Despite all the new tax regulations, registration requirements, and the promise of new tax legislation, there’s one thing that return preparers can eliminate from their worry list: tax strategy patents.
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It now looks as though running afoul of a tax strategy patent will be a thing of the past – at least as far as any new, just-patented strategies. H.R. 1249, the America Invents Act (aka the Patent Reform Act), passed the House in June, and also passed on Thursday in the Senate for the second time after a similar measure passed in March. This time it is heading to President Obama's desk for his signature.
Tax strategy patents—and efforts to eliminate them—have been around for more than a decade. But legislation to address the issue never made it through both houses of Congress during the same legislative session, and had to be reintroduced in succeeding congressional sessions. The good news is that it’s hard to see how the current effort can be derailed.
The legislation transitions the U.S. to a first-inventor-to-file system (rather than a first-to-invent-system), which would harmonize the system with the rest of the world. Although this provision is open to debate (it has been criticized as harmful to small inventors), few would disagree with the need to rein in the patenting of strategies that most practitioners would think of as common approaches to tax planning.
“It’s now a race to the Patent Office,” said Jim Burke, a partner at the San Diego office of Morrison Foerster. “Large companies are more sophisticated and are used to the first-to-file system because they deal with patents on a worldwide basis. But I don’t think the first-to-file system gives them any significant advantages.”
Existing tax strategy patents will still exist even if the legislation is passed, and could constitute a trap for the unwary. There are now more than 130 issued patents, with 150 awaiting approval. Many of them are variations of common transactions, such as a method for calculating the savings of converting an IRA to a Roth IRA; for analyzing college savings plans; or for investing long-term assets of tax-exempt charities.
Several lawsuits have been brought by patent holders, and at least one was settled for an undisclosed amount, so it behooves practitioners to be aware of the topics that have been patented.
The mechanism by which the law nullifies tax strategy patents is to deem any strategy for reducing, avoiding, or deferring tax liability “insufficient to differentiate a claimed invention from the prior art.” Under the patent rules, if an invention is “prior art,” it is not novel or obvious, and therefore is not patentable.
The legislation excludes computer programs, methods and systems used solely for preparing a tax return or filing, including one that “records, transmits, transfers, or organizes data related to such filing.” Thus, you needn’t worry about your preparation software provider.
But what about the patents that have already been issued and should the preparer be concerned about them? Although lawsuits brought under tax strategy patents already issued won’t be prohibited by the new law, prior art is still a valid argument against them. The legislation simply shifts the burden of proving that a strategy is or is not prior art to the patent holder. And it’s my guess that most judges would take notice of the legislative action and disregard the existing tax strategy patents.