A Tax Strategy Patent

A Tax Strategy Patent

May 31, 2012

A tax strategy patent was denied by a US appeals court.

A real estate company tried to patent an idea where it put real estate into a portfolio that was then divided into shares that were sold to investors. Each investor was considered to own an undivided interest in each property directly as a “tenant in common” (rather than a share in a portfolio company). This allowed investors to defer taxes on gains when swapping real estate for interests in the portfolio.

A lower court invalidated the patent on grounds that abstract ideas at not patentable. A US appeals court agreed in late February. The case is Fort Properties v. American Master Lease, LLC. The real estate company claimed it has to use machinery — a computer — to track the investors and portfolio interests. The appeals court was unimpressed.

Business methods and tax strategies have become more difficult to patent.

A Supreme Court decision in the case Bilski v. Kappos last year left the law unclear about when business methods can be patented. The case involved a patent for a strategy for hedging risk when buying energy commodities. The court said the “invention” was not patentable because it was purely a mental process for doing mathematical calculations to determine how best to hedge a particular risk and then identifying and executing a transaction that the calculations suggested would be a good hedge.

Even though the Supreme Court said the idea was too abstract, it rejected the notion that only inventions involving machinery or physical transformations are eligible for patents. The justices could not agree beyond that where to draw lines. Five of the nine justices signed a majority opinion that suggested that only a narrow range of business methods are likely to qualify for patents. The other four justices joined in three concurring opinions concluding basically that business methods are not patentable.

Congress got into the act last fall. The Leahy-Smith America Invents Act bars the US Patent Office from issuing patents for tax strategies; software for preparing and filing tax returns remains patentable. The ban is prospective. Roughly 150 tax strategy patents that were issued before the law was enacted remain on the books.

The IRS has proposed adding transactions that use patented tax strategies to a list of transactions that must be reported to the agency as potential tax shelters.

Keith Martin