Earliest US patent classified as a tax patent by the USPTO, August 4, 1992 ^[1]

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A tax patent is a patent that discloses and claims a system or method for reducing or deferring taxes. Tax patents are granted predominantly in the United States but can be granted in other countries as well.^[2] They are considered to be a form of business method patent. They are also called "tax planning patents", "tax strategy patents"^[3], and "tax shelter patents".^[4]

[edit] Jurisdictions

[edit] United States

[edit] History

The earliest patent that the United States Patent and Trademark Office (USPTO) considers to be a tax patent is Van Remortel et al., U.S. Patent 5,136,502 "System for funding, analyzing and managing health care liabilities". This patent issued in 1992 and covers, among other things, a computerized administration system for tax advantaged funding of health care programs for retirees. The United States Congress has never passed a law explicitly allowing tax patents ^[5] but in 1998, the U.S. Court of Appeals for the Federal Circuit ruled in State Street Bank v. Signature Financial Group that business methods (and hence methods for reducing taxes) have been patentable at least since 1952 when Congress amended the requirements for patentability in the Patent Act of 1952.

[edit] USPTO classification

The USPTO has created a patent class for tax patents. The classification is 705/36T.

The USPTO has placed 60 issued US patents ^[6] and 100 published patent applications ^[7] in this classification. The USPTO has not, however, published a formal definition of the class.^[8]

About 10 new tax patent applications are filed each year and about five new patents are issued each year. Some applications and issued patents appear to be mischaracterized since they do not deal with taxes. ^[9]

[edit] Legislation

Tax patents are controversial. According to some, "tax patents amount to "government-issued barbed wire" to keep some taxpayers from getting equal treatment under the tax code." ^[5] The proposed Patent Reform Act of 2007, passed by the United States House of Representatives, but not enacted into law, would provide for an explicit ban on tax patents, but would include an exemption for software that calculates taxes. The proposed Stop Tax Haven Abuse Act would provide for a similar ban. This bill was introduced in the United States Senate by several Senators including then Senator Barack Obama.^[10]

These proposals have been strongly supported by American Institute of Certified Public Accountants (AICPA). The position of the AICPA is that tax patents: ^[11]

• "Limit the ability of taxpayers to utilize fully interpretations of tax law intended by Congress;"
• "May cause some taxpayers to pay more tax than Congress intended and may cause other taxpayers to pay more tax than others similarly situated;"
• "Complicate the provision of tax advice by professionals;"
• "Hinder compliance by taxpayers;"
• "Mislead taxpayers into believing that a patented strategy is valid under the tax law;" and
• "Preclude tax professionals from challenging the validity of tax strategy patents."

Congressman Rick Boucher has introduced a bill that would exempt tax attorneys and tax payers from liability with respect to infringement of tax patents. This proposal currently has 40 cosponsors.^[12]

[edit] Regulation

In 2005, The US Internal Revenue Service (IRS) determined that none of the then pending US tax patents contained abusive tax avoidance transactions.^[13] Nonetheless, in September 2007, the IRS proposed a set of rules that would require tax filers to disclose if they have paid a license fee to the holder of a tax patent.^[14] Similar to the ban passed by the US House of Representatives, this regulation has an exemption for patents on software for calculating taxes.

There is some concern in the financial community that complying with these regulations will increase the chances of a tax patent licensee getting audited and that this, in turn, will decrease the value of tax patents in general.^[15] These regulations have, however, been strongly supported by the Section of Taxation of the American Bar Association. ^[16]

[edit] Examples

Examples of tax patents include:^[3]

• U.S. Patent 6,567,790 Funding of a GRAT with nonqualified stock options.
• U.S. Patent 6,292,788 Tax-deferred real estate transaction.

[edit] Enforcement

In 2006, the Wealth Transfer Group sued former Aetna CEO John W. Rowe for infringement of a tax patent.^[5] The patent was U.S. Patent 6,567,790, entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options".^[13] (i.e. SOGRAT) This case has been settled for undisclosed terms.^[17]

[edit] References