Supreme Court Ruling Didn’t Clarify Tax Strategy Patents

The Supreme Court’s much-anticipated Bilski decision earlier this week affirmed that business methods can be patented, although it rejected the specific patent at issue.

However, the hope that the court would clear up the law regarding tax strategy patents went unrealized.

The decision does nothing to stem the issuance of tax strategy patents,” said Mat Young, director of congressional and political affairs at the American Institute of CPAs. “The only solution to stop them in the near term is for Congress to act to ban them.

“Today’s Supreme Court decision in Bilski v. Kappos, while striking down a particular business method patent, does not stop the U.S. Patent and Trademark Office from continuing to issue tax strategy patents and the AICPA renews its call on Congress to act quickly to pass legislation to ban tax strategy patents,” said AICPA president and CEO Barry Melancon. “The AICPA believes that no one should have a monopoly on compliance with the Tax Code. Taxpayers should not have to face the threat of royalties or lawsuits from holders of tax strategy patents, and no one should have to pay more tax than he or she lawfully owes because someone else purports to hold a patent on tax planning."

“Tax strategy patents remain a serious and growing problem for taxpayers and their advisers,” he said.

As of June 28, 2010, 107 tax strategy patents have been issued, with 145 more pending, according to AICPA senior technical manager Eileen Sherr. Some of these are relatively mundane variations on common transactions, she noted. “At least two of them deal with a SOGRAT [Stock Option Grantor Retained Annuity Trust] and one of them with a deferred real estate exchange.”

Moreover, there has been at least one patent infringement suit filed over the SOGRAT patent. The suit, brought by the Wealth Transfer Group against John Rowe, then chairman and chief executive of Aetna, Inc, was settled for undisclosed terms.

Tax strategy patents are not reviewed for their tax effect, noted Sherr. “People think the government approves of these, when only the Patent Office, not the IRS, has been involved.”

Several bills were introduced in previous Congresses to remedy the problem, but did not make it through the legislative process. A number of observers believed then that any proposed legislation should wait until the Supreme Court spoke. But now that it has, it is clear that the problem will be solved only if Congress acts.

Representatives Rick Boucher, D-Va., and Bob Goodlatte, R-Va., have introduced legislation that would prohibit patents on tax strategies. Boucher and Goodlatte are both senior members of the House Judiciary Committee, which has jurisdiction over patent legislation.

“The comprehensive patent bill included a ban, but it was not passed in the last Congress,” said Young. “If a patent bill comes up before the Senate this year, we expect both Senators Baucus and Grassley [chairman and ranking members, respectively, of the Finance Committee] to push to include a ban in the larger bill. But we’re not certain if there will be enough time to take up patent reform this summer.”

There are only about seven weeks left that Congress will be in session before the November elections. And it’s uncertain whether the issue would be addressed in any lame duck session.

Meanwhile, the number of patents being applied for and issued keeps increasing, with topics including an analysis of college savings plans, split-method charitable remainder trusts, conversion to a Roth IRA, and a method for determining retirement withdrawals.

“We’re seeing an expansion not just in the number of patents but in the kinds of strategies these encompass,” said Young. “They cover a whole host of tax-related issues that could ensnare more people because of the diversity of the strategies covered.”

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