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Companies are set to lose millions of dollars in tax write-offs from donating their patents to universities and nonprofit groups. The U.S. Internal Revenue Service (IRS) announced last month that it plans to disallow certain “improper deductions” for charitable contributions of patents and other intellectual property. The agency also said that it might impose penalties on appraisers who set too high a value on donated patents. “We became aware that some taxpayers were claiming deductions more than they were entitled to,” an IRS spokeswoman said in an interview. The new rules may muddy the waters for attorneys whose corporate clients use patent donations to garner big tax write-offs. “It will have an effect on companies that are trying to find creative ways to reduce their taxes,” said William Schwartz, a partner at San Francisco-based Morrison & Foerster. The IRS said it could not cite specific examples of egregious donations. But in a Dec. 22 notice the agency said corporations have been overvaluing the intellectual property they’ve donated. Other improper deductions include transferring a nondeductible partial interest in the intellectual property. An example of this kind of transfer, the IRS said, would be a corporation retaining the right to manufacture or use any product covered by the donated patent. The IRS also said it would look at instances in which a corporation receives a benefit in exchange for the donation. The IRS action follows on the heels of recent legislation. Last year, Senator Chuck Grassley, R-Iowa, sought to impose strict limits on deductions for charitable contributions of IP. A Senate Finance Committee report on his bill, S. 1637, estimated that the restrictions would generate revenue of $3.85 billion over 10 years. “The committee is concerned that taxpayers with patents or similar property are taking advantage of the inherent difficulties in valuing such property and are preparing or obtaining erroneous valuations,” the report states. “In such cases, the charity receives an asset of questionable value, while the taxpayer receives a significant tax benefit.” Grassley’s legislation is awaiting congressional approval. Corporations and IP lawyers acknowledge that it is problematic to put a price tag on intellectual property. “I think there is something inherently difficult about valuing these assets,” Schwartz said. “I think people forget that patents are nothing more than a right to stop people from doing something. As a result, they don’t have any value unless the owner or exclusive licensee is willing to sue, to bring an action of infringement.”

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