Tax patent

A tax patent is a patent that discloses and claims a system or method for reducing or deferring taxes. Tax patents are granted predominantly in the United States but can be granted in other countries as well. [ [http://www.delphion.com/details?pn=AU00766112B2&s_FAMILY=1 Australian patent AU0766112B2: Life insurance method, system and product] ] They are considered to be a form of business method patent. They are also called "tax planning patents", "tax strategy patents" [ [http://www.patentlyo.com/patent/2007/11/tax-strategy-pa.html#comments Tax Strategy Patents, Patently O blog, November 13, 2007] ] , and "tax shelter patents". [ [http://www.senate.gov/~levin/newsroom/release.cfm?id=269516 Summary of Levin-Coleman-Obama Stop Tax Haven Abuse Act, US Senator Carl Levin press release, February 17, 2007.] ]

Jurisdictions

United States

History

The earliest patent that the United States Patent and Trademark Office (USPTO) considers to be a tax patent is Van Remortel et al., US patent|5136502 "System for funding, analyzing and managing health care liabilities". This patent issued in 1992 and covers, among other things, a computerized administration system for tax advantaged funding of for retirees. The United States Congress has never passed a law "explicitly" allowing tax patents Floyd Norris, [http://www.iht.com/articles/2006/10/19/business/norris20.php "Patent law is getting tax crazy"] , International Herald Tribune, October 19, 2006. ] but in 1998, the U.S. Court of Appeals for the Federal Circuit ruled [ State Street Bank & Trust Company v. Signature Financial Group, Inc. ] that business methods (and hence methods for reducing taxes) have been patentable at least since 1952 when Congress amended the requirements for patentability in the Patent Act of 1952.

USPTO classification

The USPTO has created a patent class for tax patents. The classification is 705/36T.

The USPTO has placed 60 issued US patents [ [http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.htm&r=0&p=1&f=S&l=50&Query=ccl%2F705%2F36T&d=PTXT List of issued US patents in class 705/36T] ] and 100 published patent applications [ [http://appft1.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO%2Fsearch-adv.html&r=0&p=1&f=S&l=50&Query=ccl%2F705%2F36T&d=PG01 Published US patent applications in class 705/36T] ] in this classification. The USPTO has not, however, published a formal definition of the class. [ [http://www.uspto.gov/go/classification/uspc705/sched705.htm USPTO list of subclasses for class 705, DATA PROCESSING: FINANCIAL, BUSINESS PRACTICE, MANAGEMENT, OR COST/PRICE DETERMINATION] ]

About 10 new tax patent applications are filed each year and about five new patents are issued each year. Some applications and issued patents appear to be mischaracterized since they do not deal with taxes. [ [http://www.taxanalysts.com/www/website.nsf/Web/TaxStrategyPatents?OpenDocument Stamper, Dustin "Tax Strategy Patents: A Problem Without Solutions?", Tax Notes] ]

Legislation

Tax patents are controversial. According to some, "tax patents amount to "government-issued barbed wire" to keep some taxpayers from getting equal treatment under the tax code." The proposed Patent Reform Act of 2007, passed by the United States House of Representatives, but not enacted into law, would provide for an explicit ban on tax patents, but would include an exemption for software that calculates taxes. The proposed Stop Tax Haven Abuse Act would provide for a similar ban. This bill was introduced in the United States Senate by several Senators including presidential candidate Barack Obama. [ [http://levin.senate.gov/newsroom/release.cfm?id=269479 Levin, Coleman, Obama Introduce Stop Tax Haven Abuse Act, press release of US Senator Carl Levin, February 17, 2007] ]

These proposals have been strongly supported by American Institute of Certified Public Accountants (AICPA). The position of the AICPA is that tax patents: [Jeffrey R. Hoops Chair, AICPA Tax Executive Committee, [http://tax.aicpa.org/Resources/Tax+Patents/AICPA+Urges+Congress+to+Address+Tax+Strategy+Patents.htm "AICPA Urges Congress to Address Tax Strategy Patents"] , February 28, 2007]

*"Limit the ability of taxpayers to utilize fully interpretations of tax law intended by Congress;"
*"May cause some taxpayers to pay more tax than Congress intended and may cause other taxpayers to pay more tax than others similarly situated;"
*"Complicate the provision of tax advice by professionals;"
*"Hinder compliance by taxpayers;"
*"Mislead taxpayers into believing that a patented strategy is valid under the tax law;" and
*"Preclude tax professionals from challenging the validity of tax strategy patents."

Congressman Rick Boucher has introduced a bill that would exempt tax attorneys and tax payers from liability with respect to infringement of tax patents. This proposal currently has 40 cosponsors. [ Dennis Crouch, [http://www.patentlyo.com/patent/2008/06/tax-patent-legi.html "Tax Patent Legislation: Excusing Infringement of Patented Tax Planning Methods"] , Patently O blog, June 20, 2008]

Regulation

In 2005, The US Internal Revenue Service (IRS) determined that none of the then pending US tax patents contained abusive tax avoidance transactions. [ [http://www.bakosenterprises.com/IP/B-10152006/IPB-10152006.html Nowotarski, Mark, "Tax Strategies?", Insurance IP Bulletin, October 15, 2006] ] Nonetheless, in September 2007, the IRS proposed a set of rules that would require tax filers to disclose if they have paid a license fee to the holder of a tax patent. [ [http://www.regulations.gov/fdmspublic/component/main?main=DocumentDetail&d=IRS-2007-0112-0001 IRS Patent Transactions Rule Changes, Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / Proposed Rules 54615] ] Similar to the ban passed by the US House of Representatives, this regulation has an exemption for patents on software for calculating taxes.

There is some concern in the financial community that complying with these regulations will increase the chances of a tax patent licensee getting audited and that this, in turn, will decrease the value of tax patents in general. [ [http://www.reuters.com/article/domesticNews/idUSN1526035520071115?sp=true Lambert, Lisa “Trend of "owning" tax avoidance methods grows in U.S”, Reuters November 15, 2007] ] These regulations have, however, been strongly supported by the Section of Taxation of the American Bar Association. [ [http://meetings.abanet.org/webupload/commupload/TX800000/relatedresources/CommentsonaNewCategoryofReportableTransactionsCoveringPatentedTaxStrategies.pdf Drapkin, Dennis, "Comments Concerning a New Category of Reportable Transactions Covering Patented Tax Strategies", February 21, 2007] ]

Examples

Examples of tax patents include: [ [http://www.patentlyo.com/patent/2007/11/tax-strategy-pa.html#comments Tax Strategy Patents, Patently O blog, November 13, 2007] ]

*US patent|6567790 Funding of a GRAT with nonqualified stock options.
*US patent|6292788 Tax-deferred real estate transaction.

Enforcement

In 2006, the Wealth Transfer Group sued former Aetna CEO John W. Rowe for infringement of a tax patent. The patent was US patent|6567790, entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options". [ [http://www.bakosenterprises.com/IP/B-10152006/IPB-10152006.html Nowotarski, Mark, "Tax Strategies?", Insurance IP Bulletin, October 15, 2006] ] (i.e. SOGRAT^®) This case has been settled for undisclosed terms. [ [http://online.wsj.com/article/SB117383751682136325.html Herman, Tom, "Patents on Tax-Related Ideas Stir Worry", "Wall Street Journal", March 14, 2007] ]

References