As tax practitioners, academics and government lawyers consider the matter more carefully, it is becoming clear that some response is necessary to the Patent and Trademark Office's (PTO's) new policy of granting tax strategy patents following the State Street Bank case. See Patents on Tax-related ideas Stir Worry: Groups Fret Plans Could Be Viewed As Backed by IRS, Wall St. Journal, Mar. 14, 2007, at D3.
Legislation was introduced by Senators Levin, Obama and Coleman to prohibit tax strategy patents. See 34 Daily Tax Report G-2 (Feb. 21, 2007) and Title III, Section 303 of S.681 on thomas.gov. The bill would prevent any patented strategy that was "designed to minimize, avoid, defer or otherwise affect the liability for" taxes. Commentators have noted that it should include a carveout for some kinds of tax software.
Treasury has announced that it is seriously considering requiring taxpayers to disclose their use of patented tax strategies under the reportable transaction regime. See 47 BNA Daily Tax Report G-12 (Mar. 12, 2007). The preamble to proposed modifications published in November asked for comments on the idea, but the proposed rules did not include any items relating to tax patents.
The American Institute of Certified Public Accountants has stated that it opposes any requirement that taxpayers disclose use of patented tax strategies, suggesting instead that the patent holder be obligated to inform the IRS when it receives a patent. See AICPA Comments on Proposed Regulations on Reportable Transactions under Sections 6011, 6111, 6112, in 44 BNA Tax Core (Mar. 7, 2007). In contrast, the ABA Task Force on Tax Strategy Patents (of which I am a member) has urged that transactions using tax patents be reported. See ABA Task Force comments; 35 Daily Tax Report G-5 (Feb. 22, 2007) (reporting on the ABA Tax Section comments). (Readers should know that the Intellectual Property Section of the ABA is the only section that is authorized to recommend changes to Congress in respect of the patent laws.)
The AICPA has also, to its credit, urged Congress either to eliminate tax planning patents or eliminate liability for tax planning patent infringement for both taxpayers and tax advisers. See AICPA Urges Congress to Address Tax Strategy Patents (Feb. 27, 2007).
If Congress does not act to prevent the patenting of tax strategies, it is essential that the IRS be informed of tax strategy patents at the time they are submitted to the PTO. Given the time lag between submission and grant, the patent process would otherwise provide a mechanism for achieving confidentiality without clearly satisfying the confidentiality trigger for disclosure under the current reportable transaction regulations. It is furthermore necessary that the IRS be informed that a taxpayer has used a patented tax strategy. Adequate disclosure would seem to require mention of use of a patented strategy, else a taxpayer who used a patented strategy and without acknowledging such use would be in the position of providing mere clues rather than full disclosure about the transaction. Cf Guardian Industries.
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