Tax strategy patents have been around for more than a decade, ever since a federal appeals court in 1998 validated business method patents, including tax strategies.
The effort to eliminate them has been around almost as long.
This time, it might work. Various bills have been introduced in the past, but none made it through both houses of Congress. Time always ran out, and the effort had to be made again in each new Congress. (A congressional term consists of two years; our current 112th Congress convened on Jan. 3, 2011.)
Now, for the first time, a prohibition on tax strategy patents is part of a larger patent reform bill. The proposed legislation is part of S. 23, the Patent Reform Act of 2011.
“The problems associated with tax strategy patents, which troublingly have already been granted in areas such as charitable giving, estate and gift taxes, pension plans, and deferred compensation, are multiple and complex,” said AICPA president and CEO Barry Melancon.
There are more than 130 tax strategy patents that have already been issued, with another 150 such patents awaiting approval at the U.S. Patent and Trademark Office. The possibility of unknowingly violating an existing patent is very real, since they cover a wide range of commonly used tax-planning vehicles.
Although many of the patents are mundane variations of fairly common transactions, violating a patent can have real consequences. At least two lawsuits have been brought by holders of a patent for a tax strategy. One patent infringement suit involved the SOGRAT patent, which covers a grantor retained annuity trust, or GRAT, funded with nonqualified stock options. The suit was settled for undisclosed terms.
The proposed legislation was approved on February 3 by the Senate Judiciary Committee, which has jurisdiction over patents (see Senate Committee Approves Tax Patent Ban). It has been referred for consideration by the Senate as a whole.
“The big message is that there’s new momentum because it’s a part of the larger bill,” said AICPA director of congressional and political affairs Mat Young. “Now, the focus will be on the Senate floor and in the House.”
The mechanics of the legislation are simple. Under Section 14 of the proposed bill, “any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention form the prior art.”
“To be patented, something has to be novel and non-obvious,” said Young. “If it is deemed to be ‘prior art,’ then it’s not novel or obvious, and therefore it’s not patentable.”
“We like this approach because the Tax Code should be available to everyone,” he said. “Strategies that are available to one taxpayer should be available to all.”
The effective date of the law’s protection is proposed to be the as yet undetermined date of enactment, and it will apply to “any patent application pending and any patent issued on or after that date.”
This means lawsuits brought under the tax strategy patents already issued won’t be covered. However, prior art will continue to be a valid argument against patents. It will simply have to be proved that the strategy is prior art, rather than already be “deemed” to be prior art, in order to effectively defend against a tax strategy patent infringement suit.
And, as Young observed, patents have an expiration date. Eventually the patents in existence before the enactment of patent reform will expire, 20 years from the date of filing, if they’re filed after June 8, 1995.
Moreover, even though a patent filed before enactment won’t be covered by the reform measure, it is probable that courts, in future tax strategy infringement suits, may take notice of the legislative pegging of tax strategy patents as "prior art."
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