Paul L. Caron

Wednesday, August 1, 2018

Polito: The TCJA's Self-Created Patents Goof

ApolitoI'm working Paul's side of the street here.  My colleague Anthony Polito (the best-dressed member of the Suffolk Law faculty) has posted Did Congress Goof? TCJA and the Taxation of Self-Created Patents and Inventions on SSRN.  Here is the abstract:

Congress, by the Tax Cuts and Jobs Act of 2017, amended the Internal Revenue Code so that patents and inventions created by the personal efforts of a taxpayer disposing of them are not capital assets, and therefore generate ordinary gain or loss. In and of itself, the action seems straightforward enough. It represents a policy choice about which reasonable minds can certainly differ, but it is a clear policy choice.

Congress, however, did not repeal or amend another, pre-existing, provision specifically granting capital gain treatment to specifically the same class of assets. What is the effect of Congress’s action under the circumstances? It is possible to reconcile the provisions as a matter of pure textual analysis. That reconciliation, however, seems quite contrary to the desire or intent of those who initiated the amendment because it leaves most gain from the disposition of the assets in question taxed at capital rather than ordinary rates.

This Article does not address the matter as a question of tax policy. Rather the question this Article addresses is the efficacy of the legislative process. What are the prospects for the proposition that self-created patents and inventions generate ordinary income as the Internal Revenue Code stands today? What action should be taken if the desire truly is to impose such ordinary income taxation and to deny capital gain taxation?

In the end, if the desire is to tax the disposition of self-created patents and inventions at ordinary rate, legislative action is the best option. This Article demonstrates that courts or the Treasury might rescue that resort, but that might not happen. If there is a bottom line to the analysis, it is this. Congress should, and should be expected to, clean up its own messes.

Jeff Lipshaw, Scholarship, Tax, Tax Profs | Permalink