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substantial rights to a patent by any holder8 shall be treated as
the sale or exchange of a capital asset held for more than 1
year, regardless of whether or not the payments in consideration
of such transfer are contingent on the productivity, use, or
disposition of the property transferred. However, section
1235(d), provides: "Subsection (a) shall not apply to any
transfer, directly or indirectly, between persons specified
within any one of the paragraphs of section 267(b)".
Lea and Cascade are persons specified under section
267(b)(2), as modified by section 1235(d)(1); thus, Lea's sale of
the patents to Cascade was a transaction between related persons,
and section 1235(a) does not apply to the transaction. See Poole
v. Commissioner, 46 T.C. 392, 401-402 (1966).
The Leas assert that even if they are not entitled to
capital gains treatment under section 1235, they are entitled
under other provisions of the law to capital gains treatment for
the payments received for the transfers of the patents to
Cascade. The Leas cite section 1.1235-1(b), Income Tax Regs.,9
8The term "holder" includes any individual whose efforts
created such property. Sec. 1235(b)(1).
9Sec. 1.1235-1(b), Income Tax Regs., provides that if a
transfer is not one described in sec. 1.1235-1(a), Income Tax
Regs. (transfer of all substantial rights to a patent by a holder
to a person other than a related person), then
section 1235 shall be disregarded in determining
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