April, 2007


The idea of issuing patents (primarily business process patents) in the area of tax planning has stirred significant controversy. The expansion of patents in this area has worried many practitioners for a variety of reasons, most notably the possibility that a strategy conceived for a private client later exposed (typically through a dispute process with the IRS) may be the same as or substantially similar to an existing patent, triggering an infringement claim. And from that claim, discovery could reach into the practitioner’s other files, and, if part of a firm, into the files of other practitioners in the firm.

One key element in a successful patent application of any type is the novelty of a procedure for which a patent is sought. The examiner is looking for the best “prior art,” and searches a number of databases for evidence as to whether the tax strategy already exists. In tax law, the problem is that there may be no publications that detail how to comply with straightforward Internal Revenue Cod provisions because the language is obvious. And the concern is that a patent examiner at the US Patent Office will find no prior publications on a tax strategy in that area, thus allowing some to “’capture’ a property right in the Internal Revenue Code.”

On Friday, January 26, 2007, the State Bar of Texas Board of Directors approved a request by that bar’s Tax Section to submit to the Internal Revenue Service a response to its request for comment on this area, and, in that response, offered specific legislation to prohibit enforcement of tax strategy patents. The model for the proposed legislation is the language added in 1997 to prevent patents on surgical procedures from being enforced against doctors and hospitals.

This is in clear contrast to the approach suggested in the preamble to the new proposed regulations under Section 6011 and in the modified version of that approach envisioned in the comments submitted by the Tax Section of the American Bar Association which both suggest making use of a patented strategy the same as participating in a listed transaction. This approach has already drawn sharp criticism from the AICPA. Tax Notes Today reported that there was only one witness at the March 20, 2007 hearing on the matter, Rochelle Hodes of PricewaterhouseCoopers, who argued against such a rule, and advocated that the burdens of seeking out the use of the strategy should be on the patent holder or licensee, who gets the benefit of seeking the patent.