Appraising a donated income stream?

Without my expressing an opinion, as a minimum you will need to have a qualified appraiser's signed valuation opinion as part of a Form 8283 attached to the tax return.

For what purpose? If you took the money as income, you add it as taxable income and take a sch A deduction if you itemize. I don't see that donating this income stream, kind as it is, results in a write-off. Joe

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If you are on a cash basis, you may not be able to deduct the net present value or the appraised value of an income stream that may or may not materialize as predicted.

This seems depressingly logical to me. When you donate your services, you don't get a deduction for anything other than your expenses. When you donate the fruits of your labor, be it a piece of lovingly crafted furniture, or a best-seller book, regardless of appraised value, you can't deduct anything more than your expenses. If you purchased that piece of furniture or the exclusive rights to that book, and then donated it, you could only deduct the lesser of fair market value OR YOUR COST. Right?

Why not? It's basically a bond that pays interest, 10k a year, declining over a period of say 20 years to zero, so it has value as a bond. A company could easily pay 100k for the rights to the book, in the hope that they will get 120k over 15 years. I have no idea how to appraise it, but think it can be done. This 100k would be a deduction on Schedule A if the person donates it.

How's this? "Because you diverted the income stream, and don't pay tax on it, that, in effect, 'is' the deduction." To not claim the income and then to take a deduction is double dipping. If this were permitted, why not direct my employer to send my December checks each year to my designated charities, avoiding the income? Joe

While all the various hypotheses posted thus far are interesting, it seem none of the posters have looked at Pubs. 561 and 526.

IP (intellectual property) can be donated and a deduction taken in the year of donation as to the lesser of FMV or its basis.

You may also be able to deduct as a charitable contribution in the year of the donation and following years based on the income (to the charity) of the donated IP.

If the IRS ever stops making their publications in three columns in a manner where you cannot cut and paste a single column, I would cut and paste. I've done that before, but far too much editing required.

Sounds like, since the OP is not going to donate the entire IP, he is limited to deducting the income stream on each year's tax return. Years 1 and 2 get a 100% deduction, year 3 90%, year 4 80%, etc. per the table in Pub 526. I guess - there is no such example in the pubs that I saw.

So, I wonder if he donates one years worth of income stream each year, does he get 100% every year?

Consider that you bought stock 1 year ago for $3000 and it is now $4500 one year later. If you sold your stock you would have an income stream of $1500, and then you could donate it, and it would write off your income. But if you choose to donate that $4500 of stock, you lose the income stream, but you still get to deduct $4500 on your tax return because you gave away an income producing asset, and now the charity will earn that income. You could donate just $1500 of stock as well and take a deduction for this amount (the cost basis of what's remaining is $2,000 then).

Responding to the technical issues only. They have the publications in HTML format.

Search for publication 526. You should get

Click Next twice. Fortunately for most publications all the content is on one page. The URL of this page is Click Find and type "intellect". You will see everything and you can copy and paste easily.

For IRS they have nice anchor links. If you click View -> Page Source you will see the source. Search for "intellect". You will see

Patents and Other Intellectual Property

The "Patents and Other Intellectual Property" is preceded by a tag. So the direct link to this page is:

Quote:

Patents and Other Intellectual Property

If you donate a patent or other intellectual property to a qualified organization, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less. Intellectual property means any of the following:

*

Patents. *

Copyrights (other than a copyright described in Internal Revenue Code sections 1221(a)(3) or 1231(b)(1)(C)). *

Trademarks. *

Trade names. *

Trade secrets. *

Know-how. *

Software (other than software described in Internal Revenue Code section 197(e)(3)(A)(i)). *

Other similar property or applications or registrations of such property.

Additional deduction based on income. You also may be able to claim additional charitable contribution deductions in the year of the contribution and years following, based on the income, if any, from the donated property.

The following table shows the percentage of the organization's income from the property that you can deduct for each of your tax years ending on or after the date of the contribution. In the table, ?tax year 1,? for example, means your first tax year ending on or after the date of the contribution. However, you can take the additional deduction only to the extent the total of the amounts figured using this table is more than the amount of the deduction claimed for the original donation of the property. Tax year Deductible percentage

1 100% 2 100% 3 90% 4 80% 5 70% 6 60% 7 50% 8 40% 9 30% 10 20% 11 10% 12 10%

After the legal life of the patent or other intellectual property ends or after the 10th anniversary of the donation, no additional deduction is allowed.

The additional deductions cannot be taken for patents or other intellectual property donated to certain private foundations. Reporting requirements. You are required to inform the organization at the time of the donation that you intend to treat the donation as a contribution subject to the provisions discussed above.

The organization is required to file an information return showing the income from the property, with a copy to you. This is done on Form

8899, Notice of Income From Donated Intellectual Property.

In Adobe Reader, hold down the Alt key and you can then use the mouse to select text in one column. Then you can copy and paste. Minor editing might still be needed.

Bob Sandler

Thanks, Bob. That's a neat trick I hadn't known about before.

big snip

Excellent example of where my general view on this would fail. I've used the appreciate stock donation trick myself.

Back to Publication 526; If you donate a patent or other intellectual property to a qualified organization, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less.

We can easily agree the fair market value can be significant. But - How to assign a basis? Joe

I guess I have to say, as the OP, that when I think about in this way, it seems depressingly logical to me also.

What is the "basis" of a patent? Example:

You have an idea. To test or verify it, or to expand your understanding of it, you buy equipment, rent or buy laboratory space, hire workers, do calculations and experiments yourself and with hired assistance, and so on.

At that point you have a lot of knowledge and understanding, which I guess is "intellectual property" in a lower-case sense, and also is an "asset" in some sense, though a highly intangible form of asset. You could perhaps sell some or all of it to a suitably interested buyer.

In any case, at that point you bring in the attorneys and patent agents, and spend some additional funds on all the legal expenses of applying for and getting a patent.

Is the basis of the patent (a) just the legal expenses that come in at this last stage? Or (b) those expenses, plus all your earlier expenses?

Sorry no idea. I was just quoting the publication. It seems logical that the basis is all the research cost, people you hired, lab costs, rentals, etc, just like the capitalization rules for manufacturing businesses.

It's conceivable that the basis is zero. Say you wrote a book without doing any research (like a story or poems, although you could do research for these), just sitting at home doing it.

Seems it might be better to just sell the rights to a company or someone, get the money, and donate it. Would the income be ordinary income or long term capital gain?

The publication says you can keep in touch with the charity for 12 years and donate a declining fraction of their income (from 100% to

10% over the years). Seems it might be better to keep the patent and donate the proceeds every year; then for 12 years you can deduct 100% of the income, as Pico said :).

But when you get income for a book you wrote you have to not only declare income, which will be balanced by your donation as long as you itemize, but you also have to pay SE tax.

Could he do the following sequence:

1) He assigns the income stream to a charity, taking as his deduction his basis (which is presumably very small).

2) Charity then wraps up the income stream and sells it to a private investor in Year 2. Realistically, given the high uncertainty of the income stream, the investor would demand a very high return to accept the risk, but let's assume the $100K projected income stream could be sold by the Charity for $50K.

3) Per your table above, the charity now claims a $50K Year 2 income from the property, and per the table above the original owner can now deduct the $50K - original cost basis. Since the original cost basis was neglible, this means most of the $50K is deductible.

I'm skeptical that any of the above could happen as a practical business matter because the amounts are too small. The legal costs alone in assigning rights to an investor that involve the original creator, the charity, and the organization that would pay future income streams would probably be substantial. The scenario gets more interesting when invention is worth $500K or more.

The basis is either what the taxpayer paid to acquire the patent from the preceding holder or what the taxpayer paid (and had not yet deducted or used for a tax credit) to create the item being patented and to legally register that patent.

In my opinion you cannot take a charitable deduction for the fair value of an expected future income stream because you will still retain an interest in the property generating the income stream. This attempt to arabesque around the limits on deducting the fair value of taxpayer created intellectual property instead of the (usually) much lower basis will not work.

I see your point, but you can do such with other types of property, so why not with I.P.?

We seem to be doing a lot of guessing in this thread. Does nobody do research anymore?