Patents on Tax Ideas Trouble the IRS and Tax Attorneys

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Since 1998, when a federal appeals court ruled that business methods could be patented, the U.S. Patent Office has issued patents to 49 tax strategies. At least 60 more are pending, the New York Times reports, a development that concerns tax attorneys and the Internal Revenue Service (IRS).


Tax attorneys say that licensing tax ideas has “mind-boggling potential,” and could lead to multiple legal challenges, the Times says. It could also reach the point where licensing fees might have to be added to an accountant's bill just for providing standard tax advice. And the Internal Revenue Service has stated that because a tax strategy is licensed by the U.S. Patent Office doesn't mean that it has been accepted.

“A patent carries with it no assurance whatsoever that the patented process, transaction or structure will pass IRS muster,” IRS Commissioner Mark Everson told a Congressional hearing in July, Fortune reports. “We are concerned, however that taxpayers may be confused about this.”

Congress has not ruled on whether patents on tax ideas are legal, but it seems obvious they would want to ensure equal protection under the law, the New York Times says.

“It is not right that Congress can give a taxpayer a benefit and someone can prohibit you from using that benefit to reduce your taxes,” Donna Belcher, a tax lawyer with the firm McGuire Woods in Richmond, Virginia, told Fortune.

Given the number of tax strategies that might be patentable, the Times envisions “lawyers and accountants rushing to the patent office as soon as a new tax law is passed, seeking to claim credit from dreaming up ideas that were made possible by the new law.”

Other possibilities, raised in an article in Legal Times by Paul Devinsky, John R. Fuisz and Thomas D. Sykes, attorneys with McDermott Will & Emery, and quoted in the New York Times, include a company devising a tax savings strategy, patenting it and refusing to license it to its competitors. This would be an example of “government issued barbed wire”, the authors say, preventing some taxpayers from getting equal treatment under the tax code.

Mr. Devinsky and his colleagues go on to say that “The successful patenting of tax strategies now limits Congress' ability to shape economic policy through legislation, and places that power in the hands of individual patent holders.”

John W. Rowe, the former chief executive of Aetna, is currently being sued by the Tax Strategies Group in federal court in Connecticut for using a patented tax strategy without permission. The suit charges that he infringed on a patent when he established a certain kind of trust to minimize taxes on stock options. Mr. Rowe's attorney, Cheryl E. Hader, a partner in Ropes & Gray, says in the Times report, that the strategy he used was clearly authorized by the tax law and should not have been given a patent.

Whether the Patent Office has examiners with sufficient knowledge of tax law to review patent applications for tax shelters is also open to question, says Belcher, according to Fortune. “It's unrealistic to think that the Patent Office can be up to date on tax reduction techniques.”

Stephen Wallach, an attorney at Ladas and Perry in New York, who helped write the first business method patent, agrees. He told Fortune that he thinks that the Patent Office's quality control process for business method patents is seriously flawed. Too many patents are later invalidated by the courts, he says.

There is always concern about patent quality whenever the Patent Office begins reviewing patents in a new field, says Polk Wagner, an intellectual property law expert at the University of Pennsylvania, Fortune reports. “But that is a temporary argument that goes away,” he says. Wagner thinks that it is possible that, over time, the Patent Office will develop expertise with the help of the same financial firms that hope to benefit financially from the patents.

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