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Questioning the wisdom of patent protection for tax planning.


The topic of federal patent protection for tax planning strategies has received considerable attention of late, (1) much of it from a tax bar whose overall incredulity concerning the patentability of tax advice has been transformed into anxiety and disgust by the prospect of infringement actions. (2) In their article Patents, Tax Shelters, and the Firm, (3) Dan Burk and Brett McDonnell approach the subject from a broader perspective by employing theory of the firm principles to evaluate the effects of stronger intellectual property protection in the tax planning arena. While conceding that the possible effects are complex and ambiguous, the authors predict that the introduction of business method patents in the tax planning industry will lead to enhanced mobility in the labor market for tax professionals, to an increase in the creation of tax planning strategies, and to a degree of disintegration within the tax planning community as firms become more specialized. (4)

For the most part, I am less sanguine about the dawn of patents in the tax planning arena. This commentary on Burk and McDonnell's article therefore is offered in the nature of a counterpoint. I begin by addressing an issue to which Burk and McDonnell do not devote a great deal of attention, as it is not central to their analysis: whether innovation in tax planning is socially desirable. (5) I draw on prior scholarship in the tax-shelter context to demonstrate that tax planning creates deadweight loss to society through distortions in taxpayer behavior and transaction costs that do not contribute to the public fisc. I then argue that such deadweight loss likely will be significantly increased if temporal monopolies on tax planning strategies are conferred through the patent system. Next, I offer competing speculation concerning the effects that patentability will have on innovation in tax planning, positing that the ability to patent a tax strategy will not lead to a marked increase in the quality of tax advice and may actually cause it to decline. In keeping with the theme of the symposium, I contend that the ability to patent a tax strategy would not have a meaningful impact on the market in abusive tax shelters, as the success of the shelter industry depends on completing as many transactions as possible before the shelter draws the attention of the Internal Revenue Service (Service). Purveyors of these transactions thus will avoid the public disclosure associated with patent protection, and the field of patented tax strategies likely will be relegated to more traditional, conservative planning. I close by highlighting the potential decrease in client mobility that will come at the expense of the increased mobility of tax advisors that Burk and McDonnell predict.


With constitutional authorization "to promote the Progress of Science and the useful Arts," (6) Congress has turned to patent law as a means of encouraging innovation. A patent grants the holder the right to exclude others from making, using, or selling the patented item for a period of twenty years from the date the application was filed. (7) This temporal monopoly is designed to ensure that the inventor will receive a return on her investment in the patented technology by allowing the patent holder to sell the item at a price greater than the marginal cost of production otherwise dictated by a competitive market. Thus, Congress has responded to the potential to free ride on the inventor's technology by intentionally creating a market failure in the form of a temporal monopoly on the sale or use of the invention. In order to justify the resulting economic inefficiencies, one would expect the subsidized innovation to be socially beneficial. That is not the case, however, with respect to tax minimization strategies.

In his scholarship in the corporate tax shelter arena, David Weisbach has addressed the social utility of tax planning and has offered a dim assessment: "[T]ax planning, all tax planning, not just planning associated with traditional notions of shelters, produces nothing of value." (8) And that was the charitable part. Weisbach continued in his critique to state that tax planning "is almost positively bad for society--it is worse than worthless." (9) The principal justifications for this assessment are two-fold. First, tax planning produces deadweight loss to society in the form of transaction costs and altered taxpayer behavior that are not offset by additional government revenue. Weisbach illustrates this point by borrowing a lighthearted but effective example originally offered by Daniel Shaviro--the hypothetical back-flip shelter. (10) Suppose that every taxpayer who successfully performs a back-flip before an examining officer receives a 10% reduction on her tax bill. Individuals respond to the incentive by brushing up on their gymnastic skills so that they can perform the back-flip. While each individual may be pleased with the tax savings the shelter produces, society collectively should be disgusted. If all individuals responded to the shelter, the government would be forced to raise nominal tax rates to collect the same revenue. In the end, each individual would have to perform a back-flip for the privilege of paying the same effective tax rate before the shelter was introduced. The deadweight loss to society from tax planning can be found in the distortions in taxpayer behavior, the actual expenses incurred by the taxpayer to qualify for the shelter (e.g., attorney's fees, transaction costs), and the costs to the government of verifying and perhaps litigating the taxpayer's entitlement to the tax savings. (11)

The second reason tax planning is harmful to society is that it effectively imposes an externality on those who do not engage in such behavior. (12) Unlike the simple back-flip hypothetical above, tax planning strategies do not have universal participation. Thus, individuals who undertake the planning will receive a real benefit from the transaction equal to the excess of the tax savings over the expenses of the planning plus the disutility that results from executing the strategy. The welfare gain to the individual undertaking the planning is not matched at the societal level, however, as the burden of the tax saved by the planning is shifted to those who do not engage in the technique. (13) This unilateral redistribution of the tax burden (14) has significance beyond its distributive effects, as it can pose a threat to voluntary compliance with the tax system. Individuals who believe that only a select group possesses access to tax-minimization opportunities may be more inclined to exercise a degree of "self-help" through blatant noncompliance, selecting means of noncompliance that pose the least risk of detection (e.g., failure to report self-employment income). (15)

Given that tax planning generates deadweight loss to society while permitting planners to deflect a portion of their tax burden onto the dutiful portion of society that does not undertake in tax minimization efforts, one could rather easily conclude that tax-reducing strategies are not among the category of "things which are worth to the public the embarrassment of an exclusive patent." (16) Yet in making the case that innovation in tax-reducing strategies is not worthy of subsidization in informal conversations with colleagues, I have been asked some variation of the following: "What about good tax planning?" The concern about "good" tax planning ultimately relates to planning that produces a social benefit by mitigating the deadweight loss otherwise caused by the existing rules. (17) For example, assume that two corporations desire to merge in what would constitute an economically efficient transaction, but the shareholders of each will not approve the plan unless the transaction can be accomplished on a nonrecognition basis. Now suppose an attorney devises a novel application of the reorganization rules, blessed by the Service in a private letter ruling, which enables the transaction to proceed. In this case, the attorney's advice appears laudable, as it has avoided the distortion otherwise caused by the realization rule.

Does this mean Congress should incentivize this type of inefficiency-mitigating tax planning through the prospect of patent protection? That would seem to be a round-about way of addressing particular flaws in the existing rules and essentially amounts to Congress offering patent protection in hopes that the tax planning community will save society from its poorly conceived laws. (18) Furthermore, the identification of "good" tax planning, the creation of which is worthy of incentivization, is a precarious task as it depends on subjective assessments of the baseline law that is being avoided. (19) Just as one may view corporate reorganization planning as socially desirable because it avoids the lock-in effect caused by the realization rule or because one opposes the taxation of the return to capital altogether, one could just as easily favor a comprehensive income-tax base and view any extension of the realization rule as offensive on policy grounds. Moreover, the scope of what may be considered "good" tax planning is not neatly confined to planning that avoids obvious potholes in the tax system. The corporate income tax is widely regarded as inefficient, and therefore any planning that achieves integration could be viewed favorably. (20) At some level, virtually any type of tax planning could be defended by identifying perceived flaws in the underlying system, and the exception would swallow the rule. Even if bright lines existed between desirable and undesirable tax planning, the Patent Office would not attempt to distinguish between the two even if it were equipped to do so. (21) In the end, "tax planning deserves little or no protection" (22) in structuring our tax laws. It certainly does not warrant subsidization through the patent process.


Having recited the case against the social desirability of tax planning as a general matter, in this part, I offer speculation on the effects resulting from the potential to patent a given tax-reducing strategy. Whereas Burk and McDonnell predict that stronger intellectual property protection in the tax planning field will lead to greater mobility in the labor market for tax advisors, increased innovation in tax planning strategies, and a degree of disintegration in the tax planning market, I paint a decidedly less benign picture. First, patent protection for tax strategies will exacerbate the inefficiencies attributable to tax planning while potentially creating unintended distributive effects. Moreover, the claim that patent protection in the tax planning field will lead to increased innovation in the industry is suspect. The existence of patents in this field may in fact trigger a decline in the overall quality of tax advice as incentives for secrecy dampen the free exchange of ideas among tax professionals.

A. Increased Inefficiency Resulting from Patented Tax Planning

Given that the holder of a patent on a given tax planning technique will enjoy an effective monopoly on the sale or use of the technique, predicting that patent protection will lead to increased inefficiency in the provision of tax advice is not a bold statement. For taxpayers who employ the technique, one would expect an increase in the associated transaction costs as the patent holder obtains control over the pricing mechanism. (23) The patent holder's control over price, however, is not the only source of increased inefficiency. The costs to all those who seek tax advice will increase, as tax lawyers will be obligated to undertake additional steps to insure that their advice is not the subject of an existing patent (and, if so, potentially modify the advice to avoid infringement). (24) Furthermore, an attorney who knows a client may be best served by employing a patented technique may nonetheless recommend a second-best alternative, either due to a desire to shield the client from excessive fees or out of fear that the client will eliminate the middleman by taking her business to the patent holder. The provision of second-best legal advice will increase the deadweight loss attributable to distorted taxpayer behavior. Think of a taxpayer who has to perform not one but two back-flips to achieve the desired result. While this conduct would be ethically suspect, it is unfortunately not unexpected given that an attorney's most valued asset is her client base. (25)

To illustrate the inefficiencies described above that could flow from patent protection for tax advice, I will use the simple example of a credit shelter trust for estate planning purposes. Assume Husband and Wife each has a taxable estate in the $2 million range. In the absence of taxes, Husband would be inclined to leave his property to Wife outright with the expectation that Wife would leave her entire estate to the couple's children at her death. Under the existing estate tax regime, however, this straightforward approach would waste Husband's credit against the estate tax. Wife would be left with a taxable estate of $4 million, which would generate a $900,000 estate tax liability (based on 2007 rates) in her estate. Suppose that Attorney 1 advises Husband that this future estate tax liability can be avoided by devising the property to a trust that is designed to provide Wife with beneficial ownership of the property that comes as close to legal ownership as possible. In that regard, the trust names Wife as trustee, calls for the distribution of net income to her annually, provides her with discretion as trustee to distribute principal to herself for her health, education, support, or maintenance, and provides Wife with a limited power of appointment to appoint the trust property to the couple's children at death. By incorporating this type of estate-planning provisions into their wills, Husband and Wife together would save $900,000 in estate tax by fully utilizing each spouse's unified credit. Note the baseline inefficiencies: Husband's will is a more complicated document, and he will pay an increased fee for the tax planning it incorporates. Wife, on the other hand, will be forced to hold the property in trust as opposed to owning it outright. In her role as trustee, Wife will assume fiduciary obligations to trust beneficiaries that will constrain her behavior and potentially expose her to liability for breach. Wife may feel compelled to seek future legal advice concerning trust administration, and the existence of the trust will necessitate the filing of additional income tax returns.

Staying with this same basic example, now assume that Attorney 1 successfully prosecutes a patent on this technique which he captions (and trademarks for good measure) the "Ultimate Credit Shelter Trust." (26) Given that Attorney 1 possesses the right to preclude others from using the technique, one would expect Attorney 1 to increase the fee for her advice significantly. While Husband would not likely pay the full $900,000 benefit of the advice as that would ignore any disutility from undertaking the plan and any uncertainty that surrounds the projected result, Attorney 1 undoubtedly could command a fee far in excess of her normal hourly rate for doing the work that a competitive market would dictate. (27) While the increased transaction costs that result from Attorney 1's control over the pricing mechanism would force Husband to internalize a greater portion of the social cost of his tax planning, the external costs of the planning would not be eliminated or even reduced. The public fisc would still be down the full $900,000 of tax savings. Rather, Attorney 1 would have simply captured a portion of Husband's consumer surplus. From a broader perspective, if an individual's baseline tax liability were viewed as that remaining after undertaking legitimate minimization efforts, then the increased transaction costs resulting from the temporal monopoly on a patented planning technique would constitute a potentially drastic increase in the cost of compliance. (28)

The increased inefficiency resulting from the patent on the Ultimate Credit Shelter Trust is not limited to the monopolistic price that Attorney 1 can extract from her clients and others who license the technique. Assume Attorney 2 has clients in an identical situation. Attorney 2 is inclined to recommend a similar type of credit shelter trust arrangement, albeit one that employs an institutional trustee and does not include the power of appointment. In addition to her normal research and drafting tasks, Attorney 2 now must undertake the additional step of detecting the patent on the Ultimate Credit Shelter Trust and ensuring that her proposed technique does not infringe upon it. (29) Under the best case scenario where Attorney 2 concludes that her proposed trust would not infringe the patent, Attorney 2 and her clients still face the additional risk that Attorney 1 will disagree and pursue an infringement action against one or both of them. If Attorney 2 concludes that the patent is implicated, then Attorney 2 can either (a) advise her clients to attempt to license the technique from the patent holder or (b) recommend a less desirable manner of fully utilizing each spouse's unified credit (for example, through an outright devise to the couple's children in the first estate). (30) The choice thus is between increased transaction costs or greater distortions in taxpayer behavior--each of which increases the inefficiency associated with the planning. Under a less-than-charitable scenario, Attorney 2 may simply steer her clients toward the second-best alternative out of fear that her clients would take their file to Attorney 1 if they preferred the patented technique. (31) Although unseemly, this latter prospect cannot be easily dismissed given the competition among attorneys for clients and the inability of attorneys to bind their clients through contractual arrangements. The increased provision of second-best legal advice is perhaps the most disconcerting drawback of patent protection for tax planning strategies. Last, even if Attorney 2's clients engage in no planning at all because they cannot afford to license the technique and do not wish to employ the alternative, (32) this manner of reducing the overall level of tax planning is not necessarily to be cheered. The clients still would face certain demoralization costs at knowing that others have access to unique means of lowering their tax liability. (33) Although popular discontent over the absence of a level playing field in the tax system would exist in any event, the prevalence and marketing of patents on tax minimization strategies would serve to highlight the disparities.

Having proposed a number of ways in which patents on tax planning advice could exacerbate the inefficiencies of the tax system, the right to exclude conferred by a patent presents the potential to decrease such inefficiencies by reducing the level of tax planning altogether. For instance, assume that a group of tax professionals dedicated to the defense of a broad tax base formed a non-profit organization for the sole purpose of devising and patenting tax-reducing strategies. In their zeal to reduce the social cost of tax planning, they refuse to license the technique. Rather than exploit the patent, their efforts are dedicated to vigorously prosecuting infringement and remitting the net proceeds to the government. (34) Similarly, the government could hire tax professionals to develop and prosecute tax planning patents on its behalf, which the government would then enforce. Note that these approaches would not carry the demoralization costs to those precluded from employing the technique. To the contrary, enforcement of tax strategy patents in this manner would help instill confidence that others cannot purchase access to preferential tax treatment. While the exploitation of a patent's right to exclude to purposely dampen the overall quantity of tax planning in this manner is interesting to hypothesize, it is by no means a likely byproduct of patent protection in the tax planning field.

B. Distributive Effects

Although the scenario described above in which patents on tax-reducing strategies are employed for the sole purpose of ensuring that no taxpayer engaged in the patented technique is not likely, one can imagine that the owner of a patent on a tax planning strategy that it employs may refuse to license the strategy to others in order to gain a competitive advantage. Take the familiar cross-border dividend-stripping transaction at issue in Compaq v. Commissioner, (35) and for a moment assume that Congress had not mandated that the taxpayer incur a meaningful amount of market risk in the transaction through the holding-period requirements of section 901(k). Now also assume that Compaq not only successfully employed the technique but also secured a patent on the transaction. Under this scenario, Compaq would possess a competitive advantage over its multinational competitors in its ability to effectively exempt its foreign passive income from taxation. (36) While Compaq may be willing to license the technique to non-competitors, the company may find it valuable (or, at a minimum, delightful) to refuse to license the technique to rival firms. (37) In effect, the right to exclude embodied in the patent would provide Compaq with the means of preventing the externality it imposes through its tax planning from being diluted by the participation of others. (38)

In some respects there is no meaningful distinction between Compaq's hypothetical tax planning patent and any other business method patent that enables a company to reduce expenses or operate more efficiently. The modern trend, at least at the corporate level, is to approach taxes less from a compliance perspective and instead to treat them as any other business expense that responds to active management. (39) Yet there remains something troubling about one party being able to engage in tax planning that is legally foreclosed to others. (40) For better or worse, the public perceives a right to engage in tax minimization efforts, fostered in no small part by judicial pronouncements to that effect: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." (41) This sentiment cannot be reconciled with exclusive rights to engage in tax planning, which raises the specter of private ownership of law. Patents on means of compliance would be especially problematic, as the license fee would be perceived as a surcharge on one's ability to satisfy a legal obligation, while the refusal to license could preclude compliance altogether. (42) This sentiment explains some of the frustration over the patent at issue in the State Street Bank (43) case. Although that patent was prosecuted as a claim to a data-processing machine system, the patent appeared to cover the exclusive means by which a mutual fund organized as a partnership could simultaneously satisfy the substantial economic effect regulations under section 704(b) and the varying interests rule of section 706(d). (44) Yet even patents on techniques more in the nature of affirmative tax minimization will have social costs. While tax planning by those having unique access to advisors may undermine faith in the fairness of the tax system, the potential dissemination of tax strategies to others in a position to employ them makes the existence of tax planning more palatable. In short, the tax planning game is easier to accept if you believe you can play too. Patents on tax strategies, however, would introduce a winner-take-all aspect to the tax planning arena, and the corresponding randomization of the tax burden would undermine confidence in the system as a whole.

C. Effect on Quality of Tax Planning

The patent system is designed to encourage an economically efficient level of innovation, with the prospect of monopolistic profits serving to induce innovation that would not otherwise occur under market conditions. (45) A key premise of patent protection--less than optimal innovation produced by the market--appears to be lacking in the context of tax planning. In her testimony before the House of Representatives, Ellen Aprill aptly noted that "it would be hard to identify a subject less in need of further innovation than tax planning." (46) This statement is consistent with the observation of Martin Ginsburg that "[t]he tax bar is the repository of the greatest ingenuity in America, and given the chance, those people will do you in." (47) To be fair, the presence of what appears to be a mature tax planning industry alone does not disprove the potential for further innovation in the field. Perhaps there is another presently unimaginable stratosphere of tax planning the development of which would be stimulated by the prospect of obtaining a government-sanctioned monopoly. Nonetheless, reason supports the sense that the market in tax planning produces an ample level of innovation in the absence of patent protection. (48) The use of patents to stimulate innovation is most logical for industries that face high development costs. The development of tax planning techniques, however, is not a capital-intensive endeavor. (49) For the most part, the development costs can be measured in terms of the opportunity costs of the time the attorney (or other tax professional) spent in researching and conceptualizing the strategy. (50) If a technique were conceptualized while undertaking paid research for a client, the development costs would be negligible.

Low development costs aside, it appears that ample economic incentives exist to induce the development of tax strategies. Professional reputation plays a critical role in the tax planning community, as it is central to securing a client base and supporting a hefty fee schedule. (51) The importance of reputation helps explain why practitioners are willing if not eager to discuss their techniques at professional meetings and in tax periodicals. Although perhaps difficult to believe, there exists such a thing as celebrity status in the tax planning community. The prospect of becoming a leading practitioner, or the drive to maintain such status, will insure a steady stream of innovation in the field. Thus, even if one believed that innovation in tax planning were socially desirable, it is difficult to identify the payoff to the social cost of sanctioning temporal monopolies in this area. (52)

In addition to having little likely effect on innovation in tax planning, the ability to obtain patent protection for tax strategies may trigger a decline in the overall quality of tax advice. Whether attributable to the affirmative desire to secure a patent on a particular form of tax planning or the defensive concern that someone else would, practitioners may become less inclined to vet their ideas through the tax literature, at professional meetings, or through informal shop-talking. (53) The open forum that currently exists in the tax planning community, at least as it relates to new ideas, thus could be undermined by incentives favoring secrecy. (54) Diminished professional discourse will hinder refinement of proposed techniques, which likely would cause the quality of tax planning to decline. Furthermore, any flaws in techniques on which patents are secured will tend to become entrenched. Whereas tax strategies in the past have been incrementally refined through replication, the fear of patent infringement would pose a significant obstacle to downstream improvement of a patented technique. Unless the quality of tax planning dropped so precipitously that it induced large numbers of taxpayers to shun planning altogether, the decline in quality would generate additional inefficiency from tax planning as the inferior product will cause further distortions in taxpayer behavior or will carry a decreased chance of success (the latter of which effectively increases the cost associated with the planning).


Although describing the aggressiveness of various tax planning strategies is an imprecise task, the spectrum of available tax planning can be roughly divided into three general camps: (55) (1) benign structures that are plainly consistent with the Internal Revenue Code (Code) and regulations (e.g., a grantor-retained annuity trust under section 2702); (2) mildly aggressive strategies of uncertain but plausible validity (e.g., the Seagram-DuPont intentionally defective redemption (56)); and (3) transactions having little if any economic impact that rely on literal interpretations of the Code and regulations to claim a tax benefit not intended by Congress (e.g., the FLIP basis-shift transaction (57)). Given the theme of the symposium, it is worth considering how the prospect of patent protection in the tax planning field will affect the market in the latter category, typically earning the pejorative "abusive tax shelter" label. In one sense, however, this may be a wasted exercise. As Pamela Olson remarked in the opening of her keynote address at the symposium, "The tax shelter war is over. The government won." (58) Based on recent appellate cases that have shunned literal interpretation as the singular means of interpreting the tax laws, (59) it appears that the tax shelter industry indeed is on the ropes. Nonetheless, it was not long ago that the shelter industry appeared to have the upper hand and a few appellate decisions in the taxpayers' favor--or another decision from the U.S. Supreme Court lending credence to literalism (60)--could just as easily reverse the momentum. Thus, it remains useful to consider how the prospect of patenting a strategy will affect the tax shelter industry.

That being said, patent protection likely will have no meaningful impact on the market in tax shelters. The overall success of a tax shelter depends in large part on avoiding government detection for as long as possible. (61) Virtually all shelter transactions become worthless once they come to the government's attention, primarily through administrative action intended to ensure that future users will have to litigate their doubtful claim to the purported tax savings. (62) At first glance, the ability to patent a shelter strategy may further the cause of non-detection by preventing copycat transactions that would impose external costs through increased risks of detection. Copycat transactions still may occur, but at least they will be discouraged by the prospect of patent infringement. (63) Yet patent protection necessitates the very thing sought to be avoided--public disclosure. A patent application generally becomes public eighteen months after the application is filed. (64) If an applicant is willing to forgo foreign protection of the technique, then public disclosure can be deferred until the patent is granted. (65) Given that it can take several years for a patent to issue, it has been argued that tax advisors could avoid having a transaction characterized as a "reportable transaction" that necessitates disclosure by dropping any condition of confidentiality (66) in offering the strategy and relying on the patent system to prevent unauthorized duplication. (67) This concern is misplaced, however, as it misreads the primary reason shelter promoters seek confidentiality--that is, to prevent detection as opposed to preventing duplication for duplication's sake. It is highly doubtful that a shelter promoter seeking to avoid the Service's detection of the shelter would disclose the transaction to another arm of the federal government, notwithstanding any guarantees of confidentiality. On that note, the Service appears poised to eliminate any potential for transactions to remain confidential while being examined by the Patent Office, as the Service has requested comments on whether the definition of a "reportable transaction" should be expanded to include a transaction for which patent protection is sought. (68)

In the end, it is not likely that those in the tax shelter industry will seek the benefits of patent protection. Rather, the field of planning on which patents will be sought will be relegated to straightforward strategies for which a patent should be denied on obviousness grounds and less-obvious, more creative forms of non-abusive planning. No clear demarcation between these two categories exists, however. Disputes concerning the obviousness of the patented technique will give rise to infringement litigation, an endeavor that would impose significant transaction costs on tax planners and their clients. (69)


The ethical implications of patents being issued for tax planning strategies that ultimately turn on novel interpretations or applications of the tax laws is an intriguing topic that could warrant one or more full articles. (70) In this part, I highlight a concern that is thrust to the forefront by the patent holder's right to exclude: the impact that patentability will have on a client's choice of representation.

Burk and McDonnell predict that stronger intellectual property protections in the tax planning arena will lead to increased mobility in the tax advisor market as firms become less concerned about employees stealing trade secrets. Any increase in advisor mobility that the prevalence of patents may elicit, however, would come at the potential drastic decrease in client mobility. As a general matter, noncompetition agreements among attorneys are disfavored on public policy grounds and barred by ethical rules. (71) A primary justification for the virtual per se rule against enforcement of non-competition agreements among attorneys is the perceived harm to the client whose freedom to select counsel of her choice would be infringed. (72) A patent on a tax planning technique, however, represents the most drastic form of a transactional non-competition agreement. At the extreme, the patent holder could refuse to license the technique and instead insist on representing the client in undertaking the transaction. While the extreme may appear unlikely given the patent holder's desire to maximize revenue from the patent, licensing is not necessarily the exclusive means of exploiting the patent. Imagine a large firm that has patented a unique corporate reorganization transaction that is highly sought after by public companies. Given the fierce competition for high-revenue clients, the firm holding the patent may insist on undertaking the representation directly in order to create an opportunity to capture the client's other legal business. Thus, to the extent that preserving a client's choice of attorney is a public priority, it is worth considering that the patentability of tax advice carries the potential to drastically restrict it.


The purpose of this commentary has been to offer reasons why the advent of patents in the tax planning arena should not be welcomed with open arms. Tax planning as a general matter is not socially desirable, and therefore it is not worthy of subsidization through the patent system. Moreover, given the existence of a mature tax planning industry marked by intense innovation and a tradition of disclosure, the introduction of patents likely will have a negative net impact as transaction costs rise and taxpayers further distort their behavior by turning to second-best techniques. Conferring exclusive rights to tax strategies through the patent system thus will most likely serve to exacerbate the inefficiencies that tax planning engenders.

Apart from the policy implications of the trend to patent tax strategies, a challenging practical issue is determining what, if anything, can be done about it. Burk and McDonnell contend that patents on tax planning strategies are a result of the inexorable expansion of patentable subject matter triggered by the decision to grant patent protection for software. (73) Furthermore, they note that amending patent law to categorically deny patents for tax investment strategies would create line-drawing problems in distinguishing tax strategies from financial management processes drawn to business methods, and that any lines that may be drawn could be avoided by artful drafting of the patent claim. (74) They have a valid point, in that virtually all financial-investment strategies will include some aspect that is designed to make them tax efficient. Nonetheless, there would appear to be a category of tax planning strategies whose core utility is attributable to a particular interpretation or application of the tax laws that could be distinguished from financial investment strategies. The patent that issued for the transfer of nonqualified stock options to a grantor retained annuity trust (75)--the point of which is to employ the rules contained in section 2702 and the regulations thereunder to transfer future appreciation in an asset (in excess of the applicable AFR rate) free of federal estate and gift tax--is one example of what could be termed a "tax-law dependent" strategy. (76)

Rather than amending patent law to deny or somehow limit patents on tax-law dependent strategies, it would be interesting to see the validity of these patents challenged on subject matter grounds. (77) Patenting an interpretation or application of the tax laws appears tantamount to patenting consideration of the underlying law itself--a proposition antithetical to the promulgation of laws for the general welfare of society. (78) For many of the same reasons that laws of nature are viewed as properly left in the public domain, (79) exclusionary rights should not be conferred on the use of laws intended to govern and benefit the general public. Although contesting the patentability of tax-law dependent strategies on subject matter grounds would be an uphill battle in light of the modern trend to abandon subject matter as a meaningful constraint on patent issuance, (80) commentators have recently advocated the reconsideration of certain obsolete commonlaw categories of non-patentable subject matter. (81) In particular, a process whose utility turns on an interpretation or application of the tax laws--a mental accomplishment--may warrant limited reconsideration of the "point of novelty" test as a restraint on patentability. (82) As Thomas Cotter has argued, "[e]xperience suggests that a point of novelty test is not unworkable and might provide a relatively reliable method for screening out some inventions that either bear little relation to technology or threaten to invade personal autonomy interests." (83) While the exposure of patents on tax-law dependent strategies to challenge on subject matter grounds is a broader topic for another day, it is interesting to note that patent law may contain a latent self-limiting feature that would keep it out of the pure tax planning field altogether.

Brant J. Hellwig*

* Assistant Professor, University of South Carolina School of Law.

(1) See, e.g., Dennis I. Belcher & Dana G. Fitzsimons, Jr., Tax Planners--Beware of Patented Estate Planning Techniques!, PROB. & PROP. 24 (Nov./Dec. 2006); E. Anthony Figg, Should the Patent Laws Exempt Certain Innovations from Patent Eligibility?, IPL NEWSLETTER, Summer 2006, at 3; Alan S. Lederman, Tax-Related Patents: A Novel Incentive or an Obvious Mistake?, 105 J. TAX'N 325 (2006); Andrew A. Schwartz, The Patent Office Meets the Poison Pill: Why Legal Methods Cannot Be Patented, 20 HARV. J.L. & TECH. (forthcoming Spring 2007), available at; Deborah L. Jacobs, Patent Pending, BLOOMBERG WEALTH MANAGER, May 2005, at 41; Floyd Norris, You Can't Use That Tax Idea. It's Patented., N.Y. TIMES, Oct. 20, 2006, at C1; Letter from Kimberly S. Blanchard, on behalf of the Tax Section of the New York State Bar Ass'n, to William M. Thomas, Chairman, House Comm. on Ways and Means, et al. (Aug. 17, 2006), available at [hereinafter NYSBA Letter]; Paul Devinsky, John Fuisz & Thomas Sykes, Whose Tax Law Is It?, LEGALTIMES.COM, Oct. 16, 2006, The issue has drawn the attention of Congress, as the House of Representatives held hearings on the topic in July 2006. See Testimony Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means, 109th Cong. 109-77 (2006) (statement of Ellen Aprill, Associate Dean of Academic Programs, Professor of Law, John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles, California) [hereinafter Aprill Testimony]; STAFF OF JOINT COMM. ON TAX'N, 109th CONG., BACKGROUND AND ISSUES RELATING TO THE PATENTING OF TAX ADVICE (Joint Comm. Print 2006) [hereinafter JCT REPORT].

(2) See Wealth Transfer Group v. Rowe, No. 06CV00024 (D. Conn. filed Jan. 6, 2006) (initiating infringement litigation concerning the funding of a GRAT with nonqualified stock options in violation of U.S. Patent No. 6,567,790); see also Lederman, supra note 1, at 327 (describing how the owner of U.S. Patent No. 6,292,788 on the section 1031-deedshare patent has publicized that it will aggressively pursue enforcement of its patent).

(3) Dan L. Burk & Brett H. McDonnell, Patents, Tax Shelters, and the Firm, 26 VA. TAX REV. 981, 990 (2007). Burk and McDonnell note that potential anticommons effects of patent protection in the tax planning field could have the opposite effect of reducing innovation in the field and increasing firm size. Admittedly without empirical support, the authors offer an educated guess that the anticommons problem will not predominate. Id. at 998.

(4) Id. at 983.

(5) Id. at 999 ("We leave it for others in this symposium to argue whether non-abusive tax planning is a social bad."). Burk and McDonnell note the existence of a fairly strong policy argument that tax investment strategies create a net social harm, and they assume this conclusion for purposes of their article. Id.

(6) U.S. CONST. art. I, [section] 8, cl. 8.

(7) See 35 U.S.C. [section] 154(a) (2006).

(8) David A. Weisbach, Ten Truths About Tax Shelters, 55 TAX L. REV. 215, 222 (2002). Weisbach notes narrow exceptions where tax planning may produce a social benefit, such as planning that assists the taxpayer in complying with tax laws designed to channel transactions into forms that ease the administration of the tax laws and instances where the planning is related to assisting the taxpayer in obtaining a subsidy that Congress has chosen to provide through the tax system. These exceptions ultimately relate to ensuring compliance with the tax laws, as opposed to planning designed to minimize tax by exploiting imperfect rules for tax measurement. See id. at 224-25. But see Lederman, supra note 1, at 332 (noting that arguments against patentability based on lack of social utility are weakened in instances where the patented process is aimed at more efficient tax compliance or targeted tax incentives); Michael L. Schler, Ten More Truths About Tax Shelters: The Problem, Possible Solutions, and a Reply to Professor Weisbach, 55 TAX L. REV. 325, 385-86 (2002) (arguing that Weisbach's criticism of tax planning cannot extend to behavior that Congress incentivizes through the tax system).

(9) Weisbach, supra note 8, at 222.

(10) Id. at 222-23 (citing Daniel N. Shaviro, Economic Substance, Corporate Tax Shelters, and the Compaq Case, 88 TAX NOTES 221, 223-34 (2000) [hereinafter Shaviro, Economic Substance]). Based on the title to Shaviro's contribution to this conference, the example is still in good working order. See Daniel N. Shaviro, In Defense of Requiring Back-Flips, 26 VA. TAX REV. 815 (2007). While this example has an air of silliness to it, the backflip shelter is no more ludicrous than many real-world tax shelters in which heroic lengths are undertaken to insure that no party is exposed to meaningful market risk as money moves through a dizzying array of transactions ultimately to arrive at its origin (trimmed by fees to promoters and accommodation parties and the costs of hedging transactions).

(11) See Mark P. Gergen, The Logic of Deterrence: Corporate Tax Shelters, 55 TAX L. REV. 255, 274 (2002) (noting that the costs to promoters of developing, marketing, and executing the strategy yield little social benefit and thus may be considered as deadweight loss); Daniel N. Shaviro, Evaluating the Social Costs of Corporate Tax Shelters, 55 TAX L. REV. 445, 446 (2002) (noting that government costs of audit and litigation should be included as part of the social costs of tax planning) [hereinafter Shaviro, Social Costs].

(12) Weisbach, supra note 8, at 223 n.19; see also Gergen, supra note 11, at 274 (noting that revenue lost to shelters imposes a social cost, but claiming that the magnitude of the loss is difficult to assess).

(13) Weisbach, supra note 8, at 223. The failure of those who engage in tax planning to internalize the full cost of their behavior suggests the need of an excise tax to be levied on tax planning, the effect of which would be to force disgorgement of the tax savings. See Shaviro, Social Costs, supra note 11, at 451 (mentioning the use of a Pigouvian excise tax, if feasible, to dampen deadweight loss attributable to tax planning costs).

(14) This characterization is admittedly question begging, as it assumes that the baseline "tax burden" is that resulting from no planning. One could claim that the baseline tax burden is the liability remaining after all legal steps are taken to reduce it. See Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934) ("Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury."). From this perspective, non-planners create positive externalities by foregoing tax reduction opportunities.

(15) This concern is one of the justifications for the existence of the alternative minimum tax (AMT), as reflected in the following passage from a committee report that accompanied the revisions to the AMT as part of the Tax Reform Act of 1986:
 Although these provisions [exclusions, deductions, and credits] may
 provide incentives for worthy goals, they become counterproductive
 when taxpayers are allowed to use them to avoid virtually all tax
 liability. The ability of high-income taxpayers to pay little or not
 tax undermines the respect for the entire tax system and, thus, for
 the incentive provisions themselves.

H.R. REP. No. 99-426, at 306 (1985).

(16) Bonito Boats, Inc. v. Thundercraft Boats, Inc. 489 U.S. 141, 148 (1989) (quoting 13 WRITINGS OF THOMAS JEFFERSON 335 (Memorial ed. 1904)).

(17) This sentiment has been recognized in the tax shelter scholarship. See Gergen, supra note 11, at 275 n.69 ("In theory, tax avoidance could yield a social benefit by reducing the deadweight loss from a tax"); Shaviro, Social Costs, supra note 11, at 450 (noting that Weisbach's blanket indictment of tax planning is overbroad in that it ignores tax rules that promote efficiency or distributional aims, while otherwise agreeing with the assessment); Weisbach, supra note 8, at 225 (identifying as the most difficult case instances in which tax lawyers help clients avoid an "obvious wart" on the tax system).

(18) However, this round-about approach might be intended by Congress as a means of changing the law in a non-transparent manner or overcoming obstacles to legislative reform. For example, the use of family-owned entities primarily for the purpose of discounting the value of assets subject to federal estate and gift taxes has been prevalent for years, and yet Congress has taken no steps to stem the hemorrhaging of the transfer tax base. Given the open disdain many members of Congress have for federal transfer taxes, the legislative branch may well view this form of unilateral rate reduction with favor. Furthermore, it could be argued that the long-term political steady state can be found only by taking the legislative rules in the context of the behavior such rules engender and to which the legislature apparently acquiesces.

(19) See Weisbach, supra note 8, at 225.

(20) See, e.g., Robert H. Scarborough, How Derivatives Use Affects Double Taxation of Corporate Income, 55 TAX L. REV. 465 (2002) (describing how use of derivatives can facilitate limited self-help integration of the corporate and individual income tax).

(21) Although only "useful" inventions may be patented, see 35 U.S.C. [section] 101 (2006), the utility requirement "has devolved over the years into a rather minimal obstacle to obtaining a patent." Robert P. Merges, Commercial Success and Patent Standards: Economic Perspectives on Innovation, 76 CAL. L. REV. 803, 811-12 (1998). Although the Patent Office at one point evaluated the moral utility of an invention in determining whether a patent would issue, the Federal Circuit clarified that the moral utility doctrine was no longer good law. See Juicy Whip, Inc. v. Orange Bang, Inc., 185 F.3d 1364, 1366-67 (Fed. Cir. 1999). For a discussion of the utility doctrine, see Schwartz, supra note 1, at 23-26. Thus, the Patent Office would not address the social desirability of a given form of tax planning that is the subject of patent application. But see Lederman, supra note 1, at 332 ("One might question whether tax-reduction schemes, even those that are likely to be viewed by the courts as compliant, should be viewed as furthering a 'useful' purpose.").

(22) Weisbach, supra note 8, at 225.

(23) Crediting the patent holder with unilateral control over the pricing mechanism may overstate the case, as it assumes the absence of non-infringing or uniquely patentable substitutes.

(24) Exposing a client to an infringement suit through failure to advise the client of the existence of a patent could, and likely would, give rise to liability for legal malpractice. See Aprill Testimony, supra note 1, at 2 (noting potential malpractice exposure).

(25) See James B. Rebitzer & Lowell J. Taylor, When Knowledge is an Asset: Explaining the Organizational Structure of Large Law Firms (Nat'l Bureau of Econ. Research, Working Paper No. 12583, 2006), available at

(26) Using a credit shelter trust as an example is less than perfect, because even if Attorney 1 were the first person to develop and employ the technique, a patent may fail to issue on grounds that the technique is obvious to the typical estate planner. See 35 U.S.C. [section] 103(a) (2006). On the other hand, the creation of a trust that effectively provides the beneficiary with effective ownership of the property while running the gauntlet of provisions that would otherwise cause inclusion of the trust assets in the beneficiary's estate may be unique enough to satisfy the requirement of non-obviousness. This type of trust is certainly no less obvious than use of non-qualified stock options to fund a grantor-retained annuity trust, a technique on which a patent has issued. See Establishing and Managing Grantor Retained Annuity Trusts Funded by Nonqualified Stock Options, U.S. Patent No. 6,567,790 (filed Dec. 1, 1999) (issued May 20, 2003); see also Belcher & Fitzsimons, supra note 1, at 24 (describing the GRAT patent in disparaging terms); NYSBA Letter, supra note 1, at 6 (also describing the GRAT patent in disparaging terms).

(27) It is possible that ethical limitations on the amount of an attorney's fee will prevent the patent holder from drastically raising her fee to maximize profits. See MODEL RULES OF PROF'L CONDUCT R. 1.5 (2007) ("A lawyer shall not make an agreement for, charge, or collect an unreasonable fee...."). On the other hand, an attorney could argue that the reasonable fee limitations do not apply a charge for licensing the technique. Whether a reviewing court would allow an attorney to segregate her advice in this manner, however, is questionable. Due to the ethical limitations on the amount of attorney's fees, an attorney holding a patent on tax advice may insist that the end user obtain independent representation so the licensing attorney could avoid the existence of a direct attorney-client relationship that would trigger the fee restrictions.

(28) The Tax Section of the New York State Bar Association expressed this sentiment as follows: "We do not believe that it is sound policy to force taxpayers to choose between paying more tax than they are legally obligated to pay and paying royalties to a third party who has patented a tax strategy." NYSBA Letter, supra note 1, at 2. See also JCT REPORT, supra note 1, at 21 (noting the claim that patenting tax advice could "effectively allow[] such patent-holders to 'capture' a property right in the Internal Revenue Code itself....").

(29) See JCT REPORT, supra note 1, at 4 (noting that tax strategy patents may unduly burden tax practitioners and taxpayers with the costs of determining whether a proposed transaction violates an existing patent); NYSBA Letter, supra note 1, at 9 (noting that a lawyer would have an ethical obligation to research the patent law to determine if the strategies she is recommending to clients is the subject of a patent). Burk and McDonnell contend that, assuming tax planning is socially undesirable, "overly broad or vague patents would be a good thing in the tax strategy area." Burk & McDonnell, supra note 3, at 1003. While this statement would be true if the existence of overly broad and vague patents caused individuals to shun the consideration of tax planning altogether, it ignores the increased transaction costs (attributable to the breadth or vagueness of the patent) of determining whether a proposed transaction would infringe the patent and, if the individual proceeds with the transaction after concluding that the patent would not be infringed or that the patent is invalid, the additional risk that such conclusions are incorrect.

(30) A non-flattering third alternative would be that Attorney 2 simply counsels her clients to proceed with the trust technique without obtaining a license from Attorney 1. In his thorough article on the intersection of patent law and tax planning, Alan Lederman notes that the holder of a patent on tax advice may have the worst of both worlds: publication to the Patent and Trademark Office (PTO) and general public, combined with little, if any, means of detecting private use of the patented technique. Lederman, supra note 1, at 330. In this context, however, the practicing bar likely would serve as the effective enforcement mechanism--much in the same manner that attorneys serve as the default enforcement vehicle for provisions of the Internal Revenue Code (Code) by advising their clients against participating in certain transactions. Even if one were less inclined to believe that attorneys would serve such an upstanding role, attorneys would likely seek to avoid the treble damages and attorney's fees that may be awarded for instances of willful patent infringement. See 35 U.S.C. [section][section] 284, 285 (2006). Furthermore, willful patent infringement likely would violate the attorney's professional obligations and thus could jeopardize the attorney's bar license.

(31) This decision does not have to be the product of a blatant breach of the attorney's duty of loyalty to the client. An attorney could rationalize this approach on the basis that her clients would not be well served by undertaking the negotiations necessary to license the technique, in addition to paying the royalty necessary to employ the technique. But, of course, this is a decision that should be left to the client.

(32) This scenario depends on Attorney 1's inability to perfectly price discriminate, which is a plausible assumption. See Burk & McDonnell, supra note 3, at 996 (noting that perfect price discrimination by patent holders typically is not possible).

(33) See Joseph Bankman, Modeling the Tax Shelter World, 55 TAX L. REV. 455, 463 (2002) (noting "demoralization costs to other taxpayers" as an additional social cost of tax shelters).

(34) The failure of the patent holder to refuse to license the technique generally is not a defense to an infringement suit. See 35 U.S.C. [section] 271(d) (2006).

(35) 277 F.3d 778 (5th Cir. 2001). A succinct description of the Compaq transaction is provided in Michael Knoll's contribution to this conference. See Michael S. Knoll, Compaq Redux: Implicit Taxes and the Question of Pre-Tax Profit, 26 VA. TAX REV. 821, 826 (2007).

(36) See Shaviro, Economic Substance, supra note 10, at 242 (illustrating that a dividend-stripping transaction, if successful, had the effect of exempting from U.S. taxation the passive foreign income of multinationals that had sufficient capital gains).

(37) See Devinsky, Fuisz & Sykes, supra note 1, at 3 (raising the prospect of competition-driven refusal to license). Of course, Compaq would have the same competitive advantage if it licensed the technique to its competitor--the advantage would simply take the form of increased revenue as opposed to decreased expenses.

(38) Given the claim that tax planning is socially undesirable, one could view Compaq's ability to preclude others from using the technique in a positive light. This assumes, however, that there exist only two choices: Compaq's dividend-stripping technique or no planning at all. The more likely scenario is that those precluded from licensing the technique will engage in a second-best form of tax planning, one that results in greater distortions in taxpayer behavior.

(39) See Gergen, supra note 11, at 263 (quoting Edward D. Kleinbard, Corporate Tax Shelters and Corporate Tax Management, 51 TAX. EXECUTIVE 235, 238 (1999)).

(40) See Editorial, Pay to Obey, N.Y. TIMES, Oct. 31, 2006, at A24 ("People should be treated the same under the law, and shouldn't have to pay a licensing fee for the privilege.").

(41) Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934). David Weisbach has argued that, to the extent the "right" to engage in tax planning even exists, it exists only at the sufferance of Congress. See Weisbach, supra note 8, at 221-22. On this point, Michael Schler agreed. See Schler, supra note 8, at 384 ("[Weisbach] is correct that Congress could freely take away the right to tax plan.").

(42) See John R. Thomas, Liberty and Property in the Patent Law, 39 HOUS. L. REV. 569, 587 (2002) ("Tax law compliance patents are potentially only a modest example of the use of private instruments to thwart legislative intent to establish a broadly applicable law for the benefit of all citizens."); see also Richard H. Stern, Scope-of-Protection Problems with Patents and Copyrights on Methods of Doing Business, 10 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 105, 133 (1999) ("It is a perverse result, to say the least, to permit a patentee to command payment of a royalty ... where federal tax law imposes fines and imprisonment, or other penalties, on taxpayers who fail to comply with the requirements of federal tax law.").

(43) State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). The State Street decision was the first to officially endorse the validity of business-method patents.

(44) See Lederman, supra note 1, at 331; Thomas, supra note 42, at 585-86.

(45) But see JCT REPORT, supra note 1, at 22 ("[U]nambiguous economic evidence that patent systems increase innovation does not exist.").

(46) Aprill Testimony, supra note 1, at 7.

(47) Testimony of Martin D. Ginsburg Before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means, 97th Cong. 90 (1982), quoted in Erik M. Jensen, The Heroic Nature of Tax Lawyers, 140 U. PA. L. REV. 367, 372 (1991).

(48) The Joint Committee on Taxation makes this point in straw-man form: "In the context of tax-strategy patents ... some may argue that innovation ... requires no special protection to encourage its undertaking...." JCT REPORT, supra note 1, at 25.

(49) Although education costs may be viewed as a significant capital cost in the tax planning market, these costs constitute barriers to entry as opposed to marginal costs of developing a particular tax planning technique.

(50) Even in elaborate tax shelter transactions, the development costs appear to be attributable less to discovering the flaw in the income-measurement rules and more to the packaging of the technique as a legitimate business transaction and then marketing it to clients:
 The hard part is not finding the loophole (there are plenty around and
 most have been written up). Rather, it is cloaking the shelter in the
 mantle of a real transaction by incorporating the requisite economic
 return to satisfy a perceived "economic substance" minimum threshold.
 A second major task is to sell the idea to clients, through meetings
 and the preparation of a selling memorandum.

Peter C. Canellos, A Tax Practitioner's Perspective on Substance, Form, and Business Purpose in Structuring Business Transactions and in Tax Shelters, 54 SMU L. REV. 56-57 (2001). But see Joseph Bankman, The New Market in Corporate Tax Shelters, 83 TAX NOTES 1775, 1780-81 (1999) (describing the development of tax shelters as "difficult and surprisingly expensive," primarily due to the practical need to arbitrage the tax accounting and financial accounting rules for reporting losses).

(51) For some, professional reputation may be the end as opposed to the means.

(52) See Thomas F. Cotter, A Burkean Perspective on Patent Eligibility 27-28 (Univ. of Minnesota Law Sch. Legal Studies Research Paper Series, Paper No. 06-68, 2006), available at (noting that a broad scope of patentable subject matter may have a negative marginal payoff in light of other incentives to discovery and the potentially exponential increase in transaction costs). To be fair, concerns similar to those I have noted with respect to patenting tax strategies have been raised in the debate between open access and proprietary rights to scientific discovery, where patents generally have gained acceptance. See, e.g., Arti K. Rai & Rebecca S. Eisenberg, Bayh-Dole Reform and the Progress of Biomedicine, 66 LAW & CONTEMP. PROBS. 289, 291 (2003) (arguing that patents may hinder rather than accelerate biomedical research).

(53) See NYSBA Letter, supra note 1, at 9 ("[I]f patents are permitted for tax strategies, tax practitioners may be discouraged from freely discussing tax issues with one another. Their interests may be better served by refraining from such discussions and instead keeping their ideas secret and seeking to patent them.").

(54) See Aprill Testimony, supra note 1, at 3 ("If patents become an important part of the tax landscape, the atmosphere could become more secretive and less cooperative."). On the other hand, the desire to prevent patents from being issued on tax planning techniques could trigger an increase in written discussion of such techniques. A patent will not issue on a technique that is not novel at the time of application. See 35 U.S.C. [section] 102 (2006). Novelty will be found lacking if the technique was described in a printed publication. 35 U.S.C. [section] 102(a), (b) (2006). Thus, one can imagine attorneys adopting a defensive posture with respect to potential patents by quickly getting new strategies in print, in order to establish a record of "prior art" that will preclude a finding of novelty should someone attempt to obtain a patent on that type of planning. Yet a rise in defensive publication is not necessarily something to cheer, as it represents an additional cost to the attorney of performing her trade. Furthermore, defensive publication may not occur, as attorneys may conclude that their clients' interests are best served by not bringing public attention to the strategy. Last, the potential for defensive publication does not address the almost certain decline in informal shop-talking, which may be the most important means by which tax planning is vetted and improved.

(55) With slight modification and the addition of examples, the description of the three general camps is borrowed from the letter of the Tax Section of the New York State Bar Association addressing the patentability of tax advice. See NYSBA Letter, supra note 1, at 3.

(56) For a description of this transaction, see Lee A. Sheppard, Can Seagram Bail Out of DuPont Without Capital Gain Tax? 67 TAX NOTES 325 (1995).

(57) For a non-flattering description of this transaction, see Calvin H. Johnson, Tales from the KPMG Skunk Works: The Basis-Shift or Defective Redemption Shelter, 108 TAX NOTES 431 (2005).

(58) See Victor Fleischer, The Tax Shelter War is Over, CONGLOMERATE, Oct. 28, 2006, (providing a contemporaneous recordation of Pamela Olson's remarks).

(59) See, e.g., TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006) (finding that the structure failed to satisfy a purposive definition of a partnership for tax purposes); Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) (finding that contingent liability shelter satisfied literal terms of statute but nonetheless failed on economic substance grounds); Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir. 2006) (finding that contingent liability shelter satisfied literal terms of statute but remanding for reconsideration on economic substance grounds).

(60) See Gitlitz v. Commissioner, 531 U.S. 206, 220 (2001) ("Because the Code's plain text permits the taxpayers here to receive these benefits, we need not address this policy concern.").

(61) In his contribution to the tax shelter literature, Mark Gergen proposed a model under which shelters have a self-limiting feature, as each additional use of a shelter increases the risk of detection for both the marginal user and all prior uses of the strategy. See Gergen, supra note 11, at 261-71.

(62) See Bankman, supra note 50, at 1781.

(63) Then again, perhaps not. If the copycat transactions trigger government detection of the transaction, thereby causing actual harm to the patent holder and all prior users, and the transaction is found to lack merit after the issues are litigated, then the patented technique would have turned out to be worthless. It is not clear whether there would be any actual damages to award for infringement in this context, as the patent would appear invalid for lack of utility.

(64) 35 U.S.C. [section] 122(b)(1)(A) (2006).

(65) Id. [section] 122(b)(2)(B)(i) (2006).

(66) See Treas. Reg. [section] 1.6011-4(b)(3) (1960) (including as a "reportable transaction" any transaction that is "offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum fee").

(67) See JCT REPORT, supra note 1, at 23.

(68) On November 1, 2006, the Internal Revenue Service (Service) issued proposed and temporary regulations that made changes to the definition of a reportable transaction under section 6011. In the preamble to the regulations, the Service sought comments on whether a new category of reportable transactions should be created for strategies for which patent protection is sought. See AJCA Modifications to the Section 6011 Regulations, 71 Fed. Reg. 64,488, 64,490 (Nov. 2, 2006).

(69) See Lederman, supra note 1, at 328 (claiming that disputes concerning the validity of tax-related business method patents will turn on the issue of nonobviousness); see also NYSBA Letter, supra note 1, at 6 (outlining the difficulties of establishing obviousness).

(70) One issue that I do not address but find interesting is the potential for attorneys to limit legal malpractice exposure through the commoditization of legal advice that will result from the licensing of patented techniques.

(71) The ABA Model Rules of Professional Conduct provide that "[a] lawyer shall not participate in offering or making: (a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship...." MODEL RULES OF PROF'L CONDUCT R. 5.6 (2007).

(72) For an article exploring the traditional justifications for not enforcing noncompetition agreements and criticizing the per-se rule as overbroad, see Robert M. Wilcox, Enforcing Lawyer Non-Competition Agreements While Maintaining the Profession: The Role of Conflict of Interest Principles, 84 MINN. L. REV. 915 (2000).

(73) Burk & McDonnell, supra note 3, at 1001.

(74) Id. at 1001-02.

(75) See, e.g., Establishing and Managing Grantor Retained Annuity Trusts Funded by Nonqualified Stock Options, U.S. Patent No. 6,567,790 (filed Dec. 1, 1999) (issued May 20, 2003).

(76) The Joint Committee on Taxation refers to these as "structure-based tax patents." See JCT REPORT, supra note 1, at 19.

(77) The Constitution provides Congress with the power to "promote the Progress of Science and useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their respective ... Discoveries...." U.S. CONST. art I., [section] 8, cl. 8. In that regard, the Patent Act refers to four general categories of inventions that may be patented: processes, machines, articles of manufacture, and compositions of matter. See 35 U.S.C. [section] 101 (2007). With respect to challenges based on subject matter grounds, Andrew Schwartz has argued that "legal methods," which include but are not limited to methods of avoiding or minimizing tax liability through application of the tax laws, do not constitute "inventions" covered by the Patent Act. See Schwartz, supra note 1, at 30-34.

(78) See Thomas, supra note 42, at 587 (noting that patents on legal compliance could thwart legislative intent to establish laws for the public benefit). Thomas was unequivocal in his assessment of this trend: "The use of patents to restrict access to legal entitlements can only be described as an unanticipated and disturbing use of the intellectual property laws." Id.

(79) See Diamond v. Diehr, 450 U.S. 175, 185 (1981); see also Cotter, supra note 52, at 8 (noting traditional agreement among courts and commentators that laws of nature are nonpatentable).

(80) In State Street Bank, the Federal Circuit rejected a subject matter inquiry that focused on the category of patentable subject matter--process, machine, manufacture, or composition of matter--to which the claim was directed and instead adopted practical utility as the universal standard for patentable subject matter. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998). Under this approach, the claimed invention is statutory subject matter if it produces a "useful, concrete, and tangible result." Id. In this manner, the Federal Circuit "collapsed the statutory subject matter requirement into the more lenient requirement of utility." Thomas, supra note 42, at 585. This development, however, may not be set in stone. In his dissent to the dismissal of the writ of certiorari in Laboratory Corp. of American Holdings v. Metabolite Laboratories, Inc., Justice Breyer, joined by Justices Stevens and Souter, noted that the Court had never stated that a process was patentable so long as it produces a "useful, concrete, and tangible result," and that such a statement would conflict with the Court's prior case holdings. See Lab. Corp. of Am. Holdings v. Metabolite Lab., Inc., 126 S. Ct. 2921, 2928 (2006) (Breyer, J., dissenting).

(81) See, e.g., Cotter, supra note 52, at 28-29, 35 (positing that the apparently obsolete physical transformation, mental steps, and technological arts requirements for patentability may embody traditional values that still merit respect and suggesting that these doctrines might play a useful, albeit limited, role in the modern patent system).

(82) The "point of novelty" test is one version of the "mental steps doctrine," under which subject matter is unpatentable if the novelty or nonobviousness of the invention is attributable entirely to one or more mental steps. See id. at 9 (citing In re Abrams, 188 F.2d 165 (C.C.P.A. 1951); In re Heritage, 150 F.2d 554 (C.C.P.A. 1945)). The point of novelty test was rejected in In re Musgrave, 431 F.2d 882 (C.C.P.A. 1970), and the mental steps doctrine has been considered "dead letter" since that case. See id. at 10.

(83) Id. at 38.
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Date:Mar 22, 2007
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