Rev. Proc. 69-19

Section 1. Purpose.

The purpose of this Revenue Procedure is to set forth the conditions or circumstances under which, for purposes of advance rulings under section 367 of the Internal Revenue Code of 1954, the Internal Revenue Service will issue a ruling that an agreement which purports to furnish technical "know-how" in exchange for stock is a transfer of property within the meaning of section 351 of the Code.

Sec. 2. Background.

.01 In order for a secret process, formula, or other secret information (often referred to as technical "know-how," and hereinafter referred to simply as "information") to qualify as property that can be transferred, without recognition of gain or loss, in exchange for stock or securities under section 351 of the Code, Revenue Ruling 64-56, C.B. 1964-1 (Part I), 133, provides in part that (1) the consideration from the transferor (the "information") must actually qualify as property within the meaning of sections 861(a)(4) and 862(a)(4) of the Code rather than personal services in the form of technical assistance and (2) the country in which the transferee is to operate must afford to the transferor substantial legal protection against the unauthorized disclosure and use of the "information."

.02 These requirements encompass issues of both fact and law. Resolution of these issues requires factual information and determinations, making it difficult to issue an unqualified ruling before the transaction has been consummated. Nevertheless, in spite of such difficulties, it is in the interest of sound tax administration to continue to answer inquiries of taxpayers on these issues. Therefore, the Service upon request will continue to issue rulings on these transactions provided the taxpayer can in good faith make certain factual representations in his application regarding the issue based upon information that would be readily available to the Service upon request.

Sec. 3. Statements to be Included in Ruling Requests.

.01 Ordinarily, for purposes of advance rulings under section 367 of the Code where the request involves the transfer of "information" in exchange for stock under section 351, the Service will accept appropriate representations referred to in section 2.02 above. If appropriate, statements as follows should be included in the request for ruling:

"It is represented that the 'information' being transferred in exchange for stock under section 351 is 'property' within the meaning of Revenue Ruling 64-56, C.B. 1964-1 (Part I), 133, and as such is afforded substantial legal protection against unauthorized disclosure and use under the laws of the country from which it is being transferred. It is further represented that any services to be performed in connection with the transfer of the property are merely ancillary and subsidiary to the property transfer within the meaning of Revenue Ruling 64-56 or the transferor will be compensated by a fee negotiated at arm's length (in consideration other than stock or securities of the transferee unless such stock or securities are identified) for any other services to be performed on behalf of the transferee."

.02 In making such representations the taxpayer should in his request for ruling describe the "information" involved and state that:

(a) the "information" is secret in that it is known only by the owner and those confidential employees who require the "information" for use in the conduct of the activities to which it is related and adequate safeguards have been taken to guard the secret against unauthorized disclosure, and

(b) the "information" represents a discovery and, while not necessarily patentable, the "information" is original, unique, and novel.

.03 The statements and representations described in .01 and .02 above must be based upon the following criteria and facts and the request for a ruling should affirmatively state the presence or absence of such criteria or facts by reference to this subsection of this Revenue Procedure:

(a) The "information" is not revealed by a patent, is not the subject of a patent application, nor is it disclosed by the product on which it is used or to which it is related.

(b) The "information" does not represent mere knowledge, or efficiency resulting from experience, or mere skill in manipulation or total accumulated experience and skill of the transferor.

(c) The "information" involved is not merely the rights to tangible evidence of information such as blueprints, drawings or other physical material on which it is recorded.

(d) The "information" has not been developed especially for the transferee.

(e) The "information" is not in the form of assistance in the construction of a plant building or advice as to the layout of machinery and equipment.

(f) The "information" is not training of the transferee's employees that is essentially educational in nature.

(g) Technical information of a related or similar nature such as new developments in the field will not be furnished on a continuing basis without adequate compensation therefor in the manner prescribed for services in the statement in subsection .01 above.

.04 Any other information that may be considered pertinent by the Service in connection with the factual representations should also be readily available upon request.

Sec. 4. Conclusion.

If the above representations are made by the transferor the Service will consider for purposes of the requested ruling that the country in which the transferee is to operate affords to the transferor substantial legal protection against the unauthorized disclosure and use of the information.

Sec. 5. Effect on Other Documents.

These procedures have no effect upon the substantive provisions and requirements of Revenue Ruling 64-56. Also, the representations and any other facts upon which the ruling letter is based will be subject to verification by the District Director in connection with the examination of the taxpayer's Federal income tax return.