IRS Proposes Adding Patented Transactions to List of Reportable Transactions

In September 2007, the Service issued proposed regulations that would add patentable transactions to the categories of reportable transactions under Regs. Sec. 1.6011-4, which requires taxpayers who engagein certain reportable transactions to file a disclosure statement using Form 8886, Reportable Transaction Disclosure Statement.

The U.S. Patent Office has recently started issuing patents for tax strategies, including some for strategies that were previously described in IRS rulings. These patents have generated much attention and controversy in recent months. (See Ransome and Sherr, “Patenting Tax Ideas,” The Tax Adviser (August 2007), p. 456.) At the time of this writing, the House has passed a bill that would prohibit the patenting of tax strategies (H.R. 1908).

The Service is concerned that patented tax strategies are potentially abusive; it is also concerned that taxpayers will think that because a strategy is patented it has been approved by the IRS.

In general, the proposed rules would require disclosure of deals if taxpayers paid for the legal right to use patented tax strategies or claimed tax benefits stemming from the use of those strategies. They also would require material advisers to such deals to maintain and disclose investor lists under Sec. 6112.

The proposed regulations define a patented transaction as any transaction in which a taxpayer pays (directly or indirectly) a fee, in any amount, to a patent holder or the patent holder’s agent for the legal right to use a tax planning method that the taxpayer knows or has reason to know is the subject of a patent. A patented transaction is also defined as a transaction for which a taxpayer (the patent holder or the holder’s agent) has the right to be paid for another person’s use of a tax planning method that is the subject of a patent.

The proposed regulations specifically exclude from the requirements patented tax preparation software or other tools used to perform calculations or provide mechanical assistance in the preparation of returns.