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CGCPA
CGCPA, CPA
Category: Tax
Satisfied Customers: 3740
Experience:  over 40 years experience in tax matters
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I own a Patent personally and Ive been advised to sell it

Resolved Question:

I own a Patent personally and I've been advised to sell it on an installment sale to a new LLC I am forming, which would allow me to be taxed at capital gains rates as I receive the installment payments from the LLC.

I've been advised if instead of selling the Patent, I contribute it to the LLC, that I will lose out on the ability to pay taxes at capital gains rates.

My plan is to own 80% of the interest in the LLC, with my Mom and Sister each owning 10%. My plan is to have the LLC taxed as a Partnership, on a calendar tax year, and be member managed with me as the Manager.

I've read Chapter 1235 "Patent Holder Exception", and Section 267 "...Related Taxpayers", and Section 707, "Transactions between partner and partnership" several times. While I don't see an exact prohibition on me getting capital gains treatment on this installment sale according to the LLC as I plan to structure it, the specific prohibitions I see are "all around" the structure I am contemplating.

So my question is, "Can I receive the income from this installment sale as a captial gain?"
Submitted: 3 years ago.
Category: Tax
Expert:  CGCPA replied 3 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

If you sell a patent to a related party (in this case the LLC), the income from this is all taxed as ordinary income. Since you anticipate controlling 80% of the LLC, it is a sale to a related party.Here is a piece from the IRS to help you see this:




Sales and Exchanges Between
Related Persons



This section discusses the rules that may apply to the sale or exchange of
property between related persons. If these rules apply, gains may be treated as
ordinary income and losses may not be deductible. See Transfers to Spouse in chapter 1 for rules that
apply to spouses.


Gain Is Ordinary
Income



If a gain is recognized on the sale or exchange of property to a related
person, the gain may be ordinary income even if the property is a capital asset.
It is ordinary income if the sale or exchange is a depreciable property
transaction or a controlled partnership transaction.


Depreciable property transaction. Gain on
the sale or exchange of property, including a leasehold or a patent application,
that is depreciable property in the hands of the person who receives it is
ordinary income if the transaction is either directly or indirectly between any
of the following pairs of entities.



  1. A person and the person's controlled entity or entities.



  2. A taxpayer and any trust in which the taxpayer (or his or her spouse) is a
    beneficiary unless the beneficiary's interest in the trust is a remote
    contingent interest; that is, the value of the interest computed actuarially is
    5% or less of the value of the trust property.



  3. An executor and a beneficiary of an estate unless the sale or exchange is in
    satisfaction of a pecuniary bequest (a bequest for a sum of money).



  4. An employer (or any person related to the employer under rules (1), (2), or
    (3)) and a welfare benefit fund (within the meaning of section 419(e) of the
    Internal Revenue Code) that is controlled directly or indirectly by the employer
    (or any person related to the employer).


Controlled entity. A person's controlled entity is either of the following.



  1. A corporation in which more than 50% of the value of all outstanding stock,
    or a partnership in which more than 50% of the capital interest or profits
    interest, is directly or indirectly owned by or for that person.



  2. An entity whose relationship with that person is one of the following.





    1. A corporation and a partnership if the same persons own more than 50% in
      value of the outstanding stock of the corporation and more than 50% of the
      capital interest or profits interest in the partnership.



    2. Two corporations that are members of the same controlled group as defined in
      section 1563(a) of the Internal Revenue Code, except that "more than 50%" is substituted for "at least
      80%" in that definition.



    3. Two S corporations, if the same persons own more than 50% in value of the
      outstanding stock of each corporation.



    4. Two corporations, one of which is an S corporation, if the same persons own
      more than 50% in value of the outstanding stock of each corporation.

CGCPA, CPA
Category: Tax
Satisfied Customers: 3740
Experience: over 40 years experience in tax matters
CGCPA and other Tax Specialists are ready to help you

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