Lynette, a famous basketball player, is considering the possibility of transferring the sole right to use her name to promote basketball shoes produced and sold by the NIK Corporation. NIK will pay $2 million to obtain the right to use Lynette’s name for the next 40 years. NIK may use the name on the shoes and as a part of any of the company’s advertisements for basketball shoes. If Lynette signs the contract and receives the $2 million payment, will she have to recognize capital gain or ordinary income?
Sec. 1221
Rev. Rul. 65-261, 1965-2C.B. 281
As per Sec. 1221, capital asset does not include
a patent or a copyright or similar property, held by a taxpayer whose personal efforts created such property.
In our case, Lynette is selling the sole right to use her name to promote Basketball Shoes produced and sold by NIK Corporation. In return she will get $2 Million.
Such income does not form part of Capital Gain as this right does not forms a Capital Asset as per Section 1221.
Hence the same shall be treated as Ordinary Income and taxed as such.
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