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Worried About Infringing A “Tax Strategy” Patent? Humble Yourself And It May All Go Away

Greg Aharonian refers to the Patent Reform Act of 2011‘s attempt to ban tax patents as a “folly” on equitable and “due process” grounds. While these may be compelling arguments in themselves, the simple fact is that the way the Senate has decided to attack tax patents is colossally stupid (and really demonstrates a complete inability to grasp the subject matter). Anyone with a brain can tell you that Congress ought to love tax patents … But if they really do want to kill them off, a more simple route is always preferable, and tax strategists may be able to rid themselves of these patents more easily than they think … but they won’t, and by the end of this post, you’ll know exactly why.

But first, Greg’s equity and due process arguments.  On equitable grounds, Greg argues that, given that business methods are patentable, if new, any legal business methods that can be invented to reduce taxes have as much right to exist as patents on life saving drugs. On due process grounds, Greg argues that defining “tax business methods” is more difficult than it appears. Considering a hypothetical patent on a pool cover having a green, grasslike texture, Greg mentions a recent NYT article about tax evasion methods in Greece where pools are concealed while their owners refuse to register and pay required taxes on their pools.  Since the primary function of the patented product, according to Greg, would be to avoid paying taxes, because the invention can be claimed and described without any mention of taxes at all, it would probably survive in a post-tax patent world.

Ultimately, the point is that the clever patent attorney is always one step ahead of Congress, and can probably claim any financial process in such a way that tax liability is reduced, without actually mentioning taxes.

That aside, the ridiculous law Congress is considering to rid the world of tax patents reads as follows:

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.

In other words, Congress now wants to legislatively dictate that something isn’t novel and non-obvious, regardless of the actual facts that may (or may not) exist. I can certainly understand the inherent conflict here. Why should a government agency be empowered to publicize and incentivize the discovery of “loopholes” in the tax code to reduce the amount of revenue realized by another government agency? Granted, tax strategies existed long before anyone thought to try and patent them, and if banned, the tax shelters will continue to exist.  The only difference is, they’ll be maintained in secret, lest KPMG give up valuable for free to clients of PwC …

This is exactly why Congress should embrace tax patents. They are the only institution that can quickly and immediately immunize itself against its “competition” by altering the tax loopholes exploited by tax patents. Encouraging publication of these methods will only help Congress identify mistakes they made in crafting the laws in the first place.  (Of course, Congress could also obsolete all tax strategies overnight by going to one of the proposed simplified tax solutions, but that’s entirely beside the point).

Of course, since tax strategies, by their nature, rely on manipulations of the tax code, a body of prior art already exists.  In effect, what the creators of various tax strategies have done is parse the “instructions” until they discover specific implementations of legal processes resulting in a reduction of tax liability. Simply put, they have applied the tax code in a specific way. If the application engaged in involved no more than ordinary skill, then any patented process would be (wait for it ….) obvious.

Tax strategists can defeat every tax patent in existence simply by agreeing (and explaining to each of their clients) that they are all of equal, ordinary skill, that no one strategist is smarter or more skilled than another, and that the strategies developed are simply obvious variations of applying the tax code. I’ll even prepare a document to that effect that every tax strategist will be able to sign. How many signatures do you think I’ll get?

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Discussion

12 thoughts on “Worried About Infringing A “Tax Strategy” Patent? Humble Yourself And It May All Go Away

  1. I have the easy solution to all of this – eliminate the Tax Code! Let’s move to a flat tax, or even a nationwide sales tax. Anything but the ridiculous system we have now.

    Posted by Mark Malek | February 24, 2011, 8:54 am
    • That would be ideal … but we both know that ain’t gonna happen.

      Seriously, could you imagine one of these hotshot tax specialists at a Big Four firm going on record as saying tax shelters are obvious manipulations of tax code completely within the ordinary skill?

      Posted by Patrick | February 24, 2011, 2:08 pm
  2. The Leahy Patent Reform and Inventor Repression Bill is destined to injure not just independent inventors but the basic start-up culture that has brought prosperity and wealth to us here in Northern California and elsewhere in our nation.

    We join all our fellow inventors in shouting DOWN WITH THE PATENT REFORM AND INVENTOR REPRESSION BILL!
    It’s time, Senator Leahy, to take a whole new approach to your deeply flawed Bill! In particular you may not exclude any area of practice to satisfy some lobbyists. By banning tax inventions you are trying to get the camel’s nose in the tent. Next inventors will find themselves crowded out by Leahy’s camel’s hump- not a pretty sight!

    This time Senator we want to see a strong invitation for multiple inventors to provide input to the new bill!

    Posted by Vic Kley | February 25, 2011, 7:58 am
  3. Hey, you missed the good part:

    (b) Definition- 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.

    ANY foreign jurisdiction? Really? ANY foreign jurisdiction? Like Iran? Lybia? North Korea? How about the Taliban? I hear they raise taxes.

    So here I am, the Taliban. I need to raise a little cash. I post a note on Craig’s list. “Have any US patent declared invalid. Just send me $$$ and I’ll set up a certified Taliban tax credit to anyone that makes uses or sells said patented invention. You file for the reexam and have all claims declared obvious because they are now all tax stragies that were unknown at the time of the invention. Every aspect of those claims that were novel must now be disregarded.”

    What a great law. I can’t wait for it to pass.

    Posted by Mark Nowotarski | February 28, 2011, 6:51 pm
  4. Oh wait. I’m not thinking out of the box enough here.

    The law says nothing about a tax strategy having to be a good tax strategy or even one that works under current law. It could be a really stupid strategy that winds up costing you more money than you save.

    So who needs the Taliban? All you have to do to invalidate a patent is submit a request for reexamination and STATES that making, using or selling the claimed invention is a strategy for reducing taxes and bingo, the claimed invention IS a strategy for reducing taxes (just not necessarily a very good one) and the patent is invalid.

    Posted by Mark Nowotarski | February 28, 2011, 7:08 pm
    • Might be an interpretation that only Scalia would adopt, but your point is a valid one. Not only is the concept behind the amendment ill-conceived, it is also poorly drafted to be both under-inclusive (Aharonian’s example) and over-inclusive (your example).

      This just demonstrates why patentability needs to be decided at the administrative level, not the policy level.

      Posted by Patrick | March 1, 2011, 8:48 am

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