McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 45

{Research} Becky recently discovered some high-tech cooking technology that has advantages over microwave and traditional ovens.She received a patent on the technology that gives her exclusive rights to the technology for 20 years.Becky would prefer to retain the patent, but she doesn't want to deal with the manufacturing and marketing of the technology.She was able to reach a compromise.A little over a year after she secured the patent, Becky signed a contract with DEF Company giving DEF control to manufacture and market the technology.In exchange, Becky is to receive a royalty based on the sales of the technology.For tax purposes, Becky is not sure how to treat her arrangement with DEF.If the exchange with DEF is treated as a sale, she will recognize long-term capital gain because the patent is a capital asset held for more than a year.If the exchange is not treated as a sale, Becky will recognize ordinary income as she receives the royalties.(Hint: IRC § 1235 and www.icpa.rg/pubs/taxadv/online/aug2000/clinic5a.tm)a.Is it possible for Becky to treat the exchange with DEF as a sale even though she never relinquishes actual title of the patent? If so, what requirements must she meet to treat the contract as a sale for tax purposes?
b.Does your answer to the question above change if Becky's contract with DEF gave DEF Company control over the income from the patent for the next 10 years of the patent's remaining 19-year life?