PAOO Greatest Hits

Originally published on Passive Activities and Other Oxymorons on December 2, 2010

I started this blog on December 28, 2009. I seeded it with a couple of unpublished articles I had written. One was of some practical import on the necessity for scrupulous transaction discipline if you wanted to have family limited partnerships respected. The other is on the tax aspects of transactions in the virtual world. The latter is currently of no practical value, but its time is coming. The blog did not begin in earnest until June of this year. I soon adopted a Monday, Wednesday, Friday schedule and a discipline of tying the posts to specific recent developments (sometimes the rope is pretty long).

Google provides me with a wealth of statistical information so I am able to identify the posts that have generated the most traffic. I'm relatively pleased with the ranking based on the peoples choice. The actual number of hits are of course a deep proprietary secret, but I feel safe in releasing the relative ranking. So the top five all time greatest posts based on traffic are


1.Does Tax Court Ruling on Gender Reassignment Go Far Enough ? This post owes its popularity to a plug from distinguished science fiction author and fellow Son of Xavier , John Sundman. I find it particularly gratifying. I am the longest serving board member of Just Detention International, formerly known as Stop Prisoner Rape. SPR had filed an amicus brief in the landmark decision Farmer v Brennan and frequently quoted the comment of Justice Blackmun:

The horrors experienced by many young inmates, particularly those who, like petitioner, are convicted of nonviolent offenses, border on the unimaginable. Prison rape not only threatens the lives of those who fall prey to their aggressors, but is potentially devastating to the human spirit

The plaintiff, Dee Farmer, was a pre-op male to female transsexual imprisoned in the general population of a male federal penitentiary. Transgendered persons, who are generally imprisoned based on their original biological gender, are among the groups most vulnerable to sexual exploitation in prison. So my work with JDI has made me sensitive to their issues.

The other thing that fascinates me about the case is that the taxpayer Rhiannon G. O'Donnabhain had changed her name from Robert Donovan. Is there some sort of connection between going from male to female and Irish American to Irish ?

2.Windfall For Unmarried Couples In this post I introduce Robin and Terry, the couple of indeterminate gender and marital status who were created to help me avoid awkward pronoun problems. The post concerns CCA 201021050 which discusses the federal tax implications of California community property laws on registered domestic partners. The ruling had received very little attention when I posted it. It may have been overshadowed by Perry vs. Schwarzenegger. I was also visiting California at the time so I was waiting for the call to be interviewed by Ellen. The call still hasn't come. My Robin and Terry posts did motivate an old friend to dub me "Friend of the Homosexual". I asked him if that was an official designation and he indicated it was so since then I have indicated that this is an "award winning" blog.

3.IRS To Stop Lousing Up Short Sales As I am writing, this post is still climbing. It is the closest I have come to a scoop. It concerns PMTA 2010-058 which relaxes IRS policy on releasing liens in short sale situations. It seems like there should be some interest in it and I have gotten some feedback that it is significant, but as of now (December 2, 2010), I seem to be the only person writing about it.

4. Incentive to Innovate This post deviated from my "current development" policy. I was at Mass Innovation Night and was surprised to learn that the special tax treatment of patents is not nearly as well known as it should be in those circles. The high traffic to this post was probably due to reciprocity since I mentioned a couple of presenters..

5. It's Over This was one of my favorites so I'm glad it did well. It concerns the failed tax shelters of EMC founder Richard Egan. It got me on a roll of historic metaphors and reflection on the tax business.

I have really enjoyed working on this blog and hope that you have enjoyed it also.

Incentive to Innovate

This was originally published on September 19th, 2010.

I attended the Mass Innovation Night Wednesday  It is a pretty neat event. Neuron Robotics   is making a central control unit to use in robot applications.  Another neat start up was Isabella Products which has a picture frame with a linked e-mail address.  I really wish my mother was still around.  I would definitely have gotten her one.  I was chatting with an attorney who does a lot of start-ups and I was really surprised to find that he wasn't aware of the special tax treatment available for patents.  It's not the first time that I've run into so I thought it might be worth a blog post even though I haven't noticed any striking developments in that area.

Code Section 1235 applies to inventors and their financial backers.  It allows capital gains treatment on payments in exchange for the transfer of a patent even if the payments are over a period of time or contingent on the use of the property.  An analogy that can be used for distinguishing capital transactions from ordinary income is that of a tree and its fruit.  If you sell the tree that's a capital transaction.  If you sell the fruit that is ordinary income. This distinction and the ways that  people try to confound it are sources of much tax complexity which I will discuss from time to time. There is an assumption that when payments for property are spread over time, some portion of the payments represent compensation for the time value of money (which used to amount to something).  Another principle is that things that you create yourself are not capital assets in  your hand.

Code Section 1235 suspends both these principles when it comes to compensating inventors.  Payments that qualify under 1235 are 100% capital gain even though long deferred and the relief is targeted to the creators.  The requirements for 1235 treatment are that the taxpayer be a "holder", which is either the inventor or someone who acquired all rights from the inventor before the invention is reduced to practice.  The inventor can transfer rights even before patents are issued and still qualify for capital gains treatment.  In one case the courts allowed 1235 treatment for the sale of patentable designs even though no patents were ultimately applied for.

In order to qualify for the treatment the sale must be of all substantial rights in the patent or an undivided interest in all the substantial rights.  This might create a significant business issue, since a sale that is restricted to a particular industry or geographic area will not qualify.  I think it is possible that 1235 is not thought about a lot, because the end game of a lot of start ups is the creation of a public company or being taken over by one.  I think this is what accounts for the strange popularity of C corporations.  Nonetheless, it can be a great benefit in the right circumstances and should not be neglected.