Retaining too much control over a company costs an inventor a tax benefit. Royalties he got from patent transfers don’t qualify for capital gains treatment.
Inventors who sell their entire interest in a patent they created to an unrelated person can claim long-term capital gains on the proceeds.
For this purpose, a sale to a firm in which you own 25% or more would not qualify. In this case, an inventor sold patent to a firm in which he had a 24% stake. But the Tax Court nixed capital gain treatment because despite his minority interest, the seller actually had control of the company. He alone made all of the firm’s decisions regarding licensing and patent transfers. The other shareholders were friends who didn’t participate (Cooper, 143 TC No. 10).