John H. Fisher <taxservice[at]aol.compliance> wrote:
- quote -

Try this question:

Suppose the buyer turned out to own a competing patent and
purchased your client's in order to bury it. As a result,
there are no future sales for your client to collect on. If
your client would not then have any cause for legal action,
then I'd say it's clear he has given up "all substantial
rights". If your client can force the purchaser to market
his invention, and especially if he has control over the
form of marketing, then he has retained substantial rights.

Seth

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"John H. Fisher" <taxservice[at]aol.compliance> wrote
That all sounds good to me!!! I still can't resolve that
- quote -

What I'm planning on doing is treating the initial large
payments (the amounts are already set by the contract) as a
sale of the rights (capital and all), and after that (in
2006 I believe) the payments shift to what clearly looks and
smells like a royalty as they are 100% based on sales.

--
Paul A. Thomas, CPA
taxman at negia.net

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sethb[at]panix.com (Seth Breidbart) writes:
- quote -

That all sounds good to me!!! I still can't resolve that
the contingent payments indicates the sale of "all
substantial rights". He has not given up the right to
income from the asset based on future sales. I'd certainly
be wanting to do what is in the best interest of the client.
But I'd want no liability if the client were challenged and
later had to pay much more than a capital gain rate!!!!=

HAPPY NEW YEAR - ALL!!!=

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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"Stuart O. Bronstein" <spamtrap[at]lexregia.com> wrote:
- quote -

I don't believe this is correct.

- quote -

But that guy sold a painting, not a patent or copyright.

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"John H. Fisher" <taxservice[at]aol.compliance> wrote:
- quote -

Sorry, but I don't see the relevance of his receiving a
stream of income. That does not mean he did not dispose of
"all substantial rights".

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John H. Fisher <taxservice[at]aol.compliance> wrote:
- quote -

Is that really "an interest retained" or merely that the
_price_ for the sale is dependent on future events?

I would say that if the inventor has no remaining _power_
(all he gets to do is collect money) then he has sold "all
substantial rights". If he still has the ability to license
the invention to others, or withdraw this license, etc. then
he hasn't.

Seth

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"steel" <steel[at]nospam.net> wrote:
- quote -

But if they are *his* invention, I'd guess they should not
get capital gain treatment. Just like the person who paints
a masterpiece and sells it several years later. It will be
a capital asset for the buyer, but not the seller.

At least that was the rule the last time I checked.

Stu

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"steel" <steel[at]nospam.net> writes:
- quote -

My response was prompted by what appears to be an interest
retained by virtue of the fact that "He should be receiving
several large payments over the next several years, and then
a stream of income based on the sales of the invention."

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=

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John H. Fisher wrote:
- quote -

John, I got impression client sold the invention, lock stock
and barrel. the kicker however is the method of payment over
several years which doesnt' seem to convert the payments to
royalties.

Paul, I've a similar client who's just waiting for the
money to roll in. he can't tell me what kind of arrangement
it might be however. In any event, he does have a cost basis
of some 15K.

Now, a correlated question I would ask , is if he eventually
receives royalties, what do we with the cost basis?
Expense it on a projected units of production method?
something similar?

Admitedly I haven't researched anything yet. But hope I'll
have to, for client's sake.

New Year's Cheer$,
Harlan Lunsford, EA n LA

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"John H. Fisher" <taxservice[at]aol.compliance> wrote:
- quote -

Not if, as the original poster stated, there is a sale of
"all substantial rights" to the patent, which according to
Section 1235(a) are treated as a sale of a long-term capital
asset.

"You may be able to treat amounts received as "royalties"
for the transfer of a patent . . . as the sale of a capital
asset. For details, see Pub. 544." (my 1040 booklet for
2003, page E-3).

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Paul A Thomas wrote:

- quote -

Well, Section 1's default for long-term capital gains is
that they qualify for the 15% rate. Those that don't are
the unrecaptured Section 1250 recapture <grin> and gain on
the sale of "collectibles." Now, we know this isn't a
Section 1250 asset, so that issue is gone. Our key
questions is simple--what is a "collectible" defined as for
this purpose.

If you follow Section 1, you'll find it references Section
408(m) (the IRA collectible provisions) without the
exception for certain coins & bullion. Below is the list of
what is a collectible found at Section 408(m)(2):

"(2) Collectible defined.
For purposes of this subsection , the term "collectible"
means—

(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by
the Secretary for purposes of this subsection."

Now, while "(F)" is open ended, it clearly states "tangible,
personal property" so it doesn't appear we need to look to
see what the Secretary may have listed under that
provision--the patent, being intangible property, wouldn't
fall under there.

So my take is, yes, it qualifies for the 15% rate. If the
IRS is going to challenge you, they are much more likely, I
suspect, to attempt to question whether there were
"inappropriate" retained interests that would convert this
to a stream of royalty payments that would be ordinary
income and subject to SE tax. But if they couldn't find
that (and you've indicated they wouldn't), then I think you
are home free.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Paul A Thomas" <taxman[at]negia.net> writes:

- quote -

Royalties from copyrights, patents, and oil, gas, and
mineral properties are taxable as ordinary income.

You generally report royalties in Part I of Schedule E (Form
1040), Supplemental Income and Loss. However, if you hold an
operating oil, gas, or mineral interest or are in business
as a self-employed writer, inventor, artist, etc., report
your income and expenses on Schedule C or Schedule C-EZ
(Form 1040).

"Jack" - John H. Fisher - TaxService[at]aol.com
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=3D

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Client sells something he invented. He should be receiving
several large payments over the next several years, and then
a stream of income based on the sales of the invention.
According to the contract language the payments appear to be
for the sale of "all substantial rights" to the patent,
which according to Section 1235(a) are treated as a sale of
a long-term capital asset.

My question is, does the gain on this sale, and the
resulting receipt of payments, qualify for the 15% capital
gain rate?

The first payment was just received.

--
Snowmen fall from heaven unassembled.
-------------
Paul A. Thomas, CPA
taxman at negia.net

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