To: Teresita Brunken
From: Claudia Carbajal
RE: Mickey and Minnie
Mickey and Minnie are individuals who have an amazing story of their life. Their story is so interesting that a magazine named, Disney Films, is interested in publishing the said story through books, film and photos. The Firm has offered Mickey and Minnie Rs. $750,000 as a price for using the said story in publication.
Issue and Conclusion 1
Under which category the income of Mickey and Minnie might be taxed and treated that they have received from The Firm?
Income received by Mickey and Minnie might be taxed as royalty income earned by them in the capacity individual taxpayer.
As per Reg. Sec. 1.269-1(a)(3) person includes an individual, a trust, an …show more content…
Resultantly, Mickey and Minnie have a story related to their life and someone else will earn profit by publishing their story. As per IRS code if a taxpayer own an intangible property or right including a work of art or literature, patents, goodwill, licenses or any thing received earned as part of arrangement for any contractual display of artistic work that is owned by the tax payer that that he allows others its use and consequently the taxpayer receive amount from that other person, same shall be treated as royalty income. As Mickey and Minnie have received payments for use of intangible work having their right on it therefore, their income might be treated as a royalty income derived from the use of their property. A royalty payment must relate to the use of a valuable right that is owned by taxpayers or have right on it.
Furthermore, according to the IRS, tax must be paid on such royalty income. However, certain types of royalties are given reduced rates or exemptions under certain conditions. Accordingly, these different types of royalties are treated as separate categories for tax purposes.
Issue and Conclusion 2
Tax treatment of royalty income varies according many factors, including whether the royalty is received as self-employment income or from creative work that is a trade or a business. Taking in account Sec. 469 (e)(1)(A) IRS
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