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December 4, 2007

Patent Tax

The United States' best known racketeering syndicate turns its green eye of jealousy towards patents: the IRS wants to know of any transactions under the aegis of a tax-related patent. As David Boundy at Cantor Fitzgerald wondered: "20%-off-sales at Sears of dishwashers covered by patents could become transactions that have to be reported to the IRS. Has the entire executive branch taken leave of its senses?" Who said there was ever any sense to take leave of?

The IRS:

[T]he IRS and Treasury Department continue to be concerned about the patenting of tax advice or tax strategies and believe that adding a new category of reportable transaction to the section 6011 regulations for patented transactions will assist the IRS and Treasury Department in obtaining disclosures of tax avoidance transactions and in providing effective tax administration. Under the new category of reportable transactions, the ‘‘patented transaction’’ is a transaction for 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 the patent. A patented transaction also is a transaction for which a taxpayer (the patent holder or the patent holder’s agent) has the right to payment for another person’s use of a tax planning method that is the subject of the patent.

Recent patent office regulations that practitioners know are the equivalent of prosecution hell have been stated as "not having a significant economic impact;" so with the proposed IRS regs.

It has been determined that these regulations are not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required.

No doubt the rodents that rooted out the regs determined their insignificance. Speak of the devil...

Mark Nowotarski, President of Markets, Patents & Alliances:

I've had several very productive conversation with the authors of the regs, Michael Beker and Charles Wien. Several of the highlights were:

o They want to keep track of SOGRAT type inventions and other financial service inventions with tax benefits.
o They are not interested in physical inventions that have tax consequences, such as the patents covering hybrid cars that get tax credits.
o They are not interested in tax planning software, such as TurboTax®, even if it provides alternative methods of filing tax returns so that a user can choose the alternative that minimizes his or her taxes (e.g. married persons filing jointly or singly).

What the IRS is supposedly interested in is best considered a ruse. The Justice Department, given warrantless wiretapping license by the White House, supposedly to monitor potential terrorist activities, got phone records of hundreds of thousands of people. "Judicious government" is an oxymoron.

Here is the proposed regulation.

Posted by Patent Hawk at December 4, 2007 4:33 PM | The Patent System

Comments

It would be more efficient for the IRS to put a watch on all new patents issuing in class 705 and including the word "tax" in the abstract. For a modest cost, they could outsource the watch and preliminary analysis.

Posted by: Steve Sereboff at December 5, 2007 8:30 AM

Perhaps it would be more efficient for the IRS to put a watch on all new patents issuing in class 705 and including the word "tax" in the abstract. For a modest cost, they could outsource the watch and preliminary analysis. I'd recommend the Patent Hawk for the job.

Posted by: Steve Sereboff at December 5, 2007 8:32 AM

Have patents directed to tax avoidance schemes ever been litigated? I doubt they are enforceable. By law, I am entitled to pay as little tax as I am required to by the tax code. If I happen to infringe a patent in fulfilling my rights to pay only what I am required to under the statute, then I should be protected against infringement liability. Otherwise, each time a new tax act is passed into law, the first person to the door of the PTO with a scheme to leverage that law with a tax avoidance scheme would get a patent circumventing the intent of Congress in passing the act to allow people to pay only what they are required to pay under that act.

Posted by: lenehey at December 6, 2007 9:36 AM

Actually, wasn't the president of Aetna sued for tax strategy patent infringement just a year or two ago? I think that you would have to go to a lot of effort and money to invalidate these patents. You might be better off to just license them, especially as an individual tax payer.

Posted by: Christa at December 24, 2007 8:18 AM