Senate Finance Committee member Chuck Grassley, R-Iowa, and chairman Max Baucus, D-Mont., have introduced a bill that would prevent any individual or firm from being able to receive patents on tax strategies.

The tax patent legislation is to be included in a broader patent reform bill under review in the Judiciary Committee.  Grassley and Baucus signaled their intentions last week to introduce the bill (see Senate to Introduce Bill to Ban Tax Strategy Patents). Grassley, along with Sen. Patrick Leahy, D-N.H., and Orrin Hatch, R-Utah, are introducing the larger patent reform bill.

“Tax patents prevent taxpayers from being able to use certain tax strategies unless they’re willing to pay for them,” Grassley said in a statement. “It’s unfair for taxpayers to have to pay for these methods. Also, tax patents undermine a tax system based on voluntary compliance. Our legislation reins in the cottage industry of those trying to own tax planning strategies that should be available to everyone or that would encourage inappropriate tax avoidance.”  

Grassley co-authored the Equal Access to Tax Planning Act, which was introduced Tuesday with Baucus and other senators. The bill also is included in the Patent Reform Act of 2011, which the Judiciary Committee will begin considering on Thursday. The patent legislation is described as offering a long-needed update of patent laws to preserve American invention and innovation, the cornerstones of the economy and job creation. 

Grassley is outgoing ranking member of the Finance Committee, with jurisdiction over tax policy, and incoming ranking member of the Judiciary Committee. He remains a senior member of the Finance Committee. He noted that he and Baucus first introduced a bill to ban patents for tax inventions in the 110th Congress. Since then they have worked with the leaders of the Judiciary Committee, the Patent and Trademark Office, the American Institute of CPAs, industry, and members of the patent bar to perfect the language. Other co-sponsors include Sen. Carl Levin, D-Mich., Ron Wyden, D-Ore., Jeff Bingaman, D-N.M., Kent Conrad, D-N.D., Mike Enzi, R-Wyo., and John Kerry, D-Mass.

“There are strong policy reasons to ban tax strategy patents,” said Grassley. “Tax strategy patents may lead to the marketing of aggressive tax shelters or otherwise mislead taxpayers about expected results. Tax strategy patents encumber the ability of taxpayers and their advisors to use the tax law freely, interfering with the voluntary tax compliance system. If firms or individuals were able to hold patents for these strategies, some taxpayers could face fees simply for complying with the tax code. And, tax patents provide windfalls to lawyers and patent holders by granting them exclusive rights to use tax loopholes, which could provide some businesses with an unfair advantage.”

Grassley argued that tax strategy patents are unlikely to be novel given the public nature of the Tax Code, and that tax strategy patents could undermine the fairness of the federal tax system by removing from the public domain particular ways of satisfying a taxpayer’s legal obligations.

“The Equal Access to Tax Planning Act 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,” he noted. “This ensures that all taxpayers will have equal access to strategies to comply with the Tax Code.”

The American Institute of CPAs expressed its support for the bill banning tax strategy patents. "“The AICPA strongly supports the legislation that Senators Baucus and Grassley are introducing this week, and we applaud the decision by Senators Leahy, Grassley and Hatch to include it in their comprehensive patent reform bill,” said AICPA president and CEO Barry Melancon in a statement. “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. They undermine the integrity of our tax code and will unnecessarily complicate the ability of taxpayers to comply with the code.”

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