Transaction structures and some tax planning ideas are patentable, but should they be?

A House subcommittee held a hearing on the subject in July. Committee staff said that if the practice becomes more widespread, it could force tax lawyers to research whether someone has already applied for a patent on every tax-planning idea before using it with a client.

Internal Revenue Service Commissioner Mark Everson testified at the hearing that none of 14 patents the agency has studied so far involves an abusive transaction. The subcommittee chairman, Dave Camp (R.-Michigan), is a critic of the practice of granting such patents The US Patent Office has issued 40 patents on tax products and has another 60 applications pending. Many of the patents are for computer software that carries out tax calculations rather than for tax-planning ideas. Some also involve tax planning as part of a larger business strategy. For example, US patent number 6,772,128 involves a method for using an insurance policy combined with a trust to cover the cost of decommissioning nuclear power plants. The patent claims the method produces tax efficiencies, but the main focus is on the structure for the insurance.

Patents can be obtained for “business methods” that are both novel and not obvious. A report that the Joint Tax Committee staff prepared for the hearing suggested there is concern that tax patents allow the holders essentially to claim a property right in the US tax code and to charge economic rents from others for merely trying to work within the US tax laws. The staff report also raises questions about whether tax planning is the type of the innovation that the patent system was intended to encourage. It is not clear whether any legislation will follow from Congress.

Meanwhile, a small advisory firm in Florida has sued the chairman of the Aetna insurance company for establishing “grantor retained annuity trusts” funded by nonqualified stock options. The firm says it holds a patent on the idea. The case is Wealth Transfer Group LLC v. Rowe.

Keith Martin