Profession, institute rally behind bill to block tax strategy patents

More than a decade ago, business method patents, including the patenting of tax strategies, were ruled legitimate by a federal appeals court. Nevertheless, most practitioners are not in the habit of checking existing patents before tailoring a program for their particular clients.

Since the 1998 decision by the Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group Inc., which ruled that an "invention" was eligible for protection by a patent in the U.S., more than 77 tax patents have been issued and 129 more are pending.

Several years ago, the first tax patent infringement suit was filed over the SOGRAT patent, which involves a grantor retained annuity trust, or GRAT, funded with nonqualified stock options. Since GRATs are permitted by the Tax Code, it surprised some practitioners that a patent was granted for a variation of such a common technique. The suit, brought by the Wealth Transfer Group, a Florida-based planner for high-net-worth clients, against John Rowe, then chairman and chief executive of Aetna Inc., was settled for undisclosed terms.

"This isn't just an intellectual exercise," said Eileen Sherr, senior technical manager at the American Institute of CPAs. "There are real consequences."

Tax strategy patents are a trap for the unwary, according to Sherr. "The patents are hard to understand. Putting the patent code on top of the Tax Code is not a good thing."

Many of the tax strategy patents are fairly mundane variations on common transactions, she observed. "There are several patents dealing with the use of charitable remainder trusts, and there's one on deferred real estate exchanges," she said. "These are fairly common little twists on transactions that people have been doing for years."

HELP ON CAPITOL HILL

Though a number of bills were introduced during the last Congress to remedy the tax patent problem, none of them were signed into law.

More recently, legislation was introduced by Reps. Rick Boucher, D-Va., and Bob Goodlatte, R-Va., which would prohibit patents on tax strategies. Reps. Boucher and Goodlatte are senior members of the House Judiciary Committee, which has jurisdiction over patent legislation.

"We need this bill so that U.S. tax laws will be applied equally to all taxpayers," AICPA president and CEO Barry Melancon said. "Tax strategies that are patented by the U.S. Patent and Trademark Office can only be used by some taxpayers. That's not fair and not how Congress intended the tax laws to be administered."

"U.S. tax laws should be applied equally to all taxpayers," agreed Jamie Walker, incoming chair of the Virginia Society of CPAs. "Right now, tax strategies that are patented by the U.S. Patent and Trademark Office can only be used by some taxpayers. That's not how Congress intended tax laws to work. It's so much more difficult for CPAs to give their clients tax advice with these patents in place."

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