Burr Alert: Patent Turmoil: Self-Created IP After Tax Reform

Articles / Publications

The "Tax Cuts and Jobs Act of 2017" (the "TCJA") impact on the tax treatment of self-created intellectual property ("IP") is resulting in a wide range of feelings depending on the nature of a particular party's IP. Contrast the howls of outrage from inventors, their investors and the technology sector in general over those provisions of the "TCJA" impacting the tax treatment of self-created IP with the loud sighs of relief from Nashville, Los Angeles, Austin and other centers of the music industry that the TCJA does not impose on them the same changes.

The source of the frustration for some and relief for others is the statement in the Joint Explanatory Statement of the Committee of Conference that the changes set forth in Section 3311 of the House Bill are intended to ensure that "gains or losses from the sale of a patent, invention, model or design (whether or not patented), or a secret formula or process [collectively "Property"]…held either by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the [creating] taxpayer (or for whom the property was created) will not receive capital gain treatment (emphasis added)."

Prior Law
An understanding of the pre-TCJA law is important in order to appreciate how the sale of self-created Property is to be treated by the TCJA. That analysis begins with IRC Section 1221(a), which defines "capital assets" to mean property held by the taxpayer unless specifically listed as an exception elsewhere. Pre-2018 Section 1221(a)(3) expressly excluded self-created copyrights, literary, musical or artistic compositions or similar property from the definition of a capital asset (in addition to separate paragraphs excluding inventory, as well as depreciable and real property, as examples). Prior law never expressly discussed self-created IP. Accordingly, such assets were characterized as "capital assets."

Download the full article, "Burr Alert: Patent Turmoil: Self-Created IP After Tax Reform" written by James M. McCarten.

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