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

question 63

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. Hiram assigned 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 the above.

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Definitions:

Controlling Interest

An ownership interest in a business entity through which a shareholder or group of shareholders can exert influence or control over management and operating policies.

Net Income

The total revenue minus expenses, taxes, and costs over a specific period, indicating the profit earned by a company.

Amortized

The gradual reduction of a debt over a period of time through regular payments that cover both interest and principal.

Bonds Payable

Long-term debt instruments issued by corporations or governments to raise capital, with an obligation to pay interest and repay principal at a specified date.