AICPA Cheers as Congress Moves One Step Closer to Protecting Tax Strategies

June 30, 2011

The patent reform bill passed by the U.S. House of Representatives on June 23 is an important victory for U.S. taxpayers and the American Institute of Certified Public Accountants. 

The AICPA believes that patents granted for tax planning methods limit the ability of taxpayers to fully utilize interpretations of tax law intended by Congress.

The House-passed bill, H.R. 1249, also known as the America Invents Act, would deem any “strategy for reducing, avoiding, or deferring tax liability” to be prior art and, therefore, not patentable. It defines “tax liability” broadly to mean liability for tax under federal, state, local and foreign law, and the provision would cover taxes imposed by any “statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.” 

H.R. 1249 differs from the version passed by the Senate on March 8, so it must now go to the Senate or to a conference committee to work out differences.

If the bill becomes law, it will reflect an intense five-year advocacy effort by the AICPA, which has been concerned about the current practice for several reasons.  Tax preparers could be forced to pay a royalty for applying the tax code, and taxpayers may be misled into assuming that a patent for strategy means the strategy is valid under the tax code.  Patents have been issued for tax strategies in several tax planning areas, particularly in retirement, charitable, and estate planning.    

The tax strategy provision of H.R. 1249, as passed, applies to “any patent application that is pending on, or filed on or after” the date of enactment. Before passing the bill, the House defeated an amendment proposed by Colorado Democrat Jared Polis that would have potentially allowed more than 160 pending tax patent applications to move forward and possibly be granted patent protection.  The AICPA strongly opposed the amendment.

The Colorado Society of CPAs worked quickly and diligently to make sure that Representative Polis understood the accounting profession's opposition to his proposed exception for pending tax strategy patents.  Mary Medley, president and CEO of the CSCPA, recruited numerous constituent CPAs in Representative Polis' Boulder district to call and e-mail Representative Polis about the amendment pointing out that it would have created a large loophole.  In addition, the CSCPA sent a letter re-affirming its long-standing support for the ban on tax strategy patents, adding to the grassroots push for the provision to proceed unchanged in the House patent reform bill.

Allowing patents on tax strategies “may have a chilling effect on public discussion among tax practitioners,” said tax professors Jack Cathey and Howard Godfrey, and Grant Thornton partner Justin Ransome in an article for the Journal of Accountancy. “Tax professionals may choose not to discuss in a public forum a tax strategy they have suggested or are contemplating suggesting for fear of alerting a patent holder and becoming the target of an infringement action.”

The bill excludes from its applicability any “method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing” or that is “used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor.”

Tax strategies have been patentable as a type of business method ever since the Federal Circuit Court of Appeals determined that business methods could be patented in State St. Bank & Trust v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir.1998). Since then, the U.S. Patent and Trademark Office has granted approximately 140 patents on tax strategies.

Read AICPA President and CEO Barry Melancon’s statement about passage of H.R. 1249 or get more information about tax strategy patents on the AICPA website.