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Tax Patents: until Legislation banning patents is certain, CPAs should be prepared.

Recent actions of the U.S. Patent and Trademark Office are poised to present CPAs and other tax practitioners with a new set of challenges.

A landmark judicial decision in 1998 resulted in the PTO PTO
1. Parent Teacher Organization

2. or p.t.o. please turn over

3. power takeoff

PTO or pto please turn over

Noun 1.
, for the first time, issuing patents for "novel" business methods (State Street Bank & Trust v. Signature Financial Group, Inc.). Based on that decision, the PTO determined that novel tax strategies qualify as patentable business methods. Since then, more than 60 patents for tax strategies have been granted and 89 tax patent applications are pending.

The best known of the tax strategies patents is the so-called "SOGRAT." This is likely because Grantor An individual who conveys or transfers ownership of property.

In real property law, an individual who sells land is known as the grantor.

grantor n.
 Retained Annuity Trusts (GRATs) have become a mainstay of tax planning Tax planning

Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer.
 for high-net-worth individuals, and was the first tax strategy patent in litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.

The SOGRAT is a type of GRAT GRAT Grantor Retained Annuity Trust  that is funded with non-qualified stock options. The patent holder, Wealth Transfer Group LLC (Logical Link Control) See "LANs" under data link protocol.

LLC - Logical Link Control
, sued Aetna CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board.  John W. Rowe for infringement. The suit was settled in March 2007 without the court deciding whether the patent was valid. However, without a holding that the patent is invalid, there is a presumption of validity.

The SOGRAT patent was issued in 2003 and can be downloaded from the PTO's website,



See American Institute of Certified Public Accountants (AICPA).
 have both written Congress opposing tax patents. Most recently, CalCPA wrote to Max Baucus Max Sieben Baucus (born December 11 1941) is the senior United States Senator from Montana and is a member of the Democratic Party. Baucus is currently chairman of the United States Senate Committee on Finance and 10th Longest-serving current Senator. , chair of the Senate Finance Committee, July 23 in opposition to tax patents because they:

* Mislead taxpayers into the belief that a patented strategy is valid under the IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel.  when, in fact, a patented strategy offers no additional assurance of compliance with the IRC;

* Complicate the government's administration of the IRC;

* Make taxpayer compliance more difficult; and

* May cause many taxpayers to pay more tax than others in identical circumstances.

"Tax strategy patents should be restricted, or at a minimum, taxpayers and tax practitioners should be made immune from liability for tax strategy patent infringement patent infringement n. the manufacture and/or use of an invention or improvement for which someone else owns a patent issued by the government, without obtaining permission of the owner of the patent by contract, license or waiver. ," concludes the AICPA's report, which was sent to Congress in February and is available at http://tax.aicpa. org/Resources/Tax[+]Patents.


Both organizations support the recent emergence of Section 10 of HR 1908, a provision that makes tax-planning methods not patentable and was voted on July 18 by the House Judiciary Committee to be included in the Patent Reform Act of 2007.

The provision applies to all levels of taxes and would take effect the date of enactment. It applies to any application for patent or application for a reissue patent that is filed on or after the date of enactment or has not been issued as of the date of enactment.

Patents issued before the date of enactment should not be considered as being validated by the legislation.

The HJC HJC Hillsborough Justice Campaign (UK)
HJC Hwa Chong Junior College (Singapore)
HJC House Judiciary Committee
 voted the bill out of committee and, at press time, it was headed to the House floor for consideration.

S. 1145, a similar patent reform bill (currently without a tax patent provision in it) was introduced by the Senate and was pending in the Senate Judiciary Committee The U.S. Senate established the Committee on the Judiciary on December 10, 1816, as one of the original 11 standing committees. It is also one of the most powerful committees in Congress; among its wide range of jurisdictions is investigation of federal judicial nominees and oversight of  at press time.


Other pending legislation includes:

* Sec. 303 of The Stop Tax Haven Tax Haven

A country that offers individuals and businesses little or no tax liability.

There are several countries in the Caribbean that are considered tax havens.
 Abuse Act (S. 681 and HR 2136), introduced by Sens. Levin, Coleman and Obama and Rep. Doggett, would curtail tax strategies patents by prohibiting the PTO from issuing patents for "inventions designed to minimize, avoid, defer, or otherwise affect liability for federal, state, local or foreign tax." HR 2136 has 44 co-sponsors and has been referred to the House Judiciary Committee Subcommittee on Courts, the Internet, and Intellectual Property. S. 681 has three co-sponsors and was referred to the Senate Finance Committee.

* HR 2365, introduced by Reps. Boucher, Goodlatte and Chabot, would provide immunity to practitioners and taxpayers from infringement liability for tax strategy patents and would limit damages and other legal remedies available to holders of patents for tax planning methods. It has 38 co-sponsors and has been referred to the House Judiciary Committee Subcommittee on Courts, the Internet, and Intellectual Property. A hearing on it has been requested by Reps. Boucher, Goodlatte and Smith. The CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000.  profession continues to support this legislative solution, as well.


However, if none of this legislation passes, and the numbers and varieties of such patents proliferate, it may become incumbent upon practicing tax CPAs to secure a working knowledge of patent law and to understand how to assess if a strategy they want to recommend to a client is patented.

If tax strategy patents begin to proliferate, it is highly likely that an increasing number of CPA, law and other tax planning firms will receive warning letters from the patent owners, telling them of a patent's existence and requesting payment of a royalty that will likely be high enough to be a nuisance, but far less than the cost of any legal action to fight the patent owner.

According to the AICPA, CPAs have already started receiving patent infringement warning letters regarding two patents--one pertaining to annuities invested in charitable remainder trusts charitable remainder trust (Charitable Remainder Irrevocable Unitrust) n. a form of trust in which the donor (trustor or settlor) places substantial funds or assets into an irrevocable trust (a trust in which the basic terms cannot be changed or the gift withdrawn)  and another regarding "deedsharing" tenant-in-common section 1031 tax-deferred real estate exchanges.

For example, if a $500 royalty can be extracted from 5,000 firms nationwide, the return on investment would be enormous. (Revenue of $2.5 million against less than $20,000 for securing the patent, plus the cost of preparing and mailing the warning letters.)

As noted, patent holders may reserve patented tax strategies for their own use, rather than licensing them.

CPAs have a fiduciary obligation to put clients' best interests ahead of their own when acting as a trusted adviser.

Because of this, if a patented tax strategy would be highly beneficial to a client, and its owner does not license it to others, the CPA may have an obligation to recommend that the client contact the patent owner to use the strategy.

Absent legislative or more remote judicial relief from tax strategies patents, CPAs and other tax practitioners may be forced into some combination of learning a substantial amount of patent law; frequently consulting with patent attorneys or other experts; or finding themselves regularly paying royalty payments.

Excerpts reprinted with the permission of Walter M. Primoff, CPA/PFS.
COPYRIGHT 2007 California Society of Certified Public Accountants
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Author:Primoff, Walter M.
Publication:California CPA
Date:Sep 1, 2007
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