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Patents for Tax Strategy: Follow-Up Story

Last year, I posted here about lawyers filing for, and receiving controversial "tax patents" that would offer protection for tax strategies and force others using those strategies to pay licensing fees to the patent holder.  At the time of my post, 49 patents for tax strategies had been issued with numerous others pending.  However, some lawyers objected to issuance of such patents as a matter of policy, noting that it would increase the cost of tax advisory services, and further 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.”

Apparently, some in Congress are listening.  Today, at Tax Prof Blog, Paul Caron writes that Senate Finance Committee Chair Max Baucus and Ranking Member Chuck Grassley introduced legislation yesterday to prohibit the Patent and Trademark Office (PTO) from granting patents for common tax strategies and tax planning inventions.  The press release explains that the legislation was motivated  by both a desire to "protect taxpayers and tax practitioners from incurring fees when they use routine tax shelters," and to address fears that some tax patent applications are for tax shelters. 

The potential for using tax strategy patents as a tax shelter is enough of a concern that the IRS recently issued a notice of proposed rules to require a taxpayer to disclose use of a patented tax planning method, according to Dennis Crouch at Patently-O.  As Crouch describes:

The specific rules would require a special disclosure reporting a patent license anytime a taxpayer pays a fee (including indirect consideration) to a patent holder for the legal right to use a tax planning method that the taxpayer “has reason to know” is subject to a patent.  A tax planning method is defined as “any plan, strategy, technique, or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment, or excise taxes.” The rule would exclude patents covering tax preparation software or “other tools used to perform or model mathematical calculations or to provide mechanical assistance in the preparation of tax or information returns.”  Under the rules, both the licensee and licensor (patent owner) would be required to submit the disclosure reporting the license transaction.

Crouch's post attracted many comments, many of which argue for the elimination of "tax strategy patents" altogether, either because they increase the problem of unlawful "tax shelters" or involve obvious practices which shouldn't qualify for patent protection at all.

Posted by Carolyn Elefant on November 16, 2007 at 05:03 PM | Permalink | Comments (0)


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