[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1235-2]

[Page 318-320]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1235-2  Definition of terms.

    For the purposes of section 1235 and Sec. 1.1235-1:
    (a) Patent. The term patent means a patent granted under the 
provisions of title 35 of the United States Code, or any foreign patent 
granting rights generally similar to those under a United States patent. 
It is not necessary that the patent or patent application for the 
invention be in existence if the requirements of section 1235 are 
otherwise met.
    (b) All substantial rights to a patent. (1) The term all substantial 
rights to a patent means all rights (whether or not then held by the 
grantor) which are of value at the time the rights to the patent (or an 
undivided interest therein) are transferred. The term all substantial 
rights to a patent does not include a grant of rights to a patent:
    (i) Which is limited geographically within the country of issuance;
    (ii) Which is limited in duration by the terms of the agreement to a 
period less than the remaining life of the patent;
    (iii) Which grants rights to the grantee, in fields of use within 
trades or industries, which are less than all the rights covered by the 
patent, which exist and have value at the time of the grant; or
    (iv) Which grants to the grantee less than all the claims or 
inventions covered by the patent which exist and have value at the time 
of the grant.

The circumstances of the whole transaction, rather than the particular 
terminology used in the instrument of transfer, shall be considered in 
determining whether or not all substantial rights to a patent are 
transferred in a transaction.
    (2) Rights which are not considered substantial for purposes of 
section 1235 may be retained by the holder. Examples of such rights are:
    (i) The retention by the transferor of legal title for the purpose 
of securing performance or payment by the transferee in a transaction 
involving transfer of an exclusive license to manufacture, use, and sell 
for the life of the patent;
    (ii) The retention by the transferor of rights in the property which 
are not inconsistent with the passage of ownership, such as the 
retention of a security interest (such as a vendor's lien), or a 
reservation in the nature of a condition subsequent (such as a provision 
for forfeiture on account of nonperformance).
    (3) Examples of rights which may or may not be substantial, 
depending upon the circumstances of the whole

[[Page 319]]

transaction in which rights to a patent are transferred, are:
    (i) The retention by the transferor of an absolute right to prohibit 
sublicensing or subassignment by the transferee;
    (ii) The failure to convey to the transferee the right to use or to 
sell the patent property.
    (4) The retention of a right to terminate the transfer at will is 
the retention of a substantial right for the purposes of section 1235.
    (c) Undivided interest. A person owns an undivided interest in all 
substantial rights to a patent when he owns the same fractional share of 
each and every substantial right to the patent. It does not include, for 
example, a right to the income from a patent, or a license limited 
geographically, or a license which covers some, but not all, of the 
valuable claims or uses covered by the patent. A transfer limited in 
duration by the terms of the instrument to a period less than the 
remaining life of the patent is not a transfer of an undivided interest 
in all substantial rights to a patent.
    (d) Holder. (1) The term holder means any individual:
    (i) Whose efforts created the patent property and who would qualify 
as the original and first inventor, or joint inventor, within the 
meaning of title 35 U.S.C., or
    (ii) Who has acquired his interest in the patent property in 
exchange for a consideration paid to the inventor in money or money's 
worth prior to the actual reduction of the invention to practice (see 
paragraph (e) of this section), provided that such individual was 
neither the employer of the inventor nor related to him (see paragraph 
(f) of this section). The requirement that such individual is neither 
the employer of the inventor nor related to him must be satisfied at the 
time when the substantive rights as to the interest to be acquired are 
determined, and at the time when the consideration in money or money's 
worth to be paid is definitely fixed. For example, if prior to the 
actual reduction to practice of an invention an individual who is 
neither the employer of the inventor nor related to him agrees to pay 
the inventor a sum of money definitely fixed as to amount in return for 
an undivided one-half interest in rights to a patent and at a later 
date, when such individual has become the employer of the inventor, he 
pays the definitely fixed sum of money pursuant to the earlier 
agreement, such individual will not be denied the status of a holder 
because of such employment relationship.
    (2) Although a partnership cannot be a holder, each member of a 
partnership who is an individual may qualify as a holder as to his share 
of a patent owned by the partnership. For example, if an inventor who is 
a member of a partnership composed solely of individuals uses 
partnership property in the development of his invention with the 
understanding that the patent when issued will become partnership 
property, each of the inventor's partners during this period would 
qualify as a holder. If, in this example, the partnership were not 
composed solely of individuals, nevertheless, each of the individual 
partners' distributive shares of income attributable to the transfer of 
all substantial rights to the patent or an undivided interest therein, 
would be considered proceeds from the sale or exchange of a capital 
asset held for more than 1 year (6 months for taxable years beginning 
before 1977; 9 months for taxable years beginning in 1977).
    (3) An individual may qualify as a holder whether or not he is in 
the business of making inventions or in the business of buying and 
selling patents.
    (e) Actual reduction to practice. For the purposes of determining 
whether an individual is a holder under paragraph (d) of this section, 
the term actual reduction to practice has the same meaning as it does 
under section 102(g) of title 35 of the United States Code. Generally, 
an invention is reduced to actual practice when it has been tested and 
operated successfully under operating conditions. This may occur either 
before or after application for a patent but cannot occur later than the 
earliest time that commercial exploitation of the invention occurs.
    (f) Related person. (1) The term related person means one whose 
relationship to another person at the time of the transfer is described 
in section 267(b), except that the term does not include a brother or 
sister, whether of the whole

[[Page 320]]

or the half blood. Thus, if a holder transfers all his substantial 
rights to a patent to his brother or sister, or both, such transfer is 
not to a related person.
    (2) If, prior to September 3, 1958, a holder transferred all his 
substantial rights to a patent to a corporation in which he owned more 
than 50 percent in value of the outstanding stock, he is considered as 
having transferred such rights to a related person for the purpose of 
section 1235. On the other hand, if a holder, prior to September 3, 
1958, transferred all his substantial rights to a patent to a 
corporation in which he owned 50 percent or less in value of the 
outstanding stock and his brother owned the remaining stock, he is not 
considered as having transferred such rights to a related person since 
the brother relationship is to be disregarded for purposes of section 
1235.
    (3) If, subsequent to September 2, 1958, a holder transfers all his 
substantial rights to a patent to a corporation in which he owns 25 
percent or more in value of the outstanding stock, he is considered as 
transferring such rights to a related person for the purpose of section 
1235. On the other hand if a holder, subsequent to September 2, 1958, 
transfers all his substantial rights to a patent to a corporation in 
which he owns less than 25 percent in value of the outstanding stock and 
his brother owns the remaining stock, he is not considered as 
transferring such rights to a related person since the brother 
relationship is to be disregarded for purposes of section 1235.
    (4) If a relationship described in section 267(b) exists 
independently of family status, the brother-sister exception, described 
in subparagraphs (1), (2), and (3) of this paragraph, does not apply. 
Thus, if a holder transfers all his substantial rights to a patent to 
the fiduciary of a trust of which the holder is the grantor, the holder 
and the fiduciary are related persons for purposes of section 1235(d). 
(See section 267(b)(4).) The transfer, therefore, would not qualify 
under section 1235(a). This result obtains whether or not the fiduciary 
is the brother or sister of the holder since the disqualifying 
relationship exists because of the grantor-fiduciary status and not 
because of family status.

[T.D. 6500, 25 FR 12014, Nov. 26, 1960, as amended by T.D. 6852, 30 FR 
12730, Oct. 6, 1965; T.D. 7728, 45 FR 72650, Nov. 3, 1980]