Tax Strategy Patents Are No More

As of September 16, 2011, patent law no longer protects tax strategy patents. The provision was part of an overall bipartisan package of patent law reforms embodied in H.R. 1249 that was signed by President Obama. The tax bar and CPAs generally opposed them, although the intellectual property bar was mildly attached to them.

Doctrinally, this was accomplished by having Congress declare as a conclusive matter of law that there is nothing new under the sun when it comes to tax avoidance.

Existing tax strategy patents will still exist even if the legislation is passed, and could constitute a trap for the unwary. There are now more than 130 issued patents, with 150 awaiting approval. Many of them are variations of common transactions, such as a method for calculating the savings of converting an IRA to a Roth IRA; for analyzing college savings plans; or for investing long-term assets of tax-exempt charities.

Several lawsuits have been brought by patent holders, and at least one was settled for an undisclosed amount, so it behooves practitioners to be aware of the topics that have been patented.

The mechanism by which the law nullifies tax strategy patents is to deem any strategy for reducing, avoiding, or deferring tax liability “insufficient to differentiate a claimed invention from the prior art.” Under the patent rules, if an invention is “prior art,” it is not novel or obvious, and therefore is not patentable.

The legislation excludes computer programs, methods and systems used solely for preparing a tax return or filing, including one that “records, transmits, transfers, or organizes data related to such filing.” Thus, you needn’t worry about your preparation software provider.

Even without the legislation, growing hostility towards business methods patents from the U.S. Supreme Court, the U.S. Court of Appeals for the Federal Circuit, and the business community leaves many of these patents on thin ice.