Intellectual Property and AI: Tax Strategies for Publishers When Your Work Is Used to Train Models

Hook: Your content was used to train an AI — now what?

Publishers and content owners face a new and pressing dilemma: when your books, articles, or textbooks are scraped and used to train large language models or multimodal AIs, how do you value that use, convert it into revenue, and manage the tax outcomes of licensing, settlements, or outright sales? With high‑profile litigation escalating in late 2025 and early 2026 and Big Tech offering licensing programs, these questions aren’t academic — they determine real cash flow, audits, and long‑term tax exposure.

The 2026 landscape: Why this matters now

In late 2025 and into early 2026, publishers including Hachette Book Group and Cengage sought intervention in high‑stakes litigation alleging massive unauthorized use of copyrighted works to train AI models. That litigation — and multiple settlements and licensing negotiations that followed — has created a market where publishers can reasonably demand licensing payments or structured settlement funds. At the same time, global tax rules (OECD Pillar Two implementations), state audit activity on intangible income, and evolving IRS positions on intangible tax treatment mean the tax consequences of any deal are as consequential as the headline dollar amounts.

Top takeaways up front (inverted pyramid)

• Valuation drives tax treatment: how you value IP for a license or settlement (royalty stream vs. lump sum sale) determines amortization, ordinary income vs. capital gain, and reporting obligations.
• Structure matters: license vs sale, exclusive vs non‑exclusive, and entity holding choices (royalty holding company, LLC, C‑Corp/S‑Corp) change effective tax rates and compliance burden.
• Document allocation: settlements must explicitly allocate payments between lost profits, punitive damages, and purchase of rights — the allocation affects ordinary vs. capital treatment and deductible legal costs.
• Plan for audits: keep granular evidence (registrations, creation dates, usage logs, licensing comps, DMCA takedown records, and time/cost records) to support valuations and tax positions.

How to value IP used in AI training

Valuation is the foundation. Buyers and sellers use three standard approaches — and each has advantages and tax implications for publishers:

1. Income approach (Discounted Cash Flow / incremental royalty)

This is most common for active content portfolios. Estimate incremental cash flows that arise from licensing the content for AI training: direct royalties, proportionate share of subscription revenue attributable to the model’s use of your content, or a per‑unit training fee (e.g., per billion tokens or per model release).

• Use DCF to value future royalties; pick a discount rate that reflects model risk and content obsolescence.
• For AI use, many publishers are negotiating hybrid metrics (flat fee + revenue share) — you can model each stream separately and sum present values.

2. Market approach (comparable licenses)

Find comparable licensing deals in publishing, database licensing, or historical technology transfers. Comparable data is sparse for AI training, so adjust for scale, exclusivity, and model reliance.

3. Cost approach (replacement or reproduction)

Cost to recreate the content (author payments, editorial costs) is the weakest method for high‑demand copyrighted works but is useful as a floor in negotiations and to support a purchase price allocation in a settlement.

Practical valuation tips for publishers

• Document historical revenue and user metrics by title — AI licensees will pay more for works with strong learning signals.
• Negotiate transparent metrics: per‑token access, ingestion counts, or model‑version royalties. Avoid vague "use" clauses.
• Seek audit rights and reporting cadence (quarterly revenue reports, model attribution studies).
• Use independent valuation experts if the deal exceeds seven figures — their reports reduce audit risk.

Amortization and accounting: Section 197 and beyond

Tax accounting hinges on whether the payment is for a license (income) or a sale of the copyright (capital asset). For acquired intangible assets, the U.S. Tax Code provides a clear mechanism:

Purchased intangibles — Section 197

Under 26 U.S.C. §197, many purchased intangibles (including copyrights and certain license acquisition costs) are amortizable over a 15‑year straight‑line period. If you sell or assign a copyright in a lump sum and treat the payment as proceeds for purchasing the asset, the buyer capitalizes and amortizes under Section 197.

Self‑created copyrights and ordinary income

If you are receiving ongoing royalties under a license for your self‑created copyright, those receipts are typically ordinary income in the year received. You cannot amortize self‑created intangible assets in the same way a purchaser can.

Licenses with lump‑sum payments

Lump‑sum license payments present tricky choices. The IRS and courts look at the substance over form:

• If the lump sum is clearly a payment for future royalties (i.e., prepaid royalties), the payer may seek to amortize or deduct the payment while the recipient recognizes income either immediately or over the period the payment covers — proper allocation in the contract is essential.
• If the lump sum is effectively a transfer of ownership of the IP, the recipient may claim capital gain treatment; the buyer may capitalize and amortize under Section 197.

Royalties vs. sale — tax consequences explained

Which is better? There is no universal answer — it depends on your cash needs, tax position, and exit plan.

Royalties (license)

• Tax treatment: generally ordinary income when received.
• Pros: ongoing revenue, retains ownership, potential for higher lifetime value if model adoption grows.
• Cons: revenue tax rate may be higher than long‑term capital gains; more administrative burden (tracking, audits).

Sale (assignment of copyright)

• Tax treatment: may qualify for capital gain treatment if it’s a sale of a capital asset (subject to holding period and other rules). Buyers typically amortize the purchase price under Section 197.
• Pros: immediate cash, simpler tax reporting, potential capital gains treatment (lower tax rate for long‑term capital gains).
• Cons: you lose future upside and control; buyer’s valuation and tax allocation may be scrutinized.

Characterizing settlement proceeds

Settlements arising from litigation over unauthorized AI training must be carefully allocated. The IRS treats different components differently:

• Lost profits or lost royalties: typically ordinary income — taxed when received.
• Compensatory damages for destruction or sale of capital asset: may be capital gain.
• Punitive damages: treated as ordinary income.
• Interest and attorneys’ fees: interest is taxable; attorney fees may be deductible depending on the origin and nature of the claim — sometimes the client can deduct directly, and sometimes fees are treated as part of the recovery (netted against gross recovery).

Therefore, settlements should be negotiated with a clear allocation in the settlement agreement. Absent allocation, courts and the IRS apply rules of substance over form — which can lead to adverse tax outcomes.

Practical steps when negotiating settlements

1. Include explicit allocation schedules that assign portions of the settlement to royalties, sale of rights, lost profits, and interest.
2. Allocate a reasonable portion to the purchase of rights if you intend capital treatment — be prepared to justify the allocation with valuation documentation.
3. Address who bears the tax burden and whether the payer will gross up for taxes.
4. Preserve fee‑shifting language and address whether legal fees will be treated as reimbursed costs or separate payments; determine client deduction treatment up front.

Entity selection and structural tax planning

How you hold the IP affects tax efficiency and regulatory exposure. Consider these common structures:

1. IP holding company (single‑member LLC or C‑Corp)

Centralizes licensing and makes royalty tracking simpler. A C‑Corp can retain earnings but faces corporate tax; transfers between affiliates trigger transfer pricing and Pillar Two scrutiny. An LLC taxed as a partnership offers pass‑through flexibility but passes income/losses to owners.

2. Operating company holds and licenses outward

Simpler for small publishers with limited catalog. But mixing operating profits and royalties may raise state‑apportionment issues and expose more income to ordinary tax rates.

3. Hybrid: license to related parties in low‑tax jurisdictions

Historically used to lower tax burdens, but be cautious: OECD Pillar Two and tightening transfer pricing rules (post‑2023 implementations) limit aggressive structures. Document arm’s‑length royalty rates and economic substance to withstand audits.

Cross‑border and withholding considerations

If AI companies are offshore or the licensee uses cloud infrastructure in multiple jurisdictions, cross‑border tax impacts matter:

• Royalty payments to non‑U.S. recipients may be subject to withholding tax — treaty rates can lower withholding but require proper paperwork (W‑8BEN‑E, etc.).
• Permanent establishment and nexus: licensing into foreign markets can create tax filings and VAT/GST obligations.
• OECD base erosion and profit shifting rules and Pillar Two can limit low‑tax benefit of routing royalties through certain jurisdictions.

Audit readiness: what to keep and for how long

Because valuations and allocations are subjective, strong documentation reduces risk. Keep the following for at least seven years (ten years for larger settlements):

• Content creation logs, registration and deposit receipts
• Usage reports and takedown notices
• All license agreements and settlement documents with signed allocation schedules
• Valuation reports, DCF models, comparable license compendia
• Legal invoices tied to litigation phases and allocation memos

Case study (hypothetical): Licensing versus settlement — a numeric example

Publisher A has a textbook catalog that a large AI firm used without permission. Two offers are on the table in 2026:

1. Exclusive license: $2M upfront + 3% of AI product revenue attributable to the model (estimated present value $4M).
2. Settlement and sale of rights: $5.5M lump sum to assign certain copyrights to the AI firm.

Tax outcomes (simplified):

• Option 1 (license): $2M upfront treated as ordinary income; ongoing 3% royalties taxed as ordinary income when received. Publisher retains rights and future upside.
• Option 2 (sale): $5.5M could be capital gain if treated as sale of capital asset — potentially lower long‑term capital gains rate if holding period satisfied. The buyer capitalizes and amortizes the intangible over 15 years under Section 197.

Which to choose? If Publisher A expects model‑driven revenue growth, licensing retains upside. If Publisher A prefers certainty and lower immediate tax rate (capital gains), sale may be preferable. Consult counsel to document allocation to qualify for capital gain treatment.

Practical checklist: What publishers should do now

1. Inventory and register: catalog all content, registration status, and market value indicators.
2. Hire valuation and tax counsel: for any high‑value negotiation or settlement, get a valuation report and tax memo.
3. Negotiate allocation: insist on explicit contract language allocating payments among royalties, rights transfers, and fees.
4. Protect future rights: require audit rights, reporting metrics, model attribution, and transparent usage definitions.
5. Plan entity structure: assess whether an IP holding entity or different corporate form reduces tax/operational risk — model post‑transaction taxes before signing.
6. Document legal costs: track attorney time and invoices tied to litigation or settlements for appropriate deduction or capitalization treatment.
7. Consider timing: the year of recognition (receipt) can affect tax rates and available deductions — timing can be negotiated in settlement language.

Advanced strategies and future predictions (2026+)

Looking ahead, publishers should consider advanced approaches:

• Performance‑based royalties: indexing royalties to model revenue or usage metrics will become more common; structure with floors and collars to reduce volatility.
• Tokenized rights: fractional ownership or tokenized revenue shares may enable micro‑licensing to many small content owners — watch securities laws and tax reporting implications.
• Standardized licensing frameworks: industry groups are working on standard templates for AI training licenses (expect more adoption in 2026), which will simplify comparability and valuation.
• Collective licensing pools: publishers may form consortia for bargaining power; tax structuring of pools requires careful allocation and governance documents.

Red flags that trigger IRS or audit attention

• Large lump‑sum settlements or unusual allocations that lack valuation support.
• Intercompany royalty rates materially different from market comparables in multinational structures.
• Claiming capital gain treatment for amounts that the facts indicate are replacement for ordinary income without documentary support.

Final checklist before you sign

1. Get a signed allocation schedule in the settlement or license.
2. Obtain valuation support for any allocation to capital sale.
3. Negotiate who bears withholding, gross‑up clauses, and who pays for audits.
4. Confirm entity receiving the payment and evaluate whether step‑up or restructuring is necessary for tax optimization.
5. Retain records and prepare a written tax position memo to support your return under audit.

“Publishers are uniquely positioned to address legal, factual, and evidentiary questions” — as industry leaders argued in early 2026 litigation filings, underscoring publishers’ leverage in both legal and commercial negotiations.

Closing — actionable next steps

If AI companies have used your work, don’t treat the moment as only legal. Transform it into a tax‑efficient monetization opportunity. Start with these immediate actions:

• Run a content audit and document registrations and usage.
• Consult a valuation expert and tax attorney before signing any letter of intent.
• Negotiate allocations and audit rights in any settlement or license.
• Model the tax consequences of license vs sale under your current entity structure.

Call to action

Ready to turn unauthorized AI use into a tax‑optimized revenue stream? Contact our tax specialists at TaxServices.biz for a tailored IP valuation, entity analysis, and settlement allocation strategy that minimizes tax risk and maximizes recoveries. Book a consultation and get a pre‑deal tax memo that auditors will respect.

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