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Contents : DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON D.C. 20224 OFFICE OF CHIEF COUNSEL April 7 2003 Number: Release Date: 200331002 08/01/2003 CC:ITA:5 POSTF-150119-01 UILC: 1341.02-00 MEMORANDUM FOR FROM: -------------------------------------------------------------------William A. Jackson Chief Branch 5 Income Tax and Accounting SUBJECT: Supplemental issues related to TAM-115287-01 This Chief Counsel Service Advice responds to your request for additional guidance regarding issues raised by the Taxpayer related to our previous technical advice memorandum TAM-115287-01 (TAM 200310001). --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------. Chief Counsel Service Advice is not binding on Examination or Appeals and is not a final case determination. This document is not to be used or cited as precedent. DISCLOSURE STATEMENT Chief Counsel Advice is open to public inspection pursuant to the provisions of section 6110(i). The provisions of section 6110 require the Service to remove taxpayer identifying information and provide the taxpayer with notice of intention to disclose before it is made available for public inspection. Sec. 6110(c) and (i). Section 6110(i)(3)(B) also authorizes the Service to delete information from Chief Counsel Advice that is protected from disclosure under 5 U.S.C. 552 (b) and (c) before the document is provided to the taxpayer with notice of intention to disclose. Only the National Office function issuing the Chief Counsel Advice is authorized to make such deletions and to make the redacted document available for public inspection. Accordingly the Examination Appeals or Counsel recipient of this document may not provide a copy of this unredacted document to the taxpayer or their representative. The recipient of this document may share this unredacted document only with those persons whose official tax administration duties with respect to the case and the issues discussed in the document require inspection or disclosure of the Chief Counsel Advice. LEGEND: Taxpayer District Court Patent Holder Unit Year 1 Year 3 Year 8 Year 11 Year 15 Year 17 Year 20 Amount $1 Amount $2 Amount $3 Amount $4 Amount $5 Amount $6 Amount $7 3 Amount $8 Month 1 ISSUE Whether Taxpayer is eligible for the benefits of section 1341 for the payment of damages in a patent infringement lawsuit. CONCLUSION Taxpayer is not eligible for the benefits of section 1341 for the payment of damages in a patent infringement lawsuit. FACTS From Year 1 to Year 17 Taxpayer produced and sold over ------------------ ----------- ---- ------ ------------------------------------------------------------------------------------------------- amounting to sales in excess of Amount $1. In Year 8 Patent Holder filed a patent infringement lawsuit in District Court. In its lawsuit against Taxpayer Patent Holder alleged that Taxpayer s manufacture and sale of the Units infringed certain patents of Patent Holder and therefore violated 35 U.S.C. section 271. Under 35 U.S.C. 271 (2001) whoever without authority makes uses offers to sell sells or imports any patented invention infringes the patent. Under 35 U.S.C. 284 (2001) damages for patent infringement are an amount adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer. The District Court determined that Taxpayer did not infringe upon Patent Holder s patents. On appeal the District Court s ruling was reversed. Ultimately Taxpayer was ordered to pay Patent Holder the sum of Amount $2 constituting damages and pre-judgment interest in the respective amounts of Amount $3 and Amount $4. ------------------------------------------------------------------------------. In the fiscal year ending Month 1 Year 20 (FYE Year 20) Taxpayer paid the amount awarded to Patent Holder. Taxpayer claims that the damages paid to Patent Holder are based upon a reasonable royalty. For FYE Year 20 Taxpayer allocated the damages on an annual basis to tax years Year 3 through Year 15 and computed its income tax liability by applying section 1341(a)(5) for the tax years Year 3 through Year 11 the years of the infringement for which the rate applicable for FYE Year 20 was different from the rates applicable for those years. In applying section 1341 Taxpayer determined its tax liability for FYE Year 20 to be Amount 4 $7. Without the benefit of section 1341 Taxpayer s liability for FYE Year 20 would have been Amount $8. In the FACTS section of Taxpayer s Summary of Position Concerning Applicability of Section 1341 to Patent Infringement Costs (Taxpayer s Summary) Taxpayer states as follows: The -------------------- assig

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