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Thursday, January 21, 2010

Patents on Tax Strategies: Issues in Intellectual Property and Innovation

John R. Thomas
Visiting Scholar

Several bills introduced in the 111th Congress addressed the recently recognized phenomenon of patented tax strategies. These legislative initiatives would prevent the grant of exclusive intellectual property rights by the United States Patent and Trademark Office (USPTO) on methods that individuals and enterprises might use in order to minimize their tax obligations. 

Many commentators trace the rise of tax strategy patents to the 1998 opinion of the Federal Circuit in State Street Bank v. Signature Financial Group, which rejected a per se rule that business methods could not be patented. In recent years, the USPTO has issued a number of patents that pertain to tax strategies, and numerous other patent applications remain before that agency. At least one of these patents, the so-called SOGRAT patent, has been subject to enforcement litigation in federal court. 

The impact of tax strategy patents upon social welfare has been subject to a spirited debate. Some observers are opposed to tax strategy patents. These commentators believe that patent protection is unnecessary with respect to tax avoidance techniques due to a high level of current innovation. Others believe that patent-based incentives to develop tax avoidance strategies are not socially desirable. They assert that patents may limit the ability of individuals to utilize provisions of the tax code intended for all taxpayers, interfering with congressional intent and leading to distortions in tax obligations. Others have expressed concerns that tax strategy patents may potentially complicate legal compliance by tax professionals and individual taxpayers alike. 

Other experts believe that these concerns are overstated, and also make the affirmative case that tax strategy patents may provide positive social benefits. They explain that patents on "business methods" have been obtained and enforced for many years. They also observe that the grant of a patent does not imply government approval of the practice of the patented invention, and that professionals in many spheres of endeavor have long had to account for the patent system during their decision-making process. They also believe that the availability of tax strategy patents may promote innovation in a field of endeavor that is demonstrably valuable. Further, such patents might promote public disclosure of tax strategies to tax professionals, taxpayers, and responsible government officials alike. 

Three bills introduced in the 111th Congress—H.R. 1265, H.R. 2584, and S. 506—would prohibit the issuance of patents on tax strategies. Other legislative responses, including oversight of the USPTO, promotion of cooperation between the USPTO and the IRS, and the encouragement of private sector contributions to the patent examination process, are also possible.

Date of Report: January 6, 2010
Number of Pages: 20
Order Number: RL34221
Price: $29.95

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