royalty agreements to determine: (1) the type of royalties involved (e.g., minimum royalty, sales-based royalty) and (2) the proper treatment of those royalties for purposes of Section 263A.

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