Just months after the Treasury Department's July 31 release of final regulations on reportable transactions (T.D. 9350), it has released new proposed regulations treating patented tax strategies as reportable transactions and requiring reporting by both taxpayers and material advisors (Download patented_transactions_reportable_transactions_regs. 092607.doc ). The regulations define patented transactions in two contexts, by focusing on a taxpayer's payment of a fee to use a patent in one case and on rights to payments from a taxpayer to a patent holder in the second case. Settlements or damanges in infringement suits are taken into account in the latter but not in the former case. Responding to concerns that tax planning methods that involve tax software should not be treated as problematic, the regulations define covered tax planning methods broadly (as a plan, strategy, technique, or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment, or excise taxes), but exclude mathematical calculations or mechanical assistance in the preparation of tax returns. The threshold dollar amounts for the material advisor determination are substantially lowered in the case of patented transactions--$250 instead of $50,000 for natural persons, and $500 instead of $250,000 otherwise. Material advisors have a list maintenance obligation under section 6112.
Interestingly, both patent holders and taxpayers who use patented strategies can be "participants" in patented tax strategies under the regulations. The definition of participation hinges on reflection of the patent ina return. The NPRM explains it this way.
A taxpayer has participated in a patented transaction if the taxpayer's tax return reflects a tax benefit from the transaction (including a deduction for fees paid in any amount to the patent holder or patent holder's agent). A taxpayer also has participated in a patented transaction if the taxpayer is the patent holder or patent holder's agent and the taxpayer's tax return reflects a tax benefit in relation to obtaining a patent for a tax planning method (including any deduction for amounts paid to the United States Patent and Trademark Office as required by title 35 of the United States Code and attorney's fees) or reflects income from a payment received from another person for the use of the tax planning method that is the subject of the patent.
Today, BNA reports a discussion at a National Association of Bond Lawyers seminar in which Treasury attorney John Cross III indicated that the proposed regulations that make patented tax strategies reportable transactions for purposes of sections 6011 and 6111 is actually not the preferred solution within Treasury. A ban, as proposed in the House version of Patent Reform legislation, would be preferable because of the problem that taxpayers may be misled into viewing patented strategies as carrying the imprimatur of correctness because of the Patent Office's approval of the patent.
"The proposal is very nuanced and if you are interested in it you should look at all the rules under it," Cross said. "But I think in the big picture Treasury would prefer a statutory ban on tax planning patents as is done under the existing House bill (H.R. 1908) rather than a regulatory approach, which by scope of authority is necessarily more limited. The base of concern is a fear by IRS and Treasury that when people run around saying ‘we have a patent,’ they will somehow imply that whatever the tax approach taken has been blessed in some way by the government."