Techniques to turn intellectual property into more profitable assets.

Patents, copyrights, trademarks and trade secrets are legally protected rights referred to collectively as intellectual property (IP), a major component of intellectual capital. As decisions about investment in and commercial exploitation of IP become increasingly critical to a business's success, CPAs can contribute to a company's efforts to maximize the value of IP assets. CPAs are trusted business advisers who bring objectivity to the process of quantifying the value of intangible property such as IP.

A thorough understanding of a company's IP portfolio is critical for the development of a strategic IP management system, and CPAs who understand a company's business plan are in a good position to help. There are proven techniques for managing IP that will turn knowledge into profits, and CPAs can offer the following IP management service activities to direct a company's efforts to obtain maximum value of its IP assets:

* Prepare a comprehensive assets inventory identifying each property right in the company's IP portfolio, the remaining term of legal protection and its relative value to the enterprise, such as core vs. noncore technology, use in existing products or services or anticipated future use.

* Consult with a licensing expert to develop a strategy for licensing selected IP to targeted companies. Wasting patented technology simply because a company has no immediate product use for it is unnecessary at best. A strategic IP management system generally includes a licensing policy and a database/tracking system for IP and licensing portfolios.

* Set up an investment holding company (IHC) in appropriate state jurisdictions to create state tax savings. Under this structure the operating units recognize a deduction for royalties paid to the IHC while the IHC does not recognize income for the royalty payment for state tax purposes. Thus an IHC structure allows a company to enjoy state tax deductions in one jurisdiction that are not offset by income for state tax purposes in another jurisdiction, thereby leaving a net savings from the state tax deductions. This independent operation often allows the IHC's managers and directors to focus more on IP management and the measurement of profit and loss from IP activities, greater IP integration into overall corporate strategy, increased development of transferable technology and more objective stewardship by outside directors.

* Consider a charitable donation of unused IP assets under IRS revenue ruling 58-260. A qualified appraisal of the donation using generally accepted IP valuation techniques (fair market value of the patent at the time of the contribution) is required by the IRS and is subject to IRS scrutiny. As an indirect benefit, an IP donation can strengthen the ties between the company and the donee research institutions.

* Investigate licensees' royalty payments to determine whether they conform to the license terms. Under-payment of royalties historically has been a problem. A well-drafted licensing agreement should include a provision requiring the licensee to pay for an audit if the underpayment exceeds a certain threshold.

* Assess litigation risk to evaluate probable outcomes and financial implications of potential disputes over similar patented technologies. Often the scope and application of relevant technology cannot be determined by the parties without an agreed settlement, either through a cross-licensing agreement or a judgment of contested claims in litigation. It is expensive to litigate IP matters, thus an effective management tool contains prelitigation estimates of probable outcomes and associated costs should lawsuits arise over patent infringements.

Source: V. Walter Bratic, CPA, vice-chairman and managing director, and Nicholas D'Ambrosio, Jr., CPA, JD, director, of Intecap, Inc., Houston, www.intecap.com.