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

question 70

Multiple Choice

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.

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Definitions:

Standard Cost System

A cost accounting system that uses standard costs for inventory valuation and cost control, comparing actual costs to standard costs to assess performance.

Direct Labor Costs

The wages paid to workers directly involved in the manufacturing of products or the provision of services.

Cash Account

A financial account that records the amounts of cash available for transactions or held as reserves.

Variable Manufacturing Overhead

Indirect production costs that vary with the level of production output, such as utilities or raw materials.