[A2k] Patent Law is Getting Tax Crazy

[Robin Gross]

Patent Law is Getting Tax Crazy
19 October 2006
 From International Herald Tribune
By Floyd Norris
  http://www.iht.com/articles/2006/10/19/business/norris20.php

As the American tax law gets more and more complicated, lawyers have
come up with one more way to make life difficult for taxpayers: Now you
may face a patent infringement suit if you use a tax strategy that
someone else thought of first.

"I can't even imagine what it will be like in 5 or 10 years," said
Dennis Drabkin, a tax lawyer with Jones Day in Dallas, "if anytime a
lawyer or accountant gives tax advice, they have to find out if there is
a patent on this." He notes that researching patents, and then licensing
them, would just make tax compliance more costly.

Drabkin is chairman of an American Bar Association task force on the
issue. He said that at one conference where tax strategies were
discussed, participants later got a letter warning that using one idea
mentioned would be in violation of a patent.

Why would Congress pass a law allowing such a thing? The answer is that
it did not. But a U.S. appeals court ruled in 1998 that business methods
could be patented, and since then the U.S. Patent and Trademark Office
has issued 50 tax- strategy patents, with many more pending.

There is even one case pending in U.S. court in Connecticut, in which an
organization called the Tax Strategies Group complains that John Rowe,
the chairman and former chief executive of Aetna, infringed on its
patent by using a certain type of trust to minimize taxes on profits
from stock options. The group wants Rowe to be barred from using that
strategy unless he buys a license from it.

To patent lawyers, all this makes some sense. Others might see it as an
example of judicial absurdity.

But if it is legal, the mind boggles at the possibilities. Could I get a
patent on taking a deduction for dependents, so that every parent in
America would have to pay a royalty to me to take advantage of the tax
law passed by Congress? I presume the patent office would find that
obvious, and thus not patentable, but there are plenty of slightly more
complicated strategies that might be patentable, particularly
considering the fact that patent examiners may not be tax experts.

Indeed, Cheryl Hader, a partner in Ropes & Gray representing Rowe,
argues that a strategy she uses is clearly authorized by the tax law and
that no patent should have been granted.

One can imagine lawyers and accountants rushing to the patent office as
soon as a new tax law is passed, seeking to claim credit for dreaming up
ideas that were made possible by the new tax law. Lobbyists who get tax
breaks inserted into such bills would be in a preferred position to win
the race to patent them.

In an article in Legal Times this week, Paul Devinsky, John Fuisz and
Thomas Sykes, who are lawyers with McDermott, Will & Emery, suggested
that a company might figure out a tax strategy that would save it a lot
of money and then patent it. Then the company could refuse to license
the patent to its competitors, thus raising their cost of doing business.

Tax patents, the lawyers wrote, amount to "government-issued barbed
wire" to keep some taxpayers from getting equal treatment under the tax
code.

In an ideal world, Congress might pass tax laws so simple that clever
strategies would be impossible and tax lawyers would need to find other
employment. But until that happens, it would seem obvious that Congress
would want to assure that tax benefits are not walled off from some.

After all, as Devinsky and his colleagues wrote, "the successful
patenting of tax strategies now limits Congress's ability to shape
economic policy through legislation and places that power in the hand of
individual patent holders." But in Washington, such things are seldom
simple. Asked what he thought Congress would do, Fuisz said action was
possible, recalling that six years ago doctors got Congress to protect
them from patent infringement suits over surgical techniques.

But, he added, it will be a battle of interests. "You will see the
people making money off these patents lining up against those who
dispense tax strategy advice," he said.

So now we can have lobbying over whether all can benefit from what the
lobbyists accomplished earlier.

Ain't democracy great?