§1235 — Title 26 Internal Revenue Code | U.S. Code

Summary

A transfer (not a gift or inheritance) of all major rights in a patent, or of an undivided share that includes part or all of those rights, is treated as the sale of a capital asset held for more than 1 year. That is true even if the buyer pays in installments while using the patent or if payments depend on how much the patent is used or earns. "Holder" means either the inventor or someone who bought the inventor’s interest for money before the invention was actually completed, except if that buyer is the inventor’s employer or a related person. Transfers between certain related parties are excluded, but when using those related‑party rules here, substitute "25 percent" for "more than 50 percent" and treat family as only spouse, ancestors, and lineal descendants. Nonresident aliens are covered by a special rule under section 871(a).

Title 26, §1235

Internal Revenue Code — Source: USLM XML via OLRC

(a)A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are—

(1)payable periodically over a period generally coterminous with the transferee’s use of the patent, or

(2)contingent on the productivity, use, or disposition of the property transferred.

(b)For purposes of this section, the term “holder” means—

(1)any individual whose efforts created such property, or

(2)any other individual who has acquired his interest in such property in exchange for consideration in money or money’s worth paid to such creator prior to actual reduction to practice of the invention covered by the patent, if such individual is neither—

(A)the employer of such creator, nor

(B)related to such creator (within the meaning of subsection (c)).

(c)Subsection (a) shall not apply to any transfer, directly or indirectly, between persons specified within any one of the paragraphs of section 267(b) or persons described in section 707(b); except that, in applying section 267(b) and (c) and section 707(b) for purposes of this section—

(1)the phrase “25 percent or more” shall be substituted for the phrase “more than 50 percent” each place it appears in section 267(b) or 707(b), and

(2)paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants.

(d)For special rule relating to nonresident aliens, see section 871(a).

Notes & Related Subsidiaries

Editorial Notes

Amendments

2014—Subsec. (b)(2)(B). Pub. L. 113–295, § 221(a)(82)(B), substituted “subsection (c)” for “subsection (d)”. Subsecs. (c) to (e). Pub. L. 113–295, § 221(a)(82)(A), redesignated subsecs. (d) and (e) as (c) and (d), respectively, and struck out former subsec. (c). Prior to amendment, text of subsec. (c) read as follows: “This section shall be applicable with regard to any amounts received, or payments made, pursuant to a transfer described in subsection (a) in any taxable year to which this subtitle applies, regardless of the taxable year in which such transfer occurred.” 1998—Subsec. (a). Pub. L. 105–206, § 6005(d)(4), substituted “18 months” for “1 year” in introductory provisions. Pub. L. 105–206, § 5001(a)(5), substituted “1 year” for “18 months” in introductory provisions. 1984—Subsec. (a). Pub. L. 98–369, § 1001(b)(19), (e), substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See

Effective Date

of 1984 Amendment note below. Subsec. (d). Pub. L. 98–369, § 174(b)(5)(C), substituted “section 267(b) or persons described in section 707(b)” for “section 267(b)” and “section 267(b) and (c) and section 707(b)” for “section 267(b) and (c)” in introductory provisions, and substituted “section 267(b) or 707(b)” for “section 267(b)” in par. (1). 1976—Subsec. (a). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, § 1402(b)(1)(V), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977. 1958—Subsec. (d). Pub. L. 85–866 substituted provisions set out as subsec. (d) for provisions reading “Subsection (a) shall not apply to any sale or exchange between an individual and any other related person (as defined in section 267(b)), except brothers and sisters, whether by the whole or half blood.”

Statutory Notes and Related Subsidiaries

Effective Date

of 2014 AmendmentAmendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a

Savings Provision

, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

Effective Date

of 1998 AmendmentAmendment by section 5001 of Pub. L. 105–206 effective Jan. 1, 1998, see section 5001(b)(2) of Pub. L. 105–206, set out as a note under section 1 of this title. Amendment by section 6000(d)(4) of Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title.

Effective Date

of 1984 AmendmentAmendment by section 174(b)(5)(C) of Pub. L. 98–369 applicable to transactions after Dec. 31, 1983, in taxable years ending after that date, see section 174(c)(2)(A) of Pub. L. 98–369, set out as a note under section 267 of this title. Amendment by section 1001(b)(19) of Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.

Effective Date

of 1976 Amendment Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.

Effective Date

of 1958 Amendment Pub. L. 85–866, title I, § 54(b), Sept. 2, 1958, 72 Stat. 1644, provided that: “The amendment made by subsection (a) [amending this section] shall apply with respect to taxable years ending after the date of the enactment of this Act [Sept. 2, 1958], but only with respect to transfers after such date.”

§1235 Sale or exchange of patents

Summary

Title 26, §1235

Notes & Related Subsidiaries

Editorial Notes

Amendments

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Statutory Notes and Related Subsidiaries

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Savings Provision

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