The Senate passed a patent reform bill on Tuesday that contains provisions banning patents on tax strategies.

Senate Finance Committee Chairman Max Baucus, D-Mont., and senior committee member Chuck Grassley, R-Iowa, applauded the Senate’s passage of a bill they had introduced to protect taxpayers and fight tax evasion that was approved as part of the larger Senate patent reform bill. The Senate approved the larger bill by a vote of 95-5. The House does not have a similar bill at the moment, but House Judiciary Committee Chairman Lamar Smith, R-Texas, is drafting one, according to Reuters.

The tax patent reform provisions prevent any individual or firm from patenting tax strategies, which could otherwise subject taxpayers to royalty fees for using the patented strategy when filing their taxes. The bill also stops tax patents from providing windfalls to lawyers and patent holders by preventing them from holding exclusive rights to use loopholes, which could provide some businesses with unfair advantages over their competitors.

“Taxes are a responsibility we share, and tax strategies should not be hijacked and monopolized for profit,” Baucus said in a statement. “Every American has the same right to work within the tax code, and no one should be able to claim a strategy as his own.  Our efforts to improve the tax code don’t stop here.  We have already begun looking at reforming the tax code in a manner that will create jobs, draw investment into the U.S., simplify the system and increase fairness for all taxpayers.”

In order to obtain any type of patent, an inventor must show, among other things, that the claimed invention is novel and non-obvious and has a practical application.  In 1998, the courts determined that a method of doing business may be patentable, and soon thereafter, the U.S. Patent and Trademark Office began granting patents for various tax-related inventions. 

“Tax strategy patents are on the rise.  More and more legal tax strategies are unavailable or more expensive for more and more taxpayers,” Grassley said. “It’s important to protect intellectual property rights for true tax preparation and financial management software. At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. That’s necessary for fairness and tax compliance.”

Tax practitioners have long decried the issuance of these tax-strategy patents because they are unlikely to be novel, given the public nature of the Tax Code, and undermine the fairness of the federal tax system by removing from the public domain particular ways of satisfying a taxpayer’s legal obligations.  The bill 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.

The American Institute of CPAs has lobbied for several years for passage of legislation banning tax strategy patents. Baucus and Grassley have led the charge to prevent the patenting of tax strategies that result in extra costs for taxpayers. The legislative text is available on the Finance Committee Web site at http://finance.senate.gov/legislation/.

AICPA president and CEO Barry Melancon welcomed passage of the legislation. "The AICPA applauds the Senate’s passage today, by a vote of 95 to 5, of S. 23, The Patent Reform Act of 2011, also known as the America Invents Act," he sadi in a statement. "This bill would overhaul the nation’s patent system and includes a provision, Section 14, strongly supported by the AICPA to stop the further issuance of tax strategy patents. Tax strategy patents restrict taxpayers’ use of the tax laws as Congress intended and, in effect, create a monopoly on tax compliance for those holding the patents. The patent holders can effectively become gatekeepers for who can and cannot use certain parts of the Tax Code. The AICPA believes that no taxpayer should be sued or have to pay a royalty just for using the best legal means available to comply with the Federal Tax Code. Section 14 of S. 23 is a pro-taxpayer measure that finally would solve the tax strategy patent problem and give all taxpayers and their advisers equal access to the tax laws. The AICPA applauds, in particular, the leadership of Senators Patrick Leahy, Charles Grassley, and Max Baucus for championing the tax strategy patents provision. The AICPA now urges members of the House of Representatives to move forward with patent reform legislation with a similar tax strategy patent provision so that this problem can be fixed as quickly as possible."