Source: https://surlysubgroup.com/2018/01/23/tcja-1221a3-1235-disconnect/
Timestamp: 2018-11-18 05:55:03
Document Index: 584880237

Matched Legal Cases: ['§ 1221', '§ 1221', '§ 1221', '§ 1235', '§ 1221', '§ 1235', '§ 1235', '§ 1235', '§ 1235', '§ 1235', '§ 1221', '§ 1221', '§ 1235', '§ 1221', '§ 1235', '§ 1221', '§ 1235']

Tax Cuts and Jobs Act: §§ 1221(a)(3)/1235 Disconnect – The Surly Subgroup
The Senate version of the TCJA contained neither provision.
Section 13314 of the Conference Report failed to repeal the favorable § 1221(b)(3) election for composers, added the quoted language above to § 1221(a)(3) for patents and similar property, but failed to repeal § 1235. Thus, § 1221(a)(3) effectively provides that gain realized on the sale of a patent by its creator (or by a taxpayer whose basis is determined by reference to the creator’s basis) is ordinary gain. At the same time, retained § 1235 provides that such gain is long-term capital gain, so long as the seller sells all substantial rights to the patent. Both cannot be true.
As described above, § 1235 provides favorable long-term capital gain treatment even to sellers other than the inventor. Did Congress retain § 1235 to ensure capital gain treatment to sellers other than the inventor, so long as they complied with the § 1235 rules described above? If that was the intent, Congress needed to amend the definition of “holder” in § 1235(b)(1) to exclude the inventor, which it failed to do.
And why in heaven retain the § 1221(b)(3) rule permitting composers to sell their music at capital gains rates while burdening inventors with ordinary gain? Enacted in 2005 as a temporary measure but made in permanent in 2006, § 1221(b)(3) is perhaps the best example of the strength of sheer lobbying power. As mentioned above, the Country Music Association lobbied Congress heavily for this provision. The legislative history contains a single sentence: “The Congress believes it is appropriate to allow taxpayers to treat as capital gain the income from a sale or exchange of musical compositions or copyrights in musical works the taxpayer created.” But why is it “appropriate”? The sale of a song’s copyright by the composer represents a return on labor just as much as an artist’s sale of her painting, an author’s sale of her copyright to a book, or now an inventor’s sale of her patent, all of which produce ordinary gain (unless § 1235 continues to apply to the latter). What policy rationale could conceivably justify this distinction? Could it, by chance, have anything to do with the fact that Senate Finance Committee Chair Orrin Hatch is a composer? Just sayin….
In any event, add resolving the disconnect between amended § 1221(a)(3) and unamended § 1235 to the Technical Corrections Act of 2018.
Posted on January 23, 2018 January 22, 2018 by Guest BloggersPosted in 2017 Tax Reform, Legislation, Taxes and PoliticsTagged capital gains, inventors, IRC § 1221, IRC § 1235, patents, TCJA, technical corrections.
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