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Saturday, May 4, 2024
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Case Studies |
Ducky Don and the Wobble Ducks Patent
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Case:
Donald Holden Ducksworth III (Ducky Don to friends) was a lifelong outdoorsman. He loved to hunt and fish. Each fall, Ducky Don and his friends would gather for the opening of duck hunting season. While still in his 20s, Ducky Don started experimenting with duck decoys. He felt that a better duck decoy would lead to more successful hunts. Ducky Don finally discovered a method for placing a spring and a special pivot under the ducks. His duck decoys would all swivel and wobble in the wind. The ducks flying overhead would see a whole flock of duck wobblers and would swoop in to join the group.
Ducky Don started a company to produce the wobbling ducks. While the market is somewhat specialized for duck decoys, Don became well known in his area and thousands of wobbling ducks soon decorated the surrounding fields.
Many years later, he produced an improved version of the Wobble Duck. To protect his invention, Ducky Don personally obtained a patent on the Wobble Duck. He then licensed the patent to his company and received annual royalties. After 10 more years with flocks of duck decoys wobbling in the wind, Ducky Don finally decided to retire. Since he had generously funded his retirement plan throughout his career, Don felt that he didn't really need anything over and above his personal retirement plan.
Ducky Don visited with a development director of his favorite charity "Ducks Everywhere." He indicated that he would like to create a fund to support the care and study of the wild duck population. The Ducks Everywhere gift planner said that it would be perfectly fine to create what is known as a donor advised fund. Ducks Everywhere would own the fund, but Ducky Don could recommend the projects that would be funded. Ducky Don thought that this was a great idea and said that he would give the Wobble Duck patent to Ducks Everywhere. The charity could then license the patent for a large sum to MegaDecoy Company.
Question:
Can Ducky Don give the patent to charity? What is the amount of his deduction?
Solution:
With a gift of a patent, the initial charitable deduction will be the lesser of the taxpayer's basis or the fair market value of the property. Since Ducky Don has a modest basis for the Wobble Duck patent, his initial deduction may be fairly limited.
After Ducks Everywhere receives the patent, it may license the patent and produce "Qualified Donee Income (QDI)." Ducky Don may then receive additional qualified charitable deductions for QDI in excess of basis received by Ducks Everywhere during the next 10 years. The deduction starts at 100% of the QDI received each year and declines over that period to 10% of the QDI in tax year 10. Ducks Everywhere will be required to track the QDI attributable to the gift of the patent and report that amount to the donor and the IRS to substantiate the deduction.
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