Patents on Tax Strategies: Issues in Intellectual Property and Innovation
Prepared for Members and Committees of Congress
Several bills introduced in the 110th Congress address the recently recognized phenomenon of
patented tax strategies. These legislative initiatives respond in different ways to the grant of
exclusive intellectual property rights by the United States Patent and Trademark Office (USPTO)
on methods that individuals and enterprises might use in order to minimize their tax obligations.
Many commentators trace the rise of tax strategy patents to the 1998 opinion of the Federal
Circuit in State Street Bank v. Signature Financial Group, which rejected a per se rule that
business methods could not be patented. In recent years, the USPTO has issued a number of
patents that pertain to tax strategies, and numerous other patent applications remain before that
agency. At least one of these patents, the so-called SOGRAT patent, has been subject to
enforcement litigation in federal court.
The impact of tax strategy patents upon social welfare has been subject to a spirited debate. Some
observers are opposed to tax strategy patents. These commentators believe that patent protection
is unnecessary with respect to tax avoidance techniques due to a high level of current innovation.
Others believe that patent-based incentives to develop tax avoidance strategies are not socially
desirable. They assert that patents may limit the ability of individuals to utilize provisions of the
tax code intended for all taxpayers, interfering with congressional intent and leading to distortions
in tax obligations. Others have expressed concerns that tax strategy patents may potentially
complicate legal compliance by tax professionals and individual taxpayers alike.
Other experts believe that these concerns are overstated, and also make the affirmative case that
tax strategy patents may provide positive social benefits. They explain that patents on “business
methods” have been obtained and enforced for many years. They also observe that the grant of a
patent does not imply government approval of the practice of the patented invention, and that
professionals in many spheres of endeavor have long had to account for the patent system during
their decision-making process. They also believe that the availability of tax strategy patents may
promote innovation in a field of endeavor that is demonstrably valuable. Further, such patents
might promote public disclosure of tax strategies to tax professionals, taxpayers, and responsible
government officials alike.
In the 110th Congress, two Senate bills, S. 681 and S. 2369, and two House bills, H.R. 1908 and
H.R. 2136, would prohibit the issuance of patents on tax strategies. H.R. 1908 passed the House
of Representatives on September 7, 2007. Another bill, H.R. 2365, would take an alternative
approach, limiting the remedies available for certain infringements of a tax planning method.
Other legislative responses, including oversight of the USPTO, promotion of cooperation
between the USPTO and the IRS, and the encouragement of private sector contributions to the
patent examination process, are also possible.
Patents and Innovation Policy.........................................................................................................2
The Mechanics of the Patent System........................................................................................2
The Phenomenon of Tax Strategy Patents.......................................................................................5
Patents on Methods of Doing Business.....................................................................................5
Patents on Tax Strategies...........................................................................................................8
Innovation Policy Issues................................................................................................................10
Stated Concerns Over Tax Strategy Patents............................................................................10
Support for Tax Strategy Patents.............................................................................................12
Congressional Issues and Options.................................................................................................14
Legislation in the 110th Congress..................................................................................................16
Author Contact Information..........................................................................................................17
Acknowledgments ......................................................................................................................... 17
roposed legislation demonstrates congressional interest in the recently recognized 1
phenomenon of patented tax strategies. H.R. 1908, the Patent Reform Act of 2007, would 2
ban patents on tax strategies. This comprehensive patent reform legislation passed the P
House on September 7, 2007. Three other bills, H.R. 2136, S. 681, and S. 2369, would prevent 3
patents directed towards a tax strategy. Another bill, H.R. 2365, takes an alternative approach, 4
limiting the remedies available for certain infringements of a “tax planning method.” These
legislative initiatives respond in different ways to the grant of exclusive intellectual property
rights by the United States Patent and Trademark Office (USPTO) on methods that individuals
and enterprises might use in order to minimize their tax obligations.
Tax strategy patents are the subject of a spirited debate. Some observers believe that such patents
negatively impact social welfare. According to some experts, tax strategy patents may limit the
ability of taxpayers to utilize provisions of the tax code, interfering with congressional intent and 5
leading to distortions in tax obligations. Others assert that tax strategy patents potentially 6
complicate legal compliance by tax professionals and taxpayers alike. Still others believe that the
patent system should not provide incentives for individuals to develop new ways to reduce their 7
Other commentators explain that patents on “business methods” have been obtained and enforced 8
for many years. Legislation enacted in 1999 that accounted expressly for patents claiming “a 9
method of doing or conducting business” arguably approved of such patents. In addition, some
commentators believe that tax strategy patents present a positive development, potentially
improving the public disclosure of tax shelters for the attention of Congress and federal tax 10
authorities. They also observe that many kinds of patents, on subject matter ranging from 11
automobile seat belts to airplane navigation systems, potentially involve legal compliance.
Although views on tax strategy patents vary, evidence suggests that numerous applications that 12
arguably cover tax planning methods have been filed at the USPTO. Some of these applications
1 This report uses the term “tax strategy patents” to refer to this category of patents. Various sources referenced within
this report identify these sorts of patents as pertaining to tax loopholes, planning methods, shelters, and other similar
2 H.R. 1908, § 10 (referring to patents claiming a “tax planning method”).
3 S. 681, § 303(a); H.R. 2136, § 303(a) (both referring to patents claiming a “tax shelter”).
4 H.R. 2365, § 1.
5 See Letter from Jeffrey R. Hoops, Chair, American Institute of Certified Public Accountants Tax Executive
Committee, to Members of Congress (February 28, 2007) (available at http://tax.aicpa.org).
6 See Letter from Kimberly S. Blanchard, Chair, New York State Bar Association Tax Section, to Members of
Congress (August 17, 2006) (available at http://www.nysba.org).
7 See William A. Drennan, “The Patented Loophole: How Should Congress Respond to This Judicial Invention?”, 59
Florida Law Review (2007), 229.
8 See Andrew F. Palmieri and Corinne Marie Pouliquen, “A Primer on Business Method Patents: What You Need to
Know for Your Real Estate Practice,” 21 Probate and Property (May/June 2007), 26.
9 First Inventor Defense Act of 1999, P.L. 106-113, § 4302, 113 Stat. 1501 (codified at 35 U.S.C. § 273 (2006)).
10 Drennan, supra, at 328 (noting this argument).
11 Stephen T. Schreiner and George Y. Wang, “Discussions on Tax Patents Have Lost Focus,” IP Law 360 (available at
12 See Jo-el J. Meyer, “Proliferation of Retirement Plan Patents Poses Problems for Practitioners,” Patent, Trademark,
and Copyright Journal (BNA June 8, 2007), 186.
have been approved as issued patents.13 Further, at least one granted patent has been the subject of 14
infringement litigation in the federal judicial system. Discussion of the recently appreciated
phenomenon of tax strategy patents therefore appears to be timely.
This report introduces the concept of tax strategy patents and reviews their implications for
intellectual property and tax policy. The report begins by providing an overview of both the
practical workings and innovation policy aspirations of the patent system. It then provides a brief
history of the phenomenon of tax strategy patents. The report next reviews competing views
about the impact of tax patents upon innovation policy. This report concludes with a summary of
congressional issues and options.
The U.S. Constitution provides Congress with the power “To promote the Progress of Science
and useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their ... 1516
Discoveries....” In accordance with the Patent Act of 1952, an inventor may seek the grant of a
patent by preparing and submitting an application to the USPTO. USPTO officials known as
examiners then determine whether the invention disclosed in the application merits the award of a 17
In determining whether to approve a patent application, a USPTO examiner will consider whether 18
the submitted application fully discloses and distinctly claims the invention. In particular, the
application must enable persons skilled in the art to make and use the invention without undue 19
experimentation. In addition, the application must disclose the “best mode,” or preferred way, 20
that the applicant knows to practice the invention.
The examiner will also determine whether the invention itself fulfills certain substantive
standards set by the patent statute. To be patentable, an invention must meet four primary
requirements. First, the invention must fall within at least one category of patentable subject
matter. According to the Patent Act, an invention which is a “process, machine, manufacture, or
14 Wealth Transfer Group LLC v. Rowe, D. Conn., No. 3:06cv00024 (AWT), filed January 6, 2006.
15 U.S. Constitution, Article I, Section 8, Clause 8. This constitutional clause also addresses copyright law, which
provides for protection for original works of authorship. In contrast to patents, copyright protection arises automatically
once a work of authorship has been fixed in tangible form. 17 U.S.C. § 102(a) (2006). Copyright provides authors with
the exclusive right to reproduce, adapt, and publicly distribute their works, among others, subject to certain limitations
such as the fair use privilege. 17 U.S.C. § 106, 107-122 (2006). Although this report concerns patent protection for tax
strategies, it should be appreciated that computer software that implements a tax strategy, and possibly other sorts of
works, may potentially enjoy protection under the copyright laws as well. See, e.g., Roger E. Schechter and John R.
Thomas, Intellectual Property: The Law of Copyrights, Patents, and Trademarks (Thomson/West 2003).
16 P.L. 82-593, 66 Stat. 792 (codified at Title 35 of the United States Code).
17 35 U.S.C. § 131 (2006).
18 35 U.S.C. § 112 (2006).
19 See Invitrogen Corp. v. Clontech Labs., Inc., 429 F.3d 1052, 1070-71 (Fed. Cir. 2005).
20 See High Concrete Structures, Inc. v. New Enterprise Stone and Lime Co., 377 F.3d 1379, 1382 (Fed. Cir. 2004).
composition of matter” is eligible for patenting.21 Second, the invention must be useful, a 22
requirement that is satisfied if the invention is operable and provides a tangible benefit.
Third, the invention must be novel, or different, from subject matter disclosed by an earlier 23
patent, publication, or other state-of-the-art knowledge. Finally, an invention is not patentable if
“the subject matter as a whole would have been obvious at the time the invention was made to a 24
person having ordinary skill in the art to which said subject matter pertains.” This requirement
of “nonobviousness” prevents the issuance of patents claiming subject matter that a skilled artisan 25
would have been able to implement in view of the knowledge of the state of the art.
If the USPTO allows the patent to issue, its owner obtains the right to exclude others from
making, using, selling, offering to sell or importing into the United States the patented 26
invention. Those who engage in those acts without the permission of the patentee during the
term of the patent can be held liable for infringement. Adjudicated infringers may be enjoined 27
from further infringing acts. The patent statute also provides for an award of damages “adequate
to compensate for the infringement, but in no event less than a reasonable royalty for the use 28
made of the invention by the infringer.”
The maximum term of patent protection is ordinarily set at 20 years from the date the application 29
is filed. At the end of that period, others may employ that invention without regard to the
Patent rights do not enforce themselves. Patent proprietors who wish to compel others to respect
their rights must commence enforcement proceedings, which most commonly consist of litigation
in the federal courts. Although issued patents enjoy a presumption of validity, accused infringers
may assert that a patent is invalid or unenforceable on a number of grounds. The Court of Appeals
for the Federal Circuit (Federal Circuit) possesses nationwide jurisdiction over most patent 30
appeals from the district courts. The Supreme Court enjoys discretionary authority to review 31
cases decided by the Federal Circuit.
21 35 U.S.C. § 101 (2006).
22 Id. See In re Fischer, 421 F.3d 1365, 1371 (Fed. Cir. 2005).
23 35 U.S.C. § 102 (2006).
24 35 U.S.C. § 103(a) (2006).
25 See KSR International Co. v. Teleflex Inc., 127 S.Ct. 1727 (2007).
26 35 U.S.C. § 271(a) (2006).
27 35 U.S.C. § 283 (2006). See eBay Inc. v. MercExchange L.L.C., 126 S.Ct. 1837 (2006).
28 35 U.S.C. § 284 (2006).
29 35 U.S.C. § 154(a)(2) (2006). Although the patent term is based upon the filing date, the patentee obtains no
enforceable legal rights until the USPTO allows the application to issue as a granted patent. A number of Patent Act
provisions may modify the basic 20-year term, including examination delays at the USPTO and delays in obtaining
marketing approval for the patented invention from other federal agencies.
30 28 U.S.C. § 1295(a)(1) (2006).
31 28 U.S.C. § 1254(1) (2006).
Patent ownership is perceived to encourage innovation, which in turn leads to industry
advancement and economic growth. One characteristic of the new knowledge that results from
innovation is that it is a “public good.” Public goods are non-rivalrous and non-excludable, for
use of the good by one individual does not limit the amount of the good available for 32
consumption by others, and no one can be prevented from using that good.
The lack of excludability in particular is believed to result in an environment where too few
inventions would be made. Absent a patent system, “free riders” could easily duplicate and
exploit the inventions of others. Further, because they incurred no cost to develop and perfect the
technology involved, copyists could undersell the original inventor. Aware that they would be
unable to capitalize upon their inventions, individuals might be discouraged from innovating in
the first instance. The patent system ameliorates this market failure by providing innovators with
a time-limited exclusive interest in their inventions, thereby allowing them to capture their 33
The patent system purportedly serves other goals as well. The patent law encourages the
disclosure of new products and processes, for each issued patent must include a description 34
sufficient to enable skilled artisans to practice the patented invention. At the close of the patent’s 35
twenty-year term, others may employ the claimed invention without regard to the expired
patent. In this manner the patent system ultimately contributes to the growth of the public
Even during their term, issued patents may encourage others to “invent around” the patentee’s
proprietary interest. A patentee may point the way to new products, markets, economies of
production and even entire industries. Others can build upon the disclosure of a patent instrument
to produce their own technologies that fall outside the exclusive rights associated with the 36
The regime of patents has also been identified as a facilitator of markets. Absent patent rights, an
inventor may have scant tangible assets to sell or license. In addition, an inventor might otherwise
be unable to police the conduct of a contracting party. Any technology or know-how that has been
disclosed to a prospective licensee might be appropriated without compensation to the inventor.
The availability of patent protection decreases the ability of contracting parties to engage in
opportunistic behavior. By lowering such transaction costs, the patent system may make 37
exchanges concerning information goods more feasible.
32 See Dotan Oliar, “Making Sense of the Intellectual Property Clause: Promotion of Progress as a Limitation on
Congress’s Intellectual Property Power,” 94 Georgetown Law Journal (2006), 1771.
33 See Dan L. Burk and Mark A. Lemley, “Is Patent Law Technology-Specific?,” 17 Berkeley Technology Law Journal
34 35 U.S.C. § 112 (2006).
35 35 U.S.C. § 154 (2006).
36 See Rebecca Eisenberg, “Patents and the Progress of Science: Exclusive Rights and Experimental Use,” 56
University of Chicago Law Review (1989), 1017.
37 Robert P. Merges, “Intellectual Property and the Costs of Commercial Exchange: A Review Essay,” 93 Michigan
Law Review (1995), 1570.
Through these mechanisms, the patent system can act in a more socially desirable way than its
chief legal alternative, trade secret protection. Trade secrecy guards against the improper
appropriation of valuable, commercially useful and secret information. In contrast to patenting,
trade secret protection does not result in the disclosure of publicly available information. That is
because an enterprise must take reasonable measures to keep secret the information for which
trade secret protection is sought. Taking the steps necessary to maintain secrecy, such as
implementing physical security measures, also imposes costs that may ultimately be unproductive 38
The patent system has long been subject to criticism, however. Some observers have asserted that
the patent system is unnecessary due to market forces that already suffice to create an optimal
level of innovation. The desire to obtain a lead time advantage over competitors, as well as the
recognition that passive firms may lose out to their more innovative rivals, may provide sufficient 39
inducement to invent without the need for further incentives. Other commentators believe that
the patent system encourages industry concentration and presents a barrier to entry in some 40
Because the relationship between the rate of innovation and the availability of patent rights is not
well understood, we lack rigorous analytical methods for studying the impact of the patent system
upon the economy as a whole. As a result, current economic and policy tools do not allow us to
calibrate the patent system precisely in order to produce an optimal level of investment in
innovation. Thus, each of these arguments for and against the patent system remains open to
challenge by those who are unpersuaded by their internal logic.
The availability of patents on tax strategies has been linked to the grant of patents on the broader 41
category of business methods. Prior to 1998, several judicial opinions could arguably be read to
hold that patents could not be granted on methods of doing business. For example, in the 1908 42
opinion in Hotel Security Checking Co. v. Lorraine Co., the court considered “a method of and
means for cash-registering and account-checking” designed to prevent fraud by waiters and 43
cashiers. At one point the court stated that a “system of transacting business disconnected from
the means for carrying out the system is not, within the most liberal interpretation of the term, an 44
art” that could be patented. However, the court also explained that the invention claimed in the
patent “would occur to anyone conversant with the business” and that it was “unable to discover
38 David D. Friedman et al., “Some Economics of Trade Secret Law,” 5 Journal of Economic Perspectives (1991), 61.
39 See Frederic M. Sherer, Industrial Market Structure and Economic Performance (1970), 384-87.
40 See John R. Thomas, “Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties,”
University of Illinois Law Review (2001), 305.
41 See Matthew A. Melone, “The Patenting of Tax Strategies: A Patently Unnecessary Development,” 5 DePaul
Business and Commercial Law Journal (2007), 437.
42 106 F. 467 (2d. Cir. 1908).
43 Id. at 467.
44 Id. at 469.
any patentable improvements....”45 As a result, it was unclear whether the court meant to establish
a categorical rule that business methods were not patentable subject matter, or merely state that
the particular invention before the court would have been obvious. In any event, the USPTO
issued some patents that were arguably directed towards business methods during its long 46
This long period of ambiguity over the patentability of business methods ended with the 1998
opinion of the U.S. Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. 47
Signature Financial Group. The patent at issue in that case concerned a data-processing system 48
for implementing an investment structure known as a “Hub and Spoke” system. This system
allowed individual mutual funds (“Spokes”) to pool their assets in an investment portfolio
(“Hub”) organized as a partnership. According to the patent, this investment regime provided the
advantageous combination of economies of scale in administering investments coupled with the 49
tax advantages of a partnership. The patented system purported to allow administrators to
monitor financial information and complete the accounting necessary to maintain this particular
investment structure. In addition, it tracked “all the relevant data determined on a daily basis for
the Hub and each Spoke, so that aggregate year end income, expenses, and capital gain or loss
can be determined for accounting and tax purposes for the Hub and, as a result, for each publicly 50
Litigation arose between Signature, the patent owner, and State Street Bank over the latter firm’s
alleged use of the patented invention. Among the defenses offered by State Street Bank was that
the asserted patent claimed subject matter that was not within one of the four categories of 5152
statutory subject matter, and hence was invalid. The district court sided with State Street Bank.
The trial judge explained:
At bottom, the invention is an accounting system for a certain type of financial investment
vehicle claimed as [a] means for performing a series of mathematical functions. Quite
simply, it involves no further physical transformation or reduction than inputting numbers,
calculating numbers, outputting numbers, and storing numbers. The same functions could be
performed, albeit less efficiently, by an accountant armed with pencil, paper, calculator, and 53
a filing system.
The trial court further relied upon “the long-established principle that business ‘plans’ and 54
‘systems’ are not patentable.” The court judged that “patenting an accounting system necessary 55
to carry on a certain type of business is tantamount to a patent on the business itself.” Because
45 Id. at 471.
46 See USPTO, White Paper on Automated Financial or Management Data Processing Methods (Business Methods)
(available at http://www.uspto.gov).
47 149 F.3d 1368 (Fed. Cir. 1998).
48 See U.S. Patent No. 5,193,056.
49 149 F.3d at 1370.
51 35 U.S.C. § 101 (2006) (identifying processes, machines, manufactures, and compositions of matter as patentable
52 927 F. Supp. 502 (D. Mass. 1996).
53 Id. at 515.
55 Id. at 516.
the court found that “abstract ideas are not patentable, either as methods of doing business or as 56
mathematical algorithms,” the patent was held to be invalid.
Following an appeal, the Federal Circuit reversed. The court of appeals concluded that the patent
claimed not merely an abstract idea, but rather a programmed machine that produced a “useful, 57
concrete, and tangible result.” Because the invention achieved a useful result, it constituted 58
patentable subject matter even though its result was expressed numerically. The court further
Today, we hold that the transformation of data, representing discrete dollar amounts, by a
machine through a series of mathematical calculations into a final share price, constitutes a
practical application of a mathematical algorithm, formula, or calculation, because it
produces “a useful, concrete and tangible result”—a final share price momentarily fixed for
recording and reporting purposes and even accepted and relied upon by regulatory authorities 59
and in subsequent trades.
The court of appeals then turned to the district court’s business methods rejection, opting to “take 60
[the] opportunity to lay this ill-conceived exception to rest.” The court explained restrictions
upon patents for methods of doing business had not been the law since at least the enactment of
the 1952 Patent Act. The Federal Circuit then concluded that methods of doing business should be 61
subject to the same patentability analysis as any other sort of process.
The holdings of State Street Bank were reached nearly a decade ago. Absent reconsideration of
the issue by Congress, the Supreme Court, or the Federal Circuit itself, business methods remain 62
patentable subject matter. Should a particular method of doing business meet the other statutory
requirements, including utility, novelty, and nonobviousness, then a patent may issue. Numerous 63
patents that arguably claim business methods have issued from the USPTO, and several have 64
been the subject of litigation in the federal courts.
Congressional reaction to the patenting of business methods has to this point been limited. In
Protection Act. That statute provides an earlier inventor of a “method of doing or conducting
57 149 F.3d at 1373.
58 Id. at 1375.
59 Id. at 1373.
60 Id. at 1375.
62 On September 20, 2007, the Federal Circuit issued its decision in In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007).
The Comiskey opinion concluded that “mental processes—or processes of human thinking—standing alone are not
patentable even if they have practical application.” Id. at 1377. However, the court of appeals also confirmed that the
proposition that when “an unpatentable mental process is combined with a machine, the combination may produce
patentable subject matter,” id. at 1379, and that “business methods are ‘subject to the same legal requirements for
patentability as applied to any other process or method.’” Id. at 1374 (citing State Street Bank, 149 F.3d at 1375).
63 See, e.g., John R. Allison and Emerson H. Tiller, “The Business Method Patent Myth,” 18 Berkeley Technology Law
Journal (2003), 987.
64 See, e.g., Nicholas A. Smith, “Business Method Patents and Their Limits: Justifications, History, and the Emergence
of a Claim Construction Jurisprudence,” 9 Michigan Telecommunications and Technology Law Review (2002), 171.
65 P.L. 106-113, 113 Stat. 1536 (1999) (codified at 35 U.S.C. § 273(b) (2006)).
business” that was later patented by another to assert a defense to patent infringement in certain
In enacting the First Inventor Defense Act, Congress recognized that some firms may have
operated under the view that business methods could not be patented prior to the State Street Bank
decision. As a result, they may have maintained their innovative business methods as trade
secrets. Having used these trade secrets in furtherance of their marketplace activities for a period
of time, however, these firms may be unable to obtain a patent upon their business method.
Further, should a competitor later independently invent and patent the same business method, the
trade secret holder would potentially be liable for patent infringement. Following the
confirmation of the patenting of business methods by the State Street Bank court, the creation of
the first inventor defense was intended to provide a defense to patent infringement in favor of the 66
first inventor/trade secret holder.
By stipulating that the first inventor defense applied only to a “method of doing or conducting 67
business,” Congress arguably recognized the validity of these sorts of patents. The First
Inventor Defense Act did not define the term “method of doing or conducting business,” however. 68
To date, no published judicial opinion addresses the precise scope of this defense.
Although the State Street Bank opinion rejected a per se rule denying patents on business
methods, the invention claimed by the Signature patent was arguably motivated by a desire to 69
reduce tax liability. In some sense, then, State Street Bank may be seen as the first tax patent
case. Some commentators believe that the “increase in the number of tax strategy patents 70
requested and approved by the [USPTO] came on the heels” of State Street Bank.
Notably, at least one observer rejects this view. Attorney Andrew Schwartz has opined that
although business methods may be patented following State Street Bank, the conclusion that tax
and other legal methods are patentable subject matter does not result. Mr. Schwartz has asserted
that while “most if not all novel business methods either save time or harness a law of nature for 71
human benefit,” legal methods instead manipulate “positive law” in order to achieve their 72
advantages. According to Mr. Schwartz, legal methods, including tax strategies, therefore do not
qualify as inventions within the meaning of the Patent Act. It remains to be seen whether this
view will gain more widespread acceptance.
66 See generally David H. Hollander, Jr., “The First Inventor Defense: A Limited Prior User Right Finds Its Way Into
U.S. Patent Law,” 30 American Intellectual Property Law Association Quarterly Journal (2002), 37.
67 See Rochelle Cooper Dreyfuss, “Are Business Method Patents Bad for Business?,” 16 Santa Clara Computer and
High Technology Law Journal (2000), 263.
68 John R. Allison and Starling D. Hunter, “On the Feasibility of Improving Patent Quality One Technology At a Time:
The Case of Business Methods,” 21 Berkeley Technology Law Journal (2006), 729.
69 See, e.g., Paul E. Schaafsma, “A Gathering Storm in the Financial Industry,” 9 Stanford Journal of Law, Business
and Finance (2004), 176.
70 Meyer, supra, at 187. See also Dan L. Burk and Brett H. McDonnell, “Patents, Tax Strategies, and the Firm,” 26
Virginia Tax Review (2007), 981.
71 Andrew A. Schwartz, “The Patent Office Meets the Poison Pill: Why Legal Methods Cannot Be Patented,” 20
Harvard Journal of Law and Technology (2007), 371.
72 Id. at 367.
The USPTO classification scheme reflects the relationship between business method patents and
tax patents. Under USPTO practice, business method patents are organized within class 705,
titled “Data Processing: Financial, Business Practice, Management, or Cost/Price Determination.”
Tax strategy patents fall into a subclass under this heading, being identified under classification
As of January 10, 2008, the USPTO identified 60 issued patents and 106 published applications 73
under classification number 705/36T. As the USPTO received 417,508 patent applications in
patents represent a very small share of that agency’s workload. Among the titles of the issued
• Method and apparatus for tax efficient investment management,
U.S. Patent No. 7,031,937
• Method and apparatus for tax-efficient investment using both long and short
U.S. Patent No. 6,832,209
• Tax advantaged transaction structure (TATS) and method,
U.S. Patent No. 6,578,016
• Use tax optimization process and system,
U.S. Patent No. 6,298,333
• Computerized system and method for optimizing after-tax proceeds,
U.S. Patent No. 6,115,697
To date, the only tax strategy patent that has been identified as subject to enforcement litigation is 75
the so-called “SOGRAT” patent, U.S. Patent No. 6,567,790. The SOGRAT patent is titled
“[e]stablishing and managing grantor retained annuity trusts funded by nonqualified stock
options.” The patent’s abstract explains that it concerns:
An estate planning method for minimizing transfer tax liability with respect to the transfer of
the value of stock options from a holder of stock options to a family member of the holder.
The method comprises establishing a Grantor Retained Annuity Trust (GRAT) funded with
nonqualified stock options. The method maximizes the transfer of wealth from the grantor of
the GRAT to a family member by minimizing the amount of estate and gift taxes paid. By
placing the options outside the grantor’s estate, the method takes advantage of the
appreciation of the options in said GRAT.
On January 6, 2006, the proprietor of the SOGRAT patent, Wealth Transfer Group L.L.C.,
brought charges of infringement against John W. Rowe, the former executive chairman of Aetna
Inc. Wealth Transfer Group reportedly asserted that Rowe had infringed the SOGRAT patent by
73 It should be appreciated that some observers have criticized the USPTO classification system as unreliable. See, e.g.,
John R. Allison and Mark A. Lemley, “The Growing Complexity of the United States Patent System,” 82 Boston
University Law Review (2002), 77. As a result, it is possible that some patents arguably directed towards tax strategies
may presently be classified under different categories.
74 USPTO, U.S. Patent Statistics, Calendar Years 1963-2006 (available at http://www.uspto.gov/web/offices/ac/ido/
75 See Michael Brier, “Patently Foolish? Allowing Firms to Patent Tax Strategies Means That You and Your Clients
Have to Foot the Bill,” Financial Advisor (June 2007).
establishing one or more GRATs that were funded by nonqualified stock options from Aetna. 76
Because the parties to the litigation reached a confidential settlement on March 12, 2007, the
courts did not have the opportunity to address the validity and infringement of the SOGRAT
patent specifically, nor the concept of tax strategy patents more generally.
Although business method patents have been held to be patentable at least since the issuance of
the State Street Bank opinion in 1998, the more recent phenomenon of tax strategy patents has
resulted in a spirited discussion. Some commentators, and in particular tax professionals, have 777879
found tax strategy patents to be “ridiculous,” “bizarre” and “deeply unsettling.” On the other
hand, other observers, including many patent professionals, believe both that concerns over tax
patents are overstated, and that the patenting of tax strategies may lead to numerous positive
consequences. This report next reviews some of the competing concerns about tax strategy
Many commentators have asserted that the issuance of tax strategy patents is improvident as a
matter of both innovation and tax policy. Some observers believe that innovation in tax avoidance
techniques has flourished absent the stimulus of patent protection. For example, the Tax Section
of the New York State Bar Association has stated that “[o]ur experience suggests ... that tax
advisors do not need the protection of the patent laws to develop tax strategies or to comply with 80
their obligations to represent the interests of their (usually paying) clients.” The views of the
American Institute of Certified Public Accountants (AICPA) are similar. According to the AICPA, 81
“[p]eople already have substantial incentives to comply with tax law and lower their taxes.”
Other observers go further, believing that to the extent that tax patents encourage further
innovation in developing innovative tax avoidance strategies, such an incentive is not socially
desirable. William A. Drennan, a member of the law faculty at Southern Illinois University,
contrasts the grant of tax strategy patents with recent Treasury Department Regulations that, in 82
his view, “reduce the economic incentive to create tax loopholes.” Mr. Drennan thus explains:
[O]ne government agency—the Treasury Department—is taking action to discourage
loopholes. In contrast, the Patent Office (at the direction of the Federal Circuit) is providing
a new incentive to create loopholes. Since the Treasury Department is in charge of the sound
76 Wealth Transfer Group LL v. Rowe, D. Conn., No. 3:06CV00245, Consent Final Judgment Regarding Settlement
Agreement (March 12, 2007).
77 Editorial, “Pay to Obey,” New York Times (October 31, 2006).
78 David Nolte, “USPTO is Getting It Wrong on Tax Strategy Patents,” (July 20, 2006) (available at
79 Melone, supra, at 438.
80 New York State Bar Association, “Patentability of Tax Advice and Tax Strategies” (August 17, 2006) (available at
81 AICPA, “Analysis and Legislative Proposals Regarding Patents for Tax Strategies” (February 28, 2007) (available at
tax.aicpa.org) (hereinafter “AICPA Analysis”).
82 Drennan, supra, at 280.
administration of the U.S. tax system, the Treasury Department’s views on sound tax policy 83
should be given greater weight than the view of the Patent Office on this subject.
As summarized by the Joint Committee on Taxation, “some may argue that innovation is either
not socially beneficial, or requires no special protection to encourage its undertaking, and thus a 84
fundamental premise behind a patent system is missing.”
Other experts believe that tax strategy patents are inappropriate because they are said to inject 85
private control over a system of public laws. Under this view, a patent may potentially grant one
individual the ability to prevent others from using a new tax provision. In turn, private actors may
effect the ability of federal, state, and local governments to raise revenue, influence taxpayer 86
behavior, and otherwise achieve the intended purposes of the tax laws. These concerns were
voiced by the AICPA in the following way:
Tax strategy patents also preempt Congress’s prerogative to have full legislative control over
tax policy. Congress enacts tax law provisions applicable to various taxpayers and intends
that taxpayers will be able to use them. Tax strategy patents thwart this Congressional intent
by giving tax strategy patent holders the power to decide how select tax law provisions can 87
be used and who can use them.
Tax professionals have also expressed concerns over the impact of tax strategy patents upon their
own practices, as well as taxpayers in general. Some observers believe that the burdens of
investigating whether a taxpayer’s planned course of action is covered by a tax strategy patent,
determining whether the patent was providently granted by the USPTO, and potentially
negotiating with the patent proprietor in order to employ the strategy, will be costly and 88
impractical for many taxpayers. Further, because compliance with the tax laws and its self-
assessment system is obligatory for all citizens of the United States, the scope of this burden 89
could be considerable.
Some commentators have also opined that the grant of a patent may mislead taxpayers. They
believe that issuance of a patent may be seen as the government’s imprimatur that a particular
technique may be useful in limiting an individual’s tax obligations. Because the USPTO does not
necessarily evaluate the legality and comparative effectiveness of a particular tax strategy as part
of its decision to issue a patent, however, such an impression would be mistaken. As the AICPA
84 Staff of the Joint Committee on Taxation, “Background and Issues Relating to the Patenting of Tax Advice” (July 13,
2006), 25 (available at http://www.house.gov/jct).
85 See Richard S. Marshall, “Tax Strategy Patents—Legislative, Judicial and Other Developments,” 48 Tax
Management Memo (2007), 243.
86 Steve Seidenberg, “Taxation Innovation: Patent Office Receives Criticism for Issuing Patents on Tax Strategies,”
Inside Counsel (December 2006).
87 AICPA Analysis, supra, at 5.
88 Gary C. Bubb, “Patented Tax Strategies—Are You Serious?,” Rhode Island Lawyers Weekly (August 20, 2007).
89 Ellen P. Aprill, “Responding to Tax Strategy Patents,” American Bar Association Annual Meeting (August 11,
Taxpayers may be misled into believing that a patented tax strategy bears the approval of
other government agencies, such as the IRS, and therefore is a valid and viable technique 90
under tax law. This is not the case.
Finally, some commentators have expressed concerns that the USPTO does not have sufficient
expertise to assess whether a particular tax strategy meets the patentability criteria of novelty and 91
nonobviousness. As Ellen P. Aprill, a member of the law faculty of the Loyola Law School of
Los Angeles, has asserted:
It is the duty of patent examiners in the PTO to make the determination that a patent is novel
and not obvious. In order to review the validity under the patent law of applications for tax
strategy patents, patent examiners need expertise not only in software and finance, but also,
of course, tax. They need to understand the conceptual basis of a range of areas of tax—
financial products, estate and gift tax, pension and deferred compensation, to name a few
where tax strategy patents already exist. Such expertise is difficult to obtain. Few tax
practitioners have such broad knowledge in such varied aspects of the tax law. Most work
very hard just to keep up in developments and changes in the law in their areas of
specialization. Yet the patent examiners evaluating these tax strategy patents are trained as
engineers, with few having some additional financial education, such as an MBA. They are 92
not tax lawyers or accountants.
In addition, identifying state of the art knowledge may present complications within the tax field. 93
Tax return information is maintained in confidence, and communications between taxpayers and 94
their advisors may also be subject to a legal privilege of nondisclosure. Due to these
circumstances, reportedly “tax practitioners are concerned that many of the patents that have or
will be issued for tax strategies will inevitably involve techniques that have long been accepted as 95
In contrast, other observers have expressed support for the allowance of patents on tax strategies.
Some of these commentators believe that previously articulated concerns about tax strategy
patents are overstated. Others make the affirmative case that tax strategy patents will produce
positive social benefits.
Some experts disagree that patents will necessarily prove ineffective in encouraging the
development of new tax strategies. Patent attorney Michael Sandonato is reported as explaining:
“Of course, tax advisers will give their best advice, but if they can patent it and have some 96
exclusive rights to it, you may see the extra level of activity that patents can motivate.” Others
observe that new ways to reduce tax liability can be both costly to develop and the source of 97
considerable value for a particular inventor. As with more traditional sorts of patents, tax
90 AICPA Analysis, supra, at 2.
91 35 U.S.C. §§ 102, 103 (2006).
92 Aprill, supra, at 7.
93 26 U.S.C. § 6103(a) (2006).
94 26 U.S.C. § 7525(a)(1) (2006).
95 Aprill, supra, at 9.
96 Quoted in Seidenberg, supra.
97 See Dennis I. Belcher and Dana G. Fitzsimmons, Jr., “Tax Planners—Beware of Patented Estate Planning
strategy patents may reward these efforts and differentiate products and services among 98
competing tax advisors.
Tax strategy patenting is also said to lead to the affirmative social benefit of enhanced public
disclosure. Each issued patent is required to incorporate a full description of the patented 99
invention. As a result, patents may provide an effective mechanism for disseminating
information regarding the current state of the art in particular disciplines. Although existing 100
regulations require that certain “tax shelters” be disclosed to the Department of the Treasury,
the patent system could arguably improve the availability of information regarding tax strategies 101
to tax professionals and regulators alike.
Some commentators further discount stated concerns that tax strategy patents potentially allow
someone to appropriate a method of complying with the law. They observe that a variety of
patented inventions could be described in this manner. As explained by patent professionals
Stephen T. Schreiner and George Y. Wang, “[m]any different types of patentable inventions
involve a manner of complying with the law, but they are not prohibited from patenting for that 102
reason.” Schreiner and Wang explain that such inventions as an improved catalytic converter,
child’s safety seat, and machine for weighing trucks may relate to laws governing automobile
emissions, transportation safety, and highway traffic. Because each of these inventions is
nonetheless eligible for patenting, Schreiner and Wang assert that “eligibility for patent protection 103
should not turn on whether the inventions pertain to compliance with the law.”
Observers also note that professionals in many spheres of endeavor have long had to account for
the patent system during their decision-making process. Chemists, biologists, engineers, computer
scientists, and medical doctors are among those individuals who may obtain patents, but must
also be mindful of the patents of others during the course of their professional activities. These
observers find no persuasive justification for treating tax professionals differently. As Schreiner
and Wang state:
[S]ome seem to have taken the position that tax attorneys and wealthy tax clients should
simply not have to be burdened with tax patents. However, this is not persuasive. If doctors
and patients must observe patent restrictions on new medical techniques and new medicines
that may have life-altering consequences, we can think of no moral, legal or policy basis for
why tax attorneys and their clients should enjoy a special exemption while those in the 104
medical profession do not.
Patent experts also explain that patents do not provide the affirmative right to use the patented 105
invention, but rather the right to exclude others from doing so. As a result, in their view the
Techniques!,” Probate and Property (November/December 2006), 24.
99 35 U.S.C. § 112 (2006).
100 Treas. Reg. 1-6011-4(a).
101 House Report, supra, at 23-24.
102 Schreiner and Wang, supra, at 1.
104 Id. at 2.
105 E. Anthony Figg, “Should the Patent Laws Exempt Certain Innovations from Patent Eligibility?,” IPL Newsletter
(Summer 2006), 3.
notion that the grant of patent implies that the patented invention is effective and approved for use
is simply incorrect. This situation is commonplace in other fields of endeavor: For example, the
USPTO commonly issues patents on pharmaceuticals and medical devices that have not yet 106
received marketing approval from the Food and Drug Administration. In the view of these
experts, if taxpayers mistakenly believe that the grant of a patent implies government approval of
the patented strategy, then the proper response is to promote taxpayer awareness, not to limit or 107
prohibit tax strategy patents altogether.
Observers further note that the USPTO has consistently been called upon to address new
categories of inventions throughout that agency’s long history. For example, contemporary
USPTO examiners must respond to cutting-edge innovations in fields such as nanotechnology by
developing technical expertise and establishing documentation regarding the state of the art. The
USPTO potentially faces a similar challenge with respect to tax strategies, but many observers 108
believe that there is nothing particularly noteworthy or unusual about this task.
Should Congress conclude that the current situation with respect to tax strategy patents is
satisfactory, then no action need be taken. If Congress wishes to intervene, however, a number of th
options present themselves. In the 110 Congress, four bills have been introduced that would
limit either the availability or the enforcement of tax strategy patents.
The first of these bills, H.R. 1908, passed the House of Representatives on September 7, 2007.
This legislation, titled the Patent Reform Act of 2007, is a comprehensive patent reform measure.
One of its provisions would prevent a patent from issuing on a “tax planning method,” which is
a plan, strategy, technique, or scheme that is designed to reduce, minimize, or defer, or has,
when implemented, the effect of reducing, minimizing, or deferring, a taxpayer’s tax
liability, but does not include the use of tax preparation software or other tools used solely to 109
perform or model mathematical calculations or prepare tax or information returns.
This provision would “take effect on the date of enactment of the Act” and would apply to any
patent “filed on or after the date of the enactment of this Act” or “filed before that date if a patent
or reissue patent has not been issued pursuant to the application as of that date.”
H.R. 1908 expressly states that it shall “not be construed as validating any patent issued before 110
the date of the enactment of this Act.” This provision would appear to be relevant in the event
that the compliance of tax strategy patents with the statutory subject matter, utility, or other
patentability requirements is called into question before the courts, USPTO, or other fora. In such
a circumstance, this statutory language indicates that the legislation should not be construed as
106 See John R. Thomas, Pharmaceutical Patent Law (Bureau of National Affairs, 2005), 7 (“An award of marketing
approval by the FDA and the grant of a patent by the PTO are distinct events that depend upon different criteria.”).
107 Schreiner and Wang, supra, at 2.
108 Figg, supra, at 3; Schreiner and Wang, supra, at 2.
109 H.R. 1908 at § 10(b)(2)(A).
constituting congressional approval of tax strategy patents that issued prior to the effective date of
Two additional bills, S. 681 and H.R. 2136, are titled the “Stop Tax Haven Abuse Act.” That
legislation would prevent the issuance of a patent where “the invention is designed to minimize, 111
avoid, defer, or otherwise affect the liability for Federal, State, local, or foreign tax.” This
prohibition would apply “to any application for a patent that has not been granted” as of the date 112
of enactment of the bill.
Another bill, S. 2369, was introduced on November 15, 2007. That bill would not allow a patent
to be obtained on a “tax planning invention,” which is defined as “a plan, strategy, technique,
scheme, process, or system that is designed to reduce, minimize, avoid, or defer, or has, when
implemented, the effect of reducing, minimizing, avoiding, or deferring, a taxpayer’s tax liability
or is designed to facilitate compliance with tax laws, but does not include tax preparation 113
software and other tools or systems used solely to prepare tax or information returns.” The
legislation would apply to any patent application pending at the USPTO as of the date of the bill, 114
or filed thereafter.
Another of these bills, H.R. 2365, was introduced on May 17, 2007. That bill provides in part:
With respect to the use by a taxpayer or a tax practitioner of a tax planning method that
constitutes an infringement under subsection (a) or (b) of section 271, the provisions of
sections 281, 283, 284, and 285 shall not apply against the taxpayer, the tax practitioner, or 115
any related professional organization with respect to such tax planning method.
Under these provisions, although an individual may obtain a patent on a tax planning method,
such a patent would essentially be unenforceable. The patent owner would not be able to bring a
civil action against individuals it believes are practicing the patented tax planning method without 116
authorization. Nor would any of the remedies available against adjudicated infringers—117
including damages, injunctions, and, in exceptional cases, attorney fees—be available. This
limitation on enforcement would apply “to any action for patent infringement that is filed on or 118
after” the date of enactment of the bill.
Other legislative responses are also possible. In furtherance of its oversight over the USPTO,
Congress could continue to track that agency’s activities with respect to tax strategy patents. In
this vein, commentators have proposed several reforms, including USPTO hiring of examiners 119
with expertise in taxation and related disciplines. Congress could also encourage continued
cooperation between the USPTO and the IRS with respect to tax strategy patents.
111 S. 681, § 303(a); H.R. 2136, § 303(a).
112 S. 681, § 303(b); H.R. 2136, § 303(b).
113 S. 2369, § 1(a).
114 Id. at § 1(b).
115 H.R. 2365, § 1(a). The term “tax planning method” receives the same definition as in H.R. 1908. Id.
116 35 U.S.C. § 281 (2006).
117 35 U.S.C. §§ 283-285 (2006).
118 H.R. 2365 at § 1(b).
119 Aprill, supra, at 21.
Congress may also wish to promote the engagement of the community of tax professionals with
the patent system. The patent laws allow members of the public both to comment upon many 120
pending patent applications and to challenge issued patents through administrative proceedings.
The voluntary contributions of knowledgeable specialists, through these and other mechanisms,
may help promote a high level of quality of issued tax strategy patents.
Tax strategies represent the latest area of controversy regarding patentable subject matter. Other
sorts of inventions, such as business methods, biotechnologies, and computer software, have also
raised considerable legal and policy questions when they were initially brought before the patent 121
system. Some observers believe that patents on these and other innovations have been allowed 122
for many years, without any evidence of harm to the U.S. innovation environment. Others
contend that the affirmative case for granting patents on business methods remains weak, and that 123
patents on tax strategies present uniquely deleterious social consequences. Although proposed
legislative responses to the phenomenon of tax strategy patents have thus far been limited to those
instruments, this episode might also promote broader congressional thinking of the sorts of
inventions that may be appropriately patented.
H.R. 1908 (Berman)
The Patent Reform Act of 2007. Amends Title 35 of the U.S. Code. Introduced April 18, 2007;
reported by the House Committee on the Judiciary September 4, 2007; passed the House of
Representatives September 7, 2007.
H.R. 2136 (Doggett)
Stop Tax Haven Abuse Act. Introduce May 3, 2007; referred to the House Subcommittee on
Courts, the Internet, and Intellectual Property of the House Committee on the Judiciary June 4,
H.R. 2365 (Boucher)
To amend title 35, United States Code, to limit damages and other remedies with respect to
patents for tax planning methods. Introduced May 17, 2007; referred to the House Subcommittee
on Courts, the Internet, and Intellectual Property of the House Committee on the Judiciary June 4,
S. 681 (Levin)
Stop Tax Haven Abuse Act. Introduce February 17, 2007; referred to the Senate Committee on
Finance February 17, 2007.
120 See 35 U.S.C. §§ 301, 311 (2006) (allowing members of the public to commence reexamination proceedings before
the USPTO); 37 C.F.R. § 1.99 (2006) (allowing members of the public to submit information that they believe is
relevant to a published, pending application to the USPTO under certain circumstances).
121 See Alan L. Durham, “‘Useful Arts’ in the Information Age,” 1999 BYU Law Review, 1419.
122 See Schreiner and Wang, supra.
123 See Moore, supra.
S. 2369 (Baucus)
To amend title 35, United States Code, to provide that certain tax planning inventions are not
patentable. Introduce November 15, 2007; referred to the Senate Committee on the Judiciary
November 15, 2007.
John R. Thomas
This report was funded in part by a grant from the John D. and Catherine T. MacArthur Foundation.