It looks as though the time has come for comprehensive patent reform, which includes the banning of tax strategy patents.

Congress has been working on some version of this for the better part of seven years, and seems poised to act favorably on the measure. Among other provisions, the new patent reform bill, the America Invents Act, transitions the U.S. to a first-inventor-to-file system (rather than first to invent), which will harmonize the system with the rest of the world. 

The Senate passed its version of the legislation, S. 23, by a vote of 95-5 in March, and the White House has signaled its support of H.R. 1249, the legislation that was passed in the House on Thursday.

The legislation bans tax strategy patents by deeming any strategy for reducing, avoiding, or deferring tax liability to be insufficient to differentiate a claimed invention from the “prior art.” Since a patent cannot be claimed on something that is not new or that is obvious, prior art will invalidate the patent.

While a number of organizations support the legislation, there is a cloud in the form of a proposed amendment that would create a major loophole in the tax strategy patent provisions. An amendment offered by Rep. Jared Polis, D-Colo., would eliminate its applicability to patents that are pending, making it apply solely to patents “filed on or after” the effective date. A broad coalition opposes the amendment, since there are currently more than 160 tax strategy patents pending. If it became law, the amendment would more than double the number of tax strategy patents from the approximately 140 that exist today.

(The amendment was defeated by a voice vote before the final bill passed on Thursday in the House by a vote of 304-117. The bill must now be reconciled with the legislation that was approved in the Senate in March.)

Rep. Polis’s office said that he generally supports the approach of the legislation, but he said he’s concerned that “if we don’t grandfather in the pending applications, then it would place these people at a disadvantage because they’ve already disclosed sensitive information in the process.”

The coalition opposing the amendment includes the American Institute of CPAs, the National Association of Enrolled Agents, and the Financial Planning Association.

“Our position has always been that tax strategy patents are bad policy,” said Mat Young, director of congressional and political affairs at the AICPA. “They are harmful to taxpayers and their advisors, and we don’t want a single additional tax strategy patent to be issued. The 160 tax strategy patents that are pending should be stopped and not granted a special loophole so they will be considered after the bill becomes law.”

“No one should have a monopoly on part of the Tax Code and no taxpayer should be subject to paying royalties or lawsuits for using a legal way to comply with the tax code,” Young added. “Everyone should be able to sue any legal means available to mitigate his or her tax burden without having to get permission from a patent holder.”

Young cited some examples of previous tax strategy patents that have been issued: a patent on calculating the savings of converting an IRA to a Roth IRA; a patent for engaging in certain tax-deferred real estate exchanges; a patent for analyzing college savings plans; and a patent for investing long-term assets of tax-exempt charities.

In answer to Polis’s contention that pending applicants have disclosed sensitive information during the application process, Young observed that a pending application is no promise that a patent will ultimately be issued by the PTO so Congress is not doing anything unfair to the patent applicants in denying them the right to a patent.

“There was no guarantee when they filed their applications that they would ultimately receive a patent,” he said. “And, these kinds of patents are simply not in the public interest.”

If tax strategy patents are bad enough to prohibit, it makes sense that the legislation that prohibits them should not legitimize the possible granting of 160 more.

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