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When a US company transfers ownership for a pending patent application via an assignment to a company outside the US, say for 1 Dollar, are there any tax implications to worry about?

As for the 1 Dollar, I suppose at the pending stage, the argument can be made that the patent application has no substantial value yet and is potentially worthless (and potentially rejected).

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  • This often done to transfer to a wholly owned subsidiary set up just to hold the company's patents. I would image that has an impact on the tax situation. May 7, 2020 at 22:29

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A $1 is often used to transfer things between companies, purely because there is no realised value yet and the contract needs an amount to be paid for it to be valid. My lawyer had done this with Company shares when the company was just starting. The same with IP in software, when we hadn't started selling it yet. It was still under development.

The tax could apply in some situations - such as for software if the company has claimed the cost of development in their accounts. But in this case, both companies had the same shareholders.

For a patent, that has not been used yet, the value is whatever someone is prepared to pay for it

I am looking for my contracts, then I can upload relevant pages. But I found this

In order for a contract to be valid and enforceable, it must meet certain legal criteria. One such criterion is “consideration”. Consideration requires that each party receive a benefit or advantage for fulfilling its obligations under the contract. Generally, except in cases where the consideration is unconscionable, such as when a party abuses a superior bargaining position, the Courts will not enquire into the adequacy of the consideration. This old and trite concept was recently tested by MemoryLink Corp (MemoryLink) in MemoryLink Corp v Motorola Solutions Inc, No. 08 C 3301, 2013 WL 4401676 (ND Ill Aug 15, 2013).

MemoryLink was a corporation formed by one of the inventors of a handheld camera recording technology that was developed jointly with Motorola Solutions Inc (Motorola). At some point, all of the inventors had signed an assignment agreement that transferred all their rights in the technology to MemoryLink and Motorola. Thus, MemoryLink and Motorola became joint owners. The assignment began with the statement:

“[f]or and in consideration of the sum of One Dollar to us in hand paid, and other good and valuable consideration, the receipt of which is hereby acknowledged . . . .” [Emphasis added]

MemoryLink later sued Motorola for patent infringement relating to the technology, arguing that the assignment was void for lack of consideration. In rejecting the arguments relating to the inadequacy of the consideration and holding the assignment to be valid, the United States District Court for the Northern District of Illinois granted summary judgment in favour of Motorola on August 15, 2013. This decision was affirmed by the United States Court of Appeals on December 5, 2014.

From Is “One Dollar” Sufficient Consideration For An Assignment?

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    – Community Bot
    May 24, 2023 at 8:02
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The US company is liable for tax at the market value of the thing sold

This won’t be less than $1 but could be considerably more. The IRS will accept a reasonable valuation of the asset based on reasonable assumptions. Factors involved would include the likelihood of a successful application, the cost of commercialising it and the expected revenue, all assessed on a forward looking basis (i.e. without the benefit of hindsight).

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  • Are you sure about this? It would seem odd to assess the full market value of the patent for tax purposes based on "likelihood of success" and "expected revenue". I've been a part of such a transaction and I know that the company was not immediately taxed on the factors you talk about. I can see this for a patent currently earning a company significantly more than the purchase price, but for a patent-pending/application, there is no market value...
    – Ron Beyer
    May 7, 2020 at 22:40
  • @RonBeyer of course there’s a market value. No doubt your accounts worked it out and decided it was less than the sale price - which may be quite a legitimate valuation. An application for a pat ant is just as much an asset as an actual patent or a piece of real estate or an option over a piece of real estate.
    – Dale M
    May 7, 2020 at 23:47
  • @DaleM Assuming it is a sale. If the patent application is a contribution to the capital of a company in exchange for shares of stock in the company, the transaction is tax free, although the taxation of the company could be complicated going forward in cases where it is owned or controlled by U.S. persons.
    – ohwilleke
    Feb 3, 2021 at 0:35
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As in many situations like this, the answer to the question can be easily found if another, preliminary question is asked: why?

Assuming that, economically, the fair market value of the transferred asset (whatever it is) is $1,000 and it was transferred for only $1 - there must be some reason why this was done that way, as opposed to a sale for $1,000, which is what you would expect if the transaction was done at arm's length:

Maybe the transferree is a charity and the the transfer was done for charitable purposes: that's one possible tax treatment.

Maybe the the transferor received stock/equity in the transferre: that's another.

Maybe the transferee is owned by a relative of the transferor and it was done as a gift: yet another.

Or there may have been some other, unstated, reason (repayment of debt?).

So, find out the reason and the tax treatment will suggest itself.

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