A tax patent is a
patent
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...
that discloses and
claims a system or method for reducing or deferring
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
es. Tax patents have been granted predominantly in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
but can be granted in other countries as well. They are considered to be a form of
business method patent
Business method patents are a class of patents which disclose and claim new methods of doing business. This includes new types of e-commerce, insurance, banking and tax compliance etc. Business method patents are a relatively new species of paten ...
. They are also called "
tax planning
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdict ...
patents", "tax strategy patents",
[Tax Strategy Patents, Patently O blog, November 13, 2007](_blank)
/ref> and "tax shelter patents". In September 2011, President Barack Obama signed legislation passed by the U.S. Congress that effectively prohibits the granting of tax patents in general.
History
The earliest patent that the United States Patent and Trademark Office
The United States Patent and Trademark Office (USPTO) is an agency in the U.S. Department of Commerce that serves as the national patent office and trademark registration authority for the United States. The USPTO's headquarters are in Alexa ...
(USPTO) considers to be a tax patent is Van Remortel et al., "System for funding, analyzing and managing health care liabilities". This patent issued in 1992 and covers, among other things, a computerized administration system for tax advantaged funding of health care programs for retirees. The United States Congress
The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...
has never passed a law ''explicitly'' allowing tax patents[Floyd Norris]
''Patent law is getting tax crazy''
International Herald Tribune
The ''International Herald Tribune'' (''IHT'') was a daily English-language newspaper published in Paris, France for international English-speaking readers. It had the aim of becoming "the world's first global newspaper" and could fairly be said ...
, October 19, 2006. but in 1998, the U.S. Court of Appeals for the Federal Circuit
The United States Court of Appeals for the Federal Circuit (in case citations, Fed. Cir. or C.A.F.C.) is a United States court of appeals that has special appellate jurisdiction over certain types of specialized cases in the U.S. federal court ...
ruled in State Street Bank v. Signature Financial Group
''State Street Bank and Trust Company v. Signature Financial Group, Inc.'', 149 F.3d 1368 (Fed. Cir. 1998), also referred to as ''State Street'' or ''State Street Bank'', was a 1998 decision of the United States Court of Appeals for the Federal ...
that business methods (and hence methods for reducing taxes) have been patentable
Within the context of a national or multilateral body of law, an invention is patentable if it meets the relevant legal conditions to be granted a patent. By extension, patentability also refers to the substantive conditions that must be met for ...
at least since 1952 when Congress amended the requirements for patentability in the Patent Act of 1952
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...
.
USPTO classification
The USPTO has created a patent class for tax patents. The classification is 705/36T.
The USPTO has placed 209 issued US patents and 188 published patent applications in this classification. The USPTO has not, however, published a formal definition of the class.
About 10 new tax patent applications have been filed each year in recent years, and about five new patents have been issued each year. Some applications and issued patents appear to be mischaracterized since they do not deal with taxes.
Regulation
In 2005, The U.S. Internal Revenue Service
The Internal Revenue Service (IRS) is the revenue service for the United States federal government, which is responsible for collecting U.S. federal taxes and administering the Internal Revenue Code, the main body of the federal statutory ta ...
(IRS) determined that none of the then pending U.S. tax patents contained abusive tax avoidance transactions.[Nowotarski, Mark, "Tax Strategies?", Insurance IP Bulletin, October 15, 2006](_blank)
/ref> Nonetheless, in September 2007, the IRS proposed a set of rules that would require tax filers to disclose whether they have paid a license fee to the holder of a tax patent. Similar to the ban passed by the U.S. House of Representatives, this regulation includes an exemption for patents on software for calculating taxes.
There is some concern in the financial community that complying with these regulations will increase the chances of a tax patent licensee being audited by the IRS and that this, in turn, will decrease the value of tax patents in general. These regulations have, however, been strongly supported by the Section of Taxation of the American Bar Association
The American Bar Association (ABA) is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. Founded in 1878, the ABA's most important stated activities are the setting of acad ...
.
Examples
Examples of tax patents include:
* Funding of a GRAT with nonqualified stock options.
* Tax-deferred real estate transaction.
* https://www.investopedia.com/how-vanguard-patented-a-system-to-avoid-taxes-in-mutual-funds-4686985
Enforcement
In 2006, the Wealth Transfer Group sued former Aetna
Aetna Inc. () is an American managed health care company that sells traditional and consumer directed health care insurance and related services, such as medical, pharmaceutical, dental, behavioral health, long-term care, and disability plans, ...
CEO John Rowe for infringement of a tax patent. The patent was , entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options". (i.e. SOGRAT
A grantor-retained annuity trust (commonly referred to by the acronym GRAT), is a financial instrument commonly used in the United States to make large financial gifts to family members without paying a U.S. gift tax.
Basic mechanism
A grantor ...
) This case has been settled for undisclosed terms.
New law
On September 8, 2011, the United States Senate passed the ''Leahy-Smith America Invents Act'', which had already been passed by the House of Representatives. The Act is described as "a comprehensive patent reform bill that includes language to stop the U.S. Patent and Trademark Office from issuing patents for tax strategy methods." The Act was signed into law by President Barack Obama on September 16, 2011.
Subsection (a) of section 14 of the Act provides (in part):
::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.
Subsection (b) of section 14 provides (in part):
::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.
Subsection (c) of section 14 provides (in part):
::This section does not apply to that part of an invention that ..is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing...
Subsection (e) of section 14 of the Act provides that the tax patent prohibition takes effect on the date of the enactment (September 16, 2011) and that it will apply "to any patent application that is pending on, or filed on or after, that date, and to any patent that is issued on or after that date."[Leahy-Smith America Invents Act, Pub. L. No. 112–29, sec. 14(e).]
References
{{reflist, 30em
United States patent law
Tax avoidance
Taxation in the United States