Because the capital gain rate at the time was 25 percent while the ordinary income tax rate was 77 percent, such a tax position significantly impacted the amount of tax Eisenhower would pay on the sale of his book rights. Eisenhower claimed amateur status regarding the sale of the rights to his World War II memoir. When created by an amateur, however, such self-created property was a capital asset under the introductory language of section 1221(a) and its disposition therefore generated capital gain.
#Irc 197 professional#
When created by a professional-a professional writer, composer, or artist, etc.-the created property was considered to be "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” Under section 1221(a)(1), such property was excluded from the definition of capital asset, and its disposition generated ordinary income. Until 1950, whether a copyright and similar property was considered to be a capital assets depended on whether its creator was a professional or an amateur. Some background on the origins of these provisions can provide helpful context. The conference report explains the reason for the change: “The intent of Congress is that profits and losses arising from everyday business operations be characterized as ordinary income and loss.” Historical background to section 1221(a)(3) The TCJA amended section 1221(a)(3) and added “a patent, invention, model or design (whether or not patented), a secret formula or process” to the list of assets excluded from capital asset treatment in the introductory sentence. Thus, a “copyright or a literary, musical, or artistic composition” is not a capital asset in the hands of a taxpayer “whose personal efforts created such property.” In contrast, a “letter, memorandum, or similar property” is not a capital asset in the hands of the taxpayer who created it, and is also not a capital asset in the hands of a taxpayer for whom it was prepared or produced. (C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B). (B) in the case of a letter, memorandum, or similar property, a taxpayer for whom the property was prepared or produced, or (A) a taxpayer whose personal efforts created such property, Prior to the passage of the Tax Cuts and Jobs Act (TCJA), section 1221(a)(3) provided that the following are excluded from capital gains treatment:Ī copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by: It defines capital assets to include all property held by a taxpayer, regardless of the property’s relationship to a trade or business, and then provides a list of exclusions.
#Irc 197 code#
Section 1221 is the principal code provision that determines what property is treated as a capital asset for income tax purposes. The treatment of the sale of section 197 assets revolves around recent changes to the Code as well as statutory history extending back more than half a century.
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The TJCA and the current statutory scheme This article explores some of those scenarios. However, there are scenarios under which capital gain treatment is still available for these types of IP. Under the TCJA, section 1221(a)(3) was revised to include a "patent, invention, model or design (whether or not patented), a secret formula or process," thereby excluding that IP from capital gain treatment on sale.
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The principle behind section 1221(a) is that someone whose occupation is the creation of intellectual property should pay ordinary income tax on its sale, similar to the way an attorney or doctor pays ordinary income tax on fee income. Under section 1221(a)(3), copyrights were, in some cases, denied capital gain status when sold. Introductionīefore the passage of the TCJA, patents generally qualified as capital assets under section 1221 and had an advantageous position relative to some other forms of intellectual property (IP), such as copyrights. The complexity arises both from the intersection of two Code provisions, one of which was amended by the TJCA, as well as from a dearth of IRS guidance on the matter.
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When such a company is sold in an asset or deemed asset sale, or when the company sells these patents, the question often arises: Does the sale of the patents generate ordinary income or capital gains?Īlthough the answer to this question was relatively straightforward prior to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, it is no longer straightforward. Companies in the life science and biotechnology industries often own patents or patentable material with tremendous value, sometimes valued at hundreds of millions of dollars.