DETERMINING PATENT WORTHLESSENESS FOR TAX PURPOSES.

• Author: Sumer, Christina

1. INTRODUCTION II. THE "PAPER PATENT" ERA III. THE PAPER PATENT ERA'S INFLUENCE ON PATENT WORTHLESSNESS IV. THE NEWER TAX APPROACH V. WHICH STANDARD IS BEST FOR PATENTS? VI. CONCLUSION I. INTRODUCTION

   Patent valuation is a complex, occasionally confusing concept that has become somewhat of a gray area in intellectual property. Patent value is "the economic benefit that the patent can bestow upon its owner." (1) It involves determining a patent's monetary value to the patent's owner, which can prove difficult based on the fact that patents are inherently unique. (2) Generally, the more significance a patent has to society, the higher its value. (3) There are currently seven different valuation methods used for valuing intellectual property. (4) They include the following: the twenty-five (25) Percent Rule, Industry Standards, Ranking, Surrogate Measures, Disaggregation Methods, the Monte Carlo Method, and Option Methods. (5) While these are all widely used methods, none of them are definitive, and they are continually being updated. (6) In fact, the Federal Circuit recently held that the twenty-five (25) Percent Rule is flawed, and it would no longer be accepting evidence using that method. (7)

   On the opposite end of this valuation spectrum is determining when a patent has no value and has become worthless or obsolete. (8) Patents are generally granted for a seventeen-year period, and throughout the life of a patent, the patent holder can take tax deductions for things such as amortization or normal wear and tear. (9) Tax deductions can also be taken for patent obsolescence or "worthlessness." (10) If the patent becomes worthless before its expiration year, the unrecovered cost may be deducted in that year. (11) However, there have not been many case discussions on what determines when a patent is "worthless" or when exactly a patent has become obsolete for purpose of these tax deductions. According to the Merriam-Webster dictionary, obsolescence is "the process of becoming obsolete or the condition of being nearly obsolete...." (12) While this definition is easy enough for most to understand, albeit somewhat obvious, it does nothing to further the question of when a patent has reached that point. Much of the same can be said for the case law surrounding the topic, which is the crux of the problem.

   The most recent cases discussing patent obsolescence can be sourced back to the 1920s and 1930s with Tennessee Fibre Co. v. C.I.R. and Hazeltine Corp. v. C.I.R. These cases came about during the height of the "paper patent" doctrine, which differentiated patents based on whether or not they had ever been put to use. (13) The outcomes of these cases reflected the times. Both the Tennessee Fibre Co. and Hazeltine decisions rested on the actual use of the patent in determining its value. (14)

   This comment considers a key question: what is the correct method for determining patent worthlessness or obsolescence? Is it the method used almost a century ago? Part II of this comment will delve into the paper patent doctrine and its effect on the question. Part III will further look at how this paper patent approach has been applied toward evaluating patents. In contrast, Part IV will look into the approach that has more recently been applied. This newer method involves a two-prong test of subjective and objective factors. (15) Finally, in Part V, this Comment will conclude by assessing what is the correct

2. THE "PAPER PATENT" ERA

   Until the 1950s, the "paper patent" doctrine was an integral part of intellectual property. (16) As previously mentioned, this doctrine correlated to patent use. (17) Courts distinguished patents on whether or not the patent was actually used. (18) Those that were not used were referred to as "paper patents," and courts were more inclined to hold them invalid. (19) Though its importance remained somewhat relevant until the early 1980s, it completely died with the creation of the Federal Circuit in 1982. (20) There was no definitive explanation given for the shift, but an important question had arisen during the doctrine's heyday, which looked at why a patent's nonuse was considered an unfavorable factor. (21) The problem this posed is what eventually led to all patents being held in equal light regardless of their use. (22)

   Though there was no explicit explanation given for the end of the paper patent era, one source of its demise was the emergence and domination of the "documentary disclosure" theory. (23) This theory stands for the fact that the only statutory disclosure required for patents is set forth in the patent document. (24) It is "the quid pro quo of the right to exclude." (25) Therefore, it is a paper disclosure set by a minimal standard. (26) Because the only requirement for patents is this paper disclosure, there is to be no discrimination against paper patents. (27)

   Furthermore, today's modern patent lawyers believe inventions can come about by two ways: through "actual reduction to practice" or "constructive reduction to practice." (28) An actual reduction to practice means the patent application can actually work in the real world. (29) A constructive reduction to practice means the invention of the patent itself need not have actually been tested prior to being patented. (30) The only requirement is that it could work if it were actually built. (31) This latter theory is somewhat in conflict with the paper patent doctrine, and its acceptance by modern patent lawyers helps clarify why the paper patent doctrine is no longer in use.

   The influence of the paper patent doctrine in the first half of the twentieth century was widespread in intellectual property. This explains why much of the litigation of patents occurred during this time, and it also explains why the holdings in those cases turned out the way they did. This comment will now look at these cases in more depth to see the repercussions this standard had.

3. THE PAPER PATENT ERA'S INFLUENCE ON PATENT WORTHLESSNESS

   The first such case involving the paper patent's influence on patent worthlessness was Tennessee Fibre Co. v. C.I.R. In this case, the petitioner held a patent for a process that separated the cotton fiber from its seeds, with the byproduct being bleached. (32) This process and its resultant product became very useful for gun cotton, and it was sold exclusively to munitions manufacturers throughout the early 1910s. (33) However, the petitioner's success changed after the end of World War I in 1918. (34) With no more weapons needed to supply a war, there was no longer any demand for the product, and the petitioner determined the patent to be valueless. (35) On his income taxes for 1918, he claimed a deduction for obsolescence, which was disallowed by the Service. (36)

   The petitioner argued that under IRC section 234(a), now IRC section 167 (37), he could take an obsolescence deduction. (38) On review, the Board of Tax...