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Putting a price tag on a patent is not simple. But for years corporations have been doing just that while reaping tax write-offs by donating their patents to universities and other nonprofit groups. That’s about to change. The Internal Revenue Service announced in December that corporations have been overvaluing intellectual property. The agency said it plans to disallow certain “improper deductions” for charitable contributions of patents and other intellectual property. It also said it might impose penalties on appraisers who set too high a value on donated patents. While the IRS did not give any specific examples of improper deductions, Greg Aharonian does. Aharonian, who publishes an online newsletter critical of the patent system, has taken to task SBC Communications Inc. for putting a $7.3 million price tag on a patent donated to the University of Texas. The patent covers methods of online virus scanning and removal. Aharonian says there was plenty of prior art to invalidate the patent or reduce its value so that no one would want to license it. The IRS did give some general examples of improper deductions: a corporation retaining the right to manufacture or use any product covered by the donated patent or instances in which a corporation receives a benefit in exchange for the donation. For example, a corporation might make its donation contingent on getting the recipient’s research results. The IRS action follows on the heels of some recent proposed legislation. Last year Sen. Chuck Grassley, R-Iowa, introduced a measure that would impose strict limits on deductions for charitable IP contributions. A Senate Finance Committee report on the bill estimated that the restrictions would generate revenue of $3.85 billion over 10 years. The new IRS rules, along with the threat of legislation, may muddy the waters for lawyers whose corporate clients use patent donations to garner big tax write-offs. But corporations and IP lawyers acknowledge that putting a price tag on IP is problematic. “I think there is something inherently difficult about valuing these assets,” says William Schwartz, a partner at Morrison & Foerster in San Francisco. “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.” Brenda Sandburg is a senior writer at The Recorder in San Francisco where she covers developments in patent law and other intellectual property matters.

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