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In 1994, petitioner and Dr. Youling Lin (also a professor at
the University) formed ISOA, Inc., a Texas corporation that was
also an S corporation for some of the years in issue. Petitioner
and Dr. Youling Lin each owned 50 percent of ISOA, Inc.
Initially, ISOA, Inc., conducted business in Lubbock, Texas. In
1995, ISOA, Inc., moved the corporation’s business operations to
Richardson, Texas. In addition to ISOA, Inc., petitioner
continued to operate ISOA Consulting.
As part of an arrangement with the University, ISOA, Inc.,
licensed intellectual property developed at the Institute to
various third-party entities. In turn, ISOA, Inc., distributed a
portion of the licensing fees received to the University and to
student-inventors as royalty payments. In October 1996, ISOA,
Inc., entered into a final royalty fee agreement with the
University as to the distribution of the licensing fees received
by ISOA, Inc. The licensing agreement between ISOA, Inc., and
the University provided that ISOA, Inc., would retain 30 percent
of the net licensing fees received, the University would receive
15 percent, student-inventors would receive 50 percent, and a
corporate co-inventor would receive 5 percent. Additionally, per
the terms of the licensing agreement, ISOA, Inc., could be
obligated to refund any licensing fees to the third party if the
patents were not approved for the licensed intellectual property.
ISOA, Inc., used amounts from the licensing fees to pay various
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