On December 1, 2004, Gray Manufacturing Company (a corporation) purchased another company’s assets, including

Question

On December 1, 2004, Gray Manufacturing Company (a corporation) purchased another company’s assets, including a patent. The patent was used in Gray’s manufacturing operations; $40,500 was allocated to the patent, and it was amortized at the rate of $225 per month. On June 30,2006, Gray sold the patent for $70,000. Twenty months of amortization had been taken on the patent. What are the amount and nature of the gain Gray recognizes on the disposition of the patent?
Write a letter to Gray discussing the treatment of the gain. Gray’s address is 6734 Grover Street, Back Bay Harbor, ME 23890. The letter
Should be addressed to Siddim Sadath, Controller.

Answer 1

The gain will be Section 1231 gain since the Patent is a capital asset. It will be a long-term capital gain, but that doesn't really matter to a regular C corporation.

The amount of gain will be $70,000 - 40,500 + (225 x 20) = $34,000.

Just for your information, the Patent when purchased was considered a Section 197 intangible asset, subject to amortization over 180 months.