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Tax Question: Cap Gains Date Sold
Old 02-04-2008, 04:44 PM   #1
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Tax Question: Cap Gains Date Sold

I'm still receiving some capital gains from the sale of assets of my company (that is, the source code). I sold the company on 2/1/2006, and the guy who bought it pays me an amount each month based on his sales.

Note that it is the assets that were sold and not the business.

I am reporting these capital gains on a Schedule D.

The form asks for the date that the property was sold.

Should I put "Various" in that field??

Thanks,
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Old 02-04-2008, 06:42 PM   #2
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Yup various works given that it has been well over a year.
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Old 02-04-2008, 06:48 PM   #3
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Isn't this an installment sale with the sale date 2/1/06?
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Old 02-04-2008, 11:40 PM   #4
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The untold story behind T-Al's tax struggles is that his beaver... uhm... eh...

... well, let's just say that the beaver got a little extra this year:

http://www.godaddy.com/gdshop/media/...i=11526&tab=sb

(Yup. Scroll down and click the "play" button.)
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Old 02-05-2008, 09:54 AM   #5
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Quote:
Isn't this an installment sale with the sale date 2/1/06?
That's what I was thinking, too. On the 2006 tax return, my accountant didn't structure it that way [no accountant now -- I'm flying solo]. I receive a percentage of the sales each month. If I call it an installment sale, there's no way to know ahead of time what the full price is.

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Yup various works given that it has been well over a year.
Do you mean "as long as what was sold had been held for well over a year"?

Thanks
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Old 02-05-2008, 01:32 PM   #6
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Originally Posted by TromboneAl View Post
That's what I was thinking, too. On the 2006 tax return, my accountant didn't structure it that way [no accountant now -- I'm flying solo]. I receive a percentage of the sales each month. If I call it an installment sale, there's no way to know ahead of time what the full price is.



Do you mean "as long as what was sold had been held for well over a year"?

Thanks
Will the buyer pay a percentage of sales for a fixed number of months or years? If so, then it's not an installment - that would require an upfront contract sale price. You are selling your company a bit at a time. You just need to make sure the costs are apportioned correctly to the income.

Note: I'm not an accountant, but I have slept recently in a holiday inn.

Michael
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Old 02-05-2008, 01:47 PM   #7
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It sounds like that it the case Michael. So his sale dates likely coincide with the dates he was paid.
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Old 02-05-2008, 02:14 PM   #8
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Originally Posted by TromboneAl View Post
I'm still receiving some capital gains from the sale of assets of my company (that is, the source code). I sold the company on 2/1/2006, and the guy who bought it pays me an amount each month based on his sales.

Note that it is the assets that were sold and not the business.

I am reporting these capital gains on a Schedule D.
I'm confused. You sold the asset (the source code) based on the sales collected but there is no fixed price?

In reality, aren't you are just collecting a percentage of the sales, so there is no actual asset sold. If this is the case, are you sure you sold a capital asset? It sounds more like you may have sold your income stream in which case it may not be a capital gain, but may be ordinary income maybe even subject to self-employment taxes.

I guess it's hard to understand this without actually reading the P & S Agreement.
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Old 02-05-2008, 02:32 PM   #9
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Quote:
Will the buyer pay a percentage of sales for a fixed number of months or years?
Yes, exactly. For three years.

Quote:
In reality, aren't you are just collecting a percentage of the sales, so there is no actual asset sold.
The lawyer who drew up the agreement was careful to word the agreement so that it was a sale of the intellectual property, and would be treated as capital gains.

Quote:
So his sale dates likely coincide with the dates he was paid.
I'm figuring I have three options:
  1. Lump all the payments for the year, and arbitrarily choose a date
  2. List 12 payments and 12 dates
  3. Put in "Various" (for the sale dates -- TaxAct does not like this)
I'm leaning towards option 1, which is what my accountant did for 2006.
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Old 02-05-2008, 03:17 PM   #10
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Yes, exactly. For three years.

The lawyer who drew up the agreement was careful to word the agreement so that it was a sale of the intellectual property, and would be treated as capital gains.

I'm figuring I have three options:
  1. Lump all the payments for the year, and arbitrarily choose a date
  2. List 12 payments and 12 dates
  3. Put in "Various" (for the sale dates -- TaxAct does not like this)
I'm leaning towards option 1, which is what my accountant did for 2006.
Sale date is either actual payment date or contract payment date. Between your listed options there doesn't seem to be much of a difference, as long as you have paid withholding or estimated tax in equal or regular amounts. Doing something different in '07 than what you did in '06 raises the greatest risk of red flags and likelihood of further review down the road. IMHO you should continue what you did the first year until the sale is finalized (in '09 or '10)

Michael
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Old 02-05-2008, 08:13 PM   #11
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[quote=TromboneAl;611295]I'm still receiving some capital gains from the sale of assets of my company (that is, the source code). I sold the company on 2/1/2006, and the guy who bought it pays me an amount each month based on his sales.

Note that it is the assets that were sold and not the business.
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Old 02-05-2008, 08:15 PM   #12
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I'm not sure I understand. If you sold the company did it not own the assets? The answer to your question cannot be answered without knowing if it was a corporation, LLC, sole prop (unincorporated business). etc. In other words, who owned the assets, you or the company?
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Old 02-05-2008, 10:55 PM   #13
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I thought that personal creations were not capital assets
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Old 02-06-2008, 09:42 AM   #14
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That answer works very well for me, Michael, thanks.

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I'm not sure I understand. If you sold the company did it not own the assets? The answer to your question cannot be answered without knowing if it was a corporation, LLC, sole prop (unincorporated business). etc. In other words, who owned the assets, you or the company?
It was a sole prop, and below is how the Letter Purchase Agreement started. For fun, you might want to see if you can spot the mistake that the lawyer made.
I, State my name, on my own behalf and on behalf of [My Company Name]
(hereinafter referred to as "I", "my", or "me") offer to sell and deliver to
you, [Purchasing Company], (hereinafter referred to as "you" or "your"), on
February 1, 2006 (the "Effective Date"), all right, title and interest in and
to the intellectual property (including with limitation, all trademarks, trade
names, patents, right to patent, copyrights, trade secrets, licenses and
proprietary and confidential information) created under the name of, or used in connection with [my company] as of the Effective Date (collectively, and as more fully described below, the "Products").

1. The Products include, without limitation, the following:

a. The copyrights known as the following programs:
Blah blah blah
Blah blah blah
Blah blah blah
Blah blah blah
Blah blah blah

b. All derivatives, modifications, reissues, continuations or
extensions (collectively, "Derivatives") of the Products, the name "Company Name" (and any derivatives of such name), the knowledgebase for Product name technical support questions, all software and state and federal
registrations relating to the Products, the third party library and the website located at blah blah.

c. The source code of the Products in human-readable form and all
written documentation helpful in understanding the source codes and the
knowledgebase for blah technical support questions...

d. All customer databases relating to the Products, which include
customer information and order information for all sales of the Product from
the first blah sale in 1993.
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Old 02-06-2008, 10:06 AM   #15
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I thought that personal creations were not capital assets
Not even under SFAS No. 86?
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Old 02-08-2008, 02:28 PM   #16
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Originally Posted by TromboneAl View Post
For fun, you might want to see if you can spot the mistake that the lawyer made.
to the intellectual property (including with limitation, all
I'm not a lawyer, but I'd guess the above should actually read:

"to the intellectual property (including without limitation, all"

Do I win a jelly bean?

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Old 02-08-2008, 05:46 PM   #17
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Ding, ding, ding -- we have a winner.

The buyer's lawyer made this mistake. I didn't mention it, not to take advantage of it, but simply because we'd already gone back and forth a few times with modifications, and it was time to get the thing signed.

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BTW, no more answers on the tax question, please, 'cause I finished my taxes and efiled them yesterday.
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