Intellectual property contribution tax problem resolution

Final regs detail donee’s filing requirements for qualified intellectual property contributions
T.D. 9392, 04/04/2008; Reg. § 1.6050L-2

Mike Habib, EA
IRS has issued final regs explaining the information return requirements for donees receiving net income from qualified intellectual property contributions made after June 3, 2004.

Background. A taxpayer’s deduction for the donation of “qualified intellectual property” patents, certain copyrights, trademarks, trade names, trade secrets, know-how, certain software, and similar property, other than property contributed to for the use of a private foundationis limited to the donor’s basis, if that is less than the property’s fair market value at the time of the initial contribution. (Code Sec. 170(e)(1)(B)) Subject to limitations, the donor can take an additional deduction in the year of contribution and in succeeding years based on a sliding-scale percentage (from 100% to 10% depending on the year after the initial contribution) of the “qualified donee income” that the charitable donee receives or accrues from that contributed property. (Code Sec. 170(m)(1)) An additional deduction in any year is allowed only to the extent that the aggregate of the specified percentages of qualified donee income exceeds the initial deduction claimed by the donor for the intellectual property itself. (Code Sec. 170(m)(2))

A donee of qualified intellectual property who is notified by the donor that he intends to take the additional charitable deduction for “qualified donee income” must: (1) file an information return (Form 8899, Notice of Income from Donated Intellectual Property) for each of the donee’s tax years showing the amount of any qualified donee income and (2) furnish the donee with a copy of the return. (Code Sec. 6050L)

In May of 2005, IRS issued temporary and proposed regs explaining how donees file this information return. These regs were generally effective for qualified intellectual property contributions made after June 3, 2004, but included several transition rules.

Final regs on donee’s filing obligation. The final regs adopts the provision in the temporary and proposed regs with only minor changes. The final regs do not include the transition rules in the temporary and proposed regs, which are no longer necessary.

Under the final regs, if a charitable organization, other than a private foundation that doesn’t qualify as a 50% charity, receives or accrues net income during a tax year from a qualified intellectual property contribution, it must make an annual information return at the time and on the form prescribed by IRS. A donee isn’t required to file an information return if:

  • the property isn’t qualified intellectual property defined in Code Sec. 170(m)(8) (e.g., property for which the donor doesn’t provide the required notice to the donee);
  • the qualified intellectual property produced no net income for the donee’s tax year;
  • the qualified intellectual property contribution is for a tax year beginning after the expiration of the legal life of the donated qualified intellectual property; or
  • the tax year begins more than 10 years after the date of the qualified intellectual property contribution. (Reg. § 1.6050L-2(a))

The information return must include:

  • The donee’s name, address, tax year, and employer identification number (EIN);
  • The donor’s name, address, and taxpayer identification number;
  • A description of the qualified intellectual property in sufficient detail to identify the property received by the donee;
  • The date of the contribution to the donee;
  • The amount of donee’s net income for the tax year that is properly allocable to the qualified intellectual property (determined without the Code Sec. 170(m) limitations that would exclude income not reported to the donee, income received ten years after the initial contribution, and income beyond the legal life of the qualified intellectual property); and
  • Other information specified by the form or its instructions. (Reg. § 1.6050L-2(b))

The donee generally must file the information return (with a copy furnished to the donor) on or before the last day of the first full month following the close of the donee’s tax year to which net income from the qualified intellectual property is properly allocable. (Reg. § 1.6050L-2(c), Reg. § 1.6050L-2(d)(2))

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