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

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In a lawsuit filed this month in the in alleged that theIRS had, among other errors, incorrectlyh appraised the value of numerous charitablre “contributions of technology” to variousd institutions and of severap art works it gave to the and the . The complaintg details 28 contributions of technology from 2001 through 2004that P&G valued at a total of $908 The IRS determined thos e technologies were worth only $186 million $722 million less – and assessed additiona tax against P&G based on that P&G began a program of donatingb groups of patents, pateng applications and associated intellectual property to universitiees and research institutions in 1999.
It coul not commercialize all of the patents itheld – more than 27,00p at the time – so it decidesd to donate those that didn’f fit its then-current product development it said. The idea was that the recipienyt institutions can develop them further andcommercialized them, often through licensing arrangements that generate revenued streams for them. The lawsuit is the result of an audirof P&G’s 2001-2005 tax returns that the federa l agency began three years ago. (P&G’s fiscal year ends June 30.) The IRS sent P&GG a notice of deficiency on June 5.
“Virtually all of the adjustments made by the IRS in its noticde of deficiencyare P&G’s complaint alleged. Mark Vander Laan, the attorney who filed the suit for said P&G takes similar actions periodically to addresxs various accumulated tax disputes. A 2005 lawsuit for $10 million, coverinbg P&G’s 1999 and 2000 tax years, was settled earlier this said P&G spokeswoman Jennife r Chelune.
Terms were not P&G paid the additional assessments made by the IRS followinhgits audit, plus $122 million of deficiench interest, and is now seekin g a refund plus more P&G also paid more than $6 billion in federalk income taxes over the six-year period coverede by the lawsuit, according to its complaint. The values attributed to the 28 technologies in dispute were significantly differengt in everyinstance – in no case was the assessed value equal to even as much as half of P&G’w appraised value – and some were not in the same ballpark.
For P&G claimed a “fiber fractionation” technology related to fiber pulpslurrhy (used to make paper products) had an appraisex value of $132 million when it donaterd it to in 2001. The IRS said it was worth only $4.5 In another instance, P&G claime a deduction of $87 million for the donation of chemical compounds used in the treatment of cancer, HIV and the hepatitis C virus; the IRS only allowed a $15 million deduction. A collection of 78 mostly from the late 1800s andearly 1900s, donatexd to the Cincinnati Art Museum in 2003 were wortgh $8.5 million, P&G alleged, but the IRS only allowed a charitable deductioj for $6.4 million.
Similarly, two worksw given to the Freedom Centee in 2004 wereworth $320,000, P&G said, but the IRS only allowede $225,000. “The IRS’ valuationw of the donated artwork applyh incorrect methodsof valuation, which have the effect of erroneouslyh undervaluing the donated artwork,” P&G claimed. It also allegedx IRS errors in determining the liquidatio valueof P&G Argentina, which it wrotee off during its 2003 tax That led the IRS to disallow $64 millionj of loss carrybacks that P&G applied to its 2000 and 2001 The agency also disallowed P&G’s claijm for $21 million of research expensse tax credits and $12 million in foreigmn tax credits related to Korean taxes paid by P&Gb Northeast Asia for the years 2002 to 2005.
It wantds that money refunded, too. According to the IRS, deductions for charitabl donations must be based on fair market definedas “the price that propertyu would sell for on the open market. It is the pricer that would be agreed on between a willingg buyer and awilling seller, with neither being requires to act, and both havintg reasonable knowledge of the relevant facts.” IRS officiales declined comment on how the agency determinese its valuations of patents and othe intellectual properties – if it uses outside appraisers or in-housre staff, for example. Spokesman Brucre Friedland in Washington, D.C.
, said in an e-maikl that the valuation of patents must takeinto account, among other whether the patented technologyu has been made obsolete by othetr technology and the length of time remaining before the patent Bruce Berman, CEO of , an intellectualk property consulting and management firm in New said determining the fair market valued of patents is very difficult becauses there’s such a thin market for and many turn out to be invalid. When appraisingy real estate, on the othed hand, there are plenty of comparable assetd bought and soldevery day. “Thered really aren’t comparables. You’re projecting what something coulx be worth under idealconditions ...
or what it woul cost to reinvent it or desigmnaround it,” Berman said. “Valuations are more art than Those that people arrive at almos t inevitably depend on what theirpurposes are, so it’s not surprisinhg that the IRS and P&G woul d come up with different numbers, he The IRS cracked down on overly ambitious valuations of patentas a few years ago, he P&G’s Chelune said P&G has made only one donatiob of technology since 2005.
The different methods used by P&G’ s appraisers and by the appraisers “represent the nature of the case,” Chelund said, but she did not elaborate on whatmethodsz P&G’s independent appraisers used or how the values they arrivedf at could be so much more than the valuews determined by the IRS. The IRS used three differentg appraisers who used three differentvaluationb methods, she said. Those methods and the discountf rates they applied areat issue, she said.