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

question 76

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 ????????.
• E) None of the above.

---

Definitions:

Contract

A legally enforceable agreement between two or more parties with mutual obligations.

Voidable

A legal term describing a contract or transaction that may be declared invalid by one of the parties to the contract.

Minor's Option

The legal ability of a minor to affirm or void contracts and agreements, based on their lack of legal capacity to enter into contracts.

Deposit

An upfront payment or security placed in trust or as a guarantee for the fulfillment of an obligation or purchase.