Tax Legislation

Noncash Donation Reforms
 

Donations of Intellectual Property IRS Guidance and Regulations On May 23, 2005, the IRS issued guidance and temporary regulations (PDF) for reporting charitable donations of intellectual property (IP) (patents, copyrights, trademarks, software or similar property). These rules implement provisions in the American Jobs Creation Act of 2004 (ACJA) that allow taxpayers who donate intellectual property to receive additional charitable deductions if and when their donated property produces income for the donee organization. The new guidance (Notice 2005-41) (PDF) details steps IP donors must take to notify donee organizations of their intent to claim additional deductions for their eligible contribution. In addition, it stipulates what information the donee organization must file with the IRS and provide to donors with respect to the amount of additional income received as a result of the donation. The IRS expects to issue a new Form 8899 on which recipient organizations will report income received from donated intellectual property. The IRS will accept comments from the public before the temporary regulations are made final. The deadline for comments is August 22, 2005. IRS Guidance (PDF) Temporary regulations for donee information returns (PDF)

IRS Guidance on Donations of Intellectual Property (PDF) Temporary regulations (PDF)

American Jobs Creation Act of 2004
Provisions to limit the deductions taxpayers can take for donations of vehicles, patents and intellectual property were included in American Jobs Creation Act of 2004 (ACJA) that President Bush signed the bill into law on October 22, 2004. The new law requires that if a taxpayer contributes a patent or other intellectual property to a charitable organization, the donor's initial charitable deduction is limited to the lesser of the donor's basis (what the donor spent to create the donated property) or the fair market value of the property. The bill also included new reporting requirements for corporations making noncash donations.

Patents and Intellectual Property
The ACJA limits a donor's deduction for contributions of a patent or other intellectual property (such as copyrights and software) to the donor’s basis or fair market value, whichever is smaller.  The donor’s basis is defined as what the donor spent to create the donated property. In addition, the donor is permitted to claim subsequent charitable deductions for up to 12 years based on a percentage of the income the charity receives as a result of the contributed property. One hundred percent of the additional income is permitted as a deduction in the first year after the contribution.  The percentage gradually decreases to ten percent of the additional income in the 12th year.  A deduction for increased income is permitted only if it exceeds the value of the initial deduction.  Additional deductions are not permitted for donations of patents or intellectual property to private foundations.

The charity must report to the IRS income received with respect to the contributed property. The donor must obtain written substantiation from the charity regarding any income from the donated property. It is effective for contributions made after June 3, 2004. 

Under previous law, donors could deduct the fair market value of donations of intellectual property.  The new restrictions may result in fewer such donations to charities such as universities.  Keeping track of increased income attributable to the donation will also involve more paperwork for the recipient universities. 

Earlier IRS Guidance
On December 22, 2003, the IRS issued a press release and notice announcing its intention to disallow improper deductions for charitable contributions of patents and other intellectual property and issue penalties for improper deductions. The particular areas of concern include instances where the donor:

• takes a charitable contribution deduction for a transfer of a nondeductible partial interests in, for example, a patent;
• expects or receives benefits in exchange for transfers, which will result in nondeductible donation;
• has inadequate substantiation of his/her contribution, in which case no deduction is allowed; and,
• overvalues the intellectual property transferred.

Last updated: August 4, 2005

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