Sale of patent

[Catherine]

Hi folks --

Another question to submit to the great minds of the tax newsgroup. I have my thoughts, and will leave those out of the mix as best I can - I want your thoughts, not your opinion of my thoughts.

Client has a patent. Expenses for acquiring the patent have been expensed over the years until it was granted, as allowed. Client has been approached by potential purchasers of the patent, and wants information on potential tax treatment and consequences upon sale. Client also wishes, as personal goal, to donate 10% of profit (if any) to charity, monies to come from the proceeds of the sale.

My concerns:

Categorizing income properly under the IRC as sale of intangible asset and then proper reporting of same.

Dealing properly with the cost of patent acquisition in determining gain on sale.

Accounting for possible AMT and charitable deduction limitation.

My request:

There is lots of info in the easy-reference materials on acquisition of intangible assets -- but much less on their sale! So, what are your favorite reference sources to look up details?

For those who have done this before - warnings of pitfalls and gotcha's that I should be on the lookout for.

TIA,

Catherine

[jainen]

>>Expenses for acquiring the patent have been expensed over the years until it was granted, as allowed.<<

In what way was this allowed? If he wants to treat this as a capital asset he would have had to call those investment expenses. Otherwise it sounds to me like a business asset with no basis. I would guess AMT will treat the sale in exactly the same way, though the higher income level might cause adjustments elsewhere. The tithe is irrelevant to the question except for general planning purposes.

[Catherine]

>>Expenses for acquiring the patent have been expensed over the years until it was granted, as allowed.<<

In what way was this allowed? If he wants to treat this as a capital asset he would have had to call those investment expenses. Otherwise it sounds to me like a business asset with no basis. I would guess AMT will treat the sale in exactly the same way, though the higher income level might cause adjustments elsewhere. The tithe is irrelevant to the question except for general planning purposes.

Patents come under special rules allowing legal expenses to be taken on Schedule C with no offsetting income for years. I found the code section I need elsewhere, thank you.

And the tithe info was indeed just for planning purposes, although someone elsewhere recommended legally giving 10% ownership to the charity before the sale, to save the client the capital gains tax on that 10%. Depending on what it gets sold for, that savings could be substantial.