tax question?

Question

Mateen, an inventor, obtained a patent on a chemical process to clean old aluminum siding so that it can be easily repainted. Mateen has no tax basis in the patent. Mateen does not have the capital to begin manufacturing and selling this product, so he has done nothing with the patent since obtaining it two years ago. Now a group of individuals have approached him and offered two alternatives. Under one alternative, they will pay Mateen $600,000 (payable evenly over the next 15 years) for the exclusive right to manufacture and sell the product. Under the other, they will form a business and contribute capital to it to begin manufacturing and selling the product; Mateen will receive 20% of the company’s shares of stock in exchange for all of his patent rights. Discuss which alternative is better for Mateen.

Answer 1

This is someone's homework................

Answer 2

Take the stock. If the product is as good as Mateen claims, the 20% interest could be worth more than $40,000/ year. In addition, if Mateen holds on to the stock for more than 1 year, and the stock has appreciated, he will have a capital gain, which is currently taxed at 15%, rather than at the rate associated with the $40 K.

(Unless Mateen is a complete moron, he will negotiate, as part of the terms of the surrender of the patent, a secure job with the new company.)

Answer 3

Righto - which class is this for?

This is a matter of risk vs. reward. The risk of receiving cash and continuing to receive it would be generally considered lower than accepting stock in an untested venture, but the stock has the potential for much higher reward.

His best choice would be C. Hire a damn good team of an attorney and a financial advisor and an accountant, spend the few bucks for their qualified advice, and make a decision.

You didn't throw in the other circumstances to consider:

a) Mateen is flat broke and has no job. If so, then private stock won't buy him a cup of coffee.

b) Mateen is the son of the India P.M. If so, then Mateen can find investors to start his own company.

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