Ways and Means Committee Approves Bill to Limit Deductions for IP Contributions
June 14, 2004. The House Ways and Means Committee amended and approved HR 4520, the "American Jobs Creation Act of 2004", a bill that would, among other things, limit the deduction available under Section 170 of the Internal Revenue Code for contributions of intellectual property.
In 1958, Internal Revenue Service (IRS) Revenue Ruling 58-260 confirmed the deductibility of donated patents. However, in recent years, some legislators, and especially Sen. Charles Grassley (R-IA), the Chairman of the Senate Finance Committee, have argued that the regime has been abused.
In addition, the Internal Revenue Service (IRS) announced in December of 2003 that it will crack down on excessive claims of deductions. The IRS notice [3 pages in PDF] and story titled "IRS Plans Crack Down on Charitable Contributions Deductions Involving Transfers of Intellectual Property" in TLJ Daily E-Mail Alert No. 805, December 23, 2003.
The Committee approved an amendment in the nature of a substitute [424 pages in PDF] offered by Rep. Bill Thomas (R-CA), the Chairman of the Committee. Section 682 of HR 4520 contains language limiting deductions for charitable contributions of intellectual property, including patents and copyrights, to non-profit entities, such as universities.
26 U.S.C. § 170 addresses charitable contributions and gifts. Subsection 170(e) addresses "contributions of ordinary income and capital gain property". First, HR 4520 would amend this section to read, in part, that "The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of (A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution), and (B) in the case of a charitable contribution ... of any patent, copyright ... trademark, trade name, trade secret, know-how, software ... or similar property, or applications or registrations of such property". (Parentheses in original.)
In addition, for twelve years following the contribution, the taxpayer who donated the intellectual property would be able to also treat as a charitable contribution certain income received by the donee of that intellectual property from that intellectual property. Section 682 provides a table that lists the percentage of such income that could be treated as a charitable contribution. It starts at 100% for the first year after the contribution, and steadily declines to 10% for the 12th year.
A staff member of the Ways and Means Committee offered a very brief explanation of Section 682 of HR 4520. There were no questions for staff. There was no discussion. No amendments were offered. This Section 682 now goes to the House floor as a part of HR 4520.
There is a similar provision in the Senate's ETI repeal bill, S 1637, the "Jumpstart Our Business Strength (JOBS) Act". The Senate passed this bill on May 11, 2004.
The Joint Committee on Taxation (JCT) estimates that this section will result in increased tax revenues of $274 Million in FY 2005, and total increased tax revenues of $3,653 Million over ten years.
That is, technology companies that make contributions of intellectual
property will be harmed by this section. On the other hand, the bill also
extends the R&D tax credit, which benefits many large technology companies. See,
related story titled "Ways and Means Committee Votes to Extend Research and
Development Tax Credit" in TLJ Daily E-Mail Alert No. 918, June 15, 2004.