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?
- Beware Patented Tax Strategies (blogs.forbes.com)
- Patent Reform Supported By Small Entities? (gametimeip.com)
- Lies And Ignorance Underlying The Patent Reform Act (gametimeip.com)