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Congress to scrutinize patent tax breaks

For corporations, patent donations can mean lower taxes. For critics, the practice is wildly unrealistic.

The U.S. Congress is set to consider a proposal to curb the controversial practice of transferring patents to nonprofit groups or universities in exchange for lower corporate tax bills.

The proposal also would renew corporate tax benefits for donating computer equipment to schools.

The House Ways and Means Committee is meeting late Monday to consider any last-minute changes to the complicated tax bill before it is sent to the full House of Representatives for a floor vote expected later this week.

A chunk of the U.S. tax code, which lapsed at the end of 2003, gave companies tax benefits if they gave computer software or hardware to public libraries or educational institutions "not later than three years" after purchase. The current proposal would extend the deduction to Dec. 31, 2005.

That proposed change, and another relating to wage withholding of stock options, are modest. Curbing tax deductions for corporate donations of intellectual property--authorized by the IRS in a 1958 ruling--represents a far more sweeping revision of the tax code.

From the perspective of corporations like Boeing, Dow Chemical and Procter & Gamble, donating patents that are otherwise unused is a way to save in taxes and focus on their core business. But critics say that the tax deduction is based on estimates of potential future income from the patent, called the income method of valuation, that are wildly unrealistic.

Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, has expressed concern about "abusive inflated valuations of intellectual property" claimed as donations. At his prodding, the Senate already approved a similar tax bill in May.

Last year, SBC Communications donated an Internet security-related patent to the University of Texas that it valued at $7 million. Procter & Gamble gave a microcircuitry patent to the University of Illinois at Chicago valued at $3 million. Other fields such as medicine and energy have seen far higher figures, including a patent that Shell Technology Ventures donated to the University of Texas at a claimed value of $83 million, according to a January 2004 report from the International Intellectual Property Institute in Washington, D.C.

In addition, the House bill, formally titled the American Jobs Creation Act, would extend the research and development tax credit until Dec. 31, 2005. Otherwise it will expire June 30. Repeated extension of the tax credit has become a crucial lobbying focus for technology trade associations like the American Electronics Association, which calls the practice "responsible for stimulating U.S. investment, wage growth, consumption and exports."