BACKGROUND AND ISSUES RELATING 

TO THE PATENTING OF TAX ADVICE 

Scheduled for a Public Hearing 

Before the 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

of the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on July 13, 2006 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 12, 2006 

JCX-31-06 
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. OVERVIEW ............................................................................................................................. 2 

II. PATENT LAW BACKGROUND............................................................................................ 6 

A. General Rights Granted by a Patent.................................................................................... 6 

B. Requirements for Patentability ........................................................................................... 8 

C. Procedure to Obtain Patents.............................................................................................. 13 

D. Time and Method of Public Notice of Patent Applications and Patents........................... 14 

E. Special Statutory Defenses ............................................................................................... 15 

F. Business Method Patents .................................................................................................. 17 

III. EXAMPLES OF TYPES OF PATENTED TAX STRATEGIES .......................................... 19 

IV. ISSUES RELATED TO PATENTING TAX STRATEGIES................................................ 21 
1 

INTRODUCTION 

The Subcommittee on Select Revenue Measures of the House Committee on Ways and 

Means has scheduled a public hearing for July 13, 2006, on issues relating to the patenting of tax 

advice. This document,1

 prepared by the staff of the Joint Committee on Taxation, provides a 

description of the background and issues relating to the patenting of tax advice. 

 1

 This document may be cited as follows: Joint Committee on Taxation, Background and Issues 

Relating to the Patenting of Tax Advice (JCX-31-06), July 12, 2006. 
2 

I. OVERVIEW 

Patents have increasingly been sought and issued for various tax-related claimed 

inventions, including strategies for reducing a taxpayer's taxes. Patented tax strategies that have 

attracted recent attention include methods that purport to reduce taxes in connection with wealth 

transfers such as estate and gift planning2

 as well as other situations.3 This pamphlet provides 

background on patent law; describes some of the types of tax-related patents that have been 

issued; and presents some issues for consideration. 

The general purpose of the patent law, grounded in the U.S. Constitution grant of 

Congressional power to enact such law, is to promote the progress of science and the useful arts.4

 

To this end, the patent law encourages invention by granting an inventor an exclusive right to 

exclude others from using his or her invention or to seek money damages against infringers for a 

period of twenty years from the date of filing the patent application. These provisions enable 

inventors to reap the financial rewards of their inventive efforts. The patent law also requires 

public disclosure of patented inventions, thus giving notice of the scope of the inventor’s 

proprietary rights and providing technical information to the public. 

Inventors can obtain patents on processes, machines, manufactures, and compositions of 

matter that are useful, novel, and non-obvious, if other necessary requirements are also met.5

 In 

1998, the Federal Circuit court held that methods of doing business could be patented. The case, 

State Street Bank,6 involved a data processing system for a partnership structure of mutual funds 

that had advantageous tax consequences. The case is considered a key decision allowing the 

patenting of business methods of all types.7 Since that time, other types of tax strategy-related 

 2

 See for example, Deborah L. Jacobs, “Patent Pending”, Bloomberg Wealth Manager, p. 41 

(May, 2005); Rachel Emma Silverman, “Lawyers, Financial Advisers Are Getting Exclusive Rights to 

Estate-Planning Strategies,” Wall Street Journal, p. D1(June 24, 2004); Wendy Davis, “Patenting Tax 

Strategies,” Trusts and Estates p. 42 (March, 2004). 

3

 See for example, Erik Larson, “Attorney Patents 'Tax Scheme’ to Target Insurance Giant,” IP 

Law Bulletin (Nov. 9, 2005); “Attorney’s Patented 'Tax Shelter' Challenged Again,” IP Law Bulletin 

(Nov. 28, 2005). 

4

 Federal patent law is authorized under the Constitution of the United States, which grants 

Congress the power “To promote the Progress of Science and the useful Arts, by securing for limited 

Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries . . . .” 

U.S.Constitution, Art. I, Sec. 8, Cl. 8. 

5

 Roger E. Schechter and John R. Thomas, Principles of Patent Law (West/Thomson, 2004) 

(hereafter “Schechter and Thomas, op. cit.”), p. 2; 35 U.S.C. secs. 101, 102, 103. 

6

 State Street Bank & Trust Company v. Signature Financial Group, Inc, 149 F.3d 1368 (Fed. 

Cir. 1998); cert. denied 525 U.S. 1093 (1999). 

7

 See Statement of Nicholas Godici, Commissioner for Patents, U.S. Patent and Trademark 

Office, before the Senate Committee on Finance Hearing on “Bridging the Tax Gap” (July 21, 2004). 
3 

patents have been issued, or applied for, in some cases involving tax strategies less related to 

computer or other mechanical data processing systems. 

Inventors must apply to the United States Patent and Trademark Office (hereafter 

“USPTO” or “Patent Office”), which is empowered to grant patents if the requirements are met. 

A patent once granted enjoys a presumption of validity; however, accused infringers may assert 

that a patent is invalid or unenforceable on a number of grounds.8

 Some observers contend that 

the Patent Office lacks sufficient resources and examiners in new fields for which patents are 

sought, and that the public has inadequate opportunity to provide pertinent information prior to 

the grant of a patent. Thus, it is argued, the Patent Office may grant patents to claimed inventions 

that are not in fact novel or in cases where there is not adequate description of the claimed 

invention to alert other users that they may be within the scope of the patent claim. Legitimate 

other users thus might inappropriately be exposed to claims for damages, or prevented from 

using products, in cases where the patent-holder should not enjoy exclusive rights. It is claimed 

that such other users face unduly cumbersome litigation if they wish to challenge the patentholder's claims. Other observers contend that these types of concerns have historically attended 

any emerging area of innovation and that the patent system has adapted to them and will 

continue to do so; therefore, there is no particular reason for concern. These issues are relevant 

to tax strategy patents, since the Patent Office has not historically been required to maintain 

significant tax expertise. 

The patent law and process has been the subject of various legislative proposals9

 and 

hearings in the Congress. Both House and Senate Judiciary committees have conducted hearings 

during the 109th Congress on issues relating to the patent process.10 Recent patent infringement 

 8

 Schechter and Thomas, op. cit. pp. 2-4. 

9

 Some patent reform proposals would expand the publication of patent applications, allow third 

parties to submit relevant information for inclusion in the record of patent applications, and set forth new 

procedures permitting third parties to oppose the grant of a patent. See, for example, the Patent Act of 

2005 (H.R. 2795) and the Patents Depend on Quality Act of 2006 (H.R. 5096). 

10 These hearings include (in reverse chronological order): (1) Patent Trolls: Fact or Fiction?: 

Oversight Hearing Before the House Subcommittee on Courts, the Internet, and Intellectual Property 

(June 15, 2006); (2) Perspectives on Patents: Post-Grant Review Procedures and Other Litigation 

Reform: Hearing before the Senate Subcommittee on Intellectual Property (May 23, 2006); (3) Patent 

Harmonization: Oversight Hearing Before the House Subcommittee on Courts, the Internet, and 

Intellectual Property (April 27, 2006); (4) Patent Quality Enhancement in the Information-Based 

Economy: Oversight Hearing Before the House Subcommittee on Courts, the Internet, and Intellectual 

Property (April 5, 2006); (5) The Amendment in the Nature of a Substitute to H.R. 2795, the “Patent Act 

of 2005”: Legislative Hearing Before the House Subcommittee on Courts, the Internet, and Intellectual 

Property (September 15, 2005); (6) Perspectives on Patents: Harmonization and Other Matters: Hearing 

Before the Senate Subcommittee on Intellectual Property (July 26, 2005); (7) Patent Law Reform: 

Injunctions and Damages: Hearing Before the Senate Subcommittee on Intellectual Property (June 14, 

2005); (8) Patent Act of 2005: Legislative Hearing on H.R. 2795 Before the House Subcommittee on 

Courts, the Internet, and Intellectual Property (June 9, 2005); (9) Committee Print Regarding Patent 

Quality Improvement (Part II): Oversight Hearing Before the House Subcommittee on Courts, the 

Internet, and Intellectual Property (April 28, 2005); (10) Perspectives on Patents: the Patent System 
4 

lawsuits involving popular products such as the “BlackBerry”11 or the “1-Click”12 method of 

ordering items on a website have attracted attention. A number of issues have been raised 

regarding patent law generally and related Patent Office procedures.13 

Although patent policy is thus being examined across the board, some observers argue 

that tax strategy patents present policy issues unique to the special role of tax law and tax advice. 

They raise three basic areas of concern. First, might tax strategy patents lead to the marketing of 

aggressive tax shelters or otherwise mislead taxpayers about expected results. Second, might tax 

strategy patents encumber the ability of taxpayers and their advisors to use the tax law freely, 

interfering with the voluntary tax compliance system. Third, are there special definitional or 

practical problems in applying patent law concepts to tax practice and the filing of tax returns. 

Some observers question whether the patent law purpose of encouraging invention needs 

to be applied to products designed to reduce taxes, especially through methods that are 

supposedly nonobvious to persons of ordinary skill in the tax law. They also ask whether patents 

might enhance the marketing of tax strategies that may not in fact achieve their advertised 

objectives if challenged by the Internal Revenue Service (IRS), and whether the IRS can readily 

be aware of the structures for which patents are sought, and their claimed results, so that it may 

consider whether to challenge such structures. 

Other observers question whether exclusive proprietary rights should be granted at all for 

methods of compliance with the tax law, which is obligatory for all. Tax strategy patents might 

inappropriately burden tax practitioners and taxpayers with trying to determine whether 

structuring a transaction in a certain way or collecting data to report a transaction properly, has 

been patented or might be the subject of a pending application, before they can enter 

transactions, collect necessary data, or file tax returns. This concern is compounded since the 

existence of pending applications is not public knowledge for significant periods of time. 

Special statutory rules allow prior users of business method patents to defend against 

infringement claims by showing they had used the method before the patent application was 

 

Today and Tomorrow: Hearing Before the Senate Subcommittee on Intellectual Property (April 25, 

2005); (11) Committee Print Regarding Patent Quality Improvement (Part I): Oversight Hearing Before 

the House Subcommittee on Courts, the Internet, and Intellectual Property (April 20, 2005). The 

Commissioner of Patents, U.S. Patent and Trademark Office, also testified before the Senate Finance 

Committee on July 21, 2004, as part of that Committee’s hearings on “Bridging the Tax Gap.” 

11 NTP Inc. v. Research in Motion Ltd., 397 F. Supp. 785 (E.D. Va., 2005) (on remand from 418 

F.3d 1282 (Fed. Cir. 2005). 

12 Preliminary injunction granted in Amazon.com, Inc. v. Barnesandnoble.com., Inc., 73 F. Supp. 

2d 1228 (W. D. Wash. 1999); vacated and remanded 239 F.3d 1343 (Fed. Cir. 2001). 

13 See for example, Peter Haapaniemi, “Have We Lost Our Way?”, IP Business (spring/summer 

2006) pp. 4-9; Robert P. Merges, “The Uninvited Guest: Patents on Wall Street,” 88 Economic Review, 

Federal Reserve Bank of Atlanta, No 4 (Fourth Quarter 2003), pp 1-14; John R. Thomas, “Patents on 

Methods of Doing Business,” CRS Report for Congress (June 1, 2000) at pp. 15-29; Wendy R. Schacht 

and John R. Thomas, “Patent Reform: Innovation Issues,”CRS Report for Congress (July 15, 2005). 
5 

filed. However, confidentiality obligations to clients might hinder the ability of a tax practitioner 

to produce the necessary proof. 

In this connection, some raise questions about how patent protection applies as a practical 

matter in the case of a tax strategy patent. For example, if a tax strategy is patented, and if both 

tax advisors and taxpayers can be infringers, what are the practical implications, especially if one 

or the other is not aware of the existence of a patent or patent application? Does the 

infringement occur at the time a tax advisor discusses tax planning, at the time a tax planning 

structure is entered, or at the time the taxpayer’s return is filed reporting a certain set of tax 

consequences? Such practical issues relate to the broader questions raised: whether giving tax 

advice, structuring transactions, or filing a tax return should ever be the subject of exclusive 

proprietary rights. The also require clear well understood answers, apart from the broader 

questions. 
6 

II. PATENT LAW BACKGROUND14

A. General Rights Granted by a Patent 

Patent rights are granted and enforced according to conditions established by Federal 

statutory law.15 A patent generally confers on its holder the right to prevent others from making, 

using, offering to sell, or selling within the United States, or importing into the United States, the 

patented item for twenty years from the date of filing the patent application. A patent can be 

assigned or licensed to others.16 

A person who engages in any one of the five types of actions that are within the rights of 

of the patent holder has committed infringement,17 though there could be situations in which the 

patent holder would not necessarily become aware of infringement or bring an infringement 

proceeding. A patent holder has the right to bring an action in civil court against those who 

infringe or induce others to infringe the rights granted by the patent. The patent enjoys a 

presumption of validity in the lawsuit, though an accused infringer may assert that the patent is 

invalid or unenforceable on a number of grounds.18 

The patent holder may seek injunctive relief as well as money damages in an amount up 

to a reasonable royalty for the uses covered by the patent claim.19 The money damages that may 

be claimed are “no less than a reasonable royalty.” A patent holder may claim lost profits if he or 

she can show that, but for the infringement, he or she would have made the additional profits and 

the infringement is the proximate cause of the lost profits.20 The question whether a patent 

holder must in some circumstances permit use of the invention by another and accept money 

damages has been the subject of litigation.21 

The United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) hears 

appeals from the USPTO and also has nationwide jurisdiction over appeals from district court 

 14 The description of patent law contained in this pamphlet is drawn in large part from Schechter 

and Thomas, op. cit. 

15 The Patent Act of 1952, as amended, is the current statute. See Title 35 of the U.S. Code. 

16 35 U.S.C. sec. 261. 

17 Schechter and Thomas, op cit. p. 275. 

18 35 U.S.C. sec. 282. 

19 See 35 U.S.C. secs. 154, 281, and 283. 

20 Schechter and Thomas, op. cit. pp. 333-334. 

21 See for example, Ebay Inc v. MercExchange L.L.C., 126 S. Ct. 1837 (2006). 
7 

patent decisions.22 The United States Supreme Court has discretionary power to grant review 

through certiorari in patent cases.23

 22 28 U.S.C. sec. 1295(a)(1) and (4). 

23 28 U.S.C. sec. 1254. 
8 

B. Requirements for Patentability 

In general

Qualified inventors may obtain patents on processes, machines, manufactures, and 

compositions of matter that are useful, novel, and nonobvious, if other necessary requirements 

are also met.24 Under U.S. patent law only the “first inventor” is entitled to the patent. This 

requirement, like other requirements for patentability or challenging a patent, can involve 

difficult problems of proof. 

In order to be entitled to a patent, an inventor must file a patent application with the 

USPTO that contains a specification that so completely describes the invention that a skilled 

artisan is enabled to practice it without undue experimentation. The application must also 

contain distinct, definite claims that set out the proprietary interest asserted by the inventor.25 

Patentable subject matter

The Patent Act provides generally that “whoever invents or discovers any new and useful 

process, machine, manufacture, or composition of matter, or any new and useful improvement 

thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”26

The categories “process, machine, manufacture, or composition of matter” are often generally 

referred to as patentable “subject matter.” Courts have held that patentable subject matter does 

not include abstract ideas (including for example, mathematical algorithms), laws of nature, or 

natural phenomena, due to a concern for pre-emption if any person were entitled to claim an 

exclusive right to these.27 

Some courts had also indicated that methods of doing business were not patentable 

subject matter, in some cases referring to pre-emption concerns, or to concerns that the methods 

were not novel or non-obvious.28 However, in 1998 the Federal Circuit reversed a lower court 

and held that a business method was patentable subject matter as long as it involved a “process” 

 24 Schechter and Thomas, op. cit., p. 2. 

25 Schechter and Thomas, op.cit, p. 2. 

26 35 U.S.C. sec.101. 

27 See for example, USPTO Interim Guidelines for Examination of Patent Applications for Patent 

Subject Matter Eligibility, 1300 Off. Gaz. Pat. Office 142 (Nov. 22, 2005), which state:” The courts have 

also held that a claim may not preempt ideas, laws of nature, or natural phenomena. . . . Accordingly, one 

may not patent every 'substantial practical application' of an idea, law, of nature or natural phenomena 

because such a patent would “in practical effect be a patent on the [idea, law of nature, or natural 

phenomena] itself.” [citing Gottshalk v. Benson, 409 U.S. 63 (1972)]”. 

28 See for example, State Street Bank and Trust Company v. Signature Financial Group, Inc, 927 

F. Supp. 502 (D. Mass, 1996) (and cases cited therein). This decision is the lower court decision that was 

reversed by the Federal Circuit Court in State Street Bank, supra. 
9 

or “machine” within the meaning of the patent law.29 The case involved summary judgment on 

the legal question of whether business methods could be patented; thus the court never reached 

the questions of whether the claimed invention was in fact novel and non-obvious or whether the 

particular patent was overbroad. 

Although there has been authority that patentable subject matter must involve a machine 

or other technological application such as a computer, recent Patent Office interim guidelines for 

examination of patentable subject matter allow the issuance of a patent without such a 

requirement.30 The Patent Office has requested public comment on these guidelines.31

Novelty

The statutory requirement of novelty states that “A person shall be entitled to a patent 

unless − (a) the invention was known or used by others in this country, or patented or described 

in a printed publication in this or a foreign country, before the invention thereof by the applicant. 

. . . ”32 Other separately stated statutory conditions can also defeat the novelty requirement, such 

as that the invention was “on sale” in the U.S. more than one year prior to the date of the 

application.33 The prior knowledge or use that can preclude patentability is often referred to as 

“prior art.”34 

Although the literal statutory language might suggest that an invention would fail the 

novelty requirement as a result of prior art by the mere fact that the invention was “known or 

used by others” before the applicant, patent law places great weight on prior disclosure in 

making this determination. Thus, case law and commentators explain that the term “known” is 

interpreted as “publicly known” and the novelty requirement is satisfied if the invention “differs 

from existing references that disclose the state of the art, such as publications and other 

patents.”35 If there has not been prior disclosure (for example, if others have used the item but 

have not provided a description of the item in a retrievable form that can be accessed by others, 

 29 State Street Bank, supra. The State Street Bank case involved a computer application of a 

business method. The general topic of business methods patents is discussed in greater detail later in this 

pamphlet, under the heading “Business method patents,” infra. 

30 Interim Guidelines for Examination of Patent Applications for Patent Subject Matter 

Eligibility, 1300 Off. Gaz. Pat. Office 142 (Nov. 22, 2005). 

31 See 70 Fed. Reg. 75451 (Dec. 20, 2005); 71 Fed. Reg. 34308 (June 14, 2006). 

32 35 U.S.C. sec. 102 (a). 

33 35 U.S.C. sec. 102(b). 

34 See for example, Wendy H. Schacht and John R. Thomas, “Patent Reform: Innovation Issues,” 

CRS Report for Congress (July 15, 2005), pp. CRS-3 to CRS-5. 

35 35 U.S.C.A. sec. 102 (1952 notes); Schechter and Thomas, op. cit, pp. 108-117. 
10 

or have purposely kept its nature a trade secret) then the fact of such prior use does not preclude 

patentability if the item passes the other requirements. 

The type of “existing references” that can preclude patentability due to lack of novelty 

have been interpreted fairly broadly. For example, in one case, a doctoral thesis indexed and 

shelved in a library was considered sufficiently accessible to the public as a printed publication 

to constitute prior art.”36 Also, an orally presented paper at a forum open to all interested parties 

constituted an adequate “printed publication.”37 A publicly displayed document at an industry 

event can constitute a “printed publication” even if the duration of the display is only for a few 

days and the documents are not disseminated by copies or indexed in a database.38 But a 

document disseminated internally within an organization with an expectation of confidentiality is 

not considered prior art.39 

Nonobviousness 

The requirement of nonobviousness is stated in the patent statute as a requirement that the 

invention be “beyond the ordinary abilities of a skilled artisan knowledgeable in the field.”40 

Difficult factual inquiries are involved in this determination and commentators have noted that 

there is surprisingly little judicial authority regarding what should be considered “ordinary skill 

in the art.”41 

One common question is whether it would have been obvious to a skilled artisan in the 

field to combine elements of prior art to create a claimed invention. One concern is whether 

hindsight night improperly influence the approach to this question. 

A significant test articulated by the Federal Circuit is whether there can be shown to have 

been a sufficient reason, suggestion, or motivation at the time of the claimed invention to 

combine the particular elements, and what specificity of proof is required. Some commentators 

have expressed the view that the Federal Circuit may be particularly rigorous in the specificity it 

requires, with the result that it may be difficult to for the USPTO to deny, or for others to 

 36 In re Hall, 781 F.2d 897 (Fed. Cir. 1986)(reissue application). 

37 Massachusetts Institute of Technology v. AB Fortia, 774 F.2d 1104, 1109 (Fed. Cir. 1985) 

(determination in proceeding attempting to enforce patent). 

38 In re Klopfenstein, 380 F. 3d 1345 (Fed. Cir. 2004) (proceeding to appeal denial of patent by 

USPTO. The slide presentation that precluded novelty was authored both by the appellants and another 

person. Various factors were considered in determining whether the presentation was sufficiently publicly 

accessible to preclude the issuance of the patent.) 

39 The forgoing examples appear in the USPTO Manual of Patent Examining Procedure, 

Patentability sec. 2128.01 (Level of Public Accountability Required). 

40 35 U.S.C. sec. 103(a). 

41 See for example, Schechter and Thomas, op. cit., pp. 158-159. 
11 

challenge, a claimed patent under the current standards.42 The Supreme Court has recently 

granted certiori in a case involving the standards that should be applied.43 

Utility

The term “useful” is not explicitly defined in the patent statute and the requirement has 

been phrased in a number of different ways. Some courts have noted that the utility standard is 

“not high.”44 One commonly used definition is that an invention is useful if it is “minimally 

operable towards some practical purpose.”45 The utility standard has been said to be met unless 

the claimed invention is “totally incapable of achieving a useful result” or “is incapable of 

serving any beneficial end.”46

In some cases it has been argued that something that is against public policy or illegal 

fails to meet the utility standard and is thus unpatentable. For example, in Juicy Whip Inc. v. 

Orange Bang Inc.,47 the district court held a patent invalid on the ground that the purpose of the 

invention was to increase sales by deception, that is, by making one product look like another. 

The Federal Circuit overruled the district court, finding that making one product look like 

another was in itself a specific benefit sufficient to satisfy the statutory requirement of utility. In 

making its decision, the court noted that the “utility” requirement is not a directive to the Patent 

and Trademark Office or the courts to serve as arbiters of deceptive trade practices: the task of 

protecting consumers is left to others.48

The Juicy Whip case reiterates the basic concept that a patent does not grant a right to use 

an invention, merely a right to exclude others from doing so. If regulatory or other legal 

requirements must be satisfied for an invention to be used, those need to be independently 

satisfied by the inventor or other users. For example, a patent might be granted for a drug, but it 

might be illegal to market or use the drug without FDA approval. If FDA approval is not granted, 

the inventor would be precluded from applying its patent not by patent law, but by the law that 

otherwise regulates the item in question.49 Some commentators suggest that it might be possible 

 42 See, Schechter and Thomas, op. cit. at pp. 153-161. 

43 Teleflex, Inc. v. KSR Intern. Co., 119 Fed. Appx. 282 (C.A. Fed. (Mich), 2005); cert. granted, -

- S. Ct.--, 2006, WL 1725628 (U.S.). 

44 Juicy Whip Inc. v. Orange Bang Inc., 51 USPQ2d 1700, 1702 (CA FC 1999). 

45 See Brenner v. Manson, 383 U.S. 519 (1966), cited in Schechter and Thomas, op cit., p. 2. 

46 Juicy Whip at 1702. 

47 Supra. 

48 Juicy Whip at 1703. 

49 Schechter and Thomas, op.cit. p. 4. 
12 

for a concept of illegality to preclude grant of a patent, but that such limits are not imposed in 

application.50

As is the case with all inventions that might receive a patent, the fact that a tax strategy 

has been patented does not determine whether that strategy will in fact achieve its claimed 

objective. The IRS and the courts have the authority to interpret the tax laws. Thus, the IRS may 

challenge the validity of a taxpayer’s position, even though the position is consistent with an 

issued patent. Although “utility” is a stated requirement for the grant of a patent, the fact that a 

patent examiner may have concluded that a tax planning method has utility has no bearing on 

whether it in fact will succeed as a tax planning or other method. 

First inventor 

Unlike the laws of many other countries, U.S. patent law grants the right to a patent to the 

first person to invent an item, rather than the first person to file a patent application. A first 

inventor must both have conceived of the invention and reduced it to practice.51 However, a first 

inventor can lose the right to obtain a patent for himself, if he has “abandoned, suppressed, or 

concealed”52 his invention. Thus difficult questions of fact may arise regarding when a “first 

inventor” is entitled to claim the rights to a patent even though another person may have filed an 

earlier patent application. 

The patent law allows a procedure called an “interference”53 when a patent claim is filed 

that appears to overlap with another pending claim or with an unexpired, issued patent. 

Procedures allow the several claimants to offer evidence regarding which is the “first inventor.” 

Some commentators have noted that these are complex procedures that have been relatively rare; 

and that it is possible that the expense of such cases may lead to their use only in the most 

commercially significant cases.54

 50 Ibid, pp. 69-72. 

51 Diligence in attempting to reduce an invention to practice can also be taken into account, even 

if the claimant is not the first to reduce it to practice. 35 U.S.C. sec. 102(g). 

52 35 U.S.C. 102(g). 

53 35 U.S.C. 135. 

54 Schechter and Thomas, op. cit. p. 118. 
13 

C. Procedure to Obtain Patents 

A patent can be obtained only by application to the USPTO. A patent examiner reviews 

the application to determine whether the requirements for patentability are met. Patent office 

guidelines indicate that when a patent application is filed, the burden is on the patent office to set 

forth a prima facie case of non-patentability.55 Thus, for example, if the patent examiner is not 

aware of information indicating that the claimed invention is not novel or is obvious, the 

presumption would generally be to issue the patent. 

The patent application must contain a specification that so completely describes the 

invention that a skilled artisan is enabled to practice it without undue experimentation and to 

show that the inventor was in possession of the claimed invention at the time of filing. The 

application must also contain distinct, definite claims that set out the proprietary interest asserted 

by the inventor.56

Once issued, a patent enjoys a presumption of validity, though it can be challenged in 

court or by certain other methods.57 An administrative procedure for re-examination may be 

brought with the USPTO by any person after the issuance of a patent. The grounds for invalidity 

must constitute a patent or a printed publication.58 Certain other grounds (such as that the 

claimed invention was sold previously) are not permitted, presumably in the interests of 

problems of proof in a proceeding intended to resolve validity disputes relatively quickly and 

short of techniques involved in litigation.59 

 55 See Interim Guidelines for Examination of Patent Applications for Patent Subject Matter 

Eligibility, 1300 Off. Gaz. Pat. Office 142 (Nov. 22, 2005). 

56 Schechter and Thomas, op. cit. p. 2. 

57 Schechter and Thomas, op. cit. pp. 252-257. 

58 35 U.S.C. secs. 301, 302. 

59 Schechter and Thomas, op. cit. pp. 252-257. 
14 

D. Time and Method of Public Notice of Patent Applications and Patents 

A patent application generally does not become public until 18 months after the 

application is filed. If an applicant will not be filing for protection outside the United Sates, the 

applicant can opt out of the 18-month public notice and prevent the patent from becoming public 

knowledge until is it granted. Years may elapse between the time an application is filed and the 

time a patent is granted. 

The patent office categorizes the application or issued patent according to subject matter. 

For example, there is a category for business method patents (705) and a more recent 

subcategory for tax patents (36T).60 The categorization may assist persons who are attempting to 

search for publicly available patents or patent applications covering certain types of subject 

matter. It is not clear how difficult it is the public to search for patents or patent applications of a 

specified type, due to the various wording that is possible for applications and for issued 

patents.61

During the time that the patent application is pending and has not become public, the 

public may have little ability to provide information to the patent examiner regarding prior art 

that could bear on novelty or non-obviousness. Although many relatively informal types of 

“publication” have been held to preclude novelty, as cited in the USPTO manual and discussed 

above, it is not clear how readily the patent examiner may be able to discover the existence of 

such publications without outside input.62 Such input might occur in the course of a 

reexamination proceeding, however. 

 60 See http://www.uspto.gov/patft/class705_sub36t.html 

61 As one possible example, the patent involved in the State Street Bank case is not in the 

705/36T list for tax-related patents, but appears under a separate business method classification (36R). 

62 See discussion above under the heading “Novelty”. At least some of the proceedings in which 

the existence of such publications came to light were either challenges to an already issued patent or a 

“reissue application” proceeding that involves public notice (for discussion of reissue proceedings 

brought by a patent holder to correct a defect in a previously issued patent or expand the patent claims, 

and the opportunity for public comment, see, Schechter and Thomas, op. cit. at 246). See for example, 

Massachusetts Institute of Technology v. AB Fortia, supra; In re Hall, supra; A third case involved a 

slide show that was found to defeat the novelty requirement and that was authored by another person and 

by the applicant. In re Klopfenstein, supra.
15 

E. Special Statutory Defenses 

First Inventor Defense Act

After the decision in State Street Bank that business methods could be patented, 

(described more fully below under the heading “Business Method Patents”) there was concern 

that persons who had used business methods that perhaps had not been thought patentable, and 

who had not previously sought patent protection for such methods (in part, perhaps, since the law 

on patentability had been unclear), might be sued by someone who had obtained a business 

method patent.63 The American Inventors Protection Act of 199964 included the First Inventor 

Defense Act,65 which generally provides an infringement defense to an earlier inventor of a 

business method that was subsequently patented by another. In order to qualify, the defendant 

must have “actually reduced the subject matter to practice at least [one] year before the effective 

filing date of such patent, and commercially used the subject matter in the United States before 

the effective filing date of such patent.”66 This defense applies only to business method 

patents,67 and the reduction to practice or use must have been made in good faith, without 

derivation from the patentee or persons in privity with the patentee.68

Physicians Immunity Statute

In 2000, following a controversial lawsuit in which one physician sued another for 

infringement of a patent on a cataract surgery technique and the condemnation of patents on 

medical procedures by the American Medical Association,69 the Physicians Immunity Statute 

was enacted.70 

Under this statute, a patent holder generally cannot obtain either damages or injunctive 

relief against a licensed medical practitioner or related health care facility with respect to the 

performance of a medical activity that constitutes an infringement of the patent. The statutory 

protection applies only for a medical procedure on the human body (or on an organ or cadaver, 

or a nonhuman animal used in medical research or instruction directly relating to the treatment of 

humans) which does not involve the use of a patented machine, patented matter, or a valid 

 63 See Schechter and Thomas, op. cit., 134-135. 

64 Pub. L. No. 106-113. 

65 Subtitle C of the American Inventors Protection Act, Codified at 35 U.S.C. sec. 273. 

66 35 U.S.C. sec. 273(b)(1). 

67 35 U.S.C. sec. 273(b)(3)(A). 

68 35 U.S.C. sec. 273(b)(3)(B). 

69 See, Schechter and Thomas, op. cit. pp. 38-40. 

70 35 U.S.C. sec. 287(c). 
16 

biotechnology patent.71 Therefore, while it is possible to obtain a patent on a medical procedure 

falling within the scope of the statute (such as a novel surgical technique), the patent holder 

generally will be unable to enforce such a patent against a licensed medical practitioner or 

related health care facility. 

It has been observed that the provision is limited in application since it covers “medical 

methods” but expressly does not cover products, compositions of matter, and biotechnologies. In 

many cases a medical method may also involve a device of some kind. Thus, commentators 

have observed that if a doctor patents a new device (i.e. a machine or composition of matter) that 

is used in surgery, and also patents its manner of use as a “medical method,” the doctor is not 

precluded from suing for infringement if another medical practitioner uses the patented device in 

surgery.72 

 71 35 U.S.C. sec. 287(c)(2)(A). 

72 Schechter and Thomas, op. cit. pp. 39-40. Some commentators have criticized the statute and 

suggested alternative approaches to the concerns such as requiring a patent holder to license and recover 

money damages from an infringer. See for example, Steve Dirksen, “A Reconsideration of the 

Physicians’ Immunity Statute”, 2001 Duke L. & Tech. Rev. 0027 (August 6, 2001). 
17 

F. Business Method Patents73

The patenting of methods of doing business generally affects many areas beyond 

taxation. As one example, a recent case before the Board of Patent Appeals and Interferences of 

the USPTO involves a method of compensating a manager to provide incentives of various 

types.74 A major case establishing the right to patent business methods involved tax as well as 

other business aspects, however. 

State Street Bank case

In 1998, in the State Street Bank,75 case noted previously, the Federal Circuit reversed a 

lower court decision and held that a method of doing business was patentable subject matter. 

The case involved a data processing system for implementing an investment structure of mutual 

funds as a set of “spokes” in a “hub” that is a partnership for tax purposes, and of performing the 

necessary calculations to allocate income and expense, compute daily share prices, and satisfy 

tax and accounting reporting obligations. 

The Federal Circuit rejected a claim for summary judgment that business methods could 

not be patented. It also concluded that the invention could qualify as patentable subject matter as 

a useful machine. Prior to this decision, as the cases cited by the court indicate, whether a 

business method could be patented had arguably been uncertain. Some prior cases had indicated 

that such methods could not be patented. 

The arguments raised in the case illustrate some of the issues that have surrounded the 

question of business method patents. The party challenging the patent, State Street Bank, first 

claimed the invention was similar to a mere mathematical algorithm that would not be patentable 

under case law that denies patentability to abstract ideas due to concerns about preemption of a 

field of knowledge. In a related argument, State Street Bank contended that the wording of the 

patent claimed was overbroad and that if the patent as claimed were valid, that would preclude 

any other business from setting up an investment structure as a partnership of funds, since such a 

form would always require performing the allocation calculations for which the patent protection 

was claimed. The Federal Circuit held that the invention for which patent protection was claimed 

was not a non-patentable mere mathematical algorithm or idea, but was a useful machine. The 

decision did not reach the question whether the patent claim was overbroad, saying that question 

was related to the requirements of novelty and nonobviousness, and not to patentable subject 

matter. 

 73 For general background on business method patents, see John R. Thomas, “Patents on 

Methods of Doing Business,” CRS Report for Congress (June 1, 2000). 

74 Ex Parte Carl A. Lundgren, Appeal No. 2003-2088 (April 20, 2004). 

75 149 F.3d 1368 (Fed. Cir. 1998), cert. denied 525 U.S. 1093 (1999). As noted previously, the 

U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) has national jurisdiction over 

most patent appeals from the district courts. 28 U.S.C. sec. 1295(a)(1). 
18 

State Street Bank further argued that the invention was not patentable, even if it were 

otherwise patentable as a process or machine, because it was a method of doing business (the 

method of using a central partnership in which mutual funds or other investors are partners). The 

Federal Circuit rejected this argument and held that business methods were not per se nonpatentable subject matter. The decision noted that other requirements of the patent law, including 

novelty, non-obviousness, and adequacy of disclosure and notice, would also have to be met to 

justify the grant of a patent. The decision did not address whether those requirements had in fact 

been met in the case before it, nor did it make any finding with respect to the question whether 

the patent claim before it was overbroad. The Federal Circuit expressed the view that many prior 

cases stating that business methods could not be patented could instead be read as implicitly 

involving situations where the courts had believed that other requirements for patentability, such 

as novelty or non-obviousness, had not been satisfied, or had implicitly involved claims for the 

patent of a pure idea without reduction to a particular useful process or machine. 

State Street Bank patent

The patent involved in the State Street Bank case76 was originally claimed both in terms 

of a computer machine application and in terms of a method,77 and includes tax elements. The 

Federal Circuit described the data processing system as facilitating a structure that offered “the 

advantageous combination of economies of scale in administering investments coupled with the 

tax advantages of a partnership.”78 The business structure pools the investment assets for its 

partner regulated investment companies (and other investor funds) in a single central partnership. 

The patent specification notes that a partnership is subject to different tax rules than a regulated 

investment company and provides advantages in the timing and measurement of tax realizations 

and in allocations, when compared to certain other structures (as one example, where one partner 

regulated investment company might instead invest in another).79 The patent is for a data 

processing system that allows the performance of daily calculations of partnership interests and 

share prices, and year-end calculations for tax and accounting purposes under the structure.80 

 76 U.S. Patent No. 5,193,056 (Mar. 9, 1993). 

77 149 F.3d 1368, 1371 (1998). 

78 149 F.3d 1368, 1370 (1998). 

79 The patent observes that if one regulated investment company invested in another regulated 

investment company that had already realized gains during the year but before the investment occurred, 

the investing company would be taxed on receipt of the year end distribution, on gains that arose before it 

had invested. This would not occur if instead of investing in one another, each regulated investment 

company's investment assets were in a partnership and each was allocated its share of gains. 

80 The description in the patent (‘056, supra, March 9, 1993; filed March 11, 1991), referring to 

the method of keeping track of book capital accounts, uses common terms also contained in the applicable 

tax rules for partnerships. The IRS later modified some of the tracking rules required for similar types of 

partnership structures. See for example, T.D. 8585, 1995-1 C.B. 120, 59 FR 66724-01 (Dec. 28. 1994); 

Rev. Proc. 2001-36, 2001-1 C.B. 1326 (relating to “qualified master feeder structures”), superseded by 

Rev. Proc. 2003-3, sec. 6.06, 2003-1 C.B. 113. 
19 

III. EXAMPLES OF TYPES OF PATENTED TAX STRATEGIES 

Patents have been granted covering a wide variety of tax planning techniques. Some 

patents focus on the use of a computer as an essential element of the business method, while 

others rely primarily on the tax structure itself. Some patents relate to tax planning only 

indirectly. 81

Until fairly recently, Patent Office procedures based on case law favored applications that 

were expressed in terms of computerization or other mechanical functions. In the tax context, 

this meant that patented tax techniques or strategies had to be performed using a computer. For 

this reason, it is not always clear whether a tax or other business method patent based on the 

computerization of a particular planning technique might also grant rights to the underlying 

strategy separate from the computer application.82 

An example of a computer-based tax patent can be found in U.S. Patent No. 5,966,693, 

which involves a method for computerized administration of leveraged split dollar life insurance 

coverage. A split dollar life insurance arrangement describes a method of paying for insurance 

in an employment context, where premiums and proceeds are split between the employer and 

employee. In a typical leveraged split dollar plan, the employer borrows against the cash value 

of the life insurance policy to partly cover the cost of the insurance premiums. The abstract to 

the ‘693 patent describes the patented business method as follows: 

The computerized method includes storing parameters of insurance policies and loan 

agreements in a computer memory, over ranges of possible death benefits, cash values, 

loan principals, and incremental payments over a span of years. Employee factors are 

quantified and input to the computer processor, which is programmed to integrate the 

employee factors with the insurance and loan terms to select an integrated loan/insurance 

arrangement to schedule payments to meet maximum contributions and retirement and 

life expectancy expectations. The processor adjusts incremental payments for the 

employer and the employee to ensure sufficient collateral and to comply with tax 

regulations that are unfavorable to certain front-loaded payment schedules. 

An example of a structure-based tax patent that does not rely primarily on the use of 

computers can be found in U.S. Patent No. 6,567,790, which describes an estate planning 

 81 As discussed previously, the grant of a patent does not limit the ability of the IRS to challenge 

a particular tax structure. Moreover, the general nature of the claims in some patent applications, and the 

lack of any specific facts, might make the claimed tax benefits difficult to evaluate in the abstract. 

82 See Interim Guidelines for Examination of Patent Applications for Patent Subject Matter 

Eligibility, 1300 Off. Gaz. Pat. Office 142 (Nov. 22, 2005). As noted previously, public comment has 

been requested on the interim guidelines. In a recent case the USPTO Board of Patent Appeals and 

Interferences concluded that the State Street Bank case and other authority led to the conclusion that a 

computer or other technological device was not required for patentable subject matter. Ex Parte Carl A. 

Lundgren, Appeal No. 2003-2088 (April 20, 2004), involving a method of compensating a manager that 

would provide certain types of incentives. 
20 

structure designed to minimize estate and gift tax liability through the use of a grantor retained 

annuity trust (“GRAT”) funded with nonqualified stock options.83 In a GRAT, the grantor 

creates an irrevocable trust and retains the right to receive, for a specified term, an annuity based 

on a specified sum or fixed percentage of the value of the assets transferred to the trust. GRATs 

are a commonly used estate and gift tax planning device. The rules governing the valuation of a 

retained interest in a GRAT are found in sections 2702(a)(2)(B) and 2702(b) of the Internal 

Revenue Code (the “Code”). In this patent, the “invention” is the use of nonqualified stock 

options to fund the GRAT. The ‘790 patent is currently the subject of litigation in federal court 

based on alleged infringement.84

Some business method patents involve tax planning only indirectly. For example, U.S. 

Patent No. 6,772,128 describes a business method for providing financial insurance to cover the 

costs of decommissioning a nuclear power plant. The business method contemplates the use of a 

decommissioning insurance policy and includes a method for receiving premiums from a trust, 

investing those premiums, and paying actual decommissioning expenses back to the trust in 

accordance with the insurance policy. The business method also describes a way to calculate 

premiums for the financial product. Although primarily an insurance product, the patent also 

claims that the business method provides tax efficiencies where funds are held in trusts that do 

not qualify for special tax treatment under section 468A of the Code (relating to the 

establishment of nuclear decommissioning reserve funds). 

 83 While the patented invention is based primarily on the tax structure, the first claim in the 

patent is for a method “performed at least in part within a signal processing device.” In addition, the 

patent application notes that in the “best mode embodiment of the . . . invention, the steps of the method 

are encoded in a software program which may be adapted for execution on any one of a variety of known 

type signal processing devices in any one of a number of different operating system protocols.” U.S. 

Patent No. 6,567,790. 

84 See Wealth Transfer Group v. Rowe, No. 06CV00024 (D. Conn. filed Jan. 6, 2006). 
21 

IV. ISSUES RELATED TO PATENTING TAX STRATEGIES 

In general

Government grants of patents for intellectual property involve the trade off of providing 

an incentive for the development of new knowledge and new products and services at the cost of 

creating a monopoly in the provision of the product or service so developed. The recent 

development of business method patents for tax strategies raises two distinct sets of concerns. 

Some observers express concern that the availability of patent protection may encourage, in a 

variety of ways, the development of aggressive tax shelter transactions, or of transactions that do 

not achieve the expected tax results. Separately, others note that the availability of patent 

protection for tax strategies could allow certain tax practitioners to seek and obtain patent 

protection for routine (and non-aggressive) tax planning, or even for certain methods of 

complying with the Code, effectively allowing such patent-holders to “capture” a property right 

in the Internal Revenue Code itself (as well as in Treasury Regulations and other administrative 

guidance) and extract economic rent from other tax practitioners (and taxpayers) for routine tax 

planning which is alleged to infringe such patents. In either case, it is argued that extending 

patent protection for tax strategies may be inconsistent with both tax policy and the policies 

underlying the patent system generally. Finally, tax patents raise certain practical questions 

independent of the underlying policy considerations. 

Economics of patents

Technological innovation is an important component of economic growth. However, 

while an individual (or business) may acquire the necessary knowledge base and find it 

profitable to undertake some investments in research, he may not find it profitable to invest in 

research as much as he otherwise might because it is difficult to capture the full benefits from the 

research and prevent such benefits from accruing to other individuals and to society at large. In 

general, individuals and businesses acting in their own self-interest will not necessarily invest in 

education and research to the extent that would be consistent with the best interests of the overall 

economy. This result occurs because the benefits from such investments, such as scientific and 

technological advances, that are made at the expense of one individual or business could be 

cheaply copied by one’s competitors. 

Investment in the acquisition of knowledge is one of the areas where there is a consensus 

among economists that government intervention in the marketplace can improve overall 

economic efficiency. Numerous government policies seek to offset the underinvestment in 

knowledge that would otherwise occur if the full costs of such investments were borne by 

individuals privately. Among these policies are public provision of elementary and secondary 

education, public libraries, public support of State universities, public support of basic research 

at universities through direct grants, and public support of private research through the research 

and experimentation tax credit. Additionally, the patent system is intended to help encourage an 

economically efficient level of innovation. 

Patents grant to their holder for a period of time the right to preclude others from using 

the item or idea that is the subject of the patent. This grants a monopoly to the holder of the 
22 

patent. Economists have long recognized that monopolies are generally economically inefficient 

because the monopolist’s profits are maximized by restricting output and setting a price above 

that of the cost of production.85 This aspect of the patent system, alone, is unambiguously 

inefficient. However, economists also recognize, as discussed above, that without the ability to 

capture the economic returns from innovation, too little investment in innovation will result. 

Obtaining a patent provides a way to claim the economic benefits from one’s innovations, and 

thus the ability to obtain a patent may lead to an increase in investments in innovation. Overall, 

the patent system is a tradeoff between the static economic losses of the grant of monopoly 

power and the dynamic efficiency gains from increased innovation stemming from the incentives 

created by the prospect of obtaining such monopoly power. The patent system leads to the early 

disclosure of information, which is economically beneficial to society as a whole, and which 

might otherwise be closely held as a trade secret. This disclosure of information helps to bring 

products to market from multiple vendors and provides the most up to date public knowledge 

base as a platform for future innovation. 

Despite the theory, unambiguous economic evidence that patent systems increase 

innovation does not exist. A variety of reasons may be at play for why patents do not 

unambiguously increase innovation, including: (1) inventors have other means to protect their 

returns to innovation (e.g., trade secrets); (2) inventors may be motivated by other than strictly 

economic factors, such as professional reputation; and (3) patents themselves may harm followon innovation (due to need to obtain licensing fees to earlier inventors), which could be 

particularly harmful in rapidly evolving industries or in industries with complex technologies. In 

general, a patent system is thought to perform best for industries with very high development 

costs of new products (i.e., many costs to recoup before a successful invention is profitable) and 

easily duplicated products (i.e., free-riders could readily duplicate and sell your innovation), such 

as in the pharmaceutical or chemical industries. 

Tax patents and tax avoidance

An initial concern is that tax shelter promoters might use patent protection as a means of 

circumventing the reportable transaction regulations. The reportable transaction regulations 

require a taxpayer that participates in a reportable transaction and that is required to file a tax 

return to attach to its return a disclosure statement in the form prescribed by the Secretary.86 

 85 This effect of monopoly occurs because when a monopolist lowers its price to increase sales, it 

loses revenue on all of the sales it was currently able to make at the higher price. Profit is thus maximized 

at a price well above the marginal cost of additional production (businesses in more competitive 

industries are considered to be “price-takers,” with prices set by the aggregate market and only the 

amount that they produce in their direct control, and will maximize profits by producing as long as their 

marginal cost of production is less than the market-determined price). The economic inefficiency results 

under monopolies because the many potential users willing to pay an amount above the marginal cost of 

the product, but below the monopolist’s profit maximizing price, are left unserved. 

86 Treas. Reg. sec. 1.6011-4(a). For this purpose, the term taxpayer includes any person, 

including an individual, trust, estate, partnership, association, company, or corporation. Sec. 7701(a)(1); 

Treas. Reg. sec. 1.6011-4(c)(1). 
23 

Under the regulations, a reportable transaction includes a listed transaction87 and five other 

categories of transactions, including “confidential transactions,” which are transactions offered to 

a taxpayer under conditions of confidentiality88 and for which the taxpayer has paid an advisor a 

minimum fee.89 A tax advisor who wishes to protect a “proprietary” tax structure from 

duplication by other competing tax advisors must, under present law and absent the availability 

of patent protection, weigh the cost of public disclosure (if the advisor does not insist on 

confidentiality) against the cost of having the transaction characterized as a reportable 

transaction and thus subject to heightened scrutiny (if the advisor insists on confidentiality, 

rendering the transaction a confidential transaction). Availability of patent protection offers a 

third approach, however: the tax advisor can obtain a business method patent on the structure 

(thereby providing the desired protection against unauthorized duplication by competing tax 

advisors) and then drop any requirement of confidentiality, thus avoiding treatment as a 

confidential transaction and eliminating any obligation of the taxpayer to specifically disclose to 

the IRS its participation in and the details of the transaction. 

While some critics argue that this and related concerns militate against allowing patent 

protection for tax strategies altogether, others maintain that this initial concern can be effectively 

addressed in ways other than an outright prohibition on tax strategy patents. For instance, the 

IRS and Treasury could amend the reportable transaction regulations to include the application, 

grant, or use of a tax strategy patent (either of one’s own patented strategy, or pursuant to a 

license from the patent-holder) as a reportable transaction, or could issue administrative guidance 

treating certain of these actions as listed transactions. Likewise, patent-holders might be 

required to provide the IRS with lists of those to whom the patented tax structure has been 

marketed. Further, to the extent the IRS concludes (on a case-by-case basis) that a particular 

patented tax strategy constitutes an abusive tax avoidance transaction, the IRS can issue guidance 

identifying it as a listed transaction. 

Separate issues arise in connection with the mandatory public disclosure of issued 

patents. This mandatory public disclosure and its role in improving the dissemination of 

information is often highlighted as one of the principal benefits of the patent system.90 With 

regard to tax strategy patents, even some who are concerned about patents on aggressive tax 

avoidance strategies nevertheless suggest that the information flow from the patenting of tax 

strategies may allow the Congress and the IRS to more quickly identify and address any abusive 

 87 A listed transaction is a reportable transaction which is the same as, or substantially similar to, 

a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 

6011 (relating to the filing of returns and statements), and identified by notice, regulation, or other form 

of published guidance as a listed transaction. Sec. 6707A(c)(2); Treas. Reg. sec. 1.6011-4(b)(2). 

88 A transaction is considered to be offered under conditions of confidentiality if the advisor 

places a limitation on disclosure by the taxpayer of the tax treatment or tax structure of the transaction and 

the limitation on disclosure protects the confidentiality of that advisor’s tax strategies. Treas. Reg. sec. 

1.6011-4(b)(3)(ii). 

89 Treas. Reg. sec. 1.6011-4(b). 

90 Schechter and Thomas, op. cit., pp. 9-12. 
24 

tax strategies, thus curtailing the availability of such strategies. According to this argument, 

patents for aggressive tax structures provide a useful window into the current “state-of-the-art” in 

tax shelter creation and promotion, and allow the IRS to focus its limited enforcement resources 

accordingly.91 Under this view, these benefits might be enhanced by legislation providing the 

IRS with earlier access to tax patent applications; for instance, notwithstanding the general rule 

that patent applications are made public only 18 months after filing (or, at the election of the 

applicant, not made public until the patent is granted if the applicant is not filing for protection 

outside of the United States), the IRS might be provided, by statute, with access to all patent 

applications (or those determined by the Patent Office to have a tax component). 

Another issue relates to the marketing of patented tax strategies to investors. The grant of 

a patent in no way constitutes government (i.e., IRS) approval of the purported tax treatment 

asserted by the patent-holder; indeed, the IRS is often unaware of an application for a tax 

strategy patent until after the patent is granted. While this fact is likely to be readily understood 

by large and sophisticated corporate taxpayers (many of whom employ a number of in-house and 

outside legal advisors well-versed in both intellectual property law and tax law), this critical 

point may not be appreciated by an individual without formal legal training and with limited 

direct interaction with the Federal government. It is argued that unscrupulous tax shelter 

promoters could prey on such unfamiliarity by falsely holding out a patent as evidence that an 

aggressive tax structure has been reviewed and approved by the government and that it thus 

“works” as advertised. A patented tax strategy also might fail to produce the anticipated tax 

results for a number of reasons other than an intentionally aggressive structure, including a 

mistake in understanding the tax law, or the application to particular facts in a way that changes 

the result. Some have suggested that requiring certain disclosure by advisors and promoters 

(e.g., a statement that the existence of a patent bears absolutely no significance to the merit of the 

asserted tax treatment) could resolve these concerns; however, others argue that such disclosure 

might have only a modest effect, particularly where the target audience consists of relatively 

less-legally-sophisticated individual investors who might easily dismiss any such required 

disclosure language as incomprehensible or irrelevant “fine-print.” 

One might be tempted to address this problem by requiring the IRS to analyze and opine 

on the legal merit of tax strategies on which patents are sought at the application stage, so that 

the issuance of a patent would indeed constitute evidence of IRS approval. However, it is likely 

that such an approach would be enormously burdensome and highly inefficient.92 The IRS 

currently provides prospective guidance to specific taxpayers about specific transactions, 

primarily through the issuance of private letter rulings, which can generally be relied upon only 

by the taxpayer to whom it is addressed. Requiring the IRS to rule on the tax treatment of a 

hypothetical isolated fact-pattern set forth in a patent application, and then allowing the general 

 91 However, others point out that publicly disclosed information is available not only to the IRS 

but to other taxpayers and tax advisors as well, and argue that expanding the scope of public knowledge 

in the field of tax planning may only exacerbate the problem of tax shelter activity. 

92 Furthermore, such an approach would arguably be inconsistent with patent policy and 

procedure generally (for instance, approval of a patent on a new drug is not conditioned on either its 

legality or government approval for medical use). 
25 

public to rely on approval of the patent as evidence of IRS sanction of the asserted tax result, 

could have negative effects on tax administration and procedure. 

Finally, the primary economic rationale for a patent system − to promote innovation − is 

premised on the assumption that innovation is socially beneficial and should be encouraged. 

Innovation that, for example, makes compliance with tax laws easier is presumably beneficial. 

In the context of tax-strategy patents, however, some may argue that innovation is either not 

socially beneficial, or requires no special protection to encourage its undertaking, and thus a 

fundamental premise behind a patent system is missing.93 Specifically, many would argue that 

no social gains from novel tax planning strategies exist as any gain to the user of the strategy is 

offset by losses to the Treasury, and therefore the resources devoted to producing and using such 

strategies represent a net loss to society. To the extent that this view of tax strategies is held, a 

patent system for tax strategies would only be socially desirable if it decreased the use of tax 

strategies. This is theoretically possible because, as noted above, a monopolist restricts “output,” 

and this effect could outweigh the innovative effect that leads to the development of more tax 

strategies. Others would argue that, regardless of whether tax strategies are socially beneficial, 

there is no need for patent protection in order to encourage their development as they seem able 

to proliferate without such protection. 

Tax patents and the private capture of public tax law

Independent of concerns about the consequences of allowing patents for aggressive tax 

avoidance strategies (i.e., tax shelters) or for novel tax structures in general, a separate set of 

concerns arises when considering patents on non-aggressive or even mundane tax strategies. The 

focus of these concerns is on the risk that patent-holders could effectively claim ownership of 

certain routine planning tools, or even of a method which constitutes the most efficient (or, in the 

extreme, the only) manner of complying with the requirements of the Internal Revenue Code and 

administrative guidance thereunder.94 This concern is similar to those arising in areas other than 

tax law, generally involving the intersection of patent law with some other regulatory regime. 

For example, commentators have observed that government health and safety standards can 

sometimes only be met by using a patented product or method, and have considered the 

appropriate policy response to such situations.95

 93 This is not to say that any and all tax planning is inappropriate or improper. As Judge Learned 

Hand famously opined, “[a]ny one may so arrange his affairs that his taxes shall be as low as possible; he 

is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to 

increase one’s taxes.” Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465 (1935). 

But acknowledging that tax planning may be legally and ethically permissible is hardly to say that it is 

socially desirable or might not otherwise be undertaken without the protection of exclusive proprietary 

rights. 

94 The grantor trust structure described in the example section of this pamphlet demonstrates the 

issues involved. In that case, patent protection was granted to a trust structure that many might view as 

routine based primarily on the type of assets (nonqualified stock options) used to fund the trust. 

95 See for example, Janice M. Mueller, Patent Misuse Through the Capture of Industry 

Standards, 17 Berkeley Tech. L. J. 623 (2002) (ultimately concluding that “when government mandates a 
26 

Some critics argue that granting a patent to a tax strategy under such circumstances is 

tantamount to granting the patent-holder an ownership right over the relevant provisions of the 

tax law (one or more sections of the Internal Revenue Code, for instance, or a Treasury 

Regulation) and allowing the patent-holder to collect economic rent from other taxpayers whose 

transactions or activities fall within the scope of such statutes or regulations; these critics view 

such a result as intolerable and contrary to the public interest, and argue that patent protection 

should therefore not be available for tax strategies. Even advocates of this position, however, 

caution that any exclusion from the scope of patent protection should be narrowly tailored, to 

avoid inadvertently prohibiting patents on, for example, proprietary software which a taxpayer 

could use to assist in managing financial information and in preparing its tax return.96

Others argue that concerns about the patenting of common and routine tax planning 

structures may be overstated, particularly in light of the statutory first inventor defense.97 As tax 

strategy patents are arguably business method patents, the first inventor defense will apply to 

provide an infringement defense to any tax practitioner who “acting in good faith, actually 

reduced the subject matter to practice at least 1 year before the effective filing date of such 

patent, and commercially used the subject matter before the effective filing date of such 

patent.”98 However, while the first inventor defense protects a veteran tax practitioner with 

regard to long-standing tax planning structures, it will not protect a tax practitioner who develops 

a new tax structure based upon a change in the tax law against a patent-holder who filed a patent 

application on the same structure within a year or less of the tax law change that rendered the 

structure possible or desirable.99

Still others argue that the issuance of tax patents imposes additional onerous requirements 

on tax practitioners, who may now have a “due diligence” obligation to conduct a patent search 

before providing tax advice to a client, in order to assure themselves that they are not infringing 

 

technology standard . . . any entity holding patent rights in the subject matter of the standard should be 

required to license all users at reasonable commercial terms,” and failing that “the government should 

consider the exercise of eminent domain over the patent”). 

96 Protection for proprietary software under these circumstances would need to be distinguished 

from protection for business methods that are presented as involving the use of a computer to make 

necessary calculations. 

97 35 U.S.C. sec. 273. 

98 35 U.S.C. sec. 273(b)(1). 

99 The first inventor defense will also not protect a tax practitioner who is new to the field, even 

with regard to the implementation of long-standing tax planning structures which are subject to a patent. 

Similarly, if infringement consists not only of a tax advisor assisting a client to implement a patented 

structure, but also of the client’s implementation, the first inventor defense will generally not protect the 

client taxpayer unless it had implemented the same structure more than one year prior to the patent filing 

date. 
27 

others’ patents.100 Conversely, granting patents for tax strategies may raise professional ethics 

issues for practitioners who seek and obtain patents, as well (and may raise issues under the 

relevant code of professional responsibility to which the practitioner is subject). One possible 

resolution of these issues would be analogous to the legislative response to similar issues among 

medical professionals: legislation could be enacted, modeled on the Physicians Immunity 

Statute,101 which would provide attorneys, accountants, and other tax advisors with immunity 

from an infringement action arising in connection with the provision of tax advice.102

Some observers contend that many of these issues do not demonstrate an inherent 

problem with tax patents, but rather arise from the misapplication of patent law to the facts. It is 

asserted that in many such cases, issuance of a patent ought to have been denied on the basis that 

the claimed invention was either obvious, not novel, or both. Others respond that, while this may 

be true as a theoretical matter, it may be difficult to separate the question of the practical 

administrability of patent law criteria (such as non-obviousness, novelty, and utility) to tax law, 

from the overarching question of whether such patents ought to be permitted at all as a matter of 

public policy. The task of judging the merit of applications for tax strategy patents effectively 

calls upon patent examiners to become expert not only in a large and complex body of statutory 

and administrative tax law, but also potentially in the received wisdom and lore familiar to tax 

practitioners regarding how transactions are, in fact, routinely structured and executed in the real 

world. Although the Patent Office does not judge whether a patented tax strategy “works” from 

a tax law perspective, patent examiners still must determine whether a patent application satisfies 

the relevant criteria. 

A closely related question concerns the appropriate definition of prior art for purposes of 

determining whether a tax strategy satisfies the novelty and non-obviousness requirements. 

Although the relevant statute does not expressly require the written publication of knowledge in 

order to establish prior art and defeat patentability,103 case law requires some element of public 

 100 Indeed, this could give rise to ethical and professional conflicts for a lawyer, who could be 

forced into the uncomfortable position of choosing between (i) seeking the client’s waiver of attorneyclient privilege to approach the patent-holder about obtaining a license, (ii) refraining from advising the 

client to pursue a course of action which might otherwise be in the client’s best interest in order to avoid 

either infringing the patent or waiving confidentiality of attorney-client communications, or (iii) willfully 

infringing the patent to preserve attorney-client privilege and satisfy the professional duty to diligently 

represent the client. 

101 The Physicians Immunity Statute is discussed in the “Patent Law and Background” section of 

this pamphlet, supra.

102 Once again, this approach might still leave the actual taxpayer exposed to a possible 

infringement action. 

103 35 U.S.C. sec. 102(a) provides that a person is entitled to a patent unless (among other 

requirements) “the invention was known or used by others in this country, or patented or described in a 

printed publication in this or a foreign country, before the invention thereof by the applicant for patent” 

(emphasis added). 
28 

availability.104 Patent examiners will typically rely on a library of written material in 

ascertaining “prior art.” The reason generally given for the preference for publication is that the 

patent law system favors the disclosure of technical knowledge; in this framework, in close cases 

it is regarded as better to err on the side of granting a patent and forcing public disclosure, than 

rejecting a patent merely because others may have been practicing the claimed technology while 

(it might be suspected) trying to keep the details of the technology to itself (as in the case of 

“trade secrets,” for instance). Whatever the merits of this approach, some observers argue that it 

is problematic to apply it in the context of legal and tax advice, where the failure to publicly 

disclose the details of a tax or other legal structure may have more to do with honoring the 

requirements of attorney-client privilege than with a suspected attempt to keep the technical 

knowledge hidden out of sight of the public sphere in order to effectively monopolize the 

superior technology outside of the patent system. 

Practical issues regarding the application and administration of tax patents

The issuance of tax strategy patents raises a final set of questions and concerns that are 

independent of the foregoing policy considerations. For instance, when a tax advisor assists a 

taxpayer in implementing a patented tax strategy, have both the advisor and the taxpayer 

potentially infringed the patent? Similarly, when does infringement occur: when the advisor 

describes the structure to the client? At the time a patented structure or strategy is implemented? 

When the taxpayer files a tax return which reflects the tax savings of the structure? When that 

return is no longer subject to audit and challenge by the IRS? 

If tax strategy patents continue to be granted, what obligations do tax advisors and 

taxpayers have to determine whether a particular strategy is subject to a patent? Conversely, 

given the confidential nature of tax returns, how can a patent-holder determine whether another 

taxpayer has infringed the patent by implementing the patented structure? Likewise, given the 

confidentiality of attorney-client communication (and, to a lesser extent, to communication with 

a tax practitioner), how can a patent-holder determine whether a tax practitioner (or a taxpayer) 

has infringed the patent? 

In the event that tax patents continue to exist, these and similar questions must be 

addressed in a clear and uniform manner in order to provide order and certainty to taxpayers, tax 

advisors, and patent-holders alike. 

 104 For example, in Gillman v. Stern, 114 F.2d 28 (2d Cir. 1940), Judge Learned Hand, writing 

for the court, concluded that where a first inventor had kept his technology a trade secret and thus had not 

increased the store of public knowledge, the first inventor’s prior use did not constitute prior art (and thus 

did not defeat the novelty of the technology with regard to a later inventor’s attempt to patent the same 

technology).