Part I. Rulings — Internal Revenue Bulletin 2003-11

The President has determined that, during 2002, the areas listed below have been adversely affected by disasters of sufficient severity and magnitude to warrant assistance by the Federal Government under the Act.

A cumulative list of the areas warranting assistance each year under the Act (beginning in 1998) is available at the Federal Emergency Management Agency (FEMA) Internet site at www.fema.gov. Accordingly, the Internal Revenue Service requests comments regarding the need for future publication of this revenue ruling. Comments should be submitted by May 1, 2003, either to:

Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC 20044 Attn: CC:PA:T:CRU (ITA) Room 5041

or electronically via the Service internet site at: Notice.Comments@irscounsel.treas.gov (the Service comments e-mail address). All comments will be available for public inspection and copying.

FURTHER INFORMATION

For further information regarding this revenue ruling, contact James R. Roy at (202) 622–4950 (not a toll-free call).

Section 139.—Disaster Relief Payments

Taxpayers are informed of the areas declared by the President to qualify as major disaster or emergency areas during 2002 under the Disaster Relief and Emergency Assistance Act. See Rev. Rul. 2003–29, on this page.

Section 165.—Losses

26 CFR 1.165–11: Election in respect of losses attributable to a disaster. (Also § 139, 1033; 1.1033(1)–1.)

Election in respect of losses attribut- able to a disaster. This ruling lists the areas declared by the President to qualify as major disaster or emergency areas during 2002 under the Disaster Relief and Emergency Assistance Act.

Rev. Rul. 2003–29

Under § 165(i) of the Internal Revenue Code, if a taxpayer suffers a loss attributable to a disaster occurring in an area subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Disaster Relief and Emergency Assistance Act, 42 U.S.C. §§ 5121–5204c (1988 & Supp. V 1993) (the Act), the taxpayer may elect to claim a deduction for that loss on the taxpayer’s federal income tax return for the taxable year immediately preceding the tax

able year in which the disaster occurred. For purposes of § 165(i), a disaster includes an event declared a major disaster or an emergency under the Act.

Section 1.165–11(e) of the Income Tax Regulations provides that the election to deduct a disaster loss for the preceding year must be made by filing a return, an amended return, or a claim for refund on or before the later of (1) the due date of the taxpayer’s income tax return (determined without regard to any extension of time to file the return) for the taxable year in which the disaster actually occurred, or (2) the due date of the taxpayer’s income tax return (determined with regard to any extension of time to file the return) for the taxable year immediately preceding the taxable year in which the disaster actually occurred.

The provisions of § 165(i) apply only to losses that are otherwise deductible under § 165(a). An individual taxpayer may deduct losses if they are incurred in a trade or business, if they are incurred in a transaction entered into for profit, or if they are casualty losses under § 165(c)(3).

A determination by the President that an area warrants assistance by the Federal Government under the Act is also relevant to § 139(a) (regarding the exclusion from gross income of certain qualified disaster relief payments) and § 1033(h) (regarding the deferral of gain realized upon the involuntary conversion of certain property).

Disaster Area Disaster Description Disaster Date

Alabama

Counties of Baldwin and Mobile FEMA–1438–DR Tropical Storm Isidore

Counties of Barbour, Bibb, Blount, Calhoun, Cherokee, Cleburne, Cullman, Dale, DeKalb, Etowah, Fayette, Franklin, Greene, Hale, Henry, Houston, Jefferson, Lamar, Lawrence, Marion, Marshall, Morgan, Pickens, Shelby, St. Clair, Talladega, Tuscaloosa, Walker, and Winston

FEMA–1442–DR Severe Storms and Tornadoes

September 23–October 1

November 5–12

2003–11 I.R.B. 587 March 17, 2003

Disaster Area Disaster Description Disaster Date

Alaska

April 27–May 30

November 3–10

October 23–December 20

June 18–July 7

December 15, 2001–January 30, 2002

April 23–June 6

Fairbanks North Star Borough, McGrath and Lime Village in the Iditarod Regional Education Attendance Area (REAA), Aniak, Crooked Creek, Red Devil, and Sleetmute in the Kuspuk REAA, Kwethluk in the Lower Kuskokwim REAA, Alakanuk and Emmonak in the Lower Yukon REAA, and Ekwok and Stuyahok in the Southwest Region REAA.

Fairbanks North Star Borough, Denali Borough, Matanuska-Susitna Borough; the Regional Education Attendance Areas of Delta Greely, Alaska Gateway, Copper River, and Yukon-Koyukuk; the cities of Tetlin, Mentasta Lake, Nothway, Dot Lake, Chistochina, and Tanacross; and the unincorporated communities of Slana and Tok.

Kenai Peninsula Borough, Kodiak Island Borough and Chignik Bay Area, to include Chignik Lake and Chignik Lagoon

Arizona

Counties of Apache, Coconino, Gila, and Navajo; and the Fort Apache Indian Reservation

Arkansas

Counties of Ashley, Clay, Cleburne, Columbia, Craighead, Crittenden, Franklin, Greene, Independence, Jackson, Lincoln, Little River, Logan, Monroe, Poinsett, Prairie, Scott, Stone, White, and Woodruff

Colorado

Counties of Adams, Alamosa, Arapahoe, Archuleta, Baca, Bent, Boulder, Broomfield, Chaffee, Cheyenne, Clear Creek, Conejos, Costilla, Crowley, Custer, Delta, Denver, Dolores, Douglas, Eagle, Elbert, El Paso, Fremont, Garfield, Gilpin, Grand, Gunnison, Hinsdale, Huerfano, Jackson, Jefferson, Kiowa, Kit Carson, Lake, La Plata, Larimer, Las Animas, Lincoln, Mesa, Mineral, Moffat, Montezuma, Montrose, Otero, Ouray, Park, Pitkin, Pueblo, Rio Blanco, Rio Grande, Routt, Saguache, San Juan, San Miguel, Summitt, Teller, Washington, Weld, and Yuma; the Southern Ute and Ute Mountain Reservations; and the Cities of Broomfield and Denver

FEMA–1423–DR Flooding

FEMA–1440–DR Earthquake

FEMA–1445–DR Severe Winter Storms, Flooding, Coastal Erosion, and Tidal Surge

FEMA–1422–DR Wildfires

FEMA–1400–DR Severe storms and flooding

FEMA–1421–DR Wildfires

March 17, 2003 588 2003–11 I.R.B.

Disaster Area Disaster Description Disaster Date

Guam

Territory of Guam FEMA–1426–DR Typhoon Chata’an

Territory of Guam FEMA–1446–DR Super Typhoon Pongsona

Illinois

July 5–6

December 8–16

April 21–May 23

April 28–June 7

September 20

June 3–25

Counties of Adams, Alexander, Bond, Brown, Calhoun, Cass, Champaign, Christian, Clark, Clay, Clinton, Coles, Crawford, Cumberland, DeWitt, Douglas, Edgar, Edwards, Effingham, Ford, Fayette, Franklin, Fulton, Gallatin, Greene, Hamilton, Hancock, Hardin, Iroquois, Jackson, Jasper, Jefferson, Jersey, Johnson, Lawrence, Logan, McDonough, Macon, Macoupin, Madison, Marion, Mason, Massac, Menard, Monroe, Montgomery, Morgan, Moultrie, Piatt, Pike, Perry, Pope, Pulaski, Randolph, Richland, St. Clair, Saline, Sangamon, Schuyler, Scott, Shelby, Union, Vermillion, Wabash, Washington, Wayne, White, and Williamson

Indiana

Counties of Brown, Crawford, Dearborn, Dubois, Franklin, Gibson, Greene, Hamilton, Jackson, Jefferson, Johnson, Knox, Marion, Martin, Montgomery, Ohio, Orange, Owen, Parke, Pike, Posey, Putnam, Sullivan, Switzerland, Union, Vermillion, Vigo, and Washington

Counties of Bartholomew, Blackford, Brown, Daviess, Decatur, Delaware, Fayette, Franklin, Gibson, Grant, Greene, Hamilton, Hancock, Hendricks, Henry, Jay, Johnson, Knox, Lawrence, Madison, Marion, Monroe, Morgan, Owen, Pike, Posey, Randolph, Rush, Shelby, Sullivan, Tipton, and Vanderburg

Iowa

Counties of Allamakee, Benton, Buchanan, Cedar, Clayton, Clinton, Delaware, Des Moines, Dubuque, Fayette, Henry, Iowa, Jackson, Johnson, Jones, Lee, Linn, Louisa, Muscatine, Scott, and Winneshiek

FEMA–1416–DR Severe Storms, Tornadoes, and Flooding

FEMA–1418–DR Severe Storms, Tornadoes and Flooding

FEMA–1433–DR Severe Storms and Tornadoes

FEMA–1420–DR Severe Storms and Flooding

2003–11 I.R.B. 589 March 17, 2003

Disaster Area Disaster Description Disaster Date

Kansas

January 29–February 15

March 17–21

April 27–May 10

September 21–October 1

October 1–16

July 4–5

December 8–16

April 28

Counties of Allen, Anderson, Barber, Bourbon, Butler, Chautauqua, Coffey, Cowley, Crawford, Douglas, Elk, Franklin, Greenwood, Johnson, Labette, Linn, Miami, Montgomery, Neosho, Osage, Sumner, Wilson, Woodson, and Wyandotte

Kentucky

Counties of Bath, Bell, Bourbon, Boyd, Breathitt, Carter, Clay, Elliott, Fleming, Greenup, Harlan, Johnson, Knott, Knox, Laurel, Lawrence, Lee, Leslie, Letcher, Lewis, McCreary, Magoffin, Menifee, Montgomery, Morgan, Nicholas, Owsley, Perry, Powell, Rowan, Wayne, and Whitley

Counties of Breathitt, Breckenridge, Crittenden, Edmondson, Floyd, Grayson, Green, Hancock, Hardin, Henderson, Hopkins, Laurel, Letcher, Marion, Martin, McLean, Meade, Ohio, Owsley, Pike, Rockcastle, Union, and Webster

Louisiana

Parishes of East Baton Rouge, Iberia, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. James, St. John the Baptist, St. Mary, St. Tammany, Tangipahoa, and Terrebonne

Parishes of Acadia, Allen, Ascension, Assumption, Avoyelles, Beauregard, Calcasieu, Caldwell, Cameron, Catahoula, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson Davis, Jefferson, Lafayette, Lafourche, LaSalle, Livingston, Natchitoches, Orleans, Ouachita, Plaquemines, Pointe Coupee, Rapides, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Landry, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermillion, Vernon, Washington, West Baton Rouge, and West Feliciana

Mariana Islands, Northern

FEMA–1402–DR Severe Winter Ice Storm

FEMA–1407–DR Severe Storms and Flooding

FEMA–1414–DR Severe Storms, Tornadoes, and Flooding

FEMA–1435–DR Tropical Storm Isidore

FEMA–1437–DR Hurricane Lili

Island of Rota FEMA–1430–DR Typhoon Chata’an

Island of Rota FEMA–1447–DR Super Typhoon Pongsona

Maryland

Counties of Calvert, Charles, and Dorchester FEMA–1409–DR Tornado

March 17, 2003 590 2003–11 I.R.B.

Disaster Area Disaster Description Disaster Date

Michigan

Counties of Baraga, Gogebic, Houghton, Marquette, and Ontonagan

Micronesia, Federated States of

FEMA–1413-DR Flooding

Yap State FEMA–1417–DR Typhoon Mitag

Chuuk State FEMA–1427–DR Tropical Storm Chata’an, including Flooding, Mudslides, and Landslides

Minnesota

April 10–May 9

February 27–March 3

July 2–4

June 9–28

September 23–October 6

November 10–11

January 29–February 13

April 24–June 10

Counties of Becker, Beltrami, Clay, Clearwater, Goodhue, Hubbard, Itasca, Kittson, McLeod, Pennington, Polk, Roseau, and Wright

Mississippi

Counties of Amite, Hancock, Harrison, Jackson, Lincoln, Pearl River, Pike, and Stone

Counties of Clay, Lafayette, Lowndes, Monroe, Noxubee, and Oktibbeha

Missouri

Counties of Adair, Audrain, Barton, Bates, Benton, Boone, Buchanan, Caldwell, Carroll, Cass, Cedar, Chariton, Clark, Clay, Clinton, Cooper, Daviess, Grundy, Henry, Howard, Jackson, Johnson, Knox, Lafayette, Lewis, Linn, Livingston, Macon, Marion, Monroe, Morgan, Pettis, Platte, Ralls, Randolph, Ray, Saline, Scotland, Shelby, St. Clair, Sullivan, and Vernon

Counties of Adair, Barry, Barton, Bollinger, Boone, Butler, Camden, Cape Girardeau, Carroll, Carter, Cedar, Christian, Chariton, Clark, Cooper, Crawford, Dade, Dallas, De Kalb, Dent, Douglas, Dunklin, Greene, Grundy, Hickory, Howard, Howell, Iron, Jasper, Jefferson, Johnson, Knox, Laclede, Lafayette, Lawrence, Lewis, Lincoln, Linn, Livingston, McDonald, Macon, Madison, Maries, Marion, Mercer, Miller, Mississippi, New Madrid, Newton, Oregon, Osage, Ozark, Pemiscot, Perry, Phelps, Pike, Polk, Pulaski, Ralls, Ray, Reynolds, Ripley, Schuyler, Scotland, Scott, Shannon, Shelby, St. Francois, St. Genevieve, Stoddard, Stone, Sullivan, Taney, Texas, Vernon, Washington, Wayne, Webster, and Wright

FEMA–1419-DR Severe Storms, Flooding, and Tornadoes

FEMA–1436–DR Hurricane Isidore

FEMA–1443–DR Severe Storms and Tornadoes

FEMA–1403–DR Severe Winter Ice Storm

FEMA–1412–DR Severe Storms and Tornadoes

2003–11 I.R.B. 591 March 17, 2003

Disaster Area Disaster Description Disaster Date

Montana

Counties of Glacier, Hill, Liberty, Pondera, and Toole; and the Blackfeet Indian Reservation

New York

FEMA–1424–DR Severe Storms and Flooding

County of Erie FEMA–1404–DR Severe Winter Storm

Counties of Cattaraugus, Chautauqua, Erie, Genesee, and Wyoming

FEMA–3170–EM Snowstorm

Counties of Clinton and Essex FEMA–1415–DR Earthquake

North Carolina

Counties of Alamance, Alexander, Anson, Burke, Cabarrus, Caldwell, Catawba, Chatham, Cleveland, Davidson, Durham, Edgecombe, Forsyth, Franklin, Gaston, Granville, Guilford, Halifax, Harnett, Iredell, Lee, Lincoln, McDowell, Mecklenburg, Montgomery, Moore, Nash, Orange, Person, Randolph, Rowan, Rutherford, Stanly, Union, Vance, and Wake

North Dakota

Counties of Grand Forks, Pembina, Stutsman, Traill, and Walsh; and the Fort Berthold Indian Reservation

Ohio

Counties of Hancock, Ottawa, Paulding, Putnam, Seneca, and Van Wert

Oklahoma

Counties of Alfalfa, Beaver, Becker, Beckham, Blaine, Caddo, Canadian, Cimarron, Cleveland, Comanche, Creek, Custer, Dewey, Ellis, Garfield, Garvin, Grady, Grant, Greer, Harmon, Harper, Jackson, Kay, Kingfisher, Kiowa, Lincoln, Logan, Major, McClain, Noble, Nowata, Oklahoma, Osage, Pawnee, Payne, Pottawatomie, Roger Mills, Rogers, Stephens, Texas, Tillman, Tulsa, Washington, Washita, Woods, and Woodward

Oregon

FEMA–1448–DR Severe Ice Storms

FEMA–1431–DR Severe Storms, Tornadoes, and Flooding

FEMA–1444–DR Severe Storms and Tornadoes

FEMA–1401–DR Ice Storm

Counties of Coos, Curry, Douglas, Lane, and Linn FEMA–1405–DR Severe Winter Storm with High Winds

June 8–21

December 24–29, 2001

April 20

December 4–6

June 8–August 11

November 10

January 30–February 11

February 7–8

March 17, 2003 592 2003–11 I.R.B.

Disaster Area Disaster Description Disaster Date

Tennessee

January 23–March 20

November 9–12

June 29–July 31

September 6–30

October 24–November 15

June 5–13

March 17–20

April 28–May 3

May 2–20

Counties of Anderson, Bedford, Bledsoe, Blount, Cannon, Claiborne, Clay, Cocke, Cumberland, Decatur, DeKalb, Dickson, Fentress, Giles, Grainger, Hancock, Hardin, Hawkins, Jackson, Lauderdale, Lawrence, Lewis, Lincoln, Loudon, McNairy, Macon, Marshall, Maury, Meigs, Overton, Roane, Scott, Sevier, Van Buren, Warren, and Wayne

Counties of Anderson, Bedford, Carroll, Coffee, Crockett, Cumberland, Gibson, Henderson, Madison, Marshall, Montgomery, Morgan, Rutherford, Scott, Sumner, and Tipton

Texas

Counties of Atascosa, Bandera, Bee, Bexar, Blanco, Brown, Burnet, Caldwell, Calhoun, Callahan, Coleman, Comal, Dimmit, Duval, DeWitt, Eastland, Frio, Gillespie, Goliad, Gonzales, Guadalupe, Hays, Jim Wells, Jones, Karnes, Kendall, Kerr, La Salle, Live Oak, McMullen, Medina, Nueces, Real, San Patricio, San Saba, Taylor, Travis, Uvalde, Victoria, Wilson, and Zavala

Counties of Brazoria, Frio, Galveston, Jim Wells, La Salle, Live Oak, Matagorda, Nueces, San Patricio, Webb, and Wharton

Counties of Aransas, Hardin, Harris, Jefferson, Liberty, Montgomery, Nueces, Orange, and San Patricio

Vermont

Counties of Caledonia, Essex, Franklin, Lamoille, and Orleans

Virginia

Counties of Dickenson, Lee, Russell, Scott, Smyth, Tazewell, Washington, Wise, and Wythe; and Independent City of Norton

FEMA–1408–DR Severe Storms and Flooding

FEMA–1441–DR Severe Storms, Tornadoes, and Flooding

FEMA–1425–DR Severe Storms and Flooding

FEMA–1434–DR Tropical Storm Fay

FEMA–1439–DR Severe Storms, Tornadoes, and Flooding

FEMA–1428–DR Severe Storms and Flooding

FEMA–1406–DR Severe Storms and Flooding

Counties of Buchanan and Tazewell FEMA–1411–DR Severe Storms and Tornado

West Virginia

Counties of Logan, McDowell, Mercer, Mingo, and Wyoming

FEMA–1410–DR Severe Storms, Flooding, and Landslides

2003–11 I.R.B. 593 March 17, 2003

Disaster Area Disaster Description Disaster Date

Wisconsin

Counties of Adams, Clark, Dunn, Marathon, Marinette, Portage, Waushara, and Wood

Counties of Barron, Burnett, Chippewa, Clark, Dunn, Langlade, Lincoln, Marathon, Polk, Portage, Price, Rusk, Sawyer, Shawano, St. Croix, Taylor, Washburn, Waupaca, and Wood

FEMA–1429–DR Severe Storms and Flooding

FEMA–1432–DR Severe Storms, Tornadoes, and Flooding

June 21–25

September 2–6

Section 170(f)(2) allows a charitable contribution deduction, in the case of property that the donor transfers in trust, if the trust is a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund. Further, § 170(f)(2) allows a deduction for the value of an interest in property (other than a remainder interest) that the donor transfers in trust if the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is a fixed percentage, distributed yearly, of the fair market value of the trust property (to be determined yearly) and the grantor is treated as the owner of such interest for purposes of applying § 671.

By its terms, § 170(f)(3)(A) does not apply to, and therefore does not disallow a deduction for, a contribution of an interest that, even though partial, is the taxpayer’s entire interest in the property. If, however, the property in which such partial interest exists was divided in order to create such interest, and thus avoid § 170(f)(3)(A), a deduction is not allowed. Section 1.170A– 7(a)(2)(i) of the Income Tax Regulations. Sections 170(f)(3)(B)(ii) and 1.170A– 7(b)(1) allow a deduction under § 170 for a contribution not in trust of a partial interest that is less than the donor’s entire interest in property if the partial interest is an undivided portion of the donor’s entire interest. An undivided portion of a donor’s entire interest in property consists of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the entire term of the donor’s interest in such property and in other property into which such property is converted. A charitable contribution in perpetuity of an interest in property not in trust does not constitute a contribution of an undivided portion of the

Section 170.—Charitable, etc., Contributions and Gifts

26 CFR 1.170–1: Charitable, etc., contributions and gifts; allowance of deduction. (Also §§ 170; 1.170A–7.)

Charitable contributions; patents. Under section 170(a) of the Code, a taxpayer’s contribution to a qualified charity of: (1) a license to use a patent is not deductible if the taxpayer retains any substantial right in the patent; (2) a patent subject to a conditional reversion is not deductible unless the likelihood of the reversion is so remote as to be negligible; and (3) a patent subject to a license or transfer restriction generally is deductible, but the restriction reduces the amount of the charitable contribution for section 170 purposes.

Rev. Rul. 2003–28

ISSUES

(1) Is a taxpayer’s contribution to a qualified charity of a license to use a patent deductible under § 170(a) of the Internal Revenue Code if the taxpayer retains any substantial right in the patent?

(2) Is a taxpayer’s contribution to a qualified charity of a patent subject to a conditional reversion deductible under § 170(a)?

(3) Is a taxpayer’s contribution to a qualified charity of a patent subject to a license or transfer restriction deductible under § 170(a)?

FACTS

Situation 1. X contributes to University, an organization described in § 170(c) (qualified charity), a license to use a patent, but retains the right to license the patent to others.

Situation 2. Y contributes a patent to University subject to the condition that A, a faculty member of University and an expert in the technology covered by the patent, continue to be a faculty member of University during the remaining life of the patent. If A ceases to be a member of University’s faculty before the patent expires, the patent will revert to Y . The patent will expire 15 years after the date Y contributes it to University. On the date of the contribution, the likelihood that A will cease to be a member of the faculty before the patent expires is not so remote as to be negligible.

Situation 3. Z contributes to University all of Z ’s interests in a patent. The transfer agreement provides that University may not sell or license the patent for a period of 3 years after the transfer. This restriction does not result in any benefit to Z, and under no circumstances can the patent revert to Z.

LAW AND ANALYSIS

Issue (1)

Section 170(a) provides, subject to certain limitations, a deduction for any charitable contribution, as defined in § 170(c), payment of which is made within the taxable year.

Section 170(f)(3) denies a charitable contribution deduction for certain contributions of partial interests in property. Section 170(f)(3)(A) denies a charitable contribution deduction for a contribution of less than the taxpayer’s entire interest in property unless the value of the interest contributed would be allowable as a deduction under § 170(f)(2) if the donor were to transfer the interest in trust.

March 17, 2003 594 2003–11 I.R.B.

tion on the marketability or use of property, the amount of the charitable contribution is the fair market value of the property at the time of the contribution determined in light of the restriction. See also Cooley v. Com- missioner, 33 T.C. 223, 225 (1959), aff’d per curiam, 283 F.2d 945 (2d Cir. 1960).

In Situation 3, Z transfers to University all of Z ’s interests in the patent with the restriction that University cannot transfer or license the patent for a period of 3 years after the transfer. Unlike the conditional reversion in Situation 2, the restriction on transfer or license is not a condition that can defeat the transfer. Thus, Z ’s contribution is deductible under § 170(a), assuming all other applicable requirements of § 170 are satisfied, and subject to the percentage limitations of § 170. See Publication 526, Charitable Contributions (describing other requirements for, and limitations on, the deductibility of charitable contributions). Under § 1.170A–1(c), however, the restriction reduces what would otherwise be the fair market value of the patent, and therefore reduces the amount of Z ’s charitable contribution. If Z had received a benefit in exchange for the contribution, the value of the benefit would further reduce the amount of Z ’s charitable contribution. See § 1.170A–1(h); Rev. Rul. 67–246, 1967–2 C.B. 104. See also Singer Co. v. United States, 449 F.2d 413, 423–424 (Ct. Cl. 1971).

HOLDINGS

Under the facts of this revenue ruling: (1) A taxpayer’s contribution to a qualified charity of a license to use a patent is not deductible under § 170(a) if the taxpayer retains any substantial right in the patent.

(2) A taxpayer’s contribution to a qualified charity of a patent subject to a conditional reversion is not deductible under § 170(a), unless the likelihood of the reversion is so remote as to be negligible.

(3) A taxpayer’s contribution to a qualified charity of a patent subject to a license or transfer restriction is deductible under § 170(a), assuming all other applicable requirements of § 170 are satisfied, and subject to the percentage limitations of § 170, but the restriction reduces what would otherwise be the fair market value of the patent at the time of the contribu

donor’s entire interest if the donor transfers some specific rights and retains other substantial rights.

In enacting § 170(f)(3), Congress was concerned with situations in which taxpayers might obtain a double benefit by taking a deduction for the present value of a contributed interest while also excluding from income subsequent receipts from the donated interest. In addition, Congress was concerned with situations in which, because the charity does not obtain all or an undivided portion of significant rights in the property, the amount of a charitable contribution deduction might not correspond to the value of the benefit ultimately received by the charity. The legislative solution was to guard against the possibility that such problems might arise by denying a deduction in situations involving partial interests, unless the contribution is cast in certain prescribed forms. See H.R. Rep. No. 91– 413 at 57–58 (1969), 1969–3 C.B. 200, 237–239; S. Rep. No. 91–552 at 87 (1969), 1969–3 C.B. 423, 479. The scope of § 170(f)(3) thus extends beyond situations in which there is actual or probable manipulation of the non-charitable interest to the detriment of the charitable interest, or situations in which the donor has merely assigned the right to future income. Rev. Rul. 88–37, 1988–1 C.B. 97. Section 170(f)(3)(A) and § 1.170A– 7(a)(1) treat a contribution of the right to use property that the donor owns, such as a contribution of a rent-free lease, as a contribution of less than the taxpayer’s entire interest in the property. Similarly, if a taxpayer contributes an interest in motion picture films, but retains the right to make reproductions of such films and exploit the reproductions commercially, § 1.170A– 7(b)(1)(i) treats the contribution as one of less than the taxpayer’s entire interest in the property. In both cases, the taxpayer has not contributed an undivided portion of its entire interest in the property. Accordingly, neither contribution is deductible under § 170(a).

In Situation 1, X contributes a license to use a patent, but retains a substantial right, i.e., the right to license the patent to others. The license granted to University is similar to the rent-free lease described in § 1.170A–7(a)(1) and the partial interest in motion picture films described in § 1.170A– 7(b)(1)(i), in that it constitutes neither X ’s entire interest in the patent, nor a fraction

or percentage of each and every substantial interest or right that X owns in the patent. As a result, the contribution in Situ- ation 1 constitutes a transfer of a partial interest, and no deduction under § 170(a) is allowable. The result would be the same if X had retained any other substantial right in the patent. For example, no deduction would be allowable if X had contributed the patent (or license to use the patent) solely for use in a particular geographic area while retaining the right to use the patent (or license) in other geographic areas.

Issue (2)

Section 1.170A–1(e) provides that if, as of the date of a gift, a transfer of property for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order for it to become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible. Similarly, under § 1.170A–7(a)(3), if, as of the date of a gift, a transfer of property for charitable purposes may be defeated by the performance of some act or the happening of some event, no deduction is allowable unless the possibility that such act or event will occur is so remote as to be negligible.

In Situation 2, Y ’s contribution of the patent is contingent upon A continuing as a member of University’s faculty for an additional 15 years, the remaining life of the patent. On the date of the contribution, the possibility that A will cease to be a member of the faculty before the expiration of the patent is not so remote as to be negligible. Therefore, no deduction is allowable under § 170(a).

Issue (3)

Section 1.170A–1(c)(1) provides that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution, reduced as provided in § 170(e).

Section 1.170A–1(c)(2) provides that the fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Rev. Rul. 85–99, 1985–2 C.B. 83, provides that when a donor places a restric

2003–11 I.R.B. 595 March 17, 2003

tion, and therefore reduces the amount of the charitable contribution for § 170 purposes.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Martin L. Osborne and Susan Kassell of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Ms. Kassell at (202) 622– 5020 (not a toll-free call).

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

26 CFR 1.401–1: Qualified pension, profit-sharing, and stock bonus plans.

Is a corporation’s S status terminated by a direct rollover of stock from its employee stock ownership plan (ESOP) to a participant’s individual retirement account (IRA)? See Rev. Proc. 2003–23, page 599.

Section 402.—Taxability of Beneficiary of Employees’ Trust

26 CFR 1.402(a)–1: Eligible rollover distributions: questions and answers.

Is an employee stock ownership plan (ESOP) required to adjust its basis in S corporation stock under section 1367(a) of the Internal Revenue Code for the ESOP’s pro rata share of the corporation’s items? Upon the distribution of S corporation stock by an ESOP to a participant, is the stock’s net unrealized appreciation under section 402(e)(4) determined using the ESOP’s adjusted basis in the stock? See Rev. Rul. 2003–27, page 597.

26 CFR 1.402(c)–2: Eligible rollover distributions: questions and answers.

Section 409.—Qualifications for Tax Credit Employee Stock Ownership Plans

Section 511.—Imposition of Tax on Unrelated Business In- come of Charitable, etc., Or- ganizations

26 CFR 1.511–3: Provisions generally applicable to the tax on unrelated business income.

Is an employee stock ownership plan (ESOP) required to adjust its basis in S corporation stock under § 1367(a) of the Internal Revenue Code for the ESOP’s pro rata share of the corporation’s items? Upon the distribution of S corporation stock by an ESOP to a participant, is the stock’s net unrealized appreciation under § 402(e)(4) determined using the ESOP’s adjusted basis in the stock? See Rev. Rul. 2003–27, page 597.

Section 512.—Unrelated Business Taxable Income

26 CFR 1.512(a)–1: Definition.

Section 1033.—Involuntary Conversions

26 CFR 1.1033–1: Involuntary conversions; non- recognition of gain.

Section 1361.—S Corpora- tion Defined

26 CFR 1.1361–1: S corporation defined.

Section 1366.—Pass-Thru of Items to Shareholders

26 CFR 1.1366–1: Shareholder’s share of items of an S corporation.

March 17, 2003 596 2003–11 I.R.B.

of which could affect the liability for tax of any shareholder and (ii) nonseparately computed income or loss.

Under § 1367(a)(1), the basis of each shareholder’s stock in an S corporation is increased for any period by the sum of the following items determined with respect to that shareholder for such period: (i) items of income described in § 1366(a)(1)(A), (ii) any nonseparately computed income determined under § 1366(a)(1)(B), and (iii) the excess of the deductions for depletion over the basis of the property subject to depletion.

Under § 1367(a)(2), the basis of each shareholder’s stock in an S corporation is decreased for any period (but not below zero) by the sum of the following items determined with respect to that shareholder for the period: (i) distributions by the corporation which were not includible in the income of the shareholder by reason of § 1368, (ii) the items of loss and deduction described in § 1366(a)(1)(A), (iii) any nonseparately computed loss determined under § 1366(a)(1)(B), (iv) any expense of the corporation not deductible in computing its taxable income and not properly chargeable to capital account, and (v) the amount of the shareholder’s deduction for depletion for any oil and gas property held by the S corporation to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such shareholder under § 613A(c)(11)(B).

Section 402(a) provides that any amount distributed by an employees’ trust described in § 401(a) that is exempt from tax under § 501(a) is taxable to the distributee in the taxable year of the distributee in which distributed, under § 72 (relating to annuities).

Section 402(e)(4)(B) provides that, for purposes of § 402(a) and § 72, in the case of any lump-sum distribution that includes securities of the employer corporation, there is excluded from gross income the net unrealized appreciation (NUA) attributable to that part of the distribution that consists of securities of the employer corporation.

Section 402(e)(4)(C) provides that NUA and the resulting adjustments to basis are determined in accordance with regulations prescribed by the Secretary.

Section 1.402(a)–1(b)(2) of the Income Tax Regulations provides that the amount of NUA in securities of the employer corporation that are distributed by the trust is

Section 1367.—Adjustments to Basis of Stock of Shareholders, etc.

26 CFR 1.1367–1: Adjustments to basis of shareholder’s stock in an S corporation. (Also §§ 402, 409, 511, 512, 1361, 1366, 4975; 1.402(a)–1.)

Employee stock ownership plan (ESOP) . This ruling concerns basis adjustments of S corporation stock held by an employee stock ownership plan (ESOP).

Rev. Rul. 2003–27

ISSUES

(1) Is an employee stock ownership plan (ESOP) required to adjust its basis in S corporation stock under § 1367(a) of the Internal Revenue Code for the ESOP’s pro rata share of the corporation’s items?

(2) Upon the distribution of S corporation stock by an ESOP to a participant, is the stock’s net unrealized appreciation under § 402(e)(4) determined using the ESOP’s adjusted basis in the stock?

FACTS

Corporation X, a calendar year S corporation, maintains plan Y, an ESOP, as defined in section 4975(e)(7) of the Internal Revenue Code (Code). Y holds 100 shares of X stock that it purchased on January 1, 2001, for $10,000 with employer contributions. Y ’s pro rata share of X ’s income for X ’s 2001 taxable year is $1,000 (comprised entirely of nonseparately computed income of $10 per share), which Y properly reports on Form 5500, Annual Return/ Report of Employee Benefit Plan. X makes no distributions to its shareholders during 2001. A, an individual who is a U.S. citizen, is an employee of X and a participant in Y . Y holds five shares of X stock for the benefit of A from January 1 to December 31, 2001. On December 31, 2001, Y distributes the five shares of X stock to A, subject to A ’s right to require X to repurchase the shares under a fair valuation formula in accordance with § 409(h). On that date, the fair market value of the five shares is $580.

LAW

Section 501(a) provides that an organization described in § 401(a) is exempt from tax under subtitle A of the Code. Section 401(a) provides that a trust created or organized in the United States and forming a part of a stock bonus, pension, or profitsharing plan of an employer for the exclusive benefit of its employees or their beneficiaries constitutes a qualified trust if the requirements of that section are satisfied.

Section 4975(e)(7) provides that an ESOP is a defined contribution plan (i) which is either a stock bonus plan which is qualified or a stock bonus and money purchase plan both of which are qualified under § 401(a), and which are designed to invest primarily in employer securities and (ii) which is otherwise defined in regulations prescribed by the Secretary. A plan is not treated as an ESOP unless it meets the requirements of § 409(h), § 409(o), and if applicable, § 409(n), § 409(p), and § 664(g), and, if the employer has a registrationtype class of securities (as defined in § 409(e)(4)), it meets the requirements of section 409(e).

Section 511(a)(1) imposes a tax on the unrelated business taxable income (as defined in § 512(a)) of organizations described in § 511(a)(2), which includes organizations described in § 401(a). Section 512(e)(1) provides that if an organization described in § 1361(c)(6) holds stock in an S corporation, the interest is treated as an interest in an unrelated trade or business and, notwithstanding any other provisions of Part III of Subchapter F, all items of income, loss, or deduction taken into account under § 1366(a) and any gain or loss on the disposition of the stock in the S corporation are taken into account in computing the unrelated business taxable income of the organization. Section 512(e)(3) provides that § 512(e) does not apply to employer securities (within the meaning of § 409(l)) held by an ESOP described in § 4975(e)(7).

Section 1366(a)(1) provides that, in determining the tax of a shareholder for the shareholder’s taxable year in which the taxable year of the S corporation ends, there is taken into account the shareholder’s pro rata share of the corporation’s (i) items of income (including tax-exempt income), loss, deduction, or credit the separate treatment

2003–11 I.R.B. 597 March 17, 2003

enue ruling, contact Mr. Gerson at (202) 622–3050 (not a toll-free call). For further information regarding the employee plans aspects of the revenue ruling, contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829– 5500 (a toll-free call) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday or contact Mr. Linder at (202) 283–9888 (not a tollfree call).

Section 4975.—Tax on Prohibited Transactions

26 CFR 54.4975–7: Other statutory exemptions.

the excess of the market value of the securities at the time of distribution over the cost or other basis of the securities to the trust.

ANALYSIS

Stock of an S corporation held by an ESOP is subject to the same basis adjustments under § 1367(a) as stock held by any other S corporation shareholder. Accordingly, Y must increase its basis in X stock under § 1367(a)(1) for the items of income described in § 1366(a)(1). Specifically, Y ’s pro rata share of X ’s nonseparately computed income for X ’s 2001 taxable year increases the basis of each share of X stock held by Y by $10. Therefore, the basis of each of the five shares of X stock held by Y for the benefit of A is increased by $10 from $100 to $110.

Under § 402(e)(4) and § 1.402(a)– 1(b)(2), the amount of NUA in the X stock is $30, the excess of the market value of the stock at the time of distribution ($580) over Y ’s adjusted basis in the stock ($550). Unless A rolls the distributed stock over into an eligible retirement plan in accordance

with the rules of § 402(c), A will have $550 of ordinary income as a result of the distribution.

HOLDINGS

(1) An employee stock ownership plan (ESOP) is required to adjust its basis in S corporation stock under § 1367(a) for the ESOP’s pro rata share of the corporation’s items.

(2) Upon the distribution of S corporation stock by an ESOP to a participant, the stock’s net unrealized appreciation under § 402(e)(4) is determined using the ESOP’s adjusted basis in the stock.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Craig Gerson of the Office of Associate Chief Counsel (Passthroughs and Special Industries), John Ricotta of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) and Steven Linder of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding the S corporation aspects of the rev

March 17, 2003 598 2003–11 I.R.B.