A tax patent is a patent

Patent

A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....

 that discloses and claim

Claim (patent)

Patent claims are the part of a patent or patent application that defines the scope of protection granted by the patent. The claims define, in technical terms, the extent of the protection conferred by a patent, or the protection sought in a patent application...

s a system or method for reducing or deferring tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

es. Tax patents have been granted predominantly in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 but can be granted in other countries as well. They are considered to be a form of business method patent

Business method patent

Business method patents are a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking, tax compliance etc. Business method patents are a relatively new species of patent and there have been several reviews investigating the...

. They are also called "tax planning

Tax avoidance

Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...

 patents", "tax strategy patents", and "tax shelter patents". In September 2011, President Barack Obama signed legislation passed by the U.S. Congress that effectively prohibits the granting of tax patents in general.

History

The earliest patent that the United States Patent and Trademark Office

United States Patent and Trademark Office

The United States Patent and Trademark Office is an agency in the United States Department of Commerce that issues patents to inventors and businesses for their inventions, and trademark registration for product and intellectual property identification.The USPTO is based in Alexandria, Virginia,...

 (USPTO) considers to be a tax patent is Van Remortel et al., "System for funding, analyzing and managing health care liabilities". This patent issued in 1992 and covers, among other things, a computerized administration system for tax advantaged funding of health care programs for retirees. The United States Congress

United States Congress

The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 has never passed a law explicitly allowing tax patents but in 1998, the U.S. Court of Appeals for the Federal Circuit ruled in State Street Bank v. Signature Financial Group that business methods (and hence methods for reducing taxes) have been patentable

Patentable subject matter

Patentable, statutory or patent-eligible subject matter is subject matter which is susceptible of patent protection. The laws or patent practices of many countries suggest that certain subject matter is or is not something for which a patent should be granted.Together with novelty, inventive step...

 at least since 1952 when Congress amended the requirements for patentability in the Patent Act of 1952

Patent Act of 1952

The U.S. Patent Act of 1952 clarified and simplified existing U.S. patent law. It also effected substantive changes, including the incorporation of the requirement for invention and the judicial doctrine of contributory infringement The U.S. Patent Act of 1952 clarified and simplified existing...

.

USPTO classification

The USPTO has created a patent class

Patent classification

A patent classification is a way the examiners of patent offices or other people arrange documents, such as patent applications, disclosing inventions according to the technical features of the inventions...

 for tax patents. The classification is 705/36T.

The USPTO has placed 60 issued US patents and 100 published patent applications in this classification. The USPTO has not, however, published a formal definition of the class.

About 10 new tax patent applications have been filed each year in recent years, and about five new patents have been issued each year. Some applications and issued patents appear to be mischaracterized since they do not deal with taxes.

Proposed legislation

Tax patents are controversial. According to some, "tax patents amount to "government-issued barbed wire" to keep some taxpayers from getting equal treatment under the tax code." The proposed Patent Reform Act of 2007

Patent Reform Act of 2007

The Patent Reform Act of 2007 is a proposal introduced in the 110th United States Congress for changes in United States patent law. Democratic Congressman Howard Berman introduced the House of Representatives bill on April 18, 2007. Democratic Party Senator Patrick Leahy introduced the Senate bill...

, passed by the United States House of Representatives

United States House of Representatives

The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...

, but not enacted into law, would have provided for an explicit ban on tax patents, but would include an exemption for software that calculates taxes. The proposed Stop Tax Haven Abuse Act would provide for a similar ban. This bill was introduced in the United States Senate

United States Senate

The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...

 by several Senators including then Senator Barack Obama

Barack Obama

Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

.

These proposals have been strongly supported by American Institute of Certified Public Accountants

American Institute of Certified Public Accountants

Founded in 1887, the American Institute of Certified Public Accountants is the national professional organization of Certified Public Accountants in the United States, with more than 370,000 CPA members in 128 countries in business and industry, public practice, government, education, student...

 (AICPA). The position of the AICPA is that tax patents:

• "Limit the ability of taxpayers to utilize fully interpretations of tax law intended by Congress;"
• "May cause some taxpayers to pay more tax than Congress intended and may cause other taxpayers to pay more tax than others similarly situated;"
• "Complicate the provision of tax advice by professionals;"
• "Hinder compliance by taxpayers;"
• "Mislead taxpayers into believing that a patented strategy is valid under the tax law;" and
• "Preclude tax professionals from challenging the validity of tax strategy patents."

Congressman Rick Boucher

Rick Boucher

Frederick Carlyle "Rick" Boucher is the former U.S. Representative for , serving from 1983 until 2011. He is a member of the Democratic Party.-Early life, education and career:...

 introduced a bill that would have exempted tax attorneys and tax payers from liability with respect to infringement of tax patents. This proposal currently has 40 cosponsors.

Regulation

In 2005, The U.S. Internal Revenue Service

Internal Revenue Service

The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 (IRS) determined that none of the then pending U.S. tax patents contained abusive tax avoidance transactions

Tax avoidance and tax evasion

Tax noncompliance describes a range of activities that are unfavorable to a state's tax system. These include tax avoidance, which refers to reducing taxes by legal means, and tax evasion which refers to the criminal non-payment of tax liabilities....

. Nonetheless, in September 2007, the IRS proposed a set of rules that would require tax filers to disclose whether they have paid a license fee to the holder of a tax patent. Similar to the ban passed by the U.S. House of Representatives, this regulation includes an exemption for patents on software for calculating taxes.

There is some concern in the financial community that complying with these regulations will increase the chances of a tax patent licensee being audited by the IRS and that this, in turn, will decrease the value of tax patents in general. These regulations have, however, been strongly supported by the Section of Taxation of the American Bar Association

American Bar Association

The American Bar Association , founded August 21, 1878, is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. The ABA's most important stated activities are the setting of academic standards for law schools, and the formulation...

.

Examples

Examples of tax patents include:
Funding of a GRAT with nonqualified stock options. Tax-deferred real estate transaction.

Enforcement

In 2006, the Wealth Transfer Group

Wealth Transfer Group

The Wealth Transfer Group is a consulting firm that provides estate planning services. They serve only clients with estates worth more than US$ 10,000,000.In 2006, the Wealth Transfer Group sued former Aetna CEO John W. Rowe for infringement of a tax patent...

 sued former Aetna

Aetna

Aetna, Inc. is an American health insurance company, providing a range of traditional and consumer directed health care insurance products and related services, including medical, pharmaceutical, dental, behavioral health, group life, long-term care, and disability plans, and medical management...

 CEO John W. Rowe

John W. Rowe

John Wallis Rowe is an American businessman and doctor, who served as Chairman and CEO of Aetna Inc., a large health insurance company based in Connecticut, a title he retired from in February 2006.-Columbia University:...

 for infringement of a tax patent. The patent was , entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options". (i.e. SOGRAT) This case has been settled for undisclosed terms.

New law on tax patents

On September 8, 2011, the United States Senate passed the Leahy-Smith America Invents Act, which had already been passed by the House of Representatives. The Act is described as "a comprehensive patent reform bill that includes language to stop the U.S. Patent and Trademark Office from issuing patents for tax strategy methods." The Act was signed into law by President Barack Obama on September 16, 2011.

Subsection (a) of section 14 of the Act provides (in part):

For purposes of evaluating an invention under section 102 or 103 of title 35, United States Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

Subsection (b) of section 14 provides (in part):

For purposes of this section, the term "tax liability" refers to any liability for a tax under any Federal, State, or local law, or the law of any foreign jurisdiction, including any statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.

Subsection (c) of section 14 provides (in part):

This section does not apply to that part of an invention that [ . . .] is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing...

Subsection (e) of section 14 of the Act provides that the tax patent prohibition takes effect on the date of the enactment (September 16, 2011) and that it will apply "to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date."