Hilde purchased all of the rights to a patent on a new garden tool developed by

Question

Hilde purchased all of the rights to a patent on a new garden tool developed by a friend of hers who is an amateur inventor. The inventor obtained the patent rights , set up a manufacturing company to produce and sell the garden tool, and produced substantial quantities of the tool, but he then became discouraged when no large garden company would agree to distribute the tool for him. Hilde purchased the patent rights (but not the manufacturing company) for $120,000 on October 24, 2014. Hilde had never engaged in such a transaction before, but she is a salesperson in the garden industry and thought she could succeed where her friend had failed. On June 27, 2015, she sold all patent rights to Garden Tool Company for $1,233,000. Garden Tool will manufacture the tool in its own factory and sell it to its customers. What is the nature of Hilde's gain from this transaction?

Explanation / Answer

n order to constitute a sale of a patent, one must transfer substantially all of the rights in the patent, including the right to make, use, and sell the invention.

under Section 1235, transfer of all substantial rights in or to a patent held by you will be given long-term capital gain treatment regardless of the period of time that the patent was held prior to the transfer

Long-term capital gain treatment under Section 1235 is available to you whether you are a professional or non-professional inventor and does not depend on the period of time that you held the patent prior to the transfer.

Based on the above Hilde's gain from the transaction will be taxed as long term capital gain

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