Tax Strategy Patents

PatentLawPic116The Internal Revenue Service is “concerned” about tax strategy patents and has issued a notice of proposed rules to require a special disclosure if a taxpayer uses a patented tax planning method to achieve a tax benefit. 

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.

One hole in the rule would allow non-licensed intentional infringers to use the patented tax strategy without filing any particular documentation. 

This disclosure is akin to the recent proposal by Lemley & Myhrvold to require publication of all patent licenses. However, the IRS rule is much easier to implement because of a pre-existing enforcement structure and the relatively small number of tax strategy patents. In the tax strategy business, the disclosure could dramatically change the current status of highly secret meetings and extensive diversion tactics.

Notes & Documents:

  • Any comments on the rules must be received by December 26, 2007. Once effected, the new rules will apply retroactively to September 26, 2007. Comments may be submitted through the eRulemaking portal at www.regulations.gov with reference to IRS-REG-129916–07. The IRS point of contact is Richard Hurst: Richard.A.Hurst@irscounsel.treas.gov (202) 622–7180.
  • Federal Register Publication: http://patent.googlepages.com/TaxPatents.pdf.
  • Senator Obama has proposed an amendment to 35 USC 101 to eliminate tax shelter patents [Link].
  • More info from Paul Caron — the “TaxProf” [Link][Link].

Some Tax Strategy Patents:

  • 6,567,790: Funding of a GRAT with nonqualified stock options.
  • 6,292,788: Tax-deferred real estate transaction.
  • 7,149,712: Purchase of an annuity contract to fund a charitable remainder trust.
  • 7,177,829: Tax Refund System (HRBlock Software).

88 thoughts on “Tax Strategy Patents

  1. I called the IRS to try and get a better understanding of how they were interpreting the proposed Regs. Here is what they shared with me.

    They want to keep track of SOGRAT type inventions and other financial service inventions with tax benefits.

    They are not interested in physical inventions that have tax consequences, such as the patents covering hybrid cars that get tax credits.

    They are not interested in tax planning software, such as TurboTax®, even if it provides alternative methods of filing tax returns so that a user can choose the alternative that minimizes his or her taxes (e.g. married persons filing jointly or singly)

    They haven’t decided if they are going to use the spec or claims of a patent or pending patent application to determine if it is a “tax planning patent”.

    All consumers who purchase a financial service product with tax benefits will have to file statements if there is a pending patent application filed by the producer of the product. This is true even if the pending application is still unpublished and even if the producer does not provide an explicit license to the pending application.

  2. Hat off to you Mark Nowotarski. I give you my impressions and you respond with yours, and yours are so overwhelming that they render me speechless.

  3. “Allowing patents on business methods might (who knows) give US an edge over ROW, but it sure is stressful also to US industry too.”

    MD,

    You make an excellent point.

    We have found, however, that education can be a powerful antidote to stress. A number of organizations have been promoting educational forums for business method patents in the financial services industry (insurance, banking, trading) for several years now and it has been my impression that these industries are adapting much more smoothly to business method patents than other industries, such as the accounting industry, where I don’t think there has been any educational outreach.

  4. Sorry Mark, when I went back to the UK PTO website to find the public opinion study I couldn’t find it any more. You know, maybe I made the whole thing up. It’s amazing what can influence public opinion, these days. As to events in USA, it’s just my general impression, gained from reading this blog, that if the highest US court in the land has no stomach to enjoin a party that is infringing a patent claim that’s impervious to all 102, 103 and 112 attacks, then there must be something so obnoxious within 101 that justifies the court in depriving the owner of the “right to exclude” which is supposed to be the sine qua non of the issue of a patent. The patent system was doing just fine till US started allowing patents for non-technical subject matter that the European specifically exclude (software, methods of doing business, presentations of information). I just think it isn’t a coincidence. Allowing patents on business methods might (who knows) give US an edge over ROW, but it sure is stressful also to US industry too.

  5. MD,

    Interesting study. Could you post a link?

    Regarding your other comment “Observing subsequent events in USA leads me to think that the British public opinion exercise got to the correct conclusion.”

    Which events in the USA in particular are you thinking of?

  6. Not me but the majority of parties polled by a thorough public enquiry conducted by the UK Government about 3 years ago, trying to see whether the “business methods” exclusion of patentability in the European Patent Convention was too tight, too loose or about right. The UK Govt conclusion was that permitting the patenting of business methods would more likely put a brake on innovation than stimulate it. Observing subsequent events in USA leads me to think that the British public opinion exercise got to the correct conclusion. It depends where you are coming from what you think about this issue, but I don’t think UK Govt has any particular axe to grind (even though the UK economy depends more on financial innovation in the City of London than engineering innovation in manufacturing real goods).

  7. EG comforts himself with the thought that the last remaining competitive advantage USA enjoys over ROW is “innovation”. I used to live in UK. There the public comforted itself with the oft-asserted mantra that the British are more innovative than any other folk anywhere in the world. Then I moved to Germany, to be greeted by oft-asserted media preening, that the Germans are the most innovative folk on earth. See, it’s what the people want to read/hear, when they gather the news, so it’s what the media will print, if sales depend on making the viewers/readers feel good about themselves. Let’s assume that there is potential for “innovation” in every country. What brings it out? Seems to me it’s 1) swift enforcement of valid patents, including injunctions 2) swiftly consigning to the trash heap all those patent claims that are invalid 3) rewarding those who come to the courts with an injustice 4) punishing those who waste the precious time of the courts by asserting worthless claims and 5)confining patent protection to that which meets a common sense public view as to what is a patentable “invention”. That’s the case in England, and England’s enjoying a resurgence in innovation, BOTH in technical stuff where patents encourage innovation and in financial engineering where patents put a damper on innovation. Anybody think otherwise?

  8. Can anyone recommend a professional prior art search firm that specializes in the tax art? I did some quick searching and couldn’t find any. (As a sidenote, I’m wondering if this is a new line of business worth pursuing/marketing.)

  9. Can anyone recommend a professional prior art search firm that specializes in the tax art? I did some quick searching and couldn’t find any. (As a sidenote, I’m wondering if this is a new line of business worth pursuing/marketing.)

  10. Since we’re patenting math now, can I get a patent on 2 + 2 = 4? Sure, there’s prior art, but that doesn’t seem to be a bar anymore.

  11. Anonymous,

    Thanks, I see your point about the “offshoring” argument. One of the reasons I like these blogs is that I get counterpoints to thoughts I’ve got that may need refinement and further thought.

    Maybe “offshoring” (R&D or otherwise) isn’t the biggest issue in the patentable subject matter issue. But I still have this “gut feel” that monkeying with the scope 35 USC 101 isn’t the right answer. For one, I think the USA’s remaining significant competitive advantage is innovation, and the ability to protect that innovation, which is currently under assault on many fronts (PTO, Congress and the courts). Narrowing the scope of what is patentable under 35 USC 101 just decreases that ability to protect innovation, especially when that innovation takes even more radical forms which the courts (including the Federal Circuit recently in Nuitjen) feel they must “pigeonhole” in the one of the 4 expressed statutory classes (article, composition, machine or process).

    Anyway, again, thanks for your counterpoint, it’s provided valuable feedback to me.

  12. These IRS rules — in addition to being arguably void for vagueness — would be nearly impossible for the IRS to enforce.

    In essence, they mean little as a practical matter.

  13. If Malcom Mooney has shown one thing, it is that he doesn’t understand the definition of ‘loophole’ or ‘shelter’. Those things are legal, smart guy! It isn’t “cheating” when you stay within the rules.

    Seriously….get in the game. This is basic stuff.

  14. If Malcom Mooney has shown one thing, it is that he doesn’t understand the definition of ‘loophole’ or ‘shelter’. Those things are legal, smart guy! It isn’t “cheating” when you stay within the rules.

    Seriously….get in the game. This is basic stuff.

  15. “Strategy for national success?”

    Again. I wasn’t advocating that it should be done. Only that it wouldn’t lead to more offshoring and, if anything, makes the market freely available for companies to come here. Of course, our labor may be more expensive, so maybe they wouldn’t come here. But regardless of whether that is a good/bad result of freeing up the market, there is no issue as to whether it would affect offshoring. It wouldn’t.

    “One reason to do R&D in the US is if it is protectable by US patents.”

    That’s a minor, minor, minor reason, if any reason at all. The US grants patents regardless of where they are developed. If development costs are a concern, those companies would be gone already. The world is flat — just ask Tom Friedman.

  16. Mr. Mooney:

    “The cost to the public of simply declaring something a trade secret or copyrighted is zilcho.

    Not so of evaluating an application for “tax strategy” patent.

    Therein lies the rub.”

    I think you have missed my point. Mine is not about how much it costs to secure rights (yes, I am aware of your concern about the use of USPTO resources to review such applications). Mine is about the simple notion that each of the laws can be used as a means to achive the same ends…tax avoidance. Your comments suggest you view such ends as problematic, at least when it comes to rights under Title 35. This being the case, then I have an extremely difficult time understanding the impact a declared exception to 101 would have on these other laws and the ability of the rights holders to enforce them through our judicial system. In my view federal preemption would likely come into play.

    On a related matter, I am informed, though I have not verified it as yet, that at least one version of bills before Congress would amend title 35 in such a manner that current patentees would be foreclosed from receiving money damages from infringers. Now, this would be a truly interesting case…one that would squarely present the issue so deftly avoided in Zoltek as to whether or not patents are in fact property within the meaning of the Fifth Amendment. You may recall that one academic and I exchanged a divergent set of views, hers being that patents are entitlements (say like social security benefits) and mine that they are property. Her position was that the Fifth Amendment would not apply, whereas mine was to the contrary. I would be very interested to learn just which view would receive Supreme Court affirmation.

  17. Let me address the various comments about why removing certain subject matter from 35 USC 101 will cause will cause the “outlawed” technology to simply move offshore. Actually, I should have said will cause R&D on the “outlawed” technology to move offshore. One reason to do R&D in the US is if it is protectable by US patents. If you don’t (or won’t) allow certain technology to be protected by US patents, why should you spend more R&D dollars in the US when you can spend fewer R&D dollars offshore to develop the same technology (and instead rely on being “first” to market)?

  18. “‘”But perhaps you can’t see that there is much less of an incentive to innovate when you know your competitors can simply copy your work.’

    I do see that”

    “If anything, limiting the scope of 101 would encourage businesses coming here to freely develop technology without fear of patents.”

    Let’s see, putting two and two together, limiting 101 protection will decrease the American companies’ incentive to innovate while at the same time encouraging businesses to come here to freely develop technology without fear of patents. Strategy for national success? (I’ll let EG explain the economics of offshoring if he desires.)

  19. “But perhaps you can’t see that there is much less of an incentive to innovate when you know your competitors can simply copy your work.”

    I do see that, but that isn’t what EG was saying–good job putting words in his mouth too. What I couldn’t see (and still can’t see) is how there would be an incentive to offshore that innovation if it isn’t protected here.

  20. Anonymous, perhaps you should live by your own words (and respond to EG’s arguments in context… But perhaps you can’t see that there is much less of an incentive to innovate when you know your competitors can simply copy your work. You actually think it works in quite the opposite way, and for the copyists I guess it does. Pity. P.S. I don’t necessarily agree with EG on this.)

  21. real anonymous: I was responding to the poster who thought that removing 101 subject matter was a bad idea because businesses would leave. I was pointing out that his logic was flawed because businesses wouldn’t leave and, if anything, more businesses would come. I was not arguing that removing 101 subject matter should be done. And I surely didn’t advocate taking that argument to your straw man’s extreme. How about responding to what people actually write in context?

  22. “For example (and a trivial one at that), would such an act have any negative effect on other longstanding laws, including, inter alia, federal copyright law and state trade secret/unfair competition law?”

    The cost to the public of simply declaring something a trade secret or copyrighted is zilcho.

    Not so of evaluating an application for “tax strategy” patent.

    Therein lies the rub.

  23. ” take it then that on your 1040 you choose to take the standard deduction and eschew itemization.”

    Right. And I answer yes, my admission will be used against me in the forthcoming patent infringement suit.

  24. “If anything, limiting the scope of 101 would encourage businesses coming here to freely develop technology without fear of patents.”

    Anonymous, following that logic, we should eliminate patents entirely to encourage businesses to come here all the more without fear of patents.

    (Oh, darn, those would be Chinese businesses….)

  25. “such an explicit removal of subject matter from 101″

    Just wait a few months when the Supreme Court takes the following case on cert and holds that pure business methods aren’t in 101 and, therefore, need not be removed:

    link to patentlyo.com

  26. “[I]n what bizarro world do we ask an underfunded government agency to spend its limited resources examining applications in order to grant exclusive rights to “strategies” for minimizing the money paid to the government?”

    In a world governed by the rule of law where a specific law, in this case the IRC, has been duly enacted.

    “Silly, crazy, but most of all greedy is what it is.”

    I take it then that on your 1040 you choose to take the standard deduction and eschew itemization.

    In all seriousness, the wisdom of counseling a client to pursue rights under Title 35 can be subject to widely diverging views. The same can be said of relying upon trade secrets and copyrights. Personally, I have a tough time trying to figure out how a patentee can even reliably determine that an infringement of such a patent has taken place.

    My concerns are two-fold. First, I become worried anytime largely uninformed incumbents and candidates for political office start playing around with the notion that some types of inventions are good and some are bad, and then focus their attention on amending 101. That can easily result in unintended consequences, and, perhaps, even stifle innovations that hold significant promise for the benefit of the public. Closely related to the first, such an explicit removal of subject matter from 101 can raise serious downstream issues about the impact on other laws at the state and federal level. For example (and a trivial one at that), would such an act have any negative effect on other longstanding laws, including, inter alia, federal copyright law and state trade secret/unfair competition law? If the foreclosure of patent rights for tax strategies reflects a matter of national interest, would such an act foreclose state action under the doctrine of federal preemption? The same can be said for copyright law. How could we tolerate rights being granted under Title 17 when the subject matter of such a grant has been explicitly declared contrary to the public welfare?

    There is no easy answer to these and other questions, and political sound bites only serve to exacerbate the problem by possibly precluding thoughful discourse.

    BTW, I itemize, but refuse to use software that informs me just how much I can value a pair of underpants without raising IRS suspicions. I was, to be frank, shocked to learn a few years back that Mr. Clinton claimed a large value for his personal undies that were donated. I presume he lowered the value accordingly to the extent they exhibited “stains” on the front” and/or “skid marks” on the back. Of course, the presence of the presidential seal or “Monica” trace evidence would likely have the opposite effect…;)

    Believe it or not Mr. Mooney, we do agree on many points, but I am afraid this is not one of them unless and until Congress acts.

  27. Malcolm is, as usual, correct.

    Whether tax avoidance is moral is not the issue. A patent grants an exclusive right (a monopoly), in exchange for the disclosure of the technology. Assuming that tax avoidance schemes (you can choose for yourself whether the term “scheme” carries negative connotations – it doesn’t necessarily) are an unavoidable consequence of a complex tax regime, the public policy question is simply this: Is the public better off with a system that rewards tax avoidance innovators with monopolies or not?

    Keep in mind that monopolies are usually economically inefficient – thus the monopoly itself is likely a drag on the tax planning ‘economy.’ It’s hard for me to conceive of much public benefit from the disclosure side of the bargain. If the IRS wants to figure out how the system is being gamed, there are probably better ways than by reading patent application publications.

    I doubt very much that the “promotion of progress” resulting from the publication of tax patents outweighs the costs.

  28. “a lot of the discussion here appears unfocused at least where it relates generally to tax avoidance being immoral”

    The only “moral” at issue here is waste.

    Take a deep breath and ask yourself again: why does the government issue patents?

    Then take another deep breath and ask: in what bizarro world do we ask an underfunded government agency to spend its limited resources examining applications in order to grant exclusive rights to “strategies” for minimizing the money paid to the government?

    Someone upthread already indicated that tax planning was a billions-dollar-a-year business. So remind me why these people need to waste the PTOs time?

    Silly, crazy, but most of all greedy is what it is.

  29. The IRS represents the collection arm of the international bankers who run the private club referred to as the Federal Reserve. The Federal Reserve is not a government institution. In order for Congress (the people) to create money, we must obtain a loan from the private bankers (Federal Reserve). The income tax (16th Amendment) was passed so that the private bankers would ensure payment on the debt. The IRS is the agency that collects the money for the private bankers. Now the income tax code is established to ensure that no one can compete with the international bankers. If you ever start earning more than $250K per year you will realize that there are sever penalties that are paid to the IRS. That is, unless you can make the leap and start making more than $700K. At that income level you can start entertaining interesting tax shelters that only the wealthy can enjoy.
    Now the patent angle is really interesting. In effect it allows an individual to effectively nullify the 450K gap that I mentioned above, by allowing an individual to expliot loophole and get paid (royalties) for allowing other people to exploit the same loop hole. In essence, this patent holder allows concerted action against the IRS in its collection endeavours. This is the beauty. Up to now the IRS has been taking citizens on one-by-one. However, if we start to work together, well that’s why they have these rules.

  30. “Anything else will cause the ‘outlawed’ technology to simply move offshore.”

    Why would they move offshore if there’s no risk of patents that read on their development activity here? If anything, limiting the scope of 101 would encourage businesses coming here to freely develop technology without fear of patents.

  31. I have a fundamental problem with trying to “restrict” the scope of 35 USC 101. This is what other countries such as Brazil and India used to do with food/beverages, pharmaceuticals, etc. Even closer to home, the misguided efforts to dictate what R&D will be done in this country by outlawing the patenting of certain types of technology. Witness the Becerra bill which isn’t even honest that more than “human genetic material” would be outlawed from patenting. Let’s leave what is patentable subject matter alone and judge it on the true merits: is it novel (under 35 USC 102) and is it unobvious (under 35 USC 103)? Anything else will cause the “outlawed” technology to simply move offshore.

  32. I am having great difficulty following the logic underlying “Again: it’s about cheating the government.” when what is being talked about concerns tax avoidance and not tax evasion.

    I have the same problem. Since nobody is pointing to the claims of any patent in particular so that we can discuss whether the claims exploit unintended consequences (“loopholes”) of the tax code, I’m a bit baffled by the outrage.

    I don’t have any problem with Congress or the IRS collecting info to sort out whether taxes are being avoided or evaded, but a lot of the discussion here appears unfocused at least where it relates generally to tax avoidance being immoral.

    Generally speaking the tax code consists mostly of deliberate tax avoidance methods because Congress wants to influence behavior in areas where it doesn’t have the power to legislate directly.

  33. I think these tax patents are cool. They disclose what they *propose* are legitimate tax avoidance structures in application of a profoundly complicated tax code. I think congress and the IRS are, simply put, embarrassed at the complexity of the tax code, so that there could, and is, the “science of financial engineering” and novel and non-obvious applications of that code. It not so much shoot the messenger (the tax patent), because some in congress certainly know and take advantage of the code complexity, it’s simply that they don’t want the patent broadcasting the structure to the whole world (you’re letting too many in on a good thing and we might have to plug it).

    Instead of abolishing the tax patent (IMHO demonstrating how uninformed and twisted the patent reform debate has become), congress should pass an act that requires each congressman or women to prepare and file there own tax return, and trust return, without the assistance of professional advice or advisors (they would surely enjoy the disclosure of a tax patent then).

    What a tempest in a teacup.

  34. I am having great difficulty following the logic underlying “Again: it’s about cheating the government.” when what is being talked about concerns tax avoidance and not tax evasion.

    Casting patents aside as a factor, would I be correct in assuming that the quotation applies with equal force to one who cloaks the invention under the label of “trade secret”? Whether or not the invention is out there for the world to see, it seems that in either case the same means is being used to achieve the same end result…the limitation of taxes paid to the IRS consistent with governing law.

    My gut tells me that if this specific subject matter is removed from the reach of 101, then I would naturally expect trade secret rights would evaporate as well under the logic of cases such as Bonito, Steffel, Compco, etc. I “smell” a law review/journal article once again rehashing federal preemption.

  35. “If 101 can be narrowed for tax avoidance, why not something else like stem-cells or some other type of subject matter that be politically charged.”

    Are you at all familiar with the notion of legislation? The idea that Congress can amend statutes hasn’t become outlandish, has it?

  36. “… the US government shouldn’t encourage the disclosure of strategies that directly decrease their revenue.”

    Well, then I pray that you are never in charge of writing the tax code, if you have that attitude.

    So much for a government “for the people” anonymous.

  37. “So, you’re saying weshould be able to patent non-obvious methods of complying with patent regulations (37 CFR) so no one can use them except us or our licensees?”

    No. I think pure business methods should be thrown out as a group. I think other pure business methods should get equal treatment. There isn’t a very large leap from patenting actions that reduce taxes to patenting actions that help when viewed in light of patent regulations or to patenting actions that help businesses run better. Why just stop at tax patents?

    Malcolm raised the only credible reason for singling out tax strategies: the US government shouldn’t encourage the disclosure of strategies that directly decrease their revenue. Great point. But others whining about not being able to “comply with” or “follow” the law is absurd because patents routinely restrict legal activity, i.e., that inherently complies with the law.

    And if the tax code truly does suggest a way to “follow” or “comply” those are obvious and not patentable anyway. But blurring the line between novelty and obviousness with eligible subject matter isn’t helpful.

  38. “Uh huh. As if there’s any other desired result to a tax strategy.”

    Exactly. We were discussing patenting ways to get there.

  39. “How is that different from a business strategy that saves costs, which just happens to comply with business regulations?”

    So, you’re saying weshould be able to patent non-obvious methods of complying with patent regulations (37 CFR) so no one can use them except us or our licensees? Is that where law and order in the U.S. should be headed? Should there be a race to the Patent Office by attorneys every time new rules are promulgated? Would such patenting really promote the progress of the “useful arts”, or just our wallets?

    My guess is you’re advocating the destruction of law and order in the U.S. Soon, regulators will get rich by putting nonobvious loopholes into the rules and laws so that the exclusive right to such can be garnered by the the tipped-off lobbyist with the biggest $$$ contribution.

    “Might anyone be aware of other patent-preempted inventions?”

    It used to be (in the days before the Lehman era when the powers that be and the solicitors understood patents) that inventions that were frivolous, fraudulent, or against public policy were not patentable. (At that time, business methods and most software was not patentable either, and the patent system was not in so much need of “reform”.) Today, however, such things are apparently patentable, in the new USPTO – see MPEP 706.03(a).

  40. “A simple mechanical invention “just follow[s]” the laws of physics, should they be unpatentable? No. Why?”

    Because it’s a composition of matter.

    Next!

  41. “That’s not a particular tax strategy. That’s just a desired result: minimization.”

    Uh huh. As if there’s any other desired result to a tax strategy.

    And before you attempt to make the same argument about a “business strategy” — think twice. Think hard.

  42. “Actually tax codes do necessarily suggest a particular tax strategy — they suggest the strategy that minimizes taxes for a person with holdings X and income Y.”

    That’s not a particular tax strategy. That’s just a desired result: minimization.

  43. Dan wrote, “they are not developing a new method they are just following the law”

    A simple mechanical invention “just follow[s]” the laws of physics, should they be unpatentable? No. Why? The laws of physics don’t suggest all mechanical inventions. Don’t assume that the tax code suggests all tax strategies either.

  44. “The real issue is that business regulations do not necessarily suggest a particular business method and the tax code doesn’t necessarily suggest a particular tax strategy.”

    Actually tax codes do necessarily suggest a particular tax strategy — they suggest the strategy that minimizes taxes for a person with holdings X and income Y. That is because the tax codes exist for one reason: to extract taxes from citizens to pay for the costs of running the country.

    The same can not be said for business codes (at least, not for those codes that do not concern business taxation).

    Again: it’s about cheating the government. Why should the government grant patents on methods of cheating the government? It’s just bizarre. It’s a WASTE of Patent Office Resources.

    The only people who disagree are (1) patent attorneys who believe that everything should be patentable (gee, I wonder why…), (2) academic blowhards and (3) folks who want to game the patent system with their lame tax strategy applications.

    In other words: self-interested types.

  45. I am not sure why these methods are patentable at all. As one poster has already said they are not developing a new method they are just following the law, which is in the prior art and, therefore all the elements are there. Under any test of obviousness they have not invented a new method of avoiding tax because it is inherent in the tax code, if not obvious. Can someone explain why structuring a transaction to follow the law and to reduce taxes is anything but following the law and therefore obvious or inherently anticipated in the tax laws themselves? This is different from a business method which is presumably novel. I think basically the PTO is missing the boat on tax strategies for the most part regardless of whether it is right or not.

  46. If the government really wanted to track tax patents, just create a new tax covering royalties received for tax patents and require disclosure of the patent with the royalty amount.

  47. “Excuse me but I think you’d have to be actively trying not to understand in order to miss that point.”

    Tax strategies are obviously crafted in view of the tax code. But guess what: businesses also craft their activities to ensure they comply with business regulations. The real issue is that business regulations do not necessarily suggest a particular business method and the tax code doesn’t necessarily suggest a particular tax strategy. And, putting aside the always-present issue of whether the USPTO does its examining job, all of the obvious ways to comply with business regulations and tax code will be free for use. So no one is getting cheated.

    Of course, you would throw out all business methods, including tax strategies. That’s fine by me. I just don’t see why legal tax strategies should be treated any different than other pure business methods.

  48. “The president’s (sic) top economic adviser, Edward Lazear, is attempting to patent a way for corporations to minimize their tax bills.”

    Seems a bit ironic (and somewhat comical) that a senior member of the President’s staff apparently views the issue a bit differently than does the IRS. I can only imagine the tenor of the next conversation he has with Mr. Obama and his congressional compatriots should the issue arise during their conversation. If Mr. Dudas is a participant it would be even more interesting. I expect his contribution to the conversation would likely be “What is a patent?”

  49. As a follow up:

    US 7,149,712 “Purchase of an annuity contract to fund a charitable remainder trust” is an interesting example. The primary benefit of the invention is to provide a method for funding funeral expenses that has less susceptibility to fraud and loss of principle that other known methods. The specification does mention a tax benefit (“The contractual arrangement is tax-deferred”), but that observation could easily have been left out without changing the invention or compromising its patentability.

    Would it still be a tax planning patent according to the IRS guidelines?

  50. Blaise and Just,

    Thanks for the examples. Are these based on your own judgment, or has the IRS listed these as examples?

    Also I noticed that Dennis has put a few examples up. Likewise, has the IRS said that these were examples?

  51. The IRS wants you to identify that you are using a patent because it will make subsequent prosecution much much easier.
    It patent X is deemed to be tax evasion, and you have stood up and said that you used patent X, well then, you have just admitted to tax evasion.
    The IRS won’t have to have 100 court cases over patent X or things that look like patent X. They win/lose once, they can then clear 99 other cases from their dockets.

    The PTO isn’t going to decided whether or not your tax strategy complies with the Tax Regs. They are not competent to do that. So, a lot of those patents (especially the more novel of them) are going to be found to be evasion. If not now, when the tax code changes (as it does every single year, really tax knowledge has a half-life like a radioactive isotope).

  52. The IRS is concerned that the existence of a tax patent suggests governmental review/approval of the substance of the technique. Therefore, they initially asked the PTO to stop issuing these patents. The PTO declined to oblige.
    So, the IRS looked into its own jurisdiction and procedures, and determined that what it could do (without help from Congress) was make the use of these patents a “reportable transaction.” Some taxpayers will be deterred from using patents because of the disclosure requirement (in particular, their not-unreasonable expectation that disclosure will lead to a heightened risk of audit).
    And as someone mentioned, at least the IRS hears about these supposed tax-saving devices and can challenge them. That’s not a guarantee of putting the kibosh on anything, of course — the patents themselves are surprisingly vague, and even if there’s a challenge, the IRS might lose. If the IRS loses, Congress can presumably set it right with legislation, but that’s a cumbersome remedy.
    Of course, as someone else said, if we had a flat tax (or at least eliminated certain provisions that encourage ‘innovation’, such as the rate differential between long-term capital gains and ordinary income), no one would bother developing, let alone patenting, tax-minimization strategies. In other words, if the law were clear and simple, we’d have no reason to worry about tax patents.
    Today’s patentability issue may relate to taxes, but tomorrow’s may implicate any other area of law: securities, corporate, environmental, healthcare — anywhere there’s a cumbersome and complex body of law and a strong emphasis on compliance at the lowest possible cost. Gee, isn’t that everywhere?
    Maybe State Street should be limited to its facts, or limited to software programs that make calculations.

  53. Not sure why the double post other than perhaps Vista and IE7 are as yet not working together in a harmonious manner. Ahhh…if only I could upgrade Vista to XP, but unfortunately I am limited by the availability of XP drivers for my new machine. Perhaps we could all use an invention wherein XP drivers for new generation machines are identified, downloaded, and then slipstreamed into XP SP2 to facilitate the “upgrade”.

  54. I may concur with Mr. MM’s view at such point in time as the IRC and TR comport with the principle underlying Section 112.

    BTW, but for the AEA re production of what I term “nuclear material”, I am not familiar with classes of inventions that are statutorily precluded from the coverage of Section 101. Certain medical procedures are limited in terms of being enforced if patented, but the wholesale removal of subject matter from 101 is an entirely different matter. Might anyone be aware of other patent-preempted inventions? I ask this question merely for personal edification. Clearly, Congress does have the power to restrict that to which the patent laws apply, but the AEA is the only specific instance of which I am aware where it has been applied by statute.

  55. I may concur with Mr. MM’s view at such point in time as the IRC and TR comport with the principle underlying Section 112.

    BTW, but for the AEA re production of what I term “nuclear material”, I am not familiar with classes of inventions that are statutorily precluded from the coverage of Section 101. Certain medical procedures are limited in terms of being enforced if patented, but the wholesale removal of subject matter from 101 is an entirely different matter. Might anyone be aware of other patent-preempted inventions? I ask this question merely for personal edification. Clearly, Congress does have the power to restrict that to which the patent laws apply, but the AEA is the only specific instance of which I am aware where it has been applied by statute.

  56. “I’m not sure why any citizen of the United States would disagree with me on that point.”

    Malcolm, I’m overpowered by your legal reasoning. You win.

  57. “How is that different from a business strategy that saves costs, which just happens to comply with business regulations?”

    The answer is implicit in your question. Tax strategies by definition don’t “just happen” to comply with business regulations.

    Excuse me but I think you’d have to be actively trying not to understand in order to miss that point.

  58. “The PTO only considers the utility of the thing, not the morality, public good, or public harm of the thing”

    That’s simply false. Certain inventions are treated differently, by statute.

    The question asked was: why should patents on tax strategies be treated differently?

    I answered that question correctly.

    Should a patent on a method for exploiting a loophole in the law to minimize the benefits a corporation must provide to its employees be treated differently from a patent on a method for evading tax?

    No. Both should be refused. It’s not a question of “morals.” It’s a question of my government shooting itself in the foot. I would rather it didn’t.

    I’m not sure why any citizen of the United States would disagree with me on that point.

  59. “Because so-called “tax strategies” are basically ways of stealing money from the public.”

    If you assume illegality, I agree the tax strategies should be excluded from eligible subject matter. But, if the strategies are legal, there’s no stealing or any other illegality.

    “1. A method of obeying the law, comprising the steps of:”

    The tax strategy is a way of reducing tax costs, which just happens to comply with the tax code. How is that different from a business strategy that saves costs, which just happens to comply with business regulations? I think the real motivation is that everyone wants to be able to avoid taxes (just like all businesses want to reduce costs) and they’re mad that they can’t. But that’s a “problem” shared by all business methods, not just tax strategies. I see no reason to make tax strategy patents the target, except that it is just near and dear to everyday people and not just big business.

  60. Things that deceive, weapons for killing people more efficiently, sex toys, and drugs useful for abortion are all patentable so long as they are new, useful, and unobvious. The PTO only considers the utility of the thing, not the morality, public good, or public harm of the thing. See Juicy Whip v. Orange Bang (find it on google). As a previous poster stated, tax avoidance is absolutely legal (a multi-billion dollar industry) so characterizing it as “stealing from the public” is an exaggeration of limited value in this discussion.

  61. Since the tax code is there for all to read, and since anyone would want to minimize the amount they have to pay, wouldn’t any tax planning method claim be prima facie obvious?

    All the Examiner would have to do is show that various portions of the tax code were combined together, with the obvious motivation of reducing one’s tax liability, and you have a solid case of obviousness.

  62. I read about Wealth Transfer Group’s US Pat. No. 6,567,790 titled, “Establishing and Managing Grantor Annuity Trusts Funded by Nonqualified Stock Options,” that was litigated and settled-out in the Connecticut District Court (New Haven), Case #: 3:06-cv-00024-AWT (available on PACER).

  63. Mark-

    Here is one example

    US Patent 6,978,254 – Income tax preparation system for traveling taxpayers

    Tax strategy methods are generally classified in class 705, subclasses 31 and 36T of the US class system. Currently there are 138 issued U.S. patents in these areas.

  64. I am perfectly fine with this, and figure that the IRS is likely doing this for a similar reason to why they require tax preparers to identify themselves. One thing – if the patent ends up being abusive, then the licensor may be contibutorily liable.

    I think that maybe part of the requirement is so that the IRS can look more closely at what is going on with those tax returns. I would think that it would take some game playing to get this sort of patent to save taxes, and identifying the patents involved would presumably alert the IRS to the types of games being played. Are they played too close to the line? Then maybe some enforcement is called for.

    Also, I would think that merely identifying a tax return as having had the benefit of such an invention might be a red flag. Here is someone who is trying to (charitably) skate near the edge. They bear looking at more closely than those who don’t.

  65. “So, rather than objecting to subject matter by assuming obviousness or lack of novelty, please explain why a new and non-obvious tax strategy should not be statutory subject matter.”

    Having thus described our invention, what we claim as new in the useful arts and thus desire to secure by Letters Patent and exclude others from lawfully so doing without payment of royalty to us therefor is as follows:

    1. A method of obeying the law, comprising the steps of:

    . . .

  66. “explain why tax strategies should be treated any different than other pure business methods”

    Because so-called “tax strategies” are basically ways of stealing money from the public. Can you patent methods of stealing? How about patenting methods for getting out of jury duty? Patents for methods of obtaining multiple drivers licenses with different IDs? Patents for methods of removing criminal convictions from one’s record? Patents for extending one’s unemployment benefits?

    Etc, etc.

    Did you really not know the answer to your question? I find that hard to believe.

  67. “I’m with the crowd that tax planning schemes should be unpatentable – the tax code is there for all to read, and if someone can figure out a way to legally minimize the amount of tax you pay, you should be able to implement that scheme; no one should be allowed to preclude you from using that scheme just because they say they thought of it first and filed for a patent on it. Put differently, the tax code says that certain things are subject to tax and certain things aren’t. I shouldn’t be able to get a patent for pointing out a way to get something classified as ‘not subject to tax.’”

    Your argument assumes that the strategies are obvious or not novel in view of the tax code (“the tax code is there for all to read”). What if the tax strategies are novel and non obvious: would you exclude tax strategies on some other basis that distinguishes them from other processes and machines? After all, machines and processes work under the laws of physics, which (like the tax laws) already existed and were just there for everyone to discover. Should “pointing out” a process or a machine likewise be unpatentable because the laws of physics are known? Obviously not because the laws of physics will not render inventions obvious in most cases. Likewise, the tax code won’t render many tax strategies obvious.

    So, rather than objecting to subject matter by assuming obviousness or lack of novelty, please explain why a new and non-obvious tax strategy should not be statutory subject matter. Also, explain why tax strategies should be treated any different than other pure business methods. (I personally don’t care whether pure business methods are found to be statutory subject matter, but I take issue with the special, and in my view undeserved, particular attention to just tax strategies.)

  68. “1. The filing of such applications allows the IRS to identify various tax-avoidance/minimization schemes that we call loopholes.”

    But we’re talking about issued patents here – by definition, these are published, and given the delays in the USPTO especially in the business method groups, they were published as applications years before they issued.

    If the IRS is concerned about closing the loopholes, why wait until someone licenses the issued patent and files a return reporting it? Why not just do a periodic search on published applications and close the loopholes before the patent issues?

  69. Obama and the IRS have the wrong idea about such patents.

    1. The filing of such applications allows the IRS to identify various tax-avoidance/minimization schemes that we call loopholes. That is, the big tax firms that would use such patents would divulge how they do things.

    I think the IRS could then know how to cover such loopholes and close them.

    2. If 101 can be narrowed for tax avoidance, why not something else like stem-cells or some other type of subject matter that be politically charged.

    3. These patents will probably be hard to obtain, difficult to enforce (as the patent holder), but won’t the litigation be fun.

  70. Hey, if the new rules are implemented, can we patent methods of using the loopholes so no one else can? Or what if the Department of Commerce patents the methods of using the loopholes first – would that prevent attorneys from using them without paying a usage license? And if we didn’t pay the license, could DoC seek treble damages from us?

  71. Learned Hand:

    “Anyone may arrange his affairs so that his taxes shall be as low as
    possible*; he is not bound to choose that pattern which best pays the
    treasury. There is not even a patriotic duty to increase one’s taxes.
    Over and over again the Courts have said that there is nothing sinister
    in so arranging affairs as to keep taxes as low as possible. Everyone
    does it, rich and poor alike and all do right, for nobody owes any
    public duty to pay more than the law demands.”

    *unless there is a patent on it

    Gregory v. Helvering 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S.
    465, 55 S.Ct. 266, 79 L.Ed. 596 (1935), caveat not in original…

  72. Problems with tax patents are rife. First of all is utility. The utility of a tax patent is that you reduce your taxale base without breaking the law. But how can compliance with the law be useful? Inventions intended to violate the law lack moral utility, but the inverse is certainly not true (that all inventions that do not violate the law possess morality just because they do not violate the law). Utility requires more than just legal compliance with a certain tax basis.

    Also, the law presumes knowledge of itself for purposes of compliance (“Ignorance of the law is no excuse.”), therefore any “invention” based on complying with law is inherently obvious.

    The 5th amendment due process clause also posts a problem for tax patents, as they unlawfully restrain potential infringers from complying with the law.

    Of course, 101 issues are almost jokes now, but it still seems doubtful that legal compliance is a useful, tangible result.

  73. I’m with the crowd that tax planning schemes should be unpatentable – the tax code is there for all to read, and if someone can figure out a way to legally minimize the amount of tax you pay, you should be able to implement that scheme; no one should be allowed to preclude you from using that scheme just because they say they thought of it first and filed for a patent on it. Put differently, the tax code says that certain things are subject to tax and certain things aren’t. I shouldn’t be able to get a patent for pointing out a way to get something classified as “not subject to tax”. (If you like, you can think of it as the difference between a discovery and an invention – the tax planning scheme was lurking in the USC and regs the whole time, and thus has merely been discovered, not invented.) What’s next, a patent on how to keep a client out of jail or provide some other legal service? Of course, I’ve also wondered how such a patentee would know that my accountant had implemented the patented scheme…

    That said, I’m even more against the IRS compelling disclosure of the licensing of such a patent. If they don’t like the fact that they can’t collect as much from some people as they’d like to, then they can go to Congress and get a more transparent tax code enacted.

    In any event, it seems to me all the IRS rule would do, if adopted, would be to cause people to stop filing tax planning patents and to revert to pre-State Street situation wherein these things were kept as trade secrets and good accountants got paid to devise perfectly legal but unpublished tax avoidance schemes. So maybe, perversely, implementation of the IRS rule will have a beneficial effect.

  74. Kevin Noonan is not sure why anybody should patent these methods. Here’s why. The way the IRS is behaving towards them, they must be hurting the IRS. By “hurting” I mean “seriously reducing its tax take”. The people licensing these patents must be absolutely delighted with the IRS’s expression on concern, and by now asking those clamouring for a licence to form an orderly queue.

    Don’t understand the reporting exemption for deliberate infringers though. Do we see here the US Government deliberately egging US citizens on, to infringe valid patents issued by the USPTO?

  75. Of course, as my partner Jim Gumina has noted, these rules only apply to patents not to the methods themselves. It seems the methods are classic trade secrets – a tax preparer does the analysis and maximizes the amount of a return for each client. Not sure the clients care to see how it’s done, so long as it is defensible during an audit. I’m not sure why anyone would patent something like this, but banning patents will not ban methods for minimizing Federal taxes.

  76. “Obama has the right idea.”

    No, he does not have the right idea. I rail at the notion that the IRS should perpetually enjoy an elevated position over that of the taxpaying public.

  77. I am curious what it is about a patent covering tax strategies to avoid unnecessary taxes that makes it such a parriah? Avoidance, as opposed to evasion, is of course completely legal.

    Personally, the proposed regs are so draconian in nature should one make a misstep and fail to file a report that it is only too clear that if the IRS and its henchmen cannot win on legal merits, then use complex procedural rules to try and accomplish the objective of keeping taxpayers from effective tax planning that takes advantage of what the IRS Code has to offer. Its extension to embrace foreign applications and patents, not to mention an inventor (even if not the rights holder) in some instances being viewed as a material advisor is disconcerting to say the least. The same can be said of reducing monetary threshholds that kick in obligations from relatively large numbers to only nominal amounts.

  78. As someone who believes that business method patents are bad for America even if they are good for patent lawyers, I hope these patents develop enough traction to survive long enough for someone to bring them to the attention of the Supreme Court. It’s just a matter of time before this income stream comes to an end.

  79. “the IRS effectively plugs any loopholes that the patents take advantage”

    They aren’t loopholes. They are (presumably) playing by the rules of the game. If the IRS/Congress doesn’t like the rules they can change them via Regs/Laws.

    That said, I believe tax patents are a bad idea, and should be banned.
    This is probably the best the IRS can do by itself to minimize tax patent use, but the real fix is to out and out ban them.

  80. This whole tax-patent “mess” is just one more reason for a national flat and/or sales tax…no chance the initial fed tax establishment Congress would have even started federal taxation had they known then what we all know now–our tax system is an abomination.

    Our Founding Fathers would be spinning in their graves if they knew what we all have allowed to happen…to us…to our children…to all the children yet to be born…

    Shame on us all.

  81. If the IRS is really worried about such patents, why doesn’t the IRS simply seize the patents using the government’s eminent domain and pay the patent holders the appropriate just compensation?

    By seizing the patent, the IRS effectively plugs any loopholes that the patents take advantages at the cost of what the patent holder might have earned in service fees by selling the tax strategy (which would be far less than the money lost from the loophole).

    Everyone wins this way, except the folks trying to outfox the IRS.

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