Senate Passes the America Invents Act Promoting Taxpayer Rights at the Expense of Intellectual Property Rights

Mar 16, 2011   

On March 8, 2011, the Senate passed the America Invents Act, which “most notably, includes a provision preventing patents on tax strategies, which will reduce the cost of compliance for taxpayers during tax season.” S. 23, America Invents Act of 2011. Senate Democratic Policy Committee Legislative Bulletin. (February 28, 2011).
The relevant provision states:

For purposes of evaluating an invention under section 102 or 103 of title 35, United States Code, any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.

America Invents Act of 2011, S. 23, 112th Cong. §14(a) (2011). In order to obtain a patent for an invention, an inventor must show that the invention is novel, non-obvious, and has a practical application. In 1998, the United States Court of Appeals for the Federal Circuit determined that business methods and methods of doing business may be patentable; State Street Bank and Trust Company v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). This led to a flood of business-related, including tax-related inventions. This provision now provides that tax strategy patents with claims for any strategy for reducing, avoiding, or deferring tax liability cannot be considered novel or non-obvious, and therefore are not patentable.

Senior committee member Chuck Grassley from Iowa discussed the balance between taxpayer rights and intellectual property rights:

Tax strategy patents are on the rise. More and more legal tax strategies are unavailable or more expensive for more and more taxpayers. Its important to protect intellectual property rights for true tax preparation and financial management software. At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. Thats necessary for fairness and tax compliance.

Notably, the America Invents Acts ban on tax strategy patents actually promotes taxpayer rights at the local, state, federal, and even international level. Among the Acts supporters is the American Institute of Certified Public Accountants (AICPA) which has expressed numerous concerns with the patentability of tax strategies in its letters to Congress. Specifically, AICPA argued that tax strategy patents limit the taxpayers ability to use tax law interpretations intended by Congress, deters compliance by taxpayers, and may deceive taxpayers into believing that a patented strategy is valid under the tax law.

AICPA President, Barry Melancon, commented on the passage of the legislation:

Tax strategy patents restrict taxpayers use of the tax laws as Congress intended and, in effect, create a monopoly on tax compliance for those holding the patents. The patent holders can effectively become gatekeepers for who can and cannot use certain parts of the Tax Code. The AICPA believes that no taxpayer should be sued or have to pay a royalty just for using the best legal means available to comply with the Federal Tax Code. Section 14 of S. 23 is a pro-taxpayer measure that finally would solve the tax strategy patent problem and give all taxpayers and their advisers equal access to the tax laws.

As we previously reported, the Internal Revenue Service (IRS) has sought to meet its goals of “a sound, fair and efficient tax administration” and “improved compliance” by shifting its focus from taxpayers to return preparers. Section 14 of the America Invents Act is expected to further these goals.

Senate Finance Committee Chairman Max Baucus from Montana discussed the positive effect of Section 14 on recent tax reform:

Taxes are a responsibility we share, and tax strategies should not be hijacked and monopolized for profit. Every American has the same right to work within the tax code, and no one should be able to claim a strategy as his own. Our efforts to improve the tax code dont stop here. We have already begun looking at reforming the tax code in a manner that will create jobs, draw investment into the U.S., simplify the system and increase fairness for all taxpayers.

If you have any questions regarding the America Invents Act or any other tax or intellectual property provision, please contact Fuerst Ittleman, PL at contact@fidjlaw.com.