Fabulous, a U.S. corporation, sells all of its rights to a German patent to Erfurt A.G. (“Erfurt”), a German corporation, for $1 million, payable in 10 equal annual installments with interest at 10% on the deferred payments. Title is passed to Erfurt in Germany. The patent had an original cost basis of $400,000 and had been subject to total amortization adjustments of $200,000, all of which had been deducted in calculating German-source taxable income.
(a) What is the source of the gross income realized. If the sales price is cast in the form of a “royalty” of 5% of the net sales by Erfurt of products incorporating the patented invention, what is the result? Suppose Fabulous sells its German trademark “Fabulair” and associated goodwill to Erfurt for $5 million payable in 5 equal annual installments with interest of 10% on the deferred payments. What is the source of the income realized?
(b) Same facts as in (a), above, except that the German patent is one of many foreign patents the exploitation of which is handled by a licensing branch office of Fabulous located in Frankfurt, Germany. The gain on the sale of the German patent to Erfurt is exempt from German tax. What is the source of income realized? If the patent sold were inventory property, would the result change? If the patent were sold for a royalty-like price, would the result change?
(c) Suppose that Fabulous had purchased trucks for $400,000 which were used solely in the transportation of inventory purchased in different parts of the United States to U.S. customers. All transportation expenses, including depreciation deductions of $200,000 in respect of the trucks, were applied to reduce U.S.-source income. Fabulous then resells the used trucks for $410,000, thereby realizing income of $210,000, to a foreign purchaser that took title to the trucks in Peru. What is the source of the income realized on the sale of the trucks?