Question

Mr. Hiram is a computer engineer and, while unemployed, invents a switching device for computer networks. He patents the device but does 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 assigns the patent to a computer manufacturing company. He assigns all substantial rights in the patent. Which of the following is correct?

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

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

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

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

e. None of these.

Answer 1

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

Lumpsum payment for patent is taxable under the head 'Long term capital gain' and royalty income ($1 per unit sold) is taxable under 'Profit and Gains of Business or Profession'