New legislation curbs patents on tax strategies

By Ken Berry
 
The new "America Invents Act" – signed by the president on September 16, 2011 – includes the biggest overhaul of the U.S. patent system in almost 60 years. Among other changes, the new law switches from a "first-inventor" to a "first-to-file" method, creates a post-grant review period for weeding out bad patents, provides greater certainty in damage calculations for willful infringement, and codifies other provisions relating to patent quality.
 
Significantly for tax practitioners, the use of patents for tax strategies is also severely curtailed.  Under the new law, any strategy for "reducing, avoiding, or deferring tax liability” can no longer be patented. For this purpose, "tax liability" is construed broadly to include any liability under federal, state, local, or foreign tax laws, statutes, or ordinances. The provision applies to patent applications that are pending on, or filed on or after, September 16.
 
But the new law doesn't completely eliminate patents on tax strategies. For instance, the prohibition doesn't apply to tax preparation software. The new legislation expressly exempts any "method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing" or that is "used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor."
 
Prior to passage of the new law, both the AICPA and various state CPA societies have been lobbying for Congress to address this issue. Some of the reasons for change cited by the AICPA are that patenting tax strategies:
 
  • Makes it difficult for taxpayers to observe and comply with the tax law;
  • May result in greater tax liability than Congress intended;
  • Complicates the tax advice offered by licensed professionals;
  • Misleads taxpayers about the validity of certain strategies; and
  • Undermines a tax practitioner's  ability to challenge a patented strategy.
 
In a rare show of bipartisan support, both Senate Finance Committee Chairman, Max Baucus (D-MT) and senior member Chuck Grassley (R-IA) applauded the tax reforms. "It’s important to protect intellectual property rights for true tax preparation and financial management software," said Grassley. "At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. That’s necessary for fairness and tax compliance."
 
The U.S. Patent and Trademark Office has granted more than 150 patents on tax strategies since the practice was approved in a 1998 case (State Street Bank & Trust v. Signature Financial Group, 149 F.3d 1368). Currently, more than 160 such patents are still pending.
 
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