Robinson Knife Manufacturing Co. v. CIR, 105 AFTR 2d 2010-XXXX (2d Cir. 2010)

This recent decision allowed the immediate deduction of license royalty payments as they accrued on the sale of the licensed inventory, rather than requiring the royalties to be capitalized into inventory. The decision rejected the Service’s deficiency assessments, which would have shifted about 10 percent of the royalty payments into ending inventory for this FIFO taxpayer.  

The key to obtaining the current deductions were the facts that (1) the license agreements made the royalties payable only upon the taxpayer’s withdrawal of the licensed products from inventory for sale, not upon their manufacture; and (2) the royalties were a percentage of the sale price. Trademark licensing agreements of the sort at issue in the Robinson case are very common. However, the particular terms describing when payments are due vary widely.  

  • Licensees who have been capitalizing such royalties should examine their agreements to determine whether the royalties can be expensed.  
  • Licensees who have the flexibility to revise their royalty agreements to meet the standards of the Robinson test should do so.  
  • Licensors should be cooperative in providing such royalty agreements, because tax savings to the licensees can benefit the licensors.