Thursday, March 10, 2011

Senate Passes Bill Addressing Tax Strategy Patents

The Senate voted 95–5 Tuesday to pass the America Invents Act (S 23), which was formerly called the Patent Reform Act. Included in the bill is a provision intended to stop the granting of patents for tax strategies. That provision, in section 14 of the bill, would deem any “strategy for reducing, avoiding, or deferring tax liability” to be prior art. Under U.S. patent law, to be patentable an idea must be novel and non-obvious; patents cannot be granted for ideas that are already within the body of public knowledge, which is known as prior art (35 U.S.C. § 102).

The patent bill defines “tax liability” broadly to mean liability for tax under federal, state, local and foreign law, and the provision would cover taxes imposed by any “statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.”

Tax strategies have been patentable as a type of business method ever since the Federal Circuit Court of Appeals determined that business methods could be patented in State St. Bank & Trust v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998). Since then, the U.S. Patent and Trademark Office has granted more than 130 patents on tax strategies.

The America Invents Act now moves to the House of Representatives for consideration. Its prospects there are uncertain.

The AICPA has for several years opposed the issuance of patents for tax strategies. Specifically, the AICPA in letters to Congress and the IRS has expressed its concerns that allowing tax strategies to be patented:

Limits taxpayers’ ability to use fully tax law interpretations intended by Congress;

May cause some taxpayers to pay more tax than Congress intended or more than others similarly situated;

Complicates the provision of tax advice by professionals;

Hinders compliance by taxpayers;

Misleads taxpayers into believing that a patented strategy is valid under the tax law; and

Precludes tax professionals from challenging the validity of a patented strategy.

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