Tax Patents

by Linda Beale

Tax Patents
crossposted with Ataxingmatter

The Senate Judiciary Committee did a markup of its patent reform legislation (S.23) today (Feb. 3, 2011) and –in a unanimous vote– sent it to the floor of the Senate with the broad ban on the patenting of tax strategies intact.

The accounting group AICPA has been leading the tax practitioner charge against patentable tax strategies, as the ABA tax section is hampered by the overall ABA’s decision to let the patent bar handle any comments on the matter. The patent bar tends to object to subject matter exclusions to patentability, claiming that broad patentability best serves innovation.

Significant patent reform has been on the table for several years, but has been the subject of intense negotations, since it is the first major amendment to patent law in 60 years. Some practitioners have urged Congress to pass a stand-along tax strategy patent ban, but that has been politically difficult, possibly because of the patent bar’s interest in the matter and those in the technology industry who fear that bans on tax strategy patents will affect tax software (such as tax preparation software). While there are arguments that software, like tax strategy patents, simply shouldn’t be patentable, those in Congress in support of tax strategy patent bans generally have indicated that tax preparation software is not intended to be covered. Sen. Grassley, for example, supports a ban on tax strategy patents but is cognizant of the technology industry’s concerns. He stated that he believes the ban can be written so as to protect tax preparation software and similar applications.

The following is excerpted from his Feb. 3, 2011 statement for the record on the tax strategy patent issue (available in BNA Daily Tax Report, Feb. 4, 2011).

I want to particularly thank the Chairman for working with me on a provision that would curtail patents on tax strategies that Senator Baucus and I strongly believe needed to be part of this patent reform package. During the 10 years that Senator Baucus and I alternated as Chair and Ranking Member of the Finance Committee, we worked on many proposals to protect taxpayer rights. The tax patent provision in this bill is one such provision. The American Institute of Certified Public Accountants started expressing concern about tax strategy patents after the then-Chairman and CEO of Aetna was sued for patent infringement for using a widely-known tax planning strategy. He eventually settled, but most taxpayers don’t have the resources to fend off such challenges. I ask consent that a 2007 article describing the AICPA’s concerns and the lawsuit be inserted in the record.
In July 2006, the House Ways & Means Committee held a hearing on the use of tax strategy patents in facilitating abusive tax avoidance transactions. The Joint Committee on Taxation prepared a document for this hearing that outlines in detail the issues that tax strategy patents present. That document, JCX-31-06, is available on the Joint Committee’s website. The bottom line is that tax strategy patents may lead to the marketing of aggressive tax shelters or otherwise mislead taxpayers about expected results. Tax strategy patents encumber the ability of taxpayers and their advisors to use the tax law freely, interfering with the voluntary tax compliance system. If firms or individuals were able to hold patents for these strategies, some taxpayers could face fees simply for complying with the tax code. And, tax patents provide windfalls to lawyers and patent holders by granting them exclusive rights to use tax loopholes, which could provide some businesses with an unfair advantage.
Tax strategy patents are unlikely to be novel given the public nature of the tax code and related guidance. Moreover, tax strategy patents may undermine the fairness of the Federal tax system by removing from the public domain particular ways of satisfying a taxpayer’s legal obligations. The provision in the bill before us today expressly provides that a strategy for reducing, avoiding or deferring tax liability cannot be considered a new or non-obvious idea, and therefore, a patent on a tax strategy cannot be obtained. This ensures that all taxpayers will have equal access to strategies to comply with the tax code. In addition to Chairman Baucus, Senators Levin, Bingaman, Wyden, Conrad, Enzi, Kerry, Stabenow and Whitehouse support this provision.
I want to express my appreciation to Senators Leahy, Hatch, Sessions and Kyl for working with me in the Judiciary Committee to include this provision in the comprehensive patent reform bill we are debating today. It’s important that this provision remain in the bill since the number of tax strategy patents issued and pending are growing rapidly. As of the publication date of the 2007 article I inserted in the record, there were 60 patents issued and 86 pending applications just under PTO’s 36T classification. Just three years later, there are 137 issued and 157 pending. These are just the ones PTOs classified as tax strategy patents, but PTO’s classification isn’t perfect so there could be other tax strategy patents under other classifications.
On the issue of software, I’d like to make crystal clear that those of us working to limit the patenting of tax strategies do not intend for this to apply to tax preparation and other software, tools or systems used to prepare tax or information returns or manage taxpayer’s finances. I’m aware that various technology industry groups have written in opposition to this provision because of their concerns over how this impacts their ability to patent software. However, we’ve also heard from the public accountants and other consumer advocate groups, including the U.S. Public Interest Research Group, supporting this provision. I ask unanimous consent that their letter be inserted into the record.
I believe that we can protect taxpayer rights while also protecting the intellectual property rights of software companies. I encourage the technology groups to work with us to ensure we achieve that result and look forward to working with them to do so.