Tax-strategy patents and the tax gap.

• Author: Hoops, Jeffrey R.

Two tax policy topics have recently been getting increased attention: tax-strategy patents and the tax gap. The AICPA has been taking an active role in the debate on each topic. This column summarizes the issues and the AICPA's involvement.

Tax-Strategy Patents

The patentability of tax strategies is a growing concern among tax practitioners and taxpayers. The AICPA believes that such patents undermine the integrity, fairness and administration of the tax system and are contrary to sound public policy.

Under the law, patents may be g-ranted for innovations that are useful, novel and nonobvious; see 35 USC Sections 101-103 and 112. Under 35 USC Section 271, a patent gives the holder the exclusive right to make, use and sell the patented invention. The consequences of infringing a patent can be substantial. Issued patents are presumed valid; an accuser must overcome this presumption with clear and convincing evidence to invalidate a patent; see 35 USC Section 282. Even if an accused infringer is not found liable, defending a lawsuit can be costly. The total cost to litigate a patent infringement suit with $1 million-$25 million at risk ranges from $1.25-$3.5 million (from $3.1-$9.4 million when more than $25 million is at risk); see American Intellectual Property Law Association, Law Practice Management Committee, "Report of the Economic Survey 2005," pp. 23 and 1-109-110, available at www.aipla.org/Content/ NavigationMenu/Publications/Publica tions_Available_for_Viewing/Publica tions_Available_for_Viewing.htm. These costs cover a "typical case with no unusual complications" involving only one patent; see id. at pp. 2-3.

Number issued: In 1998, the Federal Circuit, in State Street Bank & Trust v. Signature Financial Group, Inc., 149 F3d 1368, held that business methods could be patented. (Business methods include business practices in many fields, including healthcare management, insurance and insurance processing, reservation and booking systems, financial market analyses, point-of-sale systems, tax processing and inventory and accounting and financial management.) The U.S. Patent and Trademark Office now classifies tax-strategy patents as subclass 36T in Class 705, " Data Processing: Financial, Business Practice, Management, or Cost/Price Determination"; see www.uspto.gov/ go/classification/uspc705/sched705. htm.As of Jan. 3, 2007, its website lists 51 patents issued in that subclass, and 83 such applications are pending (published...