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June 26, 2011


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Jessica Litman

I don't know estate tax law, so I am inclined to believe you about this if you say so, but I'm surprised. Termination interests don't pass with the decedent authors' estates and don't necessarily vest in the authors' heirs. Why would they count as part of the estate for estate tax purposes?

Bridget Crawford

As I understand termination rights, an author or artist who licenses a copyright during lifetime simultaneously acquires a termination right that is exercisable during a specific time-period after the transfer. If the artist is not alive, the termination rights may be exercised by statutory heirs.

If the author dies before the termination window opens, then the present value of any income stream under the license agreement should be includable. The IRS likely would argue that the elements “retention” (in the form of termination rights) is present for purposes of Section 2036 and that they estate should include the present value of the termination rights. If the estate could establish that the decedent had received full and adequate consideration, an exception would apply, and Internal Revenue Code Section 2036, as well as Sections 2037 and 2038 would not apply either. However, it does not appear that Mr. Kirby received full and adequate consideration from Marvel for any interest in his work (if his work was other than a "work for hire”).

If the artist dies during the period for the exercise of the termination rights, Internal Revenue Code Section 2036 should apply to cause inclusion of the value of the property subject to the termination rights (as rights to designate possession, income or enjoyment). Sections 2038 (inclusion of transfers subject to right of revocation) and 2041 (inclusion of property subject to a general power of appointment) can now apply as well.

The estate tax consequences of copyright termination interests is not well-understood by IP lawyers or tax lawyers (myself included, before I sunk lots of hours of research into the issue).

Jessica Litman

Termination rights don't actually vest at the time an author executes a grant; rather they become available after the expiration of a prescribed term of years, and vest when exercised. The statute includes lists of the persons entitled to exercise termination rights, and the person(s) at the top of the list when the right becomes available is the person entitled to exercise them. If an author transfers her copyright in 2000 and dies in 2011, there's no way to know who will own the termination interest until the time comes to serve notice of termination. That person may or may not be one of the author's heirs or devisees. Does that change the tax analysis?

Bridget Crawford

Thanks for that, Jessica. I acknowledge that the termination rights are contingent (and I should have been more precise in my comment above). The rationale for estate tax inclusion changes depending on whether the artist dies during or before the period when the termination window is open. The ultimate tax result (inclusion) does not change. Pretty scary!

The only scenario in which there is no estate tax liability is where the artist survives the termination period without exercising the termination rights.

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