IRS Investigates Potential Patent Donations Abuses

by Leroy Baker, Tax-News.com, New York

08 October 2003

The Internal Revenue Service is reportedly reviewing many millions of dollars worth of patent donations which it suspects were over-valued by some firms in order to claim greater tax breaks.

Under current tax law, companies can claim a tax reduction for up to 10% of their total taxable income in any one year for the value of patents donated to organisations such as research centers and universities. Any unused segments of the deduction can then be carried over for as long as five years.

However, the system is open to abuse by companies, according to many tax experts, due to the minimal disclosure requirements on IRS forms for patent donation deduction claims. However, the Revenue seems to have got wind of potential abuses after several firms advertised their generous donations to various educational and medical research projects. The IRS is alleging that many firms are ignoring factors that affect a patent's fair market value, such as the existence of similar inventions or restrictions on how they can be used.

Consequently, the Revenue has disallowed many millions of dollars worth of patent donation claims, and is in the process of reviewing others whilst it investigates the matter. In the meantime, the IRS is asking for additional information concerning the nature of the patents and their beneficiaries, including valuation reports.

Congress is also looking into the problem, and lawmakers are currently considering changes that would effectively end the tax break for patent donations. Under proposed legislation, they would be given the same tax treatment as other intellectual property such as copyrights, which would limit tax deductions to the donor's level of investment in creating the copyright.

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