Gerald B. Treacy, Jr.

This article was prepared for educational purposes only and may or may not reflect the most current legal developments. All sample provisions herein are for illustrative purposes only and do not constitute a representation or warranty of their appropriateness or suitability for any purposes whatsoever. These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation. Individuals seeking clarification should contact Gerry Treacy.

Surviving and Thriving in the “Tax Patent” Era

Just as things seemed to be quieting down after the Pension Protection Act of 2006, along came the latest challenge to the peace of the estate-planning world: tax patents.

In early 2006, an infringement suit was filed over the first “business method” patent for a method to reduce taxes by transferring stock options into grantor retained annuity trusts (GRATs). The parties ultimately settled, but not before the tax-planning community was in an uproar over the realization of the patent’s and the suit’s implications.

The shock sparked a hearing by the House Ways and Means Committee in the summer of 2006. Testimony was heard from those who opposed the issuing of tax patents, those who supported it, and those—including the Internal Revenue Service—who were decidedly neutral. Indeed, IRS Commissioner Mark Everson testified: “[W]e have found little evidence to suggest that tax shelters or aggressive tax avoidance transactions are being patented.”
The anti-tax-patent forces were able to get bills introduced in the House and Senate that would limit at least some categories of tax patents. While Congress traditionally restrains itself from tinkering very much with the patent laws, particularly when an industry or profession seeks a change, it may impose restrictions on the types of tax patents that are permitted.

Success for the anti-tax patent movement would buck the trend. All businesses and professions naturally want to be exempt from the patent laws. For years, opponents of patents for computer-related inventions unsuccessfully pushed for an exception. And that’s just one example. So far, it appears that only a single profession has succeeded in getting an exemption, albeit in a limited manner. In 1996, Congress amended the patent laws in response to concerns raised about physicians’ use of patented methods of medical treatment. On the theory that imposing patent restrictions on doctors could impact patients’ health and in many cases mean the difference between life and death, the laws were amended to deprive patentees of monetary and injunctive remedies against medical practitioners engaging in patent-infringing “medical activity.” When the “medical activity” exception was adopted, only a handful of medical treatment patents had been issued and the effect of the provision was therefore minimal, further supporting the break from tradition the exception constituted.

Certainly the stakes are lower with tax patents; it seems unlikely that any estate-planning client would actually expire because of a tax patent.

Page 1