Tax Shelter Patents

Like a lot of people, I am skeptical of business method patents. The likelihood a granting someone a patent that they don't deserve ("there is nothing new under the sun") is greater than in the physical technology field. Simply put, most of them a junk. But, one particular class of business method patents is particularly disturbing.

Only in America would people think to patent a tax shelter. This means that even if someone else comes up with it independently, you can prevent them from using it. Yes, they exist (by the way, the linked report by the Joint Budget Committee is an excellent introduction to the topic. The staff at the JBC includes some of the smartest people in government.) Business method patents generally are category 705, and tax patents are subcategory 36T of business method patents. Indeed, arguably, they can be traced back at least as far as the infamous State Street Bank case, 149 F.3d 1368 (Fed. Cir. 1998) which is credited with making the current rush to patent business methods generally, as that case involved "a data process system for a partnership structure of mutual funds that had advantangeous tax consequences."

It doesn't help that the PTO which grants patents, is full of engineers who have no clue about business management or tax planning.

What do they look like? Consider Patent No. 6,567,790, which covers using a grantor retained annuity trust funded with non-qualified stock options, as an estate planning method. (An infringement case involving this patent is currently pending in the U.S. District Court in Connecticut in Wealth Transfer Group v. Rowe, Case No. 2006CV24.)

While this is a case where the baby really should be thrown out the with the bathwater, by simply ending business method patents entirely, tax shelter patents are a particular concern, because they put a price on equal protection of the laws. Those licensed to use a tax shelter could pay less in taxes than those not licensed to use it. It is the opposite of transparency in government. And, because these are particular to tax laws that come and go, the public benefit normally associated with patent law, which is that new ideas eventually come into the public domain, isn't present. By the time a tax shelter patent comes into the public domain, the relevant tax law frequently will no longer exist.

Similarly, it also happens to be the case that there is no demonstrated shortage of innovation in the field of creating tax shelters under current law. Tax shelter patents do not solve a problem with lack of innovation, in large part because attorney-client privileges and accountant-client privileges, along with I.R.S. privacy laws make trade secret protection for tax shelters, as opposed to patent law protection, a viable alternative. Trade secret protections, from a public policy perspective, are preferrable to patents, because a trade secret owner can't exclude someone who comes up with the idea independently from using it. Indeed, the threat that tax shelter patent litigation discovery poses to the attorney-client privilege and accountant-client privilege is another reason why allowing people to patent tax shelters, as existing law does, is a bad idea.

Incidentally, while this is a tax issue, it isn't a serious revenue issue. If anything, tax shelter patents may actually increase revenues because some people might choose not to use a tax shelter that is the tax minimizing choice for them because they don't want to pay a license fee to the patent holder.

The House Committee on Ways and Means held a hearing on the subject on July 13, 2006. For an opinion contrary to mine, and believing that tax law patents could be a good thing, read this testimony.