Joining the New York State Bar Association Tax Section, the American Institute of Certified Public Accountants (February 28, 2007), and the State Bar of Texas (asking for more disclosure of tax patents, in its comments on proposed reportable transaction regulation modifications), the Virginia Society of Certified Public Accountants and the Colorado Bar Association have now expressed their views on the granting of patents for tax planning advice. For background information, see these prior postings on the granting of tax patents here (regarding S. 681 proposed by Levin, Coleman, and Obama) and here (regarding general issues about tax patents).
The Virginia CPAs note that legal process patents simply don't make sense. The laws are part of the public domain. "We do not believe that patents on tax advice are any more supportable than a patent on the process of defending against a criminal charge." Virginia Society of Certified Public Accountants.
The Colorado Bar suggests that patents "for business processes and financial products other than tax advice may have similar issues" but expresses deep concern about the impact of tax planning patents on the US tax system. The Bar letter supports exempting tax advice from material that may be covered by a patent or eliminating remedies available to holders of tax patents. The Bar letter, echoing the NYSBA tax section comment, notes that "[t]axpayers should not be faced with a decision of whether to pay taxes or to pay royalties." The letter also comments on the dampening effect that tax patents will have on free interchange of ideas about the tax system: "[p]ractitioners may become more interested in obtaining patent protection for their tax advice and less interested in sharing their ideas so as to improve the tax system." Finally, the Colorado Bar notes that tax patents will interfere with the professional responsibility requirement that lawyers maintain professional autonomy and not limit the freedom of their clients to choose their own lawyer.
Tax patents create new arenas for conflict of interest problems. As the Colorado Bar notes, a tax adviser who must defend a claim of patent infringement may find it necessary to reveal confidential client information. Although ethically allowed to do so under the Colorado rules, this will be one further area of pressure on client confidences that may change the way clients view the role of tax advisers. Conflicts of interest will also exist when tax advisers consider whether work they are currently doing is translatable into a patent from which they can profit--at the expense of both the tax authorities and their future clients.
I've written about the prevalence of the "tax minimization norm" among tax practitioners, and the damaging effect the norm has on respect for the integrity of the tax system and structural coherence of the tax rules. Tax patents potentially will magnify that problem, since lawyers and practitioners will have a further monetary incentive to invent loophole-creating interpretations that can be patented for personal profit.
Tax patents make no sense. Patents aren't needed to encourage innovations in tax planning in a context in which Congress, Treasury and the IRS are always playing catch-up to the latest tax shelter scheme invented by creative bankers, lawyers and accountants hoping to cash in on the lucrative tax-avoidance game. At the least, the IRS and Treasury should require disclosure of patent use (or of a transaction that is substantially similar to a patented transaction) under the reportable transaction regulations. But a better solution would be a simple Congressional ban on the patenting of tax planning strategies.
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