The unfinished business awaiting Congress during the lame duck session this month includes the expiring 2001 and 2003 tax cuts, the normal extender items, the estate tax, and, many tax professionals believe, a ban on tax strategy patents.

The patents threaten American taxpayers, and Congress should ban them before it adjourns for the year, according to a coalition of 18 national consumer and taxpayer organizations, including the American Institute of CPAs, the American Association of Attorney-CPAs, and the National Association of Enrolled Agents.

"We cannot afford to postpone addressing this problem until next year," the coalition said in a joint letter to Congress.

Tax patents create a monopoly for patent holders on certain parts of the Tax Code that should be public domain, according to the coalition. "A legislative solution must be pursued immediately if we are to provide taxpayers with equal access to all available avenues of federal tax compliance," the letter said.

Legislation introduced in the last Congress by Reps. Rick Boucher, D-Va., and Bob Goodlatte, R-Va., would have prohibited such patents. Both Boucher and Goodlatte are senior members of the House Judiciary Committee, which has jurisdiction over patent legislation. The bill passed the House in the previous Congress, but stalled in the Senate and was re-introduced in the current Congress.

"It has 45 co-sponsors in the House, which is five more than it had last Congress," explained Mat Young, director of congressional and political affairs at the AICPA, which has been at the forefront of the movement against tax patents. "It definitely will continue to be a growing problem," he said.

A similar bill was introduced in the Senate by Senators Max Baucus D-Mont., and Chuck Grassley, R-Iowa, and had 29 co-sponsors from both sides of the aisle. If the current legislation is not passed before the end of the year, it will be necessary to re-introduce it again in the new Congress, in January.


Over a decade ago, the patentability of business method patents, including tax strategies, was made legitimate by a federal appeals court. Since the 1998 decision, 117 tax strategy patents have been issued by the U.S. Patent and Trademark Office, and more than 150 applications are pending. The existing patents cover a wide range of tax-planning vehicles, including retirement plans, real estate transactions and estate-planning strategies.

Pending applications would affect taxpayers' ability to create a financial plan for funding college education; utilize incentive programs for health care savings account cards; insure against tax liabilities; and use life insurance to generate income.

Tax strategy patents can be a trap for the unwary, since many are mundane variations on common transactions, according to Eileen Sherr, senior technical manager at the institute. "There are several patents dealing with the use of charitable remainder trusts, and there's one on deferred real estate exchanges," she said. "These are fairly common little twists on transactions that people have been doing for years. For example, there are several patents involving charitable remainder trusts, which are very commonly done."

At least two lawsuits have been brought by the holder of a patent for a tax strategy. In 2006, the Wealth Transfer Group sued John Rowe, former chief executive of Aetna, for violating its SOGRAT (Stock Option Grantor Retained Annuity Trust) patent.

Although the suit was settled for undisclosed terms, "It has put a chill in the air for accounting firms being willing to go into that kind of transaction," Sherr observed. "They have to go to their national office, and some are not proceeding at all in that area - they've stopped doing those kinds of transactions."

Moreover, a like-kind-exchange patent is currently under litigation in California, she noted, and there have been other threats of litigation by patent holders.

Nevertheless, many practitioners who try to patent strategies are more interested in fame than fortune, according to Evelyn McDowell, Ph.D, CPA, assistant professor of accounting at Rider University in New Jersey. "They want the recognition," she said. "In the SOGRAT case there was disclosure so the patent holder found out, but if Joe Public used a patented idea, it would be impossible to know."

McDowell suggested removing infringement or monetary damages. "By removing the enforcement, the patent holder gets the recognition, but the public can use the strategy," she said.


Many observers felt that any legislation on tax patents should wait until the Supreme Court issued an opinion in a federal circuit case, In re Bilski, which narrowed the scope of business method patents. The case centered on a 1997 patent application for hedging risks in commodities trading. The Supreme Court issued a decision in Bilski earlier this year, but did not clarify the patentability of tax strategies, noted Young.

"The Supreme Court decision in Bilski ended up having no real impact," he said. "If anything, it made the standard of patentability more confusing." Therefore, the need for legislation is greater now, he maintained.

In addition to limiting the ability of taxpayers to utilize the interpretations of tax law intended by Congress, the patents pose a risk for tax advisors.

"Tax advisors, who generally are not patent experts, have the burden to be aware of such patents, and either provide tax advice that complies with the patent holder's requirements, risk a lawsuit for themselves and their clients, or potentially not provide the most advantageous advice to clients. Not surprisingly, these patents create a highly burdensome level of cost ultimately borne by taxpayers," the coalition said.

One of the purposes of the letter is to keep the issue before legislators as they get ready to wrap up the 111th Congress, Young explained. "We wanted to keep the attention of the House and Senate on the issue, and remind legislators how important it is," he said. "With the bipartisan and bicameral support we have, it could be one of the things that gets done during the lame duck session."

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