Profession, institute rally behind bill to block tax strategy patents

More than a decade ago, business method patents, including the patenting of tax strategies, were ruled legitimate by a federal appeals court. Nevertheless, most practitioners are not in the habit of checking existing patents before tailoring a program for their particular clients.

Since the 1998 decision by the Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group Inc., which ruled that an "invention" was eligible for protection by a patent in the U.S., more than 77 tax patents have been issued and 129 more are pending.

Several years ago, the first tax patent infringement suit was filed over the SOGRAT patent, which involves a grantor retained annuity trust, or GRAT, funded with nonqualified stock options. Since GRATs are permitted by the Tax Code, it surprised some practitioners that a patent was granted for a variation of such a common technique. The suit, brought by the Wealth Transfer Group, a Florida-based planner for high-net-worth clients, against John Rowe, then chairman and chief executive of Aetna Inc., was settled for undisclosed terms.

"This isn't just an intellectual exercise," said Eileen Sherr, senior technical manager at the American Institute of CPAs. "There are real consequences."

Tax strategy patents are a trap for the unwary, according to Sherr. "The patents are hard to understand. Putting the patent code on top of the Tax Code is not a good thing."

Many of the tax strategy patents are fairly mundane variations on common transactions, she observed. "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."


Though a number of bills were introduced during the last Congress to remedy the tax patent problem, none of them were signed into law.

More recently, legislation was introduced by Reps. Rick Boucher, D-Va., and Bob Goodlatte, R-Va., which would prohibit patents on tax strategies. Reps. Boucher and Goodlatte are senior members of the House Judiciary Committee, which has jurisdiction over patent legislation.

"We need this bill so that U.S. tax laws will be applied equally to all taxpayers," AICPA president and CEO Barry Melancon said. "Tax strategies that are patented by the U.S. Patent and Trademark Office can only be used by some taxpayers. That's not fair and not how Congress intended the tax laws to be administered."

"U.S. tax laws should be applied equally to all taxpayers," agreed Jamie Walker, incoming chair of the Virginia Society of CPAs. "Right now, tax strategies that are patented by the U.S. Patent and Trademark Office can only be used by some taxpayers. That's not how Congress intended tax laws to work. It's so much more difficult for CPAs to give their clients tax advice with these patents in place."

Melancon noted that the tax strategy patents that have been approved and the others that are pending apply to a broad range of areas affecting regular taxpayers, including charitable contributions, estate and gift taxes, pension plans, and deferred compensation. For example, he said, a patent has been granted for the process of computing and disclosing the federal income tax consequences involved in the conversion from a standard Individual Retirement Account to a Roth IRA.

The bills introduced in the last Congress would have precluded the enforcement of tax strategy patents. "This bill doesn't just take away the enforcement, it prohibits the issuance of the patents," Sherr pointed out.

The new bill is similar to one that passed the House last year dealing with tax strategy patents, she noted. "It's also similar to a bill introduced in the Senate by Senators [Max] Baucus and [Chuck] Grassley," she said.

"No one should have a monopoly on using the provisions of the Tax Code," said Sherr. "Congress enacts the laws, and they should be available to everybody. Moreover, these patents are not reviewed for tax purposes. People think the government approves of these transactions, when the IRS has not been involved to validate them."

Many of the practitioners who seek to patent their tax strategies seek accolades, rather then monetary rewards, according to Evelyn McDowell, Ph.D, CPA and assistant professor of accounting at Rider University in New Jersey. "In the SOGRAT case, there was disclosure so the patentholder found out, but if Joe Public used a patented idea, it would be impossible to know," she said. "I would be in favor of removing any infringement or monetary damages, and allow people to get the recognition for being innovative. By removing the enforcement aspect, the patentholder still gets bragging rights, but the public can use the strategy."

McDowell said that limiting remedies is a solution borrowed from the medical profession, which suffered from a series of lawsuits in the mid-1990s, when patent law threatened doctors performing patented medical procedures. "The Physicians Immunity Statute removed all remedies, both monetary and injunctive, against licensed medical practitioners in the performance of a medical activity that infringed on a patent," she explained.

A recent Federal Circuit case, In re Bilski, somewhat narrowed the scope of business method patents. The case centered on the filing of an application in 1997 for a method of hedging risks in commodities trading. At issue was whether a process must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing to be eligible for patenting, and whether the machine or transformation test for patent eligibility contradicts congressional intent that patents protect methods of doing business. At press time, the Supreme Court had agreed to hear an appeal of the case.

A number of observers believe that any proposed legislation should wait until the Supreme Court speaks on the Bilski decision, according to Ellen P. April, associate dean for academic programs at Loyola Law School. "But the case won't be argued until next year, and even when it is, many of us believe that it won't resolve the issue of tax strategy patents," she said.

Meanwhile, she noted, the granting of monopolies for tax strategies amounts to privatization of the tax law. "Legislation is necessary now because of the policy issues that tax patents raise," she said.

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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