There is an IRS Technical Advice
Memorandum dated Aug.8, 2002 and released Dec 6, 2002 in
which IRS ruled that the royalty payments should be treated as long-term
capital gain under Section 1235. A number of cases are cited in that TAM. However,
most of what is written about IRC 1235 and similar fact patterns occurred prior
to 2014 and therefore prior to the existence of the Net Investment Income Tax
(NIIT). This raises a new question about the taxation of royalty payments
afforded long-term capital gain treatment under IRC 1235 - is the gain subject
to NIIT, or conversely, is there an argument that can be made that the gain is
exempt from NIIT under the theory that the gain was derived in the ordinary
course of a non-passive trade or business. Can the inventor be deemed to be in
the business of inventing patentable property such that the capital gain from
such property would qualify as exempt from NIIT.
I am seeking support for making
such an argument or any argument that would enable a capital gain under IRC
1235 to be deemed exempt from NIIT.
