8148 / What is the federal tax law definition of “trade secret”?

Since tax cases and rulings use the terms “trade secret” and “know-how” interchangeably and inconsistently, it is impossible to make any meaningful distinction between these terms for purposes of the tax law. Therefore, in this text the term “trade secret” will be used throughout. Information other than “true trade secrets,” as identified in Q 8147, will be described by their main characteristics, namely “services” or “nonsecret information.” In this context, the federal taxation definition is governed by Revenue Ruling 64-56, which states:¹

In accordance with this revenue ruling the Service recognizes as “property” secret processes and formulas or other “secret information” as to a device, process, etc., in the general nature of a patentable invention without regard to whether a patent has been applied for … and without regard to whether it is patentable in the patent law sense.²

However, aside from the above, this revenue ruling tends to categorize secret information as services. For example, it defines “services” as information developed especially for the transferee, whether or not it is recorded on a tangible medium, training, or continuing assistance. Additionally, if information is not secret, it is not treated as property. However, if these “services” or the nonsecret information are ancillary and subsidiary to a true trade secret property, then such “services” or nonsecret information will be treated as property, along with the trade secret. Subject matter is generally considered ancillary and subsidiary if it is incidental to the true trade secret property in the sense that it is necessary for effective utilization of that property. “Ancillary and subsidiary” includes information relating to promoting the transaction, assisting in effecting a start-up or performing under a guarantee relating to effecting a start-up.

To summarize, for federal income tax purposes, trade secrets (or know-how) may be divided into three categories:

1. Trade secrets or know-how similar to patent technology that are deemed to be property


2. Information that has characteristics of “services” or is not secret, but which is ancillary and subsidiary to the trade secret property and is therefore considered as part of that property


3. Information that is deemed to be purely services or is not secret, which is not considered to be property