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1 of 3 DOCUMENTS

Taxation of Intellectual Property and Technology

Copyright 2011, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

Appendix B Primary Revenue Rulings and Revenue Procedures

1-B Taxation of Intellectual Property Rev Rul 79-285

Rev Rul 79-285 [Income Forecast -- Books, Patents, and

Master Recordings]

Depreciation; "sliding scale" method; manuscript, patents, and master recordings. The "sliding scale" method
of depreciation may not be used by an individual who purchases all rights to a book manuscript, patent, or
master recording. Rights to the manuscript, patent, or master recording are first placed in service when the
products or processes resulting from these rights are first released for distribution and sale or used in a trade or
business or for the production of income. Rev. Rul. 60-358 amplified.

ISSUES

Does use of a "sliding scale" method of computing depreciation for a book manuscript result in a reasonable allowance
for depreciation under section 167(a) of the Internal Revenue Code of 1954 under circumstances described below?

When is a book manuscript placed in service for purposes of section 1.167(a)-(10)(b) of the Income Tax Regulations?

FACTS

On January 1, 1975, A, an individual, purchased all rights to a book manuscript for the sum of 200x dollars and entered
into an agreement with P, a publisher, to print, publish, and sell the book. The first copies of the regular trade edition
were published and sold during October 1975.

Under terms of the publishing contract, A will receive specified royalties on sales of the book, and a share of the
proceeds from the sale or licensing of other publication rights by the publisher. In April and October of each year
following publication of the book, P will provide A with semi-annual statements showing royalties or other sums
accruing to A for the preceding semi-annual periods ending December 31 and June 20 respectively, together with
payment of amounts due A for the period covered by the statement.

A reported no income from the book for the taxable year 1975. However, A did claim a depreciation deduction in the
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1-B Taxation of Intellectual Property Rev Rul 79-285

amount of 100x dollars computed by use of a "sliding scale" method of depreciation. The schedule attached to the return
showed an estimated life for the book of 4 years with depreciation rates of 50 percent for the first year, 25 percent for
the second year, 15 percent for the third year, and 10 percent for the fourth year.

LAW

Section 461(a) of the Internal Revenue Code provides that any deduction shall be taken for the taxable year that is
proper under the method of accounting used in computing taxable income.

Section 446(b) of the Code provides that if the taxpayer does not use a regular method of accounting, or if the method
used by the taxpayer does not clearly reflect income, taxable income will be computed in accordance with a method
that, in the opinion of the Secretary, does clearly reflect income.

Section 167(a) of the Code provides that there shall be allowed as a depreciation deduction a reasonable allowance for
the exhaustion, wear and tear, and obsolescence of property used in the trade or business or held for the production of
income.

Section 167(b) of the Code provides that the term "reasonable allowance" shall include an allowance computed under
the straight line method, the declining balance method at a rate not exceeding twice the straight line rate, the
sum-of-the-years digits method, or any other method that does not, during the first two-thirds of the useful life of the
property, produce total allowances that exceed the amount that would have been allowable under the declining balance
method. Nothing in this section shall be construed to limit or reduce an allowance otherwise allowable under section
167(a).

Section 167(c) of the Code provides that the declining balance method, the sum-of-the-years digit method, and any
other consistent method provided under section 167(b)(4) are available only for tangible property with a useful life of 3
years or more.

Section 1.167(a)-3 of the regulations provides that intangible assets such as copyrights and patents with determinable
useful lives may be the subject of a depreciation allowance. Section 1.167(a)-6(a) provides that a patent or copyright
may be depreciated over its remaining useful life.

Section 1.167(a)-10(b) of the regulations provides that the period of depreciation for an asset begins when the asset is
placed in service and ends when the asset is retired from service. A proportionate part of one year's depreciation is
allowable for that part of the first year and last year during which the asset was in service.

Rev. Rul. 60-358, 1960-2 C.B. 68, as amplified by Rev. Rul. 64-273, 1964-2 C.B. 62, recognizes that methods of
computing depreciation described in section 167(b) of the Code are in most cases inadequate when applied to motion
picture and television films and other property of a similar character, because such methods result in a distortion of
income. Rev. Rul. 60-358 states that the usefulness of such assets in the taxpayer's trade or business is measurable over
the income it produces and cannot be adequately measured by the passage of time alone. Therefore, in order to avoid
distortion of income, depreciation must follow the "flow of income." The Revenue Ruling holds that the income
forecast method of depreciation is an acceptable method for computing a reasonable allowance for depreciation of the
cost of such property.

Rev. Rul. 78-28, 1978-1 C.B. 61, holds that income reflected in the numerator of the fraction used to compute the
depreciation for the taxable year under the income forecast method must reflect the same gross income used to compute
taxable income from the property for the same period.

ANALYSIS
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1-B Taxation of Intellectual Property Rev Rul 79-285

Section 167(c) of the Code limits the use of section 167(b) methods of depreciation deemed to result in an allowance
that clearly reflects income for intangible assets to the straight line method.

In Rev. Rul. 60-358, it is recognized that the usefulness of assets such as movie and television films, and property used
to generate a similar uneven flow of income, is measurable over the income it produces, and that the income forecast
method of computing depreciation permits recovery of asset costs without producing any serious distortion of income.
Books, patents, and sound recordings used to produce income in a manner similar to television and movie films are
other property similar in character for purposes of Rev. Rul. 60-358.

Any method other than the straight line and income forecast methods of computing depreciation deductions for
intangible assets must clearly reflect income as provided in section 446(b) of the Code. In KIRO, Inc. v. Commissioner,
51 T.C. 155 (1968), acq., 1974-2 C.B. 3, the court found that the "sliding scale" method of computing depreciation for
television films subject to contract terms limiting their use, and indicating a rate of exhaustion as a function of
sequential exposures, resulted in a reasonable depreciation allowance. The sliding scale rate was based largely on the
rate of exhaustion indicated by the contract terms. Films not subject to comparable contract terms could not be
depreciated by use of the sliding scale method.

In the present case, there is no contract or other pertinent data to support the contention that the depreciation deductions
computed by use of the "sliding scale" method are reasonable and clearly reflect income.

Motion picture rights are placed in service when the film is initially released for public exhibition. See S. Rep. No.
94-938, 94th Cong. 2nd Session 186 (1976), 1976-3 C.B. (Vol. 3) 49, 224. Manuscript rights having the same
characteristics for purposes of depreciation as motion picture film rights, are placed in service when books produced
from the manuscript are first released for distribution and sale.

HOLDING

In this case, the sliding scale method of computing depreciation allowances for the book manuscript fails to clearly
reflect income as provided in section 446(b) of the Code and is, therefore, not an acceptable method of depreciation for
Federal income tax purposes. The income forecast and straight line methods are acceptable methods for computing
depreciation allowances for book manuscripts. The same conclusion applies to patents and master recordings.

Rights to manuscripts are placed in service when copies of the book are first released for distribution and sale.
Similarly, rights to patents and master recordings are placed in service when products or processes resulting from these
rights are first released for distribution and sale, or are used in the trade or business or for the production of income.
However, patents are not placed in service prior to the issue date.

EFFECT ON OTHER REVENUE RULINGS

Revenue Ruling 60-358 is amplified.

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2 of 3 DOCUMENTS

Taxation of Intellectual Property and Technology

Copyright 2011, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

Appendix B Primary Revenue Rulings and Revenue Procedures

1-B Taxation of Intellectual Property Rev Rul 89-62

Rev Rul 89-62 [Income Forecast -- Books, Patents, and

Master Recordings]

ISSUE

What is the proper method of depreciating videocassettes under the Internal Revenue Code?

FACTS

In 1988 the taxpayer established a videocassette rental business. A videocassette consists of a cartridge mechanism
containing a designated length of magnetic video tape. Videocassettes are used in videocassette recorders or players.
The taxpayer purchases mass-produced copies of master versions of movies in the videocassette format and rents them
to the public.

LAW AND ANALYSIS

Section 167(a) of the Code provides that there shall be allowed as a depreciation deduction a reasonable allowance for
the exhaustion and wear and tear (including a reasonable allowance for obsolescence) of property used in the trade or
business or held for the production of income.

Section 168(a) of the Code provides that, except as otherwise provided in this section, the depreciation deduction
provided by section 167(a) for any tangible property shall be determined by using the applicable depreciation method,
recovery period, and convention.

Section 168(f)(3) of the Code provides that section 168 does not apply to "any motion picture film or video tape." If
videocassettes are encompassed within the phrase "any motion picture film or video tape," they are not subject to
section 168(a). The language of section 168(f)(3) is broadly inclusive. Similarly inclusive language was used in section
168(e)(5) of the Internal Revenue Code of 1954, the predecessor of section 168(f)(3). There is nothing in the legislative
history of these sections to suggest that they were to be narrowly applied. H.R. Conf. Rep. No. 861, 98th Cong., 2d
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1-B Taxation of Intellectual Property Rev Rul 89-62

Sess. 1009 (1984), 1984-3 (Vol. 2) C.B. 263.

A videocassette is a video tape adapted for use in a videocassette recorder or player. Accordingly, videocassettes are
among the motion picture films and video tapes excluded from the scope of section 168.

If property is excluded from section 168 of the Code, the provisions of section 167 apply in determining the allowable
depreciation deduction with respect to such property.

Section 167(b) of the Code provides that a reasonable allowance for depreciation shall include an allowance computed
under the straight line method and certain accelerated methods.

Section 167(c) of the Code provides that the accelerated methods of depreciation described in section 167(b) do not
apply to any motion picture film, video tape, or sound recording. This broadly inclusive language encompasses
videocassettes. Accordingly, the taxpayer may depreciate the videocassettes utilizing the straight line method over their
useful life in the taxpayer's business, but may not utilize the methods of depreciation described in paragraphs (2), (3),
and (4) of section 167(b).

A taxpayer's videocassettes may be depreciated in a group account consistent with the rules set forth in section
1.167(a)(7) of the Income Tax Regulations. In addition, taxpayers may be able to demonstrate that some of their
videocassettes will not have a useful life in excess of 1 year. The cost of such videocassettes may be deducted under
section 162 of the Code.

The legislative history of section 167(c) states that the income forecast method of depreciation is available with respect
to motion picture films, video tapes, and sound recordings. H.R. Rep No. 426, 99th Cong., 2d Sess. 914-15 (1985),
1986-3 (Vol. 2) C.B. 914-15. For a description of the income forecast method, see Rev. Rul. 60-358, 1960-2 C.B. 68
(income forecast method applies to films). The income forecast method recognizes that certain assets generate uneven
flows of income and have unique income producing potential. To properly apply the income forecast method, tax payers
must make income projections of each asset subject to the method. Tax payers may group their videocassettes by
videocassette title for purposes of making the required income projections Broader groupings of videocassettes of
projection purposes are not permissible under the income forecast method.

HOLDING

Videocassettes are subject to section 167 of the Code and may be depreciated in accordance with the straight line
method over the useful life of the video cassettes in the particular taxpayer's business. Alternatively, the income forecast
method may be used.
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3 of 3 DOCUMENTS

Taxation of Intellectual Property and Technology

Copyright 2011, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

Appendix B Primary Revenue Rulings and Revenue Procedures

1-B Taxation of Intellectual Property Rev Proc 2000-50

Rev Proc 2000-50 [Computer Software Costs] (effective December 1, 2000)

SECTION 1. PURPOSE

This revenue procedure provides guidelines on the treatment of the costs of computer software.

SECTION 2. DEFINITION

For the purpose of this revenue procedure, "computer software" is any program or routine (that is, any sequence of
machine-readable code) that is designed to cause a computer to perform a desired function or set of functions, and the
documentation required to describe and maintain that program or routine. It includes all forms and media in which the
software is contained, whether written, magnetic, or otherwise. Computer programs of all classes, for example,
operating systems, executive systems, monitors, compilers and translators, assembly routines, and utility programs as
well as application programs, are included. Computer software also includes any incidental and ancillary rights that are
necessary to effect the acquisition of the title to, the ownership of, or the right to use the computer software, and that are
used only in connection with that specific computer software. Computer software does not include any data or
information base described in § 1.197-2(b)(4) of the Income Tax Regulations (for example, data files, customer lists, or
client files) unless the data base or item is in the public domain and is incidental to a computer program. Nor does it
include any cost of procedures that are external to the computer's operation.

SECTION 3. BACKGROUND

.01 In the preamble to the final regulations issued January 25, 2000, under §§ 167(f) and 197 of the Internal
Revenue Code (T.D. 8865, 2000-7 I.R.B. 589), the Internal Revenue Service advised taxpayers that they may not rely on
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1-B Taxation of Intellectual Property Rev Proc 2000-50

the procedures in Rev. Proc. 69-21, 1969-2 C.B. 303, to the extent the procedures are inconsistent with § 167(f) or §
197, or the final regulations thereunder.

.02 Except as otherwise expressly provided, §§ 446(e) and 1.446-1(e) provide that a taxpayer must obtain the
consent of the Commissioner of Internal Revenue before changing a method of accounting for federal income tax
purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the
limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of
accounting.

SECTION 4. SCOPE

This revenue procedure applies to all costs of computer software as defined in section 2 of this revenue procedure.
This revenue procedure does not apply to any computer software that is subject to amortization as an "amortizable
section 197 intangible" as defined in § 197(c) and the regulations thereunder, or to costs that a taxpayer has treated as a
research and experimentation expenditure under § 174.

SECTION 5. COSTS OF DEVELOPING COMPUTER SOFTWARE

.01 The costs of developing computer software (whether or not the particular software is patented or copyrighted)
in many respects so closely resemble the kind of research and experimental expenditures that fall within the purview of
§ 174 as to warrant similar accounting treatment. Accordingly, the Service will not disturb a taxpayer's treatment of
costs paid or incurred in developing software for any particular project, either for the taxpayer's own use or to be held
by the taxpayer for sale or lease to others, where:

(1) All of the costs properly attributable to the development of software by the taxpayer are consistently treated as
current expenses and deducted in full in accordance with rules similar to those applicable under § 174(a); or

(2) All of the costs properly attributable to the development of software by the taxpayer are consistently treated as
capital expenditures that are recoverable through deductions for ratable amortization, in accordance with rules similar to
those provided by § 174(b) and the regulations thereunder, over a period of 60 months from the date of completion of
the development or, in accordance with rules provided in § 167(f)(1) and the regulations thereunder, over 36 months
from the date the software is placed in service.

SECTION 6. COSTS OF ACQUIRED COMPUTER SOFTWARE

.01 With respect to costs of acquired computer software, the Service will not disturb the taxpayer's treatment of:

(1) Costs that are included, without being separately stated, in the cost of the hardware (computer) if the costs are
consistently treated as a part of the cost of the hardware that is capitalized and depreciated; or
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1-B Taxation of Intellectual Property Rev Proc 2000-50

(2) Costs that are separately stated if the costs are consistently treated as capital expenditures for an intangible asset
the cost of which is to be recovered by amortization deductions ratably over a period of 36 months beginning with the
month the software is placed in service, in accordance with the rules under § 167(f)(1). See § 1.167(a)-14(b)(1).

SECTION 7. LEASED OR LICENSED COMPUTER SOFTWARE

Where a taxpayer leases or licenses computer software for use in the taxpayer's trade or business, the Service will
not disturb a deduction properly allowable under the provisions of § 1.162-11 as rental. However, an amount described
in § 1.162-11 is not currently deductible if, without regard to § 1.162-11, the amount is properly chargeable to capital
account. See § 1.197-2(a)(3).

SECTION 8. APPLICATION

.01 A change in a taxpayer's treatment of costs paid or incurred to develop, purchase, lease, or license computer
software to a method described in section 5, 6, or 7 of this revenue procedure is a change in method of accounting to
which §§ 446 and 481 apply. However, a change in useful life under the method described in section 5.01(2) or 6.01(2)
of this revenue procedure is not a change in method of accounting. Section 1.446-1(e)(2)(ii)(b).

.02 A taxpayer that wants to change the taxpayer's method of accounting under this revenue procedure must follow
the automatic change in method of accounting provisions in Rev. Proc. 99-49, 1999-52 I.R.B. 725 (or its successor),
with the following modifications:

(1) In order to assist the Service in processing changes in method of accounting under this section and to ensure
proper handling, section 6.02(3)(a) of Rev. Proc. 99-49 is modified to require that a Form 3115, Application for Change
in Accounting Method, filed under this section include the statement: "Automatic Change Filed Under Section 8.01 of
Rev. Proc. 2000-50." This statement must be legibly printed or typed at the top of any Form 3115 filed under this
revenue procedure.

(2) If a taxpayer is changing to the method described in section 5.01(2) of this revenue procedure, the taxpayer must
attach a statement to the Form 3115 stating whether the taxpayer is choosing the 60-month period from the date of
completion of the development of the software, or the 36-month period from the placed-in-service date of the software.

.03 For taxable years ending on or after December 1, 2000, the Service will not disturb the taxpayer's treatment of
costs of computer software that are handled in accordance with the practices described in this revenue procedure.

.04 For taxable years ending prior to December 1, 2000, the Service will not disturb the taxpayer's treatment of
costs of computer software except to the extent that the taxpayer's treatment is markedly inconsistent with the practices
described in this revenue procedure. For the purpose of applying the preceding sentence to costs described in section 5
of this revenue procedure, the absence of any formal election similar to that required by § 174 or the amortization of
capitalized software costs over a period shorter than the 5-year period specified in § 174(b) (but not less than 36 months
for costs paid or incurred after August 10, 1993, or, if a valid retroactive election has been made under § 1.197-1T, July
25, 1991) will not characterize the taxpayer's treatment of the costs as markedly inconsistent with the principles of this
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1-B Taxation of Intellectual Property Rev Proc 2000-50

revenue procedure. In addition, the amortization of acquired software described in section 6 of this revenue procedure
treated as an intangible asset over a period of 60 months or less, but in no case less than 36 months for costs paid or
incurred after August 10, 1993 (or after July 25, 1991, if a valid retroactive election has been made under § 1.197-1T)
will not characterize the taxpayer's treatment of these costs as markedly inconsistent with the principles of this revenue
procedure.

SECTION 9. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 69-21, 1969-1 C.B. 303, is superseded.

.02 Rev. Proc. 97-50, 1997-2 C.B. 525, is modified by deleting all references to Rev. Proc. 69-21 and replacing
them with references to this revenue procedure. Section 3 of Rev. Proc. 97-50 is modified by deleting references to
section 3, section 4, and section 5 of Rev. Proc. 69-21, and replacing them with references to section 5, section 6, and
section 7 of this revenue procedure.

.03 Rev. Proc. 99-49 is modified and amplified to include this accounting method change in the APPENDIX.

.04 Section 1.02 of the APPENDIX of Rev. Proc. 99-49 is modified by deleting all references to Rev. Proc. 69-21
and replacing them with references to this revenue procedure.

SECTION 10. EFFECTIVE DATE

This revenue procedure is effective for a Form 3115 filed on or after December 1, 2000, for taxable years ending on
or after December 1, 2000. The Service will return any Form 3115 that is filed on or after December 1, 2000, for taxable
years ending on or after December 1, 2000, if the Form 3115 is filed with the national office pursuant to the Code,
regulations, or administrative guidance other than this revenue procedure and the change in method of accounting is
within the scope of this revenue procedure.