Giving Away Patents With Strings Attached

William H. ShawnCo-Managing Partner, ShawnCoulson

Gifts of intellectual property to a qualified charity are generally tax deductible. But can you deduct a charitable donation of a patent if the gift comes with certain built-in restrictions? It depends. A ruling from the IRS answers the question in three different gift-giving scenarios that have strings attached.

The recipient of the gift is a university that qualifies as a charity under tax law. (IRS Revenue Ruling 2003-28)Scenario 1. A taxpayer contributes a license to use a patent to the university. However, the taxpayer retains the right to license the patent to others. Result: The contribution is actually a transfer of a partial interest in the property. Therefore it is not deductible because the taxpayer retains a right in the patent. The outcome would be the same if the taxpayer retained any other “substantial right” (for example, the right to license the patent outside a limited geographic area where the university could use the patent).

Scenario 2. A taxpayer contributes the patent to the university but places conditions on the gift. Specifically, a professor who worked on the project must continue to be employed there. If the professor isn’t retained for the remainder of the patent’s 15-year useful life, the patent will revert to the taxpayer. Result: The contribution is contingent upon an event that could happen. Therefore, the IRS notes, the contribution is not tax deductible “unless the likelihood of the reversion is so remote as to be negligible.”

Scenario 3. This time, a taxpayer contributes all interests in the patent to the university. But the gift is subject to a condition that the patent not be sold or licensed for at least three years after the transfer. The restriction does not provide any benefit to the taxpayer nor does the gift revert to the taxpayer. Result: Unlike the first two scenarios, this restriction does not invalidate the charitable gift so the taxpayer receives a deduction.

There is, however, a catch: The restriction reduces the fair market value of the patent and the charitable deduction. Additionally, if the taxpayer were to receive a benefit in exchange for the contribution, the value of the benefit would further reduce the deductible amount.