Congress Passes Tax Patent Reform; Sends Bill to President

On the evening of September 8, the Senate passed the America Invents Act (H.R. 1249) by a vote of 89–9. The Senate’s version of the bill was identical to one passed by the House of Representatives in June, and it now goes to President Barack Obama for his signature.

The act reforms the U.S. patent system, and among its provisions is one intended to stop the granting of patents for tax strategies. The act deems any “strategy for reducing, avoiding, or deferring tax liability” to be “prior art” under patent law, and therefore not patentable. The tax strategy provision applies to “any patent application that is pending on, or filed on or after” the date of enactment.

In the act, “tax liability” is broadly defined to mean any liability for tax under federal, state, local or foreign law, and the provision covers taxes imposed by any “statute, rule, regulation, or ordinance that levies, imposes, or assesses such tax liability.”

The provision, however, does not apply to tax preparation and other software; it explicitly excludes 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.”

The AICPA and state CPA societies have been advocating for legislation to address tax strategy patents for the past five years. In a letter to all United States senators on September 6, AICPA President and CEO Barry Melancon urged the Senate to pass H.R. 1249, calling the tax patent provision, a “pro-taxpayer provision that will help ensure that our tax code is fair, less complicated, and accessible to all.”

In previous letters to Congress and the IRS, the AICPA expressed its concerns that allowing tax strategies to be patented:

• Limits taxpayers’ ability to use fully tax law interpretations intended by Congress;
• May cause some taxpayers to pay more tax than Congress intended or more than others similarly situated;
• Complicates the provision of tax advice by professionals;
• Hinders compliance by taxpayers;
• Misleads taxpayers into believing that a patented strategy is valid under the tax law; and
• Precludes tax professionals from challenging the validity of a patented strategy.

The U.S. Patent and Trademark Office Tax has granted over 150 patents on tax strategies and more than 160 more are pending. Existing patents would not be affected by the new law, but applications pending on the date of enactment are within the scope of the provision.

Tax strategies became patentable in 1998, along with other business methods, as a result of a Federal Circuit Court of Appeals decision, State St. Bank & Trust v. Signature Fin. Group, 149 F.3d 1368 (Fed. Cir. 1998).