House Approves Tax Strategy Patent Legislation

August 24, 2011

By HunterMaclean Attorneys

Published in Business in Savannah

On June 23, 2011, the House voted 304-117 to pass legislation (H.R. 1249) that would ban the patenting of tax strategies. The bill garnered strong bipartisan support. Under the bill, dubbed the America Invents Act, the U.S. Patent and Trademark Office would not be allowed to approve any more tax strategy patents, whether for pending or future applications. The new version of the bill is now awaiting approval from the Senate and, if passed, a final signature from the President.

Currently, to obtain a patent an inventor must show that the claimed invention is novel and non-obvious and has a practical application. In 1998, the courts determined that a method of doing business may be patentable. Soon thereafter, the U.S. Patent and Trademark Office began granting patents for various business-related strategies, including tax strategies. As of January, 2010, some 90 patents had been issued for tax-related advice, and 136 patent applications have been published. These developments have tremendous implications for the tax system and for the legal system in general.

As it stands now, some taxpayers must pay royalty fees or face litigation simply for complying with the Internal Revenue Code or a state tax code if the taxpayer uses a patented tax strategy. Awarding patents for tax strategies grants unfair advantages to patent holders who retain exclusive use of tax avoidance techniques. These patents remove particular ways of satisfying a taxpayer’s legal obligations from the public domain. The proponents of the bill argue that exclusive rights over how to comply with the law is bad public policy. The proposed bill works to make tax compliance fair for all taxpayers and deliberately addresses the idea that a strategy for reducing, legally avoiding or deferring tax liability is not a new or non-obvious idea.

The Georgia Society of CPAs (GSCPA) has been instrumental in voicing support for the bill leading up to this vote, saying tax strategy patents undermine the integrity of our tax code and unnecessarily complicate compliance. Further, the GSCPA expressed great concern to lawmakers about this issue, and sought to ensure that the Georgia tax code is accessible to everyone and that no one has a monopoly on a particular form of tax compliance.

Over the past several years, the GSCPA leadership and staff have worked hard to advocate for such legislation, in conjunction with a national coalition of taxpayer rights groups, consumer groups, financial planners and public interest groups. As a part of the grassroots outreach, delegates from the GSCPA and the American Institute of CPAs (AICPA) went to Washington, D.C. in May to lobby for this legislation.

A similar bill (S. 23) passed the Senate in March with a 95-5 vote. Both the House and Senate legislation contain key language that says tax strategy patents are indistinguishable from “prior art” and therefore cannot be patented as a novel or non-obvious invention.

Both the House and Senate versions would continue to allow patents of tax filing and preparation software, so tax preparation software like TurboTax will not go out of style or pass into the public domain. The House version went one step further by including language exempting patents of financial management software. Because the Senate bill differs from the House bill, the question now is whether the Senate will take up the House-passed language, pass it and then send it to the President, or whether the Senate will request a House-Senate conference.

Even after the bill becomes law, tax strategies will remain in the market place whether or not patented. Another reason the patent of tax strategies gets bad press is that they often look and act like tax shelters. Tax shelters are arrangements that have a significant purpose of avoiding or evading federal income tax and have certainly earned their tarnished image in a system based on voluntary compliance. If someone tries to sell you a tax strategy (patented or not), always be sure to get a second opinion.

Related Insights

Fisheries Recent Case Update

October 19, 2023

Authored by Justin Guthrie, this update was distributed to the Maritime Law Association and discusses recent noteworthy admiralty cases that involve fisheries-related issues, specifically decisions by the federal circuit courts…

Trends and Developments

August 15, 2023

By Shawn A. Kachmar and Louann Bronstein, as published by Chambers USA Shawn Kachmar, Louann Bronstein Background The State of Georgia is located in the Southeastern United States. It has…