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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, 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 Retained Annuity Trusts (GRATs) have become a mainstay of tax planning for high-net-worth individuals, and was the first tax strategy patent in litigation.

The SOGRAT is a type of GRAT that is funded with non-qualified stock options. The patent holder, Wealth Transfer Group LLC, sued Aetna CEO 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,


CalCPA and the AICPA have both written Congress opposing tax patents. Most recently, CalCPA wrote to Max Baucus, 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 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," 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 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 at press time.


Other pending legislation includes:

* Sec. 303 of The Stop Tax Haven 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 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 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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