Hidasu Is a Mechanical Engineer And,while Unemployed,invents a Switching Device

question 62

Multiple Choice

Hidasu is a mechanical engineer and,while unemployed,invents a switching device for computer networks.He patents the device,but does not reduce it to practice.Hidasu has a zero tax basis for the patent.In consideration of $600,000 plus a $2 royalty per device sold,Hidasu assigns the patent to a computer manufacturing company.Hidasu assigned all substantial rights in the patent.Which of the following is correct?

• A) Hidasu automatically has long-term capital gain from the lump sum payment, but not from the royalty payments.
• B) Hidasu automatically has long-term capital gain from the royalty payments, but not from the lump sum payment.
• C) Hidasu automatically has long-term capital gain from both the lump sum payment and the royalty payments.
• D) Hidasu does not have automatic long-term capital gain from either the lump sum payment or the royalty payments.
• E) None of the above.

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Definitions:

Asset Investment

The use of funds to purchase property, securities, or other assets to generate returns or achieve strategic goals.

Operating Assets

Assets used in the day-to-day operations of a business to generate revenue, excluding investment and idle assets.

Controllable Margin

A measure of profitability that represents the amount of income over which managers have control, usually after direct costs have been deducted from revenues.

ROI

Return on Investment, a measure used to evaluate the financial performance of an investment by dividing the benefit (or return) of the investment by its cost.