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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29965
Experience:  Taxes, Immigration, Labor Relations
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Question and/or tax attorney: In 2015 I sold all rights

Customer Question

Question for CPI and/or tax attorney: In 2015 I sold all rights to a software product I created to a corporation (owned by my son). The software incorporates features that are expected to be patentable and the corporation is in the process of applying for a patent. Can the income from this sale be treated as long term capital gains under Section 1235? I have received conflicting advice from my tax advisor (not a CPA), but it appears to me that it could be treated as a capital asset for its patent and not simply as a copyright.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
If you are selling a patent - then yes.But if you are not selling a patent - you are selling a self-created section 197 intangible - that is not amortizable section 197 intangible - and I do not see how we may treat the gain as long term.The best you might try to do to classify that as the selling as an asset - so that income would not be subject to self-employment tax.But based on your information - I do not see any ground to treat that gain as long term for you personally.
Customer: replied 1 year ago.
The software contains portions that are (presumably) patentable and a patent is being sought. In State Street Bank & Trust v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), the U.S. Court of Appeals for the Federal Circuit held that all software is inherently patentable. Given this overall patentability and the specific expectation of receiving a patent related to this software, would you agree that this is "selling a patent", as you described it in your response? If not, can you provide any information specifically pertaining to software IP to support this one way or another? Thanks for your help.
Expert:  Lev replied 1 year ago.
I personally do not agree that you are selling the patent simply because you do not have a patent and did not actually applied for the patent.
Expert:  Lev replied 1 year ago.
But it doesn't matter what I actually think...More important that the auditor (in case of the audit) will think similarly - and I believe they will NOT allow the long term capital gain treatment.As I mentioned - assuming the software product was created in the course of your ordinary business activity - the sale might be re-classified as self-employment income - subject to both - regular income tax and self-employment tax. And that most likely will the outcome if you are audited..I appreciate if you take a moment to rate the answer.Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all tax related issues.