Relevant and even prescient commentary on news, politics and the economy.

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.

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New Year’s Tax Resolutions

by Linda Beale

A quote from Amartya Sen, and my New Year’s Tax Resolutions (for Congress and the Obama Administration)

The time between December 30 and January 4 seems to be filled with lists. Along with the ever-present list of “to dos” that haven’t been done and still are hanging around waiting for our attention, there are everyone’s “10 best” lists (e.g., the ten best movies–regretably, I don’t think I saw ten new movies in 2009, so can only say I thought Slumdog was a decent showing) or their opposite (e.g., the ten worst celebrities of the year, every one of them with Tiger Woods and Gov. Sanford firmly placed near the top). And of course there are those New Year’s resolutions that we are supposed to deliberate over and then deliver on when the New Year rolls around–mine is to join my hubby in his morning walk and to give up doughnuts completely.

Not being one to gather quotes all year just for this final celebration, here’s one quote that I believe is worth thinking about as we head into the new year. Amartya Sen writes, in “The Idea of Justice” (Belknap Press 2009), at 32:

Being smarter may help the understanding not only of one’s self-interest, but also how the lives of others can be strongly affected by one’s own actions. Proponents of so-called ‘Rational Choice Theory’ (first proposed in economics and then enthusiastically adopted by a number of political and legal thinkers) have tried hard to make us accept the peculiar understanding that rational choice consists only in clever promotion of self-interest (which is how, oddly enough, ‘rational choice’ is defined by the proponents of brand-named ‘rational choice theory’). Nevertheless, our heads have not all been colonized by that remarkably alienating belief. There is considerable resistance to the idea that it must be patently irrational–and stupid–to try to do anything for others except to the extent that doing good to others would enhance one’s own well-being.”


In light of Sen’s helpful clarity about the ridiculousness of ‘rational choice theory’, I also offer the following as the resolutions that I wish Congress and the Obama administration (and/or various administrative agencies thereof) would make (and follow through on) for this new year of 2010.

1) The Treasury should resolve that it will no longer provide special dispensation to the financial institution powers that be, such as its invalid notice indicating that it would not enforce the law on loss corporations for too-big-to-fail banks, thus allowing too-big-to-fail banks to become even bigger by buying loss banks, and then allowing them to use those losses in direct contravention of the law and avoid paying income tax for years (or perhaps decades). A similar “notice” went out recently–Notice 2010-12–stating that Treasury will continue to fail to enforce the rules under section 956 regarding what constitutes an obligation and hence relieving US shareholders of controlled foreign corporations ( many of them possibly the same too-big-to-fail banks) of further US taxpaying obligations. (This notice continued the nonenforcement decision Treasury had made in 2008, in Notice 2008-91. Too bad decisions do not make a good decision.)

2) The Supreme Court should resolve to deal with the problem of financial institutions claiming patent protection for all kinds of financial software and financial engineering “solutions” and for others claiming patent protection for tax planning strategies by releasing a decision in the Bilski case that clarifies the “abstract idea” exception. The Court should say that no patent can be granted for innovations that merely utilize the positive laws to assert that a transaction carried out in a particular way will have a particular legal result, or for other methods of conducting transactions or of organizing human activity that do not involve the technological arts, as understood under European patent law.

3) Congress should resolve to end the preferential treatment of those few Americans who own most of the financial assets of the country by ending the capital gains preference.

4) Congress should resolve to eliminate the preferential tax treatment of the earned income of hedge fund and equity fund managers (the so-called “carried interest”), and any other “partners” that manage partnerships and earn a share of the partnership’s gains as their compensation (such as real estate partnerships).

5) In order to restore some sort of balance between worker and employer, Congress should eliminate the business deduction for any compensation in excess of 20 times the average salary (about $1 million). The cap on compensation deduction to apply to compensation in any form (stock, assets, cash), whether or not “performance related”.

6) In order to treat the gifts of ordinary Americans to charities of their choice the same as the gifts of multi-millionaires to charities of their choice, Congress should repeal the special rule that permits a charitable contribution deduction for the value of stocks rather than the investment basis in the stocks. Will that limit contributions that are made? Perhaps, though it is clear that contributors do so for many reasons and not merely for the contribution deduction.

7) Congress should resolve to resolve the estate tax situation once and for all, before some do-nothing heir-to-be decides that 2010 is the right time for the wealthy person in his life to go. Congress should enact a modest exemption of $2 million but should make the estate tax rates progressive (beginning at2009s 45%, but moving up to at least 65% for the largest estates).

8) Congress should resolve to revisit the tax brackets. We have an economy in which the average income is around $50,000, but there are individuals who make more than $500 million a year. That spread is so large that it cannot be adequately addressed by brackets that focuse on the first $350,000 or so. Those who make $200 million a year have incredibly more freedom of choice, and the few dollars they pay in taxes are merely peanuts compared to the precious funds from an average family. We need to make the income tax more progressive by adding additional rate brackets–perhaps as many as 3 or 4 more. That would still be a far cry from the income tax system before Reagan took office, when we had top rates more than double today’s top rates. But it would address the dire fiscal need of the country in a way that is doable without creating undue suffering.

9) Congress and Treasury should resolve to clean up the partnership tax rules so that they do not offer such extraordinary flexibility to partners to arrange their affairs to avoid taxation–for example, by eliminating the electivity permitted to partners in many places in the rules (make the remedial method the only method allowed for taking into account book-tax disparities in contributed property) and by changing the way that partners take account of partnership debt (such as being able to get distributions of nonrecourse debt that monetize partnership property appreciation).

10) Congress should re-visit the rules on mergers and acquisitions, so that a tax-free merger becomes an unusual event. Part of the problem we are facing today is that multinational corporations have grown so big that they wield enormous power globally and can sometimes appear to be able to order laws to suit them. Witness the fact that we are well beyond the beginnings of the financial system crisis, and no single piece of legislation imposing new and better regulations on the banks have been enacted. The size of corporations ensures that they will become as focused on raising rents for their managers as they will on making profits for shareholders, and that they will care not one whit for the ordinary American who is their customer, or their low-wage employee, or the resident of a town that they leave derelict when they move to sunnier shores. We say that the rationale for tax-free reorganization provisions is to encourage efficient organization of corporations. But efficiency is not God, and in fact focus on efficiency may leave democracy and fairness far behind. We should give tax-free treatment only to shareholders who get no boot for any of their stock, and only in transactions where a high percentage of the consideration is stock (perhaps 80% or more).

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