President Obama signed the patent reform bill into law on Friday with provisions outlawing patents on tax strategies.

Barry Melancon

The America Invents Act includes patent reform measures that have been pushed by a variety of industries, including a first-to-file system for inventors instead of a first-to-invent system, which is expected to reduce prolonged patent litigation battles in court (see Tax Patents a Thing of the Past?).

It also includes a prohibition on tax patent strategies, which has been a longtime priority for the American Institute of CPAs. The AICPA has been lobbying for five years to ban tax strategy patents, saying they could expose many tax practitioners to high royalty fees and patent infringement litigation simply for recommending tax advice to clients based on the U.S. Tax Code.

“Tax strategy patents are the equivalent of private tollbooths that block tax compliance options and could cost Americans more money,” said AICPA president and CEO Barry Melancon in a statement hailing the enactment of the patent reform law. “We are grateful that Congress and the President recognized this and acted to correct the inequity.”

In effect, tax strategy patents erect a barrier to the use of legitimate methods to reduce or defer tax liability, the AICPA noted. The patents could lead to disparities in which one taxpayer faces a higher tax burden than another, even when the two have essentially the same tax situation. Eliminating the issuance of new tax strategy patents would effectively level the playing field to allow any taxpayer to take the legal steps available to keep their taxes as low as possible.

“Navigating the Tax Code should be a simple, clear and fair process,” Melancon added. “The remedy contained in the new law reinforces this goal and makes it easier for financial professionals to give appropriate tax advice.” 

The new law deems any “strategy for reducing, avoiding, or deferring tax liability” to be “prior art” under patent law, and therefore not patentable. Under the patent reform law, “tax liability” is broadly defined to mean any tax liability under federal, state, local or foreign law.