Question

Hiram is a computer engineer. While unemployed, he invented a switching device for computer networks. He patented the device, but did not reduce it to practice. Hiram has a zero tax basis for the patent. In consideration of $800,000 plus a $1 royalty per device sold, Hiram assigned the patent to a computer manufacturing company. Hiram assigned all substantial rights in the patent. Which of the following is correct?

a.         Hiram has long-term capital gain from the lump sum payment, but not from the royalty payments.

b.         Hiram has long-term capital gain from the royalty payments, but not from the lump sum payment.

c.         Hiram has long-term capital gain from both the lump sum payment and the royalty payments.

d.         Hiram does not have long-term capital gain from either the lump sum payment or the royalty payments.

e.         None of the above is correct.

Answer 1

Long term capital Gain : The tax which is levied on the investments which are held for more than one year is known as long term capital gain.Where as tax which is levied on the investments which are held for less than a year is known as short term capital gain.

A long term capital gain arises from the sale of the asset which is held for more than twelve months at the time of sale.Long term capital gain tax rates differ and are based on the taxable income.Here, Hiram sold the device and received the sale consideration of $800,000 which is being held for longer period (it is known because it was patented and devices are being patented for a period of 20 years) so Hiram is eligible for long term capital gain.

Royalty payments : Royalty payment is the amount paid by one party to another party for using their work. It includes the payments made for inventions,literary works and music. Here,hiram invented switching device and received royalty payment of one dollar per device sold.

So, hiram has long term capital gain from both the lump sum payments and the royalty payments.