Tax Planning Patents (Portfolio 618)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this portfolio, Premier tax experts examine many aspects of the tax planning patent phenomenon and the practical issues faced by tax practitioners. This portfolio traces the background and history of this movement from the drive to merely patent computer software and financial methods, to a 1998 judicial decision permitting patents on business methods generally, to the U.S. Patent and Trademark Office (the “Patent Office”) practice of issuing patents on tax strategies.

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The Tax Planning Patents, No. 618, examines many aspects of the tax planning patent phenomenon and the practical issues faced by tax practitioners. This portfolio traces the background and history of this movement from the drive to merely patent computer software and financial methods, to a 1998 judicial decision permitting patents on business methods generally, to the U.S. Patent and Trademark Office (the “Patent Office”) practice of issuing patents on tax strategies.
While this portfolio explains why the Patent Office issues tax planning patents, and describes the steps that an inventive tax planner can follow to file a patent application and eventually obtain a tax planning patent, emphasis is placed on how tax advisors can practice in a world with patented tax strategies and avoid or minimize the risk of being sued for infringing or inducing infringement. Unfortunately, merely locating patents will not always be sufficient; a taxpayer or practitioner will have to know what is covered under (or “claimed” by) a patent. This portfolio describes the difficulties in identifying the boundaries of a patent. One judge has observed that a district court interpretation of a patent claim is reversed approximately forty percent of the time when challenged on appeal, making claim construction a veritable coin toss. Furthermore, this portfolio discusses the disturbing fact that a taxpayer will be liable for direct infringement, and a tax advisor will be liable for inducing infringement, even if they do not violate the literal claims of a patent when a court deems that they used an “equivalent.” This portfolio discusses the potential consequences of patent infringement — the ability of a patent holder to obtain an injunction, monetary damages for lost profits, and in the case of willful infringement, even treble damages and an award of attorney fees.
This portfolio considers various ethical issues for the non-patent holding attorney who is advising a client with respect to tax or estate planning in a context where a potentially relevant patent may exist or is known to exist, and the issues presented for an attorney seeking to profit from a patent as the patent holder, as well as some related issues arising out of a representation that may create the opportunity to obtain a patent on a tax strategy.
This portfolio also summarizes the debate on whether tax planning patents should be available. It reviews the arguments by intellectual property rights advocates that the patent laws must apply equally across all areas of human endeavor and that U.S. treaty obligations prevent the U.S. from excluding tax planning innovations from the range of patentable subject matter, and the counter-arguments by many tax professionals that no artificial economic stimulus is needed to promote the proliferation of tax shelters, and that tax patents allow individuals to capture public laws with adverse consequences for horizontal equity, taxpayer morale, and a proper balance of the tax burdens between the rich and the less wealthy. The portfolio concludes with a brief list of current prominent tax planning patents.

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Bloomberg BNA Portfolios are written by leading tax professionals who set the standard as leaders in their fields. The Tax Planning Patents, No. 618 portfolio was authored by the following attorneys.  



Professor Michael B. Lang was the founding Director of Chapman University School of Law's Tax LL.M. Program. A graduate of Harvard and the University of Pennsylvania Law School, where he was elected to the Order of the Coif, he is a member of the Pennsylvania and Illinois Bars and practiced in Chicago and Philadelphia. He has taught at nine law schools, at both the J.D. and LL.M. level, including Utah, Washington University (St. Louis), Loyola (Los Angeles), Miami and San Diego. His extensive work with the ABA Section of Taxation has included chairing its Committees on Teaching Taxation and Standards of Tax Practice. He has also been an active member of the Section's Task Force on Patented Tax Strategies and is an elected Fellow of the American College of Tax Counsel. Professor Lang's publications range from articles in leading tax periodicals, such as The Tax Lawyer, Tax Law Review, Florida Tax Review and Tax Notes, and law reviews to a treatise on Federal Tax Elections (with Colleen Khoury) and two decades of compiling the Index to Federal Tax Articles (with Isa Lang). He is a co-author of a textbook, Federal Tax Accounting, for graduate tax students, which was published in 2006, and a textbook, The Regulation of Tax Practice, to be published in 2010.


Credentials / J.D., UNIVERSITY OF PENNSYLVANIA LAW SCHOO; Order of the Coif; Moot Court Board; Invited to Join Law Review; Government Policy Research Unit; HARVARD UNIVERSITY; Professor, Chapman University, Visiting Professor; Loyola Law School, Spring 2008, Summer 2009; Professor  Director, LL.M. in Taxation Program; Chapman University, 2002; 2007 Professor (Associate Dean 199); University of Maine School of Law, 1983; University of Miami, Fall 2000, Visiting Professor, Washington University in St. Louis, 1991; University of San Diego; Associate Professor, University of Utah; Assistant Professor; Illinois Institute of Technology/ Chicago; Kent College of Law, 1978; Research Fellow; Yale Law School, Temple University


Portfolio Description


Technical Advisors


Detailed Analysis

I. Introduction - Tax Planning Patents: Practical Problems for Practitioners

Introductory Material

A. Moving from Fear and Loathing to Comprehension and Appropriate Responses

1. First Emotional Response - Tax Patent Popularity

2. Tax Planning Patents Are Here

3. Basic Patent Rights and Rules

4. A High Stakes Game: Damages, Treble Damages, Award of Attorney Fees to the Winner and More

B. Arrival of Tax Planning Patents and Disturbing Features

1. Patents on Business Methods and the Introduction of Tax Planning Patents

2. High Stakes

3. Why Many Intellectual Property Experts Have No Sympathy for Tax Patent Critics

C. Practically Dealing with Tax Planning Patents

1. How to Obtain a Tax Planning Patent

2. How to Avoid Infringing a Tax Planning Patent

3. Ethical Considerations in Representing Clients

D. Will the Rules Change?

II. Tax Planning Patents in Context

Introductory Material

A. Pre-U.S. Patent History

B. U.S. Patent History

C. Patent Justifications

1. Natural Rights

2. Utilitarianism

D. Patent Economics

1. Economic Benefits of Patents

a. Asserted Market Failure Without Patents

b. Cause for Market Failure - Inventions as Public Goods

c. Would the Asserted Market Failure Actually Occur in Every Industry?

d. Patents as the U.S. Response

2. Adverse Economic Consequences of Patents

a. Loss of Liberty

b. Monopoly Power

c. Alternatives to Patents

3. The Four Economic Incentives Created by U.S. Patents

E. Role of the Federal Circuit

1. The Most Powerful and Controversial Force in Shaping Patent Law?

2. Congress' Reasons for Creating the Federal Circuit

3. Benefits of the Federal Circuit's Exclusive Patent Jurisdiction

4. Criticism of the Federal Circuit

III. How to Obtain a Tax Planning Patent - Patenting Procedures

Introductory Material

A. Documenting the Invention Process

B. Working With the Patent Attorney or Patent Agent

C. Preparing and Filing the Patent Application

1. Provisional Patent Applications

2. Elements of a Patent Application

D. Publication of the Patent Application

E. Patent Office Processing Through the First Office Action

F. Correspondence With the Patent Examiner, Appeals and Patent Issuance

G. Post-Issuance Procedures, Including Maintenance, Reissue, and Re-Examination

H. Continuing Application Practice

IV. Statutory Subject Matter - Key Hurdle For Tax Planning Patents

Introductory Material

A. The Four Statutory Categories: Innovative Tax Plans as a "Process"

B. Fundamental Principles and Mental Steps: Important Exclusions for Tax Plans

1. Exclusion of Fundamental Principles

2. Mental Steps Exclusion

C. Traditionally Business Methods Were Not Patentable Subject Matter

D. The Patent Battle on Computer-Related Inventions

E. State Street Bank Case, the Rise of Business Method Patents in General, and Tax Planning Patents in Particular

1. The State Street Bank Case

2. Rise of Business Method Patents Generally.

3. Rise of Tax Planning Patents in Particular

F. Prior User Defense Helped Make Business Methods Patentable

G. U.S. Supreme Court Grumblings in 2006 on the Federal Circuit's Approach to Patentable Subject Matter

H. In re Bilski - Something for Everyone, and Confusion for All

1. Facts and Procedural History of Bilski

2. Supreme Court Fails to Enunciate a Clear Test for Process Patents

a. The U.S. Supreme Court Majority's Opinion in Bilski Is a Narrow Holding Dealing with Non-Machine Implemented Processes

(1) Supreme Court Rejects Federal Circuit's View That a "Process" Must Satisfy the MORT Test To Be Patentable

(2) Supreme Court Confirms Federal Circuit's View That Business Methods Can Be Patented

(3) Supreme Court Concludes That Bilski's Invention Is a Non-Patentable Abstract Idea

b. Supreme Court's Approach May Make the Federal Circuit's Nightmare Come True

c. Points for Patent Advocates, and Opponents, in the Supreme Court Majority's Opinion

3. Beyond the Supreme Court's Approach in Bilski - the Real World Issue of Dealing with Machine-Implemented Processes

a. Machine Prong of the Test

b. Transformation Prong of the Test

c. Corollary Rules and Procedures in Applying the MORT Test

I. When Are Tax Plans Patentable After Bilski?

1. Arguments for Patentability

a. Machine

b. Process Tied to a Machine: Machine Prong

c. Transformation Prong

2. Arguments that Tax Planning Processes Are Not Patent-Eligible Subject Matter After Bilski

a. Non-Machine Implemented Process

b. Machine or Machine Tied to a Process

c. Transformation Prong

J. Future Patentability Tests After Bilski

K. Patent Office Interim Guidance Issued One Month After Bilski Opinion

L. First Decided Case Clearly Involving a Tax Planning Patent

V. Other Patentability Tests and Special Concerns for Tax Planning Patents

Introductory Material

A. Utility

1. Formulation of the Utility Test - An Easy Test Today

2. An Invention That Violates Public Policy May Be "Useful"

3. Will Utility Be an Easy Hurdle for Tax Planning Patents?

B. Novelty

1. Judging Novelty and Identifying Prior Art

2. Prior Use Must Be Public To Be Prior Art

3. Novelty and Tax Planning Innovations

C. Nonobvious

1. The "Ultimate Test of Patentability"

2. Modern Application of the Nonobvious Test

a. Factual Findings Required in Three Areas

b. Secondary Considerations

3. Testing Tax Planning Patents for Nonobviousness

VI. How to Avoid Infringing a Tax Planning Patent

Introductory Material

A. Infringement and the Scope of Patent Claims

1. Infringement Defined and the Two-Step Test

2. The First Step: Patent Claim Construction

a. The Nature of a Claim and Difficulties of Interpretation

b. The Process and Procedures for Claim Construction

3. The Second Step - Comparing the Construed Patent Claim with the Alleged Infringement

4. Infringement Under the Doctrine of Equivalents

5. Judicial Restrictions on the Doctrine of Equivalents

B. Potential Consequences of Infringement

1. Risk of Detection and Potential Liability

2. Injunctive Relief

3. Monetary Damages - Rampant Uncertainty

a. Actual Damages: Lost Profits

b. Alternative Damages: Reasonable Royalty

c. Enhanced Damages - Potential for Treble Damages

4. Attorney Fees, Costs and Interest

5. Settlement and a License Agreement

C. Prior User Defense

D. Limited Avenues for Challenging a Bad Patent in an Administrative Proceeding

E. Special Concerns with Tax Planning Patents

VII. Tax Planning Patent Debates

Introductory Material

A. Praising Tax Planning Patents

1. The Benefits of a Unified Patent System

2. U.S. Treaty Obligations

3. Congress or the IRS Can Render a Particular Tax Planning Patent Useless by Changing the Law

4. Greater Employee Mobility and Entrepreneurial Opportunities - The Silicon Valley Argument

5. Winners and Losers in the Tax Planning Market, and the Nature of Tax Planning Strategies

B. Criticizing Tax Planning Patents

1. Traditional Policy Rationales for Patents Fail to Justify Tax Planning Patents

2. Tax Planning Patents Allow a Private Person to Capture a Public Law

3. Horizontal Inequity, Vertical Inequity, and Increased Government Deficits

4. Tax Inequity, Tax Complexity and Reduced Taxpayer Morale

5. Bad Patents - Monopoly Rights on Old and Obvious Tax Techniques

6. Increased Administrative Costs

7. Patent Trolls

8. Potential Restrictions on the Free Flow of Ideas - Impact on Professionalism

9. Promoting Scams?

VIII. Ethical Considerations in Representing Clients

A. Introduction

B. Non-Patent Holder Lawyer Advising Client Where Possibility of Relevant Patent

1. Risks

2. Competence and Diligence

3. Communication

4. Conflicts of Interest

5. Confidential Client Information, Attorney-Client Privilege and Section 7525 Privilege

6. Substantial Likelihood of Infringement Claim

7. Return Preparer Accuracy Standards

8. Planning Advice and Covered Opinions

C. Lawyer Seeking to Profit from Patent She Owns

1. Introduction

2. A Patented Tax Strategy as the Embodiment of a Package of Legal Services

3. Lawyer Licensing Patent to Own Client

4. Conflict of Interest in Advising Client

5. Fee Issues

6. Patents, Applications, Licensing Agreements and Other Advice

7. IRS Requests for Information

IX. Congressional Proposals to Prohibit or Restrict Tax Planning Patents

Introductory Material

A. Why Is Congressional Action Needed to Respond to Tax Planning Patents?

1. The Patent Office Cannot Stop Tax Strategy Patents on Its Own Initiative

2. The Federal Circuit Is Unlikely to Prohibit Patents in a Particular Field of Endeavor

3. Can the Treasury Prohibit Tax Strategy Patents?

B. Line-Drawing: A Key Issue for Any Proposal

C. Proposals Prohibiting Tax Planning Patents

1. Analysis of the Bills

2. The Current "Nuclear" Invention Exception

D. Proposal Limiting Remedies on Tax Planning Patents

1. Analyzing the Bill

2. The Current Restriction on Remedies - Medical Procedures

E. How Did the Medical Profession Effectively Render Medical Procedure Patents Null and Void, and Can This Be Done in the Tax Field?

F. Would a Restriction on Previously Issued Tax Planning Patents Constitute a Taking of Property Requiring the Government to Pay Just Compensation?

1. Analyzing the Existing Exclusions

2. Types of Takings and Uncertainty with Regulatory Takings of Patent Rights

X. Possible Regulatory Response - Proposed Regulations Treating Patented Transactions as Reportable Transactions

Introductory Material

A. Structure of the Reportable Transaction Regulations Generally

B. The Boundaries of "Patented Transactions" Under the Proposed Regulations

C. When an Inventor or User "Participates" in a Patented Transaction

D. Effective Date

E. Reporting on IRS Form 8886

F. Considerations for Material Advisors

1. Reporting Requirement

2. List Requirement

G. Potential Penalties for Failure to Report

H. Relation to Confidential Transactions as Reportable Transactions

XI. Prominent Tax Planning Patents


Working Papers

Table of Worksheets


Worksheet 1 How to Find Tax Planning Patents and Published Tax Planning Patent Applications (as of October 31, 2010)

Worksheet 2 Consent Judgment Settling 2006-2007 Litigation Involving the SOGRAT Patent - Wealth Transfer Group, LLC v. John W. Rowe, Case No. 3:06CV00024 (AWT) (D. Conn. March 9, 2007) (Consent Final Judgment Regarding Settlement Agreement)

Worksheet 3 Unpublished Opinion, Fort Properties, Inc. v. American Master Lease, LLC, Case No. SACV07-365 AG (JCx) (C.D. Ca. Jan. 22, 2009) (Order Granting Motion for Summary Judgment of Invalidity)

Worksheet 4 U.S. Patent #6,292,788 (Sept. 18, 2001), Methods and Investment Instructions for Performing Tax-Deferred Real Estate Exchanges (patent involved in Fort Properties, Inc. v. American Master Lease, Case No. SACV07-365 AG (JCx))

Worksheet 5 U.S. Patent #5,193,056 (March 9, 1993), Data Processing System for Hub and Spoke Financial Services Configuration (patent involved in State Street Bank case)



U.S. Constitution:

Amendment V. Statutes:

Internal Revenue Code:


Proposed Regulations:

Legislative History:

Committee Reports and Hearings:

Ethics Rules and Opinions:

American Law Institute Restatements:

Treasury Ruling: