1. Selected High Tech Federal Tax Developments Annette Nellen SJSU November 6, 2006

2. Property Transactions

3. §1031 and intangibles TAM 200602034 Exchange of patents, trademarks, designs, software, trade secrets, know-how §1031 applies if like-kind – Look to nature or character of rights involved and – Nature or character of underlying property © on novel is like kind to © on different novel, but not a © on a song Patent, SW, trade secrets and know-how – look at nature of underlying assets of the patent Trademarks so similar to GW - §1031 n/a

4. §1033 and copyright infringement damages TAM 200625032 Suit and countersuit involving © infringement and misappropriation of trade secrets T/p reinvested in stock of company with intangibles used in similar way Held - §1033 n/a – © infringement does not involve involuntary interruption in continuity of t/p’s investment – Not really a theft because was no permanent loss of the property – And – proceeds must be for loss of property rather than loss of profits

5. Compensation

6. AMT and ISOs Merlo, 126 TC 125 (2006) [Exodus stock] ISO exercise 12/21/00 with spread of $1M Reportable in AMT T/p only reported $452K using stock’s FMV at 4/15/01 11/01 stock became worthless T/p generated $1M capital loss for AMT in 2001 IRS assessed deficiency of $169K for 2000 T/p argued that capital loss limits n/a for AMT purposes so 2001 loss could be carried back to reduce 2000 AMTI

7. AMT and ISOs – cont’d “for AMT purposes, section 56(b)(3) provides that the adjusted basis of any stock acquired by the exercise of an ISO “shall be determined on the basis of the treatment prescribed by this paragraph.” Thus, the taxpayer will increase his adjusted AMT basis by the amount of income included in his AMTI. See secs. 55(b)(2), 56(b)(3), 83(a).”

8. AMT and ISOs – cont’d “We find no statute, regulation, or other published guidance that purports to change the treatment of capital losses for AMT purposes. 10 See secs. 55-59 (and accompanying regula- tions). Therefore, we hold that the capital loss limitations of sections 1211 and 1212 apply in calculating a taxpayer's AMTI. See sec. 1.55-1(a), Income Tax Regs.; see also Allen v. Commissioner, 118 T.C. at 8 (holding that the wage-expense limitation of section 280C(a) applies to the calculation of AMTI where nothing in the sections relating to the wage-expense limitation or in the AMT provisions indicates otherwise). Accordingly, we find that petitioner cannot carry back his AMT capital loss realized in 2001 to reduce his AMTI in 2000.”10

9. AMT and ISOs – cont’d Court – Capital loss limits do apply for AMT so no ATNOL generated to be c/b to 2000 AMTI – Since nothing in statute providing for different capital loss limit for AMT, regular rules apply Also see: – Norman v. U.S., 98 AFTR2d 2006-______, (DC CA 2006) – Palahnuk v. Commissioner, 127 T.C. No. 9 (2006)

10. Court doesn’t care about fairness “This Court has previously stated: – The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected. ***“