October, 2006

Patenting Tax Advice: GRAT Case Stirs Debate


On January 6, 2006, a complaint was filed in the U.S. District Court, District of Connecticut, seeking relief for infringement of a patented tax strategy involving the transfer of stock options to a GRAT. The complainant, Wealth Transfer Group, LLC, alleged that John W. Rowe, an Aetna, Inc. executive, infringed on United States Patent 6,567,790 for “Establishing and Managing Grantor Retained Annuity Trusts Funded by Nonqualified Stock Options” when he funded a GRAT with non-qualified stock options of Aetna, Inc. (see below)

The case brought by Wealth Transfer Group, LLC appears to be the first time that infringement of a patented tax strategy has been alleged in court. However, the GRAT patent at issue in the case is certainly not the only patent that has been awarded to protect tax planning ideas. The U.S Patent and Trademark Office recently established a separate category for patents relating to “tax strategies” (subclass 36T in class 705). According to the U.S. Patent and Trademark Office website, 43 patents relating to tax strategy have been issued, and 61 published applications, not yet examined, are pending. (see below)

Until relatively recently, it was generally assumed that financially oriented business methods were not patentable. (see below) However, in 1998, the U.S. Court of Appeals for the Federal Circuit upheld the patentability of a computer application developed for use in a business that pooled mutual fund assets through a partnership. (see below) Among other functions, the patented computer application tracked and stored information necessary to allocate items of income and expense among the funds and comply with tax reporting obligations. Since State Street, other tax-related patents have been issued. While many of these have related to computer and other mechanical data processing systems, others have involved tax planning strategies. (see below)

In response to policy concerns about the patenting of tax advice, Congressional hearings were held on July 13, 2006. At these hearings, former RPPT Chairman Dennis Belcher testified that patents for tax reduction techniques should be prohibited. Dennis argued that it “should be against public policy to allow a patent of a tax reduction technique because the patent prevents taxpayers from exercising their right to minimize taxes within the limits of the law, and avoiding the activity in question, the payment of taxes, is not an option.” (see below) Other tax lawyers have echoed Dennis’s views. (see below) However, not surprisingly, his sentiments are not universally shared. (see below)

It is uncertain whether Congress will take action in response to the July 13 th hearing. However, it is clear that the ability to patent tax strategies will remain a hot-button issue for the foreseeable future. The patenting of tax advice will be addressed at a plenary session entitled “Can Patents Restrict Our Advice to Clients” at the upcoming joint Tax-RPPT fall CLE meeting to be held in Denver, October 19–21, 2006.



See Wealth Transfer Group v. Rowe, No. 06V00024 (D. Conn. Filed January 6, 2006).

See, as of September 17, 2006.

See Deborah L. Jacobs, “Patent Pending,” Bloomberg Wealth Manager, p. 41, 43 (May 2005).

State Street Bank & Trust Co. v. Signature Financial Group, Inc., 927 F. Supp. 502 (D. Mass. 1996).

A patent application has been filed for a three-tier master-feeder structure for a regulated investment fund intended to avoid unrelated business taxable income to tax-exempt investors. Pub. No.: US 2006/00026085 A1, filed July 28, 2004 (published February 2, 2006). See Joint Committee on Taxation, Background and Issues Relating to the Patenting of Tax Advice (JCX-31-06), July 12, 2006 and New York State Bar Association, letter re: Patentability of Tax Advice and Tax Strategies, August 17, 2006.

See Statement of Dennis I. Belcher, Testimony Before the Subcommittee on Select Revenue Measure of the House Committee on Ways and Means, July 13, 2006. Dennis testified on his own behalf and on behalf of ACTEC and the Patenting Estate Planning Techniques Task Force. The task force includes members from RPPT, ACTEC, the American Bankers Association and the AICPA The task force representatives from RPPT include Steve R. Akers, Christine L. Albright, Alan F. Rothschild, Jr. and Michael D. Whitty. In addition to Dennis, the ACTEC representatives are Louis S. Harrison and William C. Weinsheimer (Chair of the Task Force). The representatives from the American Bankers Association include Kathleen C. Brown, Julianne M. Hallenbeck and Joseph W. Mooney. The representatives from AICPA are Evelyn M. Capassakis, Justin Ransome and Steven A. Thorne. Ellen P. Aprill, who also testified at the July 13, 2006 hearing, is a liaison to the task force from the ABA Tax Section.

See e.g., New York State Bar Association, letter re: Patentability of Tax Advice and Tax Strategies, August 17, 2006.

See e.g., Statement of James Toupin, General Counsel, U.S. Patent and Trademark Office, Testimony Before the Subcomittee on Select Revenue Measures of the House Committee on Ways and Means, July 13, 2006.