Congress passes a prohibition on "tax patents"

[Famspear]

On Thursday, September 8, the U.S. Congress passed a bill which, if it is signed into law by the President, apparently would effectively prohibit tax patents (prospectively). The United States Senate passed the Leahy-Smith America Invents Act, which had been passed by the House of Representatives back in June. The Act is described by the president of the American Institute of Certified Public Accountants as "a comprehensive patent reform bill that includes language to stop the U.S. Patent and Trademark Office from issuing patents for tax strategy methods." See "Statement from AICPA President and CEO Barry Melancon Praising Final Congressional Action on Bill to Stop Tax Strategy Patents," Sept. 8, 2011, American Institute of Certified Public Accountants, at:

http://www.aicpa.org/Press/PressRelease ... tents.aspx

See also: Bill Summary and Status, Library of Congress, ''Leahy-Smith America Invents Act'', H.R. 1249; passed U.S. House of Representatives on June 23, 2011; passed U.S. Senate on Sept. 8, 2011, at:

http://thomas.loc.gov/cgi-bin/bdquery/z ... 01249:@@@X

Subsection (a) of section 14 of the Act provides (in part):

For purposes of evaluating an invention under section 102 or 103 of title 35, United States Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

Subsection (b) of section 14 provides (in part):

For purposes of this section, the term "tax liability" refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.

Subsection (c) of section 14 provides (in part):

This section does not apply to that part of an invention that [ . . .] is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing.....

Subsection (e) of section 14 of the Act provides that the tax patent prohibition takes effect on the date of the enactment (generally, the date the Act is signed into law by the President) and that it will apply "to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date."

The subject of tax patents has been controversial for some time now. I don't know what the President's position is on the bill, but I assume he will probably sign it into law.

[Arthur Rubin]

On Thursday, September 8, the U.S. Congress passed a bill which, if it is signed into law by the President, apparently would effectively prohibit tax patents (prospectively).

That's a good idea, but the change from a FTI (first to invent) system to a modified FITF (first inventor to file) system, called in at least one source FTFG (first to file with grace period) system would almost certainly reduce patents, except by companies with in-house patent departments (i.e., large companies), and hence reduce innovation by small companies.

[JamesVincent]

Just one question. Why in the world was it possible to start with to patent a system to break the law? Does that mean I can patent a proven system to by-pass security features in an automobile and allow you to steal it?

[jg]

A "strategy for reducing, avoiding, or deferring tax liability" refers to legal means of avoidance not to illegal evasion of taxes.

[notorial dissent]

I still do not see how something like this could be patented, copyrighted, possibly, but not patented. This comes under the heading of patenting a way of counterfeiting money as close as I can see.

[Famspear]

I still do not see how something like this could be patented, copyrighted, possibly, but not patented. This comes under the heading of patenting a way of counterfeiting money as close as I can see.

I agree with "jg"; there is not much reason to try to obtain a patent right on a strategy or procedure that violates the law.

The big problem with "tax patents," conceptually, is not that they describe ways of doing something illegal, but rather than they (at least theoretically) describe a way of legally avoiding or deferring the imposition of a tax liability. In my opinion, there is something almost absurd about having the patent laws of the United States allow someone to have a "patent right" on what is, essentially, excellent tax planning. In my opinion, there is little justification, from a public policy standpoint, for granting someone a "patent" for coming up with a description or plan for a way to legally reduce taxes.

EDIT: My opinion would apply to "patents" on any kind of law, not just tax law. I don't think anyone should be granted a "patent" on what is essentially a plan or strategy based on study of the law.

[notorial dissent]

My point exactly, I just don't see how this can even be possible, it is like someone patenting a way to manually fold a piece of paper.

[jg]

Background to tax strategy patents is described in the 2007 Congressional Research Service Report on Tax Strategy Patents found at http://www.aicpa.org/InterestAreas/Tax/ ... L34221.doc

Patents on Methods of Doing Business
The availability of patents on tax strategies has been linked to the grant of patents on the broader category of business methods.41 Prior to 1998, several judicial opinions could arguably be read to hold that patents could not be granted on methods of doing business. For example, in the 1908 opinion in Hotel Security Checking Co. v. Lorraine Co.,42 the court considered "a method of and means for cash-registering and account-checking" designed to prevent fraud by waiters and cashiers.43 At one point the court stated that a "system of transacting business disconnected from the means for carrying out the system is not, within the most liberal interpretation of the term, an art" that could be patented.44 However, the court also explained that the invention claimed in the patent "would occur to anyone conversant with the business" and that it was "unable to discover any patentable improvements. . . ."45 As a result, it was unclear whether the court meant to establish a categorical rule that business methods were not patentable subject matter, or merely state that the particular invention before the court would have been obvious. In any event, the USPTO issued some patents that were arguably directed towards business methods during its long history.46
This long period of ambiguity over the patentability of business methods ended with the 1998 opinion of the U.S. Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group.47 The patent at issue in that case concerned a data-processing system for implementing an investment structure known as a "Hub and Spoke" system.48 This system allowed individual mutual funds ("Spokes") to pool their assets in an investment portfolio ("Hub") organized as a partnership. According to the patent, this investment regime provided the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership.49 The patented system purported to allow administrators to monitor financial information and complete the accounting necessary to maintain this particular investment structure. In addition, it tracked "all the relevant data determined on a daily basis for the Hub and each Spoke, so that aggregate year end income, expenses, and capital gain or loss can be determined for accounting and tax purposes for the Hub and, as a result, for each publicly traded Spoke."50
Litigation arose between Signature, the patent owner, and State Street Bank over the latter firm's alleged use of the patented invention. Among the defenses offered by State Street Bank was that the asserted patent claimed subject matter that was not within one of the four categories of statutory subject matter,51 and hence was invalid. The district court sided with State Street Bank.52 The trial judge explained:

At bottom, the invention is an accounting system for a certain type of financial investment vehicle claimed as [a] means for performing a series of mathematical functions. Quite simply, it involves no further physical transformation or reduction than inputting numbers, calculating numbers, outputting numbers, and storing numbers. The same functions could be performed, albeit less efficiently, by an accountant armed with pencil, paper, calculator, and a filing system.53

The trial court further relied upon "the long-established principle that business 'plans' and 'systems' are not patentable."54 The court judged that "patenting an accounting system necessary to carry on a certain type of business is tantamount to a patent on the business itself."55 Because the court found that "abstract ideas are not patentable, either as methods of doing business or as mathematical algorithms,"56 the patent was held to be invalid.
Following an appeal, the Federal Circuit reversed. The court of appeals concluded that the patent claimed not merely an abstract idea, but rather a programmed machine that produced a "useful, concrete, and tangible result."57 Because the invention achieved a useful result, it constituted patentable subject matter even though its result was expressed numerically.58 The court further explained that:

Today, we hold that the transformation of data, representing discrete dollar amounts, by a machine through a series of mathematical calculations into a final share price, constitutes a practical application of a mathematical algorithm, formula, or calculation, because it produces "a useful, concrete and tangible result" -- a final share price momentarily fixed for recording and reporting purposes and even accepted and relied upon by regulatory authorities and in subsequent trades.59

The court of appeals then turned to the district court's business methods rejection, opting to "take [the] opportunity to lay this ill-conceived exception to rest."60 The court explained restrictions upon patents for methods of doing business had not been the law since at least the enactment of the 1952 Patent Act. The Federal Circuit then concluded that methods of doing business should be subject to the same patentability analysis as any other sort of process.61
The holdings of State Street Bank were reached nearly a decade ago. Absent reconsideration of the issue by Congress, the Supreme Court, or the Federal Circuit itself, business methods remain patentable subject matter.62 Should a particular method of doing business meet the other statutory requirements, including utility, novelty, and nonobviousness, then a patent may issue. Numerous patents that arguably claim business methods have issued from the USPTO,63 and several have been the subject of litigation in the federal courts.64
Congressional reaction to the patenting of business methods has to this point been limited.

...later in the same document...

Patents on Tax Strategies
Although the State Street Bank opinion rejected a per se rule denying patents on business methods, the invention claimed by the Signature patent was arguably motivated by a desire to reduce tax liability.70 In some sense, then, State Street Bank may be seen as the first tax patent case. Some commentators believe that the "increase in the number of tax strategy patents requested and approved by the [USPTO] came on the heels" of State Street Bank.71
Notably, at least one observer rejects this view. Attorney Andrew Schwartz has opined that although business methods may be patented following State Street Bank, the conclusion that tax and other legal methods are patentable subject matter does not result. Mr. Schwartz has asserted that while "most if not all novel business methods either save time or harness a law of nature for human benefit,"72 legal methods instead manipulate "positive law" in order to achieve their advantages.73 According to Mr. Schwartz, legal methods, including tax strategies, therefore do not qualify as inventions within the meaning of the Patent Act. It remains to be seen whether this view will gain more widespread acceptance.

Although business method patents have been held to be patentable at least since the issuance of the State Street Bank opinion in 1998, the more recent phenomenon of tax strategy patents has resulted in a spirited discussion. Some commentators, and in particular tax professionals, have found tax strategy patents to be "ridiculous,"78 "bizarre"79 and "deeply unsettling."80 On the other hand, other observers, including many patent professionals, believe both that concerns over tax patents are overstated, and that the patenting of tax strategies may lead to numerous positive consequences. This report next reviews some of the competing concerns about tax strategy patents.

To me, Mr. Andrew Schwartz had it right and I have always thought that tax strategy patents were ridiculous, bizarre and deeply unsettling.
Every taxpayer has a right to arrange his affairs in order to pay the least legal tax and that right should not be limited, or impaired, because of a patent or because others have used the same methods.

For more on the problems with tax strategy patents see "TAX STRATEGY PATENTS CONSIDERED HARMFUL" from the 2008 HOUSTON BUSINESS AND TAX JOURNAL (ALL RIGHTS RESERVED) at http://www.hbtlj.org/v08p2/v08p2groeschelar.pdf

[fortinbras]

I am unaware of any patents issued for tax reduction strategies. The whole idea would seem like the patenting of a legal argument, which would, of course, cause enormous injustices because some people could not pay the royalties to make use of the patented strategy, and other lawyers would be disabled from working up any similar strategy even if done entirely by their own efforts and research.

But the law spares the Patent Office from even having to spin its wheels on applications for such, and also debunks the claims of those mountebanks who say they have a monopoly on their tax strategy.

[jg]

There are currently 161 listed for issued US patents in class 705/36T
in a database at http://patft.uspto.gov/netacgi/nph-Pars ... 36T&d=PTXT

Details of each patent issued are linked from the database search.
For example:

United States Patent 7,337,141
Sullivan , et al. February 26, 2008

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Hedging employee stock options


Abstract
An efficient process, from both a regulatory and tax perspective, for individuals to hedge employee stock options. No margin is required for a listed call option written on an equity security when the account holds a "long" position in a vested employee stock option which can be immediately exercised without restriction (not including the payment of money) to purchase an equal or greater quantity of the security underlying the listed option provided that the vested employee stock option does not expire before the short listed call option, and provided that the amount (if any) by which the exercise price of the vested employee stock option exceeds the exercise price of the short listed call option is held in or deposited to the account.


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Inventors: Sullivan; Colleen (Chicago, IL), Klein; Joseph (Chicago, IL), Kelly; Joseph (Seattle, WA)
Assignee: iOptions (Chicago, IL)

Appl. No.: 10/126,756
Filed: April 19, 2002

[fortinbras]

I stand corrected. And I think it's an injustice to have a monopoly on what are, essentially, legal arguments and mathematical formulae.

[ProfHenryHiggins]

Considering that in recent years, people have patented the wheel, swinging on a swing, pushing the button on a vending machine, and other completely inane things that have enormous amounts of prior existence before the patent, I would think that a complete overhaul of what a patent can and can not be would be called for.

[Famspear]

The President signed the bill into law on Friday, Sept. 16, 2011.