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. Hiram assigned 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 ????????.
E) None of the above.

Question

Quizplus · Accepted Answer

Hiram assigned all substantial rights in the patent, which means he transferred ownership of the patent. As a result, he received a lump sum payment and a royalty per device sold. The lump sum payment is considered a sale of a capital asset, which results in long-term capital gain since Hiram held the patent for more than one year. The royalty payments are also considered capital gain since they are payments for the use of a capital asset (the patent) and were received after the transfer of the patent ownership. Therefore, Hiram automatically has long-term capital gain from both the lump sum payment and the royalty payments.

Hiram Is a Computer Engineer And, While Unemployed, Invents a Switching