26 U.S.C. § 1235

Sale or exchange of patents

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(a) GeneralA 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) “Holder” definedFor 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) Related personsSubsection (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) Cross reference

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

(Aug. 16, 1954, ch. 736, 68A Stat. 329; Pub. L. 85–866, title I, § 54(a), Sept. 2, 1958, 72 Stat. 1644; Pub. L. 94–455, title XIV, § 1402(b)(1)(V), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 98–369, div. A, title I, § 174(b)(5)(C), title X, § 1001(b)(19), (e), July 18, 1984, 98 Stat. 707, 1012; Pub. L. 105–206, title V, § 5001(a)(5), title VI, § 6005(d)(4), July 22, 1998, 112 Stat. 788, 805; Pub. L. 113–295, div. A, title II, § 221(a)(82), Dec. 19, 2014, 128 Stat. 4049.)Editorial NotesAmendments

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 SubsidiariesEffective Date of 2014 Amendment

Amendment 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 Amendment

Amendment 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 Amendment

Amendment 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.”

Notes of Decisions

Cited in 45 cases (1 in the last 5 years), 1955–2022 · leading case: Cooper v. Comm'r, 877 F.3d 1086 (9th Cir. 2017).

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Cooper v. Comm'r, 877 F.3d 1086 (9th Cir. 2017). · cites it 10× “CIR SUMMARY* Tax The panel affirmed the Tax Court’s decision, after a bench trial, on a petition for redetermination of federal income tax deficiencies in which taxpayers sought capital gains treatment of patent-generated royalties pursuant to 26 U.S.C. § 1235 (a). Taxpayer…”

Spiridon Spireas v. Comm'r of Internal Reven, 886 F.3d 315 (3rd Cir. 2018). · cites it 8× “Spireas claimed the favorable capital gains treatment pursuant to 26 U.S.C. § 1235 (a), which applies to money received “in consideration of” “[a] transfer .”

Freda v. Comm'r of Internal Revenue, 656 F.3d 570 (7th Cir. 2011). · cites it 2× “§ 1222 (3), which defines as "long-term capital gain" proceeds from the "sale or exchange of a capital asset held for more than 1 year," and 26 U.S.C. § 1235 , which provides that "[a] transfer .”

Norman & Arlene Rodman, Appellants-Cross-Appellees v. Comm'r of Internal Revenue, Appellee-Cross-Appellant, 542 F.2d 845 (2d Cir. 1976). · cites it 2× “Rather, appellants make the bold assertion only that the joint venture was entitled to long term capital gains treatment through the special provisions of § 1235 of the Code, 26 U.S.C. § 1235 , 6 which generally provides such treatment for the transfer of a patent or patent…”

Charlson v. United States, 208 Ct. Cl. 296 (Ct. Cl. 1975). · cites it 8× “Charlson under their patent sales agreement are ordinary income rather than capital gains, because, for the purposes of 26 U.S.C. § 1235 , Germane is a sham corporation and/or controlled by Mr.”

Harper v. Tax Comm'r, 506 A.2d 93 (Conn. 1986). · cites it 3× “He reported the income received from the sales as a capital gain; 26 U.S.C. § 1235 (a); 2 and elected to pay the federal taxes on an installment basis.”

Lee v. United States, 302 F. Supp. 945 (E.D. Wis. 1969). · cites it 5× “After discussing incorporation with the accountant and the attorney, Lee was interested in the tax benefits both of a corporation generally and of 26 U.S.C. § 1235 . In discussing the future course of the business with the attorney and the accountant, it was determined that Lee…”

Stephen Wyden v. Comm'r of Patents & Trademarks, 807 F.2d 934 (Fed. Cir. 1986). “(21)(22) 26 U.S.C. §§ 1235 , 1441 (patent sales as capital gains).”

Est. of Richard Baier v. Comm'r of Internal Revenue, 533 F.2d 117 (3rd Cir. 1976). “Payments received by an employee as compensation for services rendered as an employee under an employment contract requiring the employee to transfer to the employer the rights to any invention by such employee are not attributable to a transfer to which section 1235 applies.…”

United States v. Zacks, 375 U.S. 59 (1963). “5 The issue was settled for the future in 1954 by the enactment of § 1235 of the 1954 Code, 26 U. S. C. § 1235 , 68A Stat. 329. Section 1235, applicable only prospectively, contains provisions identical in relevant part to those quoted above from § 117 (q) .”

Walter Juda & Renee Juda v. Comm'r of Internal Revenue, 877 F.2d 1075 (1st Cir. 1989). “Appellants, Walter and Renee Juda (Juda), appeal the Tax Court’s determination that they are not entitled to capital gains treatment under 26 U.S.C. § 1235 1 *1076 for certain transactions involving the transfer of patents.”

Thomas L. Fawick & Marie Fawick v. Comm'r of Internal Revenue, 436 F.2d 655 (6th Cir. 1971). “Specifically, the issue on this appeal is whether or not an exclusive patent license having a field-of-use restriction is a transfer of “property consisting of all substantial rights to a patent” within the meaning of § 1235 of the Internal Revenue Code of 1954, 26 U.S.C. § 1235…”

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— 26 U.S.C. § 1235(a) — 1 case

Edward D. Wilkerson & Marie v. Wilkerson v. United States, 435 F.2d 845 (3rd Cir. 1970).

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