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Why Tax Innovation Could Be Harmful to Your Practice

tax strategy patentsWhat do CPAs, estate planners, attorneys, and multimillion dollar corporations (or their chief executives) have in common? They are all affected by patents being issued on tax strategies or products that were already in use in the industry.

“The current statutory scheme leads the [Patent and Trademark] Office to issue many dubious patents because it does not have the resources to properly examine the patents.”  So testified David Simon, associate general counsel for the processor giant Intel at a congressional hearing.

Why should tax practitioners care? The concept of tax strategy patents (TSPs) may seem abstract or unimportant to many tax advisors.  And, frankly, I don’t blame them. Would anyone find out whether a client of a CPA in Reno lowered his tax liability through some complicated plan involving a charitable trust

The short answer is, probably not. BUT… if that client files with the Securities and Exchange Commission, you’ve got a problem if some enterprising patent holder reviews those filings.  In that case, your client gets sued and stands to lose all the profits from any transaction for which the strategy was used, on top of other penalties. John Rowe, former CEO of Aetna, learned this the hard way when two trusts that his advisors had funded with nonqualified stock options prompted a patent infringement suit by the Wealth Transfer Group.

Let’s say your clients are owners of a local beauty salon or a retired couple who want to donate to their grandson’s college fund.  You think you’re off the hook. Not so fast. Here are some reasons to care a little more than you may have initially thought you needed to:

  • The PTO is not required to (and generally does not) consult with the IRS or other tax experts to determine whether a strategy is novel, useful, or nonobvious, the three criteria required for patenting. 

A CPA in Indiana who provides financial planning services said he was floored when he saw an announcement that a charitable trust strategy was patented.  “The subject of the patent was a planning technique that we had been lecturing and training on for a number of years,” he said. 

  • Not all patents involve highly complicated strategies.  Many, in fact, relate to everyday financial planning matters.
  • Confidentiality requirements could severely restrict your ability to challenge a patent or defend a claim of infringement.  Patents can be challenged by requesting a re-examination, which requires not only payment of a hefty fee but also documentation of previous use of the strategy to justify it as “prior art”; and,  
  • As AICPA President and CEO Barry Melancon stated in  a letter to House Judiciary Chair Lamar Smith, “No one should have a monopoly on compliance with part of the tax code.”

Where are we now?

Good news may be on the horizon. In early March, the Senate passed legislation to reform the whole patent system that included an amendment advocated by AICPA and other organizations to limit the issuance of TSPs.

The bill says that any strategy for “reducing, avoiding, or deferring tax liability” is considered prior art and, therefore, not patentable.  The same language is in the America Invents Act passed by the House in late June.  The House-passed bill went to the Senate for reconsideration because some of its provisions vary from the Senate bill.

While this activity represents major progress in a four-year effort to change the law, the fight is not over.  Patent reform legislation is controversial, and its final fate is unclear as differences in the House and Senate bills need to be reconciled. The AICPA is monitoring this issue closely and working with lawmakers to protect members, as Tom Stout, chair of AICPA’s tax strategy patent task force, explains

To find out more about TSPs and their potential impact on your practice and the profession as a whole, check out AICPA’s patent resource page.

Jina Etienne, CPA, Director of Taxation, American Institute of CPAs. Jina started her career in 1989 in the tax department of Touche Ross and, in 1993, started her own practice to focus on the needs of small businesses and their owners.  She recently joined the AICPA after 17 years in private practice.

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