Coalition puts tax strategy patents in its cross hairs

A broad coalition of accounting, financial planning and consumer groups are hoping that the new Congress will take up a long-sought-after ban on the practice of patenting tax strategies. Tax patents cover a broad range of techniques involving retirement plans, trusts, charitable giving and even Roth individual retirement account conversions. Critics said that the patents can prevent accountants and financial planners from using many valuable techniques for their clients and give patent holders the power to determine who can and can't use parts of the tax code. The coalition is led by the American Institute of Certified Public Accountants and includes the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the International Association for Registered Financial Consultants. Matthew Young, director of congressional and political affairs at the AICPA, said that 130 tax patents have been issued and 100 more are pending before the Patent Office. “Anyone who uses a patented tax strategy has to get permission from the patent holder before they do so; otherwise, you could be sued [or] your client could be sued,” he said. Although some legal observers said that patent holders are more interested in getting credit for their strategies than making money off them, they can demand royalties from those who use their strategies, Mr. Young said. At least one tax patent case has been brought and settled. In 2006, the Wealth Transfer Group LLC sued the former chief executive of Aetna Inc. for violating its patent on the use of grantor-retained annuity trusts to transfer ownership of non-qualified stock options. The parties settled for undisclosed terms. On its web page, Wealth Transfer Group advertises the fact that it has a “patented technique to help you increase the value” of stock options in an estate plan. Robert Slane, managing member of the firm, said the strategy is available to anyone who pays a royalty, which is typically less than 1% of the “effective value that has been transferred outside the asset.” As far as banning tax patents, he said, “trying to dampen and take away intellectual property is very dangerous.”

NO HELP FROM COURTS

The patent issue began developing after a federal court ruled in 1998 that “business methods” could be patented. That was later interpreted as including tax strategies. Observers had hoped that a Supreme Court case involving commodities hedging, decided in June, might narrow the scope of business method patents. But the high court didn't alter the legal landscape, Mr. Young said, and “perhaps even made [the issue] more confusing.” “We feel it's just not good public policy to be able to say that this strategy is exclusive to us [the patent holder], and no one else can use it,” said Richard Salmen, chairman of the FPA and a senior vice president with Gtrust Financial Partners. “It's one thing [to patent] music, or a new tool or process, but to patent new ideas like that is another matter,” he said. “In our opinion, the patent system is not designed to be used that way.” Mr. Salmen said that those who prepare tax returns are at the greatest risk of running afoul of a patented strategy. A Roth IRA conversion patent, granted in 2000, covers what appears to be a fairly broad process for computing the tax consequences of converting a traditional IRA to a Roth and analyzing options for funding the tax cost. That is the type of analysis planners do every day. The holder of the patent, David A. Crockett of Marionville, Mo., could not be reached for comment. Critics said that it is nearly impossible to avoid violating patents on commonly used techniques. Patents have been granted to strategies that have been used by tax practitioners for many years, said T. John Costello Jr., an intellectual-property lawyer at Costello Royston & Wicker LLP. “That's one of the biggest issues with tax patents,” he said. “The burden goes to the planner to make sure he's not infringing on patents when giving tax advice,” said Phillips Hinch, assistant director of government relations for the FPA. The patents cover “more and more common practices,” he said. That is why the AICPA and its allies are gearing up to get legislation reintroduced in the next Congress to ban tax patents or make them unenforceable. In 2007, the House passed the Patent Reform Act of 2007, which would have made any tax-planning strategy unpatentable. A bill introduced in the Senate several years ago also got bipartisan support. President Barack Obama, who then was a senator from Illinois, supported it. This year, the Senate Finance Committee has been working with the Patent Office on details of possible legislation, Mr. Young said. One attorney thinks that the coalition's efforts go too far. Charles F. Wieland III, a shareholder and patent attorney with Buchanan Ingersoll & Rooney PC, said that the proposed legislation would ban patents of law in general and could have “great sweeping effects, far beyond tax patents.” E-mail Dan Jamieson at djamieson@investmentnews.com.