Patents on Tax Reduction Strategies a Problem

EsonLinji writes "The International Herald Tribune has an article about how some lawyers are realising that patents on tax reduction strategies (a business method) might be a problem. The article states that there are already 50 such patents with more on the way, and at least one lawsuit. Particularly worrying is the idea of needing a license to follow the law. Fortunately, some of the laws get that this is a problem. Tax patents, the lawyers wrote, amount to 'government-issued barbed wire' to keep some taxpayers from getting equal treatment under the tax code."

Comments

Re:Shakespeare was right

[noidentity]

That line may not mean what you think it means.

Re:Fourteenth Amendment / equal protection clause

[Anonymous Coward]

No, you're 100% correct. The document you're referring to is http://www.capitolhillblue.com/artman/publish/arti cle_7779.shtml">"Just a goddamned piece of paper". And while some may say that this quote is only hearsay, actions speak far louder than words anyway.

The IRS and Tax Shelters

[AngryNick]

I think the article is a bit alarmist. While in theory these planning ideas may be patentable, they are still subject to the tax laws. The article is essentially saying that if I hold a patent for a unique way of creating crystal meth then I can flout the drug laws and sue any meth lab that uses my technique. Something tells me that wouldn't fly.

Tax shelters, and other creative interpretations of the tax code, are the bane of the IRS's existence. In the late '90s and early '00s, a few accountants went overboard with their tax planning strategies and started selling them as if they were "products", not unlike the what the law firms appear to be doing today. As a result of their marketing of products called BLIPS, FLIP, OPIS, and SOS, KPMG ended up paying the IRS $456 million dollars in penalties. Since 2003, the IRS appears to have focused on cleaning up the accounting industry and the rules around "reportable transactions" (transactions with attributes common to tax shelters) and seems to have the accountants in check. It looks like it's time to turn their attention to the lawyers.

Just like the "confidential transactions" of the accounting industry, where the taxpayer isn't allowed to disclose the details of a transaction to others (presumably for intellectual property protections for the accountant), a lawyer holding a patent on a tax strategy will only serve to draw attention to the strategy and get the whole thing shut down.

Boring but informative:
From the IRS Publication 550 on reportable transations:

Confidential transaction. A confidential transaction is one that is offered to you under conditions of confidentiality and for which you have paid an advisor a minimum fee. A transaction is offered under conditions of confidentiality if the advisor who is paid the fee places a limit on the disclosure of the tax treatment or tax structure on you and the limit protects the advisor's tax strategies. The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on you.

See also: Inside the KPMG mess

Re:What the...?

[cpt kangarooski]

No you can't. Patents apply to use of the patented invention, whether commercial or not. Take a look at 35 USC 271(a). There is an exception for experimental use, but it is extremely limited, and ordinary people who merely wanted to use the patented method would never win on that basis.

Notes From the Field

[wol]

Disclaimer - I am a tax lawyer

We've been discussing this internally for a few months now. Looking at the patent applications involving tax, we saw three categories of items:

(1) claims on how to implement data tracking systems in order to pay taxes (think programs for calculating sales taxes depending on where the product is shipped).
(2) claims on automating how to think through the tax consequences of a business deal (wow, if you do it with a database rather than pencil and paper, that should be patentable, right?) Side note: The hard part is not the algorithm, the hard part is getting the data and keeping it up to date.
(3) claims on a certain sequence of transactions that are claimed to be non-obvious and achieve lower taxes than a different sequences of transactions.

These have all the same problems that the software industry is dealing with: Some of this stuff has been done for decades, but is not "obvious" to a patent examiner.

A lot of these seem to be filed for patent troll purposes - if the patent office grants the application, then the patent holder will show up at the big accounting firms and demand a payoff.

There are a couple of interesting additional twists when this stuff starts getting applied to things like tax law. The first relates to type 1 claims (e.g. data tracking implementations). Here is where we argue that the patent system should not be allowed to put roadblocks on people's attempts to follow the law (and we are not even talking about gaming the system, just trying to be legal).

The second tax law specific twist relates to telling the government about your new tax planning idea. A competent government would look at the idea, decide if it should be allowed, and if it doesn't like the idea, change the tax law even before the patent is granted. [Yes, you can argue whether the US has competent government, but hey, we can talk hypothetically.]

I generally agree that the patent system is broken, we've just found additional ways to demonstrate that fact.