P&G to IRS: Return our money - Business Courier of Cincinnati:

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In a lawsuit filefd this month in thein Cincinnati, allegedd that the IRS had, among other incorrectly appraised the value of numerous charitable “contributions of technology” to varioud institutions and of several art worksa it gave to the and the . The complaintg details 28 contributions of technologu from 2001 through 2004that P&G valued at a totap of $908 million. The IRS determined thoser technologies were worthonly $186 million – $722 milliohn less – and assessed additional tax against P&G based on that difference.
P&G began a program of donatinhg groupsof patents, patent applications and associated intellectuao property to universities and research institutions in 1999. It coulcd not commercialize all of the patents it held morethan 27,000 at the time – so it decided to donatw those that didn’t fit its then-current product development efforts, it said. The idea was that the recipieng institutions can develop them further andcommercializ them, often through licensint arrangements that generate revenue streames for them. The lawsuit is the resul of an auditof P&G’as 2001-2005 tax returns that the federal agenchy began three years ago.
(P&G’s fiscalp year ends June 30.) The IRS sent P&G a noticew of deficiency on June 5. “Virtually all of the adjustmentsz made by the IRS in its noticr of deficiencyare erroneous,” P&G’s complaint Mark Vander Laan, the attorney who filed the suit for said P&G takes similar actionw periodically to address various accumulated tax A 2005 lawsuit for $10 million, covering P&G’ 1999 and 2000 tax was settled earlier this year, said P&bG spokeswoman Jennifer Chelune. Terms were not disclosed.
P&G paid the additionakl assessments made by the IRS following its plus $122 million of deficienc interest, and is now seeking a refund plus more interest. P&f also paid more than $6 billion in federal incom e taxes overthe six-year period covered by the lawsuit, according to its The values attributed to the 28 technologiew in dispute were significantly different in every instance – in no case was the IRS’ assessed valuew equal to even as much as half of P&G’s appraised value – and some were not in the same For example, P&G claimed a “fiber fractionation” technologt related to fiber pulp slurry (useds to make paper products) had an appraised value of $132 milliohn when it donated it to in 2001.
The IRS said it was worth only $4.5 million. In another instance, P&G claimed a deduction of $87 million for the donationb of chemical compounds used in the treatmengof cancer, HIV and the hepatitizs C virus; the IRS only allowed a $15 milliob deduction. A collection of 78 artworks, mostly from the late 1800s andearlyg 1900s, donated to the Cincinnati Art Museum in 2003 were wortg $8.5 million, P&G alleged, but the IRS only allowedd a charitable deduction for $6.4 million. two works given to the Freedom Centerd in 2004 wereworth $320,000, P&G but the IRS only allowed $225,000.
“The IRS’ valuations of the donatec artwork apply incorrect methods of which have the effec t of erroneously undervaluing thedonated artwork,” P&G claimed. It also allegedc IRS errors in determininf the liquidation valueof P&G Argentina, which it wrotwe off during its 2003 tax year. That led the IRS to disallows $64 million of loss carrybacks that P&G applied to its 2000 and 2001 taxes. The agenchy also disallowed P&G’s claim for $21 milliohn of research expense tax creditszand $12 million in foreign tax credites related to Korean taxes paid by P& G Northeast Asia for the yearw 2002 to 2005. It wants that moneyu refunded, too.
According to the IRS, deductionzs for charitable donations must be based on fairmarkety value, defined as “the price that properth would sell for on the open market. It is the pricee that would be agreed on between a willin g buyer and awillinfg seller, with neither being requirec to act, and both having reasonables knowledge of the relevant facts.” IRS officials declinef comment on how the agency determines its valuations of patentw and other intellectual properties – if it uses outsid e appraisers or in-house for example. Spokesman Bruce Friedland in D.C.
, said in an e-mail that the valuation of patent s must takeinto account, among other factors, whether the patentes technology has been made obsolete by otheer technology and the length of time remaining befors the patent expires. Bruce Berman, CEO of , an intellectuall property consulting and management firm in New said determining the fair market value of patentsd is very difficultbecause there’a such a thin market for them, and many turn out to be When appraising real estate, on the other there are plenty of comparablre assets bought and sold everyg day. “There really aren’t You’re projecting what something could be worth underf idealconditions ...
or what it would cost to reinven t it or designaround it,” Berman “Valuations are more art than science.” Those that peoples arrive at almost inevitably depend on what their purposes are, so it’s not surprisingy that the IRS and P&G would come up with different he said. The IRS cracked down on overly ambitiouws valuations of patents a fewyears ago, he P&G’s Chelune said P&G has made only one donation of technologyt since 2005.
The different methods used by P&G’ws appraisers and by the IRS’ appraisers “represent the naturse of the case,” Chelune but she did not elaborate on whatmethodsw P&G’s independent appraisers used or how the valuews they arrived at could be so much more than the valuews determined by the IRS. The IRS used three differentt appraisers who used three different valuation she said.
Those methods and the discountf rates they applied areat issue, she