Gerald B. Treacy, Jr.

Surviving and Thriving in the “Tax Patent” Era

Proposed Bills

Patent protection in the United States has an impressive pedigree. Ben Franklin spearheaded the inclusion of the U.S. Constitution’s patent clause “to encourage and protect fellow inventors.” The U.S. Patent and Trademark Office (USPTO) essentially is the IRS of patent law. The courts respect its determinations. In 1998, a federal court confirmed the USPTO’s determination that a “business method” is patentable. The USPTO has since determined that tax-planning methods constitute patentable business methods. Hence, tax patents are legal.

How might the two legislative proposals change this? The first iteration of the House bill would have amended the remedies provisions of the patent laws to deny infringement remedies as to “a tax planning method,” defined as “a plan, strategy, technique, or structure that is designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing or deferring, a taxpayer’s tax liability.” Excluded from the definition of a tax-planning method would be “the use of tax preparation software or other tools used solely to perform or model mathematical calculations or prepare tax or information returns.” This bill was incorporated into the House’s patent reform bill. Although that patent reform bill had earlier been pronounced D.O.A., the text was redrafted and a revised version of the tax patent provision was added. That proposal went the whole nine yards—it simply made tax-planning methods unpatentable. A later version even substituted the word “scheme” for the word “structure,” reflecting the emotion the tax patent controversy has elicited.

In the Senate, a provision dealing with tax patents was introduced as a relatively brief portion of the lengthy and multi-faceted “Stop Tax Haven Abuse” bill. Section 303 of that bill would amend the patent provisions by excluding from patentability an invention that “is designed to minimize, avoid, defer, or otherwise affect the liability for Federal, State, local or foreign tax.” Arguably, the phrase “otherwise affect the liability for” is overly broad.

Even if one or both of these bills are adopted and future tax patents are curtailed, estate planners still will need to be concerned about those tax patents that get grandfathered in and, presumably, tax patent applications that were pending when the new legislation is enacted. (See “Grandfathered In,” p. 59). Advisors must learn how to ensure that they do not expose their clients—or themselves—to patent infringement actions.

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