Patenting tax strategies: what it means for the accounting profession: imagine filing your company's or your client's tax return. Weeks later, you receive notice that ACME tax services is suing you for patent infringement. This is the possibility with patented tax strategies. Several pieces of legislation are pending to remedy the situation. In the meantime, what does this mean for CPAs?

AuthorKowalski, Lawrence W.
PositionThe Ohio Society of CPAs Academic Perspectives

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Patenting tax strategies presents difficult considerations for tax accountants. The Joint Committee on Taxation, a non-partisan Congressional committee, analyzed this controversial area in the report Background and Issues Relating to the Patenting of Tax Advice. The Joint Committee raises three basic areas of concern:

  1. Could patenting tax advice lead to the marketing of aggressive tax shelters or in other ways mislead taxpayers?

  2. Will tax strategy patents disrupt the voluntary tax compliance system and handicap taxpayers and their advisers in the free use of the Internal Revenue Code?

  3. What practical problems could arise in applying patent law to tax practice and filing tax returns?

The profession has been left to face the broader question of whether giving tax advice, filing a tax return, or providing tax planning services should ever be the subject of exclusive proprietary rights.

HOW THE MESS GOT STARTED

The origins of patent protection begin with the United States Constitution. Article I, Section 8 provides that Congress shall have the power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." The statutory body of patent law that has evolved since Thomas Jefferson first championed its inclusion in our federal system can be found in Title 35 of the United States Code.

In their treatise on patent law, Schechter and Thomas set out the requirements for a patent in the following manner. Title 35 "allows inventors to obtain patents on processes, machines, manufactures and compositions of matter that are useful, new and non-obvious. An invention is judged as useful if it is minimally operable towards some special purpose. The invention also must not be wholly anticipated by the so-called 'prior art,' or public domain materials such as publications and other patents. The nonobviousness requirement is met if the invention is beyond the ordinary abilities of a skilled artisan knowledgeable in the appropriate field." The liberal interpretation of the statute by the judicial system in three principal cases has evolved the law to the point of making tax strategies patentable subject matter.

THE DIAMOND CASE

In Diamond v. Chakrabarty, 447 U.S. 303 (1980) Chief Justice Burger delivered the opinion of the court, holding that a live, human-made microorganism is patentable subject matter. In delivering the opinion of the Court, the Chief Justice's opinion noted that "Congress intended statutory (patentable) subject matter to include anything under the sun that is made by man." This Supreme Court decision opened the door for a broadening of the definition of patentable subject matter.

THE STATE STREET BANK CASE

If the Diamond case opened the door to the expansion of patentable subject matter, then State Street Bank & Trust Co. v. Signature Financial Group, Inc.,149 F.3d 1368 (1998) tore the door off its hinges. This case revolved around U.S. Patent No. 5,193,056, which is generally directed to a data processing system for implementing an investment structure that was developed for use in Signature's business as an administrator and accounting agent for mutual funds. The system facilitates a structure whereby mutual funds pool their assets in an investment portfolio organized as a partnership. This investment configuration provided the administrator of a mutual fund with the advantageous combination of economies of scale in administering investments coupled with the tax advantages of a partnership. In a case that can only be described as a landmark decision, the U.S. Court of Appeals for the Federal Circuit expanded the definition of patentable subject matter to include business methods.

Until 1998, the answer to the question of whether "methods of doing business" were patentable subject matter had not been fully adjudicated and indeed, a number of court decisions had indicated that such methods were not patentable. Signature was the holder of the patent and State Street had gone to the Federal District Court asking the Court to find that Signature's...

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