Thursday April 25, 2024

4.9.3 Trademarks

Trademarks

Definition:  A trademark is a word, phrase, symbol or design that identifies and distinguishes the source of a particular good or service.

Tax Deduction:  The owner of a trademark who gives his or her entire interest in that trademark to a qualified charity will generally be entitled to claim an income tax deduction.

Amount Deductible:  So long as the donor gives his or her entire interest to a qualified charity, he or she receives an income tax deduction for the lesser of the cost basis or the fair market value of the trademark.

Valuation:  The fair market value of a trademark is determined by an appraiser and is typically based upon the value of goodwill.

Transfer Methods:  Trademarks are generally transferred to charity via an assignment contract that is recorded with the United States Patent and Trademark Office.

Definition

A trademark is a word, phrase, symbol or design that identifies and distinguishes the source of a good or service. Common examples include company names, logos, taglines and product names. However, a trademark could also be a particular shape, sound, color or scent that is used to identify or distinguish a particular commodity. Some trademarks are registered with the United States Patent and Trademark Office (USPTO), while others are not. Once registered, the trademark will need to be renewed every ten years. Both registered and unregistered trademarks reflect the right to the legitimate use of the mark, but only a registered trademark gives the owner the exclusive right to use the mark nationwide or in connection with the goods and services listed in the registration.

Tax Deduction

Trademarks are considered capital assets under Section 1221. The owner of a trademark who gives his or her entire interest in that trademark to a qualified charity is entitled to claim an income tax deduction. Sec. 1221. Trademark gits to charity are deductible up to 30% of donor's adjusted gross income.

Amount Deductible

So long as the donor gives his or her entire interest to a qualified charity, he or she receives an income tax deduction for the lesser of the cost basis or the fair market value of the trademark.

If the donor "retains any significant power, right or continuing interest with respect to the subject matter of the... trademark," no deduction is allowed when transferring the trademark to charity. PLR 199944045. The term "significant power, right, or continuing interest" includes, but is not limited to the list outlined in Sec. 1253(a).

After the charity receives the trademark, it may license the trademark and produce Qualified Donee Income (QDI). Sec. 170(m)(3). The donor may receive additional qualified charitable deductions for a percentage of the QDI.

If the donor informs the nonprofit of the intent to take a QDI deduction, the income produced by the charity's use of the trademark will produce QDI. Notice 2005-41. Per Sec. 170(m)(8)(B), the donor must provide written notice at the time of the donation electing treatment as a qualified intellectual property contribution under Sec. 170(m)(8) and Sec. 6050L. Qualified intellectual property includes copyrights, trademarks and patents. Sec. 170(m)(9), Sec. 170(e)(1)(B)(iii). Reg. 1.170A-16(d)(1)(ii). The net income is then reported by the nonprofit on IRS Form 8899 each year. The donor may deduct QDI (initially reduced by the basis) amounts for up to 10 years. Sec. 170(m)(5).

Tax Year	Deductible Percentage
1/gift year	100%
2	100%
3	90%
4	80%
5	70%
6	60%
7	50%
8	40%
9	30%
10	20%
11	10%
12	10%

For short tax years, a 12-year sliding scale may be used to cover a partial first and final year where the deduction is 100% of QDI in year one, 100% in year two and declines by 10% each year to 10% in years 11 and 12. Sec. 170(m)(7), Sec.170(m)(10)(D)(i). A donor is unable to claim a deduction for any QDI accrued after the legal lifespan of the intellectual property asset expires. Sec. 170(m)(6)

Example 4.9.3A

Tallulah owns a trademark. She wants to give the trademark to her alma mater but keep the right to prescribe the standard of quality of products or services sold under that trademark. She learns that if she retains this right, she will not receive an income tax deduction for the transfer of the trademark to her alma mater.

Example 4.9.3B

Missy held a valuable trademark she created eight years ago. Missy donated the trademark and the right to receive income from the trademark to a charitable organization five years ago. Every year since its creation, Missy's trademark has produced income of $1,000. In the year following the donation, Missy was able to deduct the full $1,000. In year five, Missy was only able to deduct $700.

Valuation

The fair market value of a trademark is determined by an appraiser and is typically based upon the value of goodwill. Goodwill relates to the inherent value of the trademark, which is based on reputation, the loyalty of the customer base associated with the trademark and the public recognition of the trademark. If the trademark is valued over $5,000, the donor must also obtain a qualified appraisal prepared by a qualified appraiser.

Transfer Methods

Trademarks are generally transferred to charity via an assignment contract that is recorded with the USPTO. Sec. 500 of the Trademark Manual of Examining Procedure contains the rules applicable to trademark transfers. The Trademark Manual of Examining Procedure is available on the USPTO website.

Case Studies on Trademarks

Ducky Don and the Trademark Unitrust: 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.

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