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January 10, 2008

Green Over Patents

Bruce Springsteen once wrote: "Poor man wanna be rich; rich man wanna be king; and a king ain't satisfied 'tll he rules everything." In their raw lust for hegemony, creating "a new category of reportable transaction" for tax-related patents, the IRS resembles Springsteen's rich man.

The IRS on its new rule:

[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.

[A] taxpayer has participated in a patented transaction if the taxpayer's tax return reflects a tax benefit from the transaction (including a deduction for fees paid in any amount to the patent holder or patent holder's agent). A taxpayer also has participated in a patented transaction if the taxpayer is the patent holder or patent holder's agent and the taxpayer's tax return reflects a tax benefit in relation to obtaining a patent for a tax planning method (including any deduction for amounts paid to the United States Patent and Trademark Office as required by title 35 of the United States Code and attorney's fees) or reflects income from a payment received from another person for the use of the tax planning method that is the subject of the patent.

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

Charles Macedo of Amster, Rothstein & Ebenstein:

The proposed rules as written, besides having a host of infirmaries in terms of definiteness and breadth, set forth a serious challenge to the Patent System which should not be tolerated without comment by the patent bar. In particular, the proposed regulations in effect have the IRS induce patent infringement of so-called "tax strategies" patents by attaching a penalty on the lawful licensee which it does not attach to a willful infringer. Since the proposed regulations only apply while the patent is in effect, it is clear these rules are merely meant to penalize legitimate patent holders. The patent bar should let the IRS know that this is an inappropriate scheme. If we as a group do not indicate our objection to these proposed regulations, what is to stop another part of the Federal Government (e.g., the EPA, CPSC, etc) from adopting similar rules to penalize patent holders and legitimate licensees for patenting devices to improve the ecology or safety of devices.

To provide a facade for venting, a public hearing is being held February 21 in Greenback Confiscation Central.

Posted by Patent Hawk at January 10, 2008 5:03 PM | The Patent System


Your comments about the proposed IRS regulation are well taken. Many patent practitioners, however, are either unconcerned about the regulation or are members of larger firms with tax partners who are opposed to method patents directed to tax strategies. Perhaps you will appear at the public hearing and make comments?

Posted by: stephen milbrath at January 11, 2008 7:04 AM


I would suggest that the precedent of the US government penalizing legitimate patent holders and applicants has been in effect for decades. Dog bites man.

When the government takes money out of inventors' pockets (ostensibly for filing and maintenance fees), the portion of the money that is not related to the administration of the patent system, such as the portion applied to the costs of invading foreign countries, is a penalty and a special tax applied to inventors for seeking and holding a patent.

Pure and simple.

But I agree with you, the IRS' method is flawed however admirable their intentions may be. Congress needs to proscribe this subject matter by statute.

Posted by: BabelBoy at January 11, 2008 8:53 AM

And Congress is legislating in this area, forbidding such inventions. This is one item in the pending Senate bill. Since there is so much wrong with the bill, I think that the patent tax provision is not being addressed.

Posted by: Joyce at January 11, 2008 11:10 AM

While I agree that the IRS probably has gone about this the wrong way, extending patent protection to cover tax methods doesn't serve any real purpose.

First, it serves no function except to disadvantage other parties vis-a-vis a tax system that, in at least the theoretical sense, is designed to treat similarly situated individuals/entities the same. It makes perfect sense that the IRS would want to punish people trying to use/enforce patents that disadvantage similarly situated individuals.

Second, I'm not sure why inventors need extra incentive in this area. People have lots of incentive to avoid taxes, so I'm not sure that extending patent protection to these areas promotes progress. Indeed, one should probably argue that we want to create incentives to NOT avoid taxes.

Finally, Charles' slippery slope argument is ridiculous. Neither of the above points would apply to ecology or safety.

Posted by: mmm at January 15, 2008 7:11 AM