Expenses paid or incurred by a taxpayer in obtaining foreign patents on inventions covered by United States patents and patent applications developed and owned by other persons are not deduc­tible under section 174(a) of the Internal Revenue Code of 1954 as research or experimental expenditures.

Rev. Rul. 66-30

Advice has been requested whether a taxpayer may deduct, under section 174(a) of the Internal Revenue Code of 1954, relating to research and experimental expenditures, amounts spent in obtaining foreign patents on inventions covered by United States patents and patent applications owned and developed by persons other than the taxpayer.


The taxpayer in this case enters into agreements with holders of United States patents and patent applications giving to tile taxpayer the right to obtain and exploit the foreign rights in the inventions owned by the other parties to the agreements. The taxpayer and the owner of the United States patent share equally in any funds collected from licensees in foreign countries or otherwise derived from the exploitation of the foreign patents.

The taxpayer applies for and obtains foreign patents and rights in its own name and not in the name of or as licensee of the owner of the United States patents. The patents are acquired for the purpose of commercializing the inventions in foreign countries through licensees and not for purpose of resale.

All expenses in connection with the foreign patents are paid for by the taxpayer. These expenses include costs of preparing foreign translations of specifications and claims, costs of formal drawings and certified copies of United States patents and patent applications, legal fees, filing fees, and taxes.

Section 174(a) of the Code allows a deduction for research and experimental expenditures paid or incurred by a taxpayer in con­nection with his trade or business. The issue in this case is whether the expenditures of the taxpayer are research or experimental expenditures.

Section 1.174-2 of the Income Tax Regulations provides, in part, as follows:

(a) IN GENERAL.-(1) The term “research or experimental expenditures”, as used in section 174, means expenditures incurred in connection with the tax­payer’s trade or business which represent research and development costs in the experimental or laboratory sense. The term includes generally all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property, and the improve­ment of already existing property of the type mentioned. The term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, manage­ment studies, consumer surveys, advertising, or promotion. However, the term includes the cost of obtaining a patent, such as attorneys’ fees expended in making and perfecting a latent application. On the other hand, the term does not include the costs of acquiring another’s patent, model, production or process.

While this definition includes the costs of obtaining a patent, such costs are included only in connection with inventions or improvements from research and development in the experimental or laboratory sense undertaken directly by the taxpayer or carried on in his behalf by another person or organization. The expenses incurred in this case do not differ for purposes of the question presented from the costs of acquiring the patents of others.

Accordingly, expenditures paid or incurred by a taxpayer in obtain­ing foreign patents on inventions covered by United States patents and patent applications owned by other persons may not be deducted as research or experimental expenditures under section 174(a) of the Code.

LET'S TALK

Do you have questions about the research tax credit? If so, we would like to hear from you.

Your Name (required)
Your Email (required)
Your Message