Effecting the impossible: An argument against tax strategy patents

Southern California Law Review

Volumn 81, Issue 3, 2008, Pages 631-669

  Moulton, Michael ^a  

^a UNIVERSITY OF SOUTHERN CALIFORNIA   (United States)

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EID: 46049088339     PISSN: 00383910     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (166)

1. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093 (1999).
2. See Hearing on Issues Relating to the Patenting of Tax Advice: Hearing Before the Subcomm. on Select Revenue Measures of the H. Comm. on Ways and Means, 109th Cong. 8 (2006) [hereinafter Hearing on Issues Relating to the Patenting of Tax Advice] (statement of James Toupin, Gen. Counsel, U.S. Patent and Trademark Office) (explaining that there were approximately 9000 filings for business method patents in 2001, as opposed to only 1500 filings for business method patents in 1998, but also noting that the grant rate for business method applications has declined in the years since the State Street Bank decision).
3. See Business Method Patents: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Prop. of the H. Comm. on the Judiciary, 107th Cong. 35 (2001) [hereinafter Business Methods Hearing] (testimony of Michael K. Kirk, Exec. Dir., American Intellectual Property Law Association & Ronald E. Myrick, Chief Intellectual Property Counsel, General Electric, General Electric Capital Services, and President, Intellectual Property Owners Association).
4. See, e.g., Peter J. Howe, "Business Methods" Patents Raise the Stakes, THE BOSTON GLOBE, July 5, 2005, at C1 (noting that many "Internet entrepreneurs" became concerned after Sun Microsystems patented the internet "shopping cart" in 1998 and Amazon.com patented one-click online shopping in 1999, since "[a]spects of online shopping as common as writing a check . . . could become subject to demands for royalty payments").
5. For an explanation of what can qualify for a business method patent, see United States Patent and Trademark Office, Class 705 Data Processing: Financial, Business Practice, Management, or Cost/Price Determination, http://www.uspto.gov/go/classification/uspc705/sched705.pdf (last visited Apr. 8, 2008).
6. See United States Patent and Trademark Office, U.S. Patent Grant and U.S. PreGrant Publication Documents Classified in U.S. Patent Classification 705/36T, http://www.uspto.gov/ patft/class705_sub36t.html (last visited Apr. 8, 2008).
7. Complaint at 1, Wealth Transfer Group, LLC v. Rowe, No. 06CV00024, 2006 WL 434187 (D. Conn. Jan. 6, 2006).
8. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 44 (statement of Dennis I. Belcher, Partner, McGuireWoods LLP) (explaining that grantor retained annuity trusts (GRATs) are a "commonly used estate planning technique[]," the purpose of which "is to allow taxpayers to minimize their federal estate and gift tax liability").
9. See id. ("When word of this patent spread through the estate planning community, most estate planning professionals were shocked to learn that an individual could patent a common estate planning technique . .. .").
10. See, e.g., id. at 38 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles) (explaining that tax advisors whose clients face patent infringement suits may themselves face malpractice claims); Alan S. Lederman, Tax-Related Patents: A Novel Incentive or an Obvious Mistake?, 105 J. TAX'N 325, 330-31 (2006) (pointing out that some commentators have cautioned that tax practitioners who negligently fail to "search for, detect, and advise a client about the existence of a patent covering a recommended tax strategy could be liable for state law malpractice").
11. Consent Final Judgment Regarding Settlement Agreement, Wealth Transfer Group, LLC v. Rowe, No. 06CV00024, 2006 WL 434187 (D. Conn. Mar. 9, 2007), available at http://tax.aicpa.org/ NR/rdonlyres/D62E55BF-474B-4E5C-94A9- AF140F9D5604/0/WTG_ROWE_FINALCONSENT JUDGMENT.pdf.
12. Id. at 1.
13. Id. at 2. See also Charles F. Wieland III & Richard S. Marshall, Tax Strategy Patents - Policy and Practical Considerations, 35 TAX MGMT. COMPENSATION PLAN. J. 123, 125 (2007).
14. Patent Reform Act of 2007, H.R. 1908, 110th Cong. See also Alison Bennett, Baucus, Grassley, Others Crafting Legislation Solely to Ban Tax Strategy Patents, Aides Say, DAILY TAX REP., Sept. 13, 2007, at GG-1.
15. Stop Tax Haven Abuse Act, S. 681, 110th Cong. § 303 (1st Sess. 2007). See also Press Release, Senator Carl Levin, Levin Cosponsors Bill to Ban Patents on Strategies to Reduce Taxes (Nov. 15, 2007), available at http://levin.senate.gov/newsroom/release.cfm?id=287634.
16. U.S. CONST. art. I, § 8, cl. 8.
17. See, e.g., Diamond v. Chakrabarty, 447 U.S. 303, 308-09 (1980) (explaining that the language of the Patent Act of 1793, which was authored by Thomas Jefferson and defined patentable subject matter as "'any new and useful art, machine, manufacture, or composition of matter, or any new or useful improvement [thereof]'" was motivated by Jefferson's philosophy that "'ingenuity should receive a liberal encouragement'" and that "[s]ubsequent patent statutes in 1836, 1870, and 1874 employed this same broad language"); STAFF OF JOINT COMM. ON TAXATION, 109TH CONG., BACKGROUND AND ISSUES RELATING TO THE PATENTING OF TAX ADVICE (JCX-31-06) 2 (2006) [hereinafter JOINT COMM. REPORT].
18. See JOINT COMM. REPORT supra note 17, at 2.
19. 35 U.S.C. §§ 101-12 (2000).
20. § 101. The section reads in full: "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 therefore, subject to the conditions and requirements of this title."
21. § 102. The code section details a number of factors that would point to non-novelty. For an in-depth discussion of the "novelty" requirement set forth in 35 U.S.C. § 102, see discussion infra Part II.C.2.
22. § 103.
23. § 112. For an in-depth discussion of the disclosure requirement, see discussion infra Part II.C.1.
24. Diamond v. Chakrabarty, 447 U.S. 303, 306, 309 (1980).
25. Id. at 309 (quoting S. REP. NO. 1979-82, at 5 (1952); H.R. REP. NO. 1923-82, at 6 (1952)).
26. See, e.g., In re Alappat, 33 F.3d 1526, 1543-45 (Fed. Cir. 1994) (holding that the claimed invention - a rasterizer for creating a waveform - did not constitute a disembodied mathematical concept which "may be characterized as an 'abstract idea,' but rather a specific machine to produce a useful, concrete, and tangible result," and so could be patented).
27. State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998), cert denied, 525 U.S. 1093 (1999).
28. See, e.g., AT&T Corp. v. Excel Commc'ns, Inc., 172 F.3d 1352, 1353-55 (Fed. Cir. 1999) (explaining that a process to be implemented in a telecommunications system with multiple long-distance service providers constituted patentable subject matter).
29. See Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 8 (statement of James Toupin, Gen. Counsel, U.S. Patent and Trademark Office); Wieland & Marshall, supra note 13, at 124.
30. In 2006, the USPTO added subclass 36T to class 705 in its patent classification system. See United States Patent and Trademark Office, U.S. Patent Grant and U.S. PreGrant Publication Documents Classified in U.S. Patent Classification 705/36T, http://www.uspto.gov/patft/class705 _sub36t.html (last visited Apr. 8, 2008).
31. Juicy Whip, Inc. v. Orange Bang, Inc., 185 F.3d 1364, 1366 (Fed. Cir. 1999) (quoting in parenthetical Fuller v. Berger, 120 F. 274, 275 (7th Cir. 1903)).
32. See Andrew A. Schwartz, The Patent Office Meets the Poison Pill: Why Legal Methods Cannot Be Patented, 20 HARV. J.L. & TECH. 333, 358-59 (2007).
33. 35 U.S.C. § 102(a) (2000).
34. See ROGER E. SCHECHTER & JOHN R. THOMAS, PRINCIPLES OF PATENT LAW, § 4.1, at 74 (2004). For an in-depth discussion of prior art, see discussion infra Part II.C.2.
35. 35 U.S.C. § 103(a).
36. JOINT COMM. REPORT, supra note 17, at 13.
37. See, e.g., Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 60 (statement of Stephen T. Schreiner, Hunton & Williams).
38. See id. at 60 (alluding to the patent at issue in Diamond v. Chakrabarty, and the various software patents issued by the USPTO during the dotcom boom in the 1990s).
39. See, e.g., id.
40. See United States Patent and Trademark Office, Our Business: An Introduction to the USPTO, http://www.uspto.gov/web/menu/intro.html (last visited Apr. 8, 2008).
41. See Internal Revenue Service, United States Dep't of the Treasury, The Agency, its Mission and Statutory Authority, http://www.irs.gov/irs/ article/0,,id=98141,00.html (last visited Apr. 8, 2008).
42. Id. (explaining that Congress passes tax laws and requires taxpayers to comply, and that the IRS's role is to "help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share").
43. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 13 (statement of Mark Everson, Comm'r, Internal Revenue Service).
44. Id.
45. Treas. Reg. § 1.6011-4(b)(2) (as amended in 2006). See also Internal Revenue Service, Disclosure Reminder for Participants in Listed Transactions (explaining, before the IRS recently redesigned its website and removed the link, that "[l]isted transactions are those that the IRS has determined to be structured for the significant purpose of tax avoidance or evasion") (on file with author). For a complete list of 1RS listed transactions, see Internal Revenue Service, Listed Abusive Tax Shelters and Transactions, http://www.irs.gov/businesses/corporations/article/0,,id=120633, 00.html (last visited Apr. 8, 2008).
46. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 13 (statement of Mark Everson, Comm'r, Internal Revenue Service).
47. Id.
48. Id.
49. Id.
50. 35 U.S.C. § 112 (2000).
51. 26 U.S.C. §§ 7201, 7203 (2000) (criminalizing willful evasion of taxes and willful failure to file a return). See generally Joshua Stein, Criminal Liability for Willful Evasion of an Uncertain Tax, 81 COLUM. L. REV. 1348 (1981).
52. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 22 (testimony of James Toupin, Gen. Counsel, U.S. Patent and Trademark Office).
53. In the absence of criminal liability, for example, individuals who can expect to receive more money from licensing fees for use of their tax strategy than they can expect to pay in civil fines may go ahead and patent the abusive tax strategy and incur the civil fines for noncompliance with the federal tax laws. With the threat of criminal liability looming for implementation of an illegal tax avoidance strategy that individuals know are illegal, however, that those same individuals are less likely to patent the abusive tax avoidance strategy for fear of incarceration.
54. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 18 (testimony of Mark Everson, Comm'r, Internal Revenue Service).
55. Id. at 14 (statement of Mark Everson, Comm'r, Internal Revenue Service).
56. REG-129916-07, 2007-43 I.R.B. 891, available at http://www.irs.gov/pub/irs-irbs/irb07-43.pdf.
57. Id. at 892.
58. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 14 (statement of Mark Everson, Comm'r, Internal Revenue Service).
59. Id. at 46 (statement of Dennis I. Belcher, Partner, McGuireWoods LLP). See also Paul Devinsky, John R. Fuisz & Thomas D. Sykes, To Practice Tax Law, You Need a Patent License, IP LAW 360, Sept. 11, 2006, available at http://www.iplaw360.com/Members/ViewArticlePortion. aspx? Id=9940&ReturnUrl=%2fsecure%2fViewArticle.aspx%3fId%3d9940.
60. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 44 (statement of Dennis I. Belcher, Partner, McGuireWoods LLP).
61. See Wynn W. Coggins, United States Patent and Trademark Office, When is an Electronic Document a Printed Publication for Prior Art Purposes? (Fall 2002), http://www.uspto.gov/web/ menu/pbmethod/ aiplafall02paper.htm.
62. 37 C.F.R. § 1.105 (2007). See also Business Methods Hearing, supra note 3, at 12-13 (statement of Nicholas P. Godici, Acting Under Sec'y of Commerce for Intellectual Property and Acting Dir. of the U.S. Patent and Trademark Office).
63. 37 C.F.R. § 1.105(a)(1)(i)(2007).
64. § 1.99(a).
65. See Business Methods Hearing, supra note 3, at 12 (statement of Nicholas P. Godici, Acting Under Sec'y of Commerce for Intellectual Property and Acting Dir. of the U.S. Patent and Trademark Office); Coggins, supra note 61.
66. 35 U.S.C. § 273 (2000). See also Deborah L. Jacobs, Patent Pending: As Estate Planning Heats Up, It May Not Be Enough to Invent a Brilliant Tax-Saving Technique for Your Clients. You May Need to Patent It, Too, BLOOMBERG WEALTH MANAGER, May 2005, at 48.
67. See, e.g., Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 39 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles).
68. See id. at 13 (statement of Mark Everson, Comm'r, Internal Revenue Service); Lederman, supra note 10, at 333 (Mr. Lederman notes, however, that because "many tax-related techniques are presented to clients through privileged . . . communications, comprehensive prior art searches of tax-related techniques often will be incomplete"); Dustin Stamper, USPTO Official Critical of Bill to Prevent Patents on Tax Strategies, Tax Notes Today, May 14, 2007, Lexis, 2007 TNT 94-1 (pointing out that the USPTO has partnered with the IRS to "learn about financial products, wealth transfer, and pension funds");
69. Stephen Joyce, Patent Office Petitioning to Hire Examiners With Expertise in Tax to Review Applications, 93 BNA Daily Tax Report G-9 (May 15, 2007), available at http://www.abanet.org/tax/patents/articles/ 070515_patentoffice.pdf (pointing out that the USPTO, in May, requested that the Office of Personnel Management change hiring requirements for patent examiners and hire an additional forty examiners specializing in tax, finance, and insurance).
70. But see Ellen P. Aprill, Responding to Tax Strategy Patents, Proceedings of the Fifty-Ninth Tax Institute, Gould School of Law, USC, 2007, at 13-14, available at http://ssrn.com/abstract=980347 (asserting that there are some unique barriers to establishing a comprehensive library of prior art in the tax-strategy arena, including constraints stemming from the fact that tax return information is confidential). Some commentators have also suggested that the USPTO could improve the quality of tax strategy patents by seeking IRS assistance in understanding the patented strategies. This would require statutory authorization; authorization similar to 35 U.S.C. § 164, which permits the Secretary of Agriculture, under certain circumstances, to furnish information to USPTO employees to help them evaluate plant patents. See id. at 40.
71. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 44 (statement of Dennis I. Belcher, Partner, McGuireWoods LLP).
72. Wieland & Marshall, supra note 13, at 127 (noting that "valid patents issue only when the claimed invention is both novel and nonobvious . . . at the time of the invention," and therefore, "[v]alid patents . . . should . . . only have the potential to restrict access to . . . those tax strategies that would not have been obvious to the ordinary tax practitioner") (emphasis in original).
73. But see id. at 137 (pointing out that the defense is relatively restricted in the tax strategy context because, among other things, "[t]he person asserting the defense has the burden of establishing it by 'clear and convincing evidence,'" and that "[m]eeting such a burden can be difficult in the tax strategy area insofar as much of the evidence likely would be covered by attorney-client privilege or other confidences"); Aprill, supra note 68, at 18-19 (noting that the applicability of the defense is as of yet unproven in the tax strategy setting).
74. 35 U.S.C. § 101 (2000).
75. See Schwartz, supra note 32, at 358-59; John R. Thomas, The Post-Industrial Patent System, 10 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 3, 4 (1999).
76. Juicy Whip, Inc. v. Orange Bang, Inc., 185 F.3d 1364, 1366 (Fed. Cir. 1999).
77. See In re Fisher, 421 F.3d 1365, 1371-75 (Fed. Cir. 2005) (affirming a USPTO determination that an invention related to five purified nucleic acid sequences was not useful because the inventor disclosed only general uses for its claimed ESTs, and not specific ones sufficient to satisfy the § 101 requirement of utility).
78. But see id. at 1374 (holding that the applicant's proposed uses were not sufficiently specific). Note, however, that in Fisher, the court also found that the invention at issue failed to meet the " substantial" or general utility bar, noting that the inventor only proposed that his invention would effectuate hypothetical results. Id. at 1373.
79. See, e.g., Brewer v. Lichtenstein, 278 F. 512, 513 (7th Cir. 1922) (invalidating a patent for a gambling device on the grounds that it was contrary to public policy).
80. See SCHECHTER & THOMAS, supra note 34, § 3.4. For examples of other instances when the USPTO rejected inventions as not useful because they promoted an immoral end, see Schwartz, supra note 32, at 360 (pointing out that "deadly weapons, gambling machines, and inventions useful for committing fraud were found not 'useful' in the past because they facilitated illegal activities and failed to provide a morally acceptable benefit to society").
81. Juicy Whip, 185 F.3d at 1368.
82. Id. (citing Webber v. Virginia, 103 U.S. 344, 347-48 (1880)).
83. United States Patent and Trademark Office, Manual of Patent Examining Procedures § 706.03(a)(II) (2006) [hereinafter MPEP] ("A rejection under 35 U.S.C. § 101 for lack of utility should not be based on grounds that the invention is frivolous, fraudulent or against public policy.") (emphasis in original).
84. Note, however, that the USPTO has still expressed an unwillingness to grant patents for inventions relating to "human/non-human chimera" on the grounds that such an invention fails to meet the morality aspects of the utility requirement. See Media Advisory, U.S. Patent and Trademark Office, Facts on Patenting Life Forms Having a Relationship to Humans (Apr. 1, 1998), http://www.uspto.gov/ web/offices/com/speeches/98-06.htm.
85. Schwartz, supra note 32, at 362.
86. See SCHECHTER & THOMAS, supra note 34, § 3.4.
87. See Zachary Lerner, Rethinking What Agriculture Could Use: A Proposed Heightened Utility Standard for Genetically Modified Food Patents, 55 U. KAN. L. REV. 991, 1012 (2007)
88. (citing ROBERT P. MERGES ET AL., INTELLECTUAL PROPERTY IN THE NEW TECHNOLOGICAL AGE 152 (4th ed. 2006)).
89. See MPEP, supra note 81, at § 2107.01 (2006).
90. Newman v. Quigg, 877 F.2d 1575, 1577-78 (Fed. Cir. 1989). See also Ex Parte Heicklen, 16 U.S.P.Q.2d (BNA) 1463, 1464 (B.P.A.I. 1990) (disallowing a patent for a method that allegedly slowed the human aging process).
91. Newman, 877 F.2d at 1581.
92. Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934).
93. See, e.g., U.S. Patent No. 7,023,374 (filed Oct. 6, 2002) (issued Apr. 4,2006) (a type of radar detector); U.S. Patent No. 6,928,960 (filed Mar. 5, 2003) (issued Aug. 16, 2005) (a device for use in cock fights); U.S. Patent No. 6,540,609 (filed Feb. 22, 1999) (issued Apr. 1, 2003) (a device to be utilized in slot machines).
94. Schwartz, supra note 32, at 367.
95. See discussion supra note 82 (the USPTO has stated that an invention relating to a "human/non-human chimera" may fail to satisfy the utility requirement because it is immoral). Some commentators, however, have suggested that the courts will disagree. See Margo A. Bagley, Patent First, Ask Questions Later: Morality and Biotechnology in Patent Law, 45 WM. & MARY L. REV. 469, 492 (2003).
96. Newman, 877 F.2d at 1577-78. See also Ex Parte Heicklen, 16 U.S.P.Q.2d (BNA) 1463 (B.P.A.I. 1990) (disallowing a patent for a method that purportedly slowed the human aging process).
97. Newman, 877 F.2d at 1581.
98. See In re Ferens, 417 F.2d 1072, 1074-75 (C.C.P.A. 1969) (holding that a hair growth potion was not credibly useful and so could not be patented because the utility of the claimed invention was based on allegations which "border[ed] on the incredible in light of contemporary knowledge"); In re Oberweger, 115 F.2d 826, 829 (C.C.P.A. 1940) (affirming USPTO decision refusing to patent a hair growth stimulant on the grounds that it lacked credible utility).
99. In re Cortright, 165 F.3d 1353, 1356-57 (Fed. Cir. 1999) (recognizing that Rogaine® and Propecia® are recognized as effective in treating baldness). See also U.S. Patent No. 5,777,134 (filed Oct. 24, 1996) (issued July 7, 1998); U.S. Patent No. 5,767,152 (filed May 4, 1995) (issued June 16, 1998); U.S. Patent No. 4,139,619 (filed Aug. 19, 1977) (issued Feb. 13, 1979) (all dealing with hair regrowth and treatments for baldness). Notice, however, that after hair regrowth becomes objectively possible, a proposed hair regrowth tonic that actually does not regrow hair will not pass through the patent filters, although it likely will clear the credible utility bar. The inventor would likely not be able to satisfy the § 112 disclosure requirements, for example, and the invention may not clear the specific utility hurdle if that is the case.
100. See Ferens, 417 F.2d at 1074-75; Oberweger, 115 F.2d at 829.
101. Cortright, 165 F.3d at 1356-57.
102. See discussion supra note 96 (it is important to note that even if a proposed hair regrowth tonic actually does not regrow hair, but it has been determined that hair regrowth is objectively possible, the functionally useless hair regrowth tonic will likely clear the credible utility hurdle, although it will not pass through the other patent filters).
103. 26 U.S.C. § 338(h)(10) (2000).
104. See, e.g., Jonathan Weisman, House Passes Permanent Estate Tax Repeal, WASH. POST, Apr. 14, 2005, at A4.
105. That the implementers of those once-useful tax-saving techniques may be economically happier when the estate tax is entirely repealed than when they were able to implement the tax-reduction strategies is irrelevant. The important point is that the strategies themselves will be credibly useless after the repeal.
106. See, e.g., discussion supra Part III.A (stating that a particular tax strategy that effects an illegal result is not in itself sufficient grounds for determining that it is useless pursuant to § 101).
107. See, e.g., Posting of Andrew Oh-Willeke to Wash Park Prophet, http://washparkprophet. blogspot.com/2006/07/tax-shelter-patents.html (July 21, 2006, 07:54 EST) (commenting on the Wealth Transfer Group case and stating that "the baby really should be thrown out the [sic] with the bathwater, by simply ending business method patents entirely"). Cf. Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 126 S. Ct. 2921, 2928-29 (2006) (questioning the propriety, or at least the current scope, of business method patents) (Breyer, J., dissenting). Note, moreover, that other countries do not recognize business methods as patentable subject matter.
108. See, e.g., European Patent Convention, Art. 52(2)(c), (3) (2007), available at http://www.epo.org/patents/law/legal-texts/html/epc/1973/e/ ar52.html;
109. Craig Groeschel, Tax Strategy Patents Considered Harmful, 8 HOUSTON BUS. & TAX L.J. (forthcoming 2008), available at http://www.hbtlj.org/content/HBTLJ_Symposium2007_E-Binder. pdf.
110. Schwartz, supra note 32, at 372.
111. Data Processing Sys. for Hub and Spoke Fin. Servs. Configuration, U.S. Patent No. 5,193,056 (filed Mar. 11, 1991).
112. Id.
113. See discussion infra Part IV.
114. SCHECHTER & THOMAS, supra note 34, § 1.3.1.
115. See id.
116. See id.
117. Id. See also Mark A. Lemley, Property, Intellectual Property, and Free Riding, 83 TEX. L. REV. 1031, 1031 (2005).
118. Rebecca S. Eisenberg, Patents and the Progress of Science: Exclusive Rights and Experimental Use, 56 U. CHI. L. REV. 1017, 1024-27 (1989) (explaining the "incentive to invent" theory).
119. See JOINT COMM. REPORT, supra note 17, at 17 (pointing out that policies like "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" are all artificial implements designed to "offset the underinvestment in knowledge that would otherwise occur if the full costs of such investments were borne by individuals").
120. SCHECHTER & THOMAS, supra note 34, § 1.3.1.
121. The detrimental costs of granting a monopoly arise from the economic inefficiency that results under monopolies. Basically, a monopolist's profits are maximized by setting a price well above the marginal cost of additional production. The result is that there are some consumers who are willing to pay an amount to use the product above the marginal costs of the product, but below the monopolist's price, and those people are left entirely unserved. See JOINT COMM. REPORT, supra note 17, at 22 & n.85.
122. Letter from the N.Y. State Bar Ass'n to selected members of the House Comm. on Ways & Means & the Senate Comm. on Fin., Patentability of Tax Advice and Tax Strategies (Aug. 17, 2006), available at http://www.abanet.org/tax/patents/articles/nysbaletter.pdf.
123. See, e.g., Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 41 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles) ("Existing economic incentives already provide ample inducement for the development, promotion, and implementation of tax-planning strategies."); id. at 17 (testimony of Mark Everson, Comm'r, Internal Revenue Service) (explaining that some individuals have articulated that "[r]egardless of whether tax strategies are socially beneficial, there is no need for patent protection").
124. Examples include decisions about how to structure a transfer of property from a corporation to a shareholder, how to characterize nonliquidating distributions, and how to characterize a merger or acquisition, to name a few.
125. See, e.g., STEPHEN A. LIND ET AL., FUNDAMENTALS OF BUSINESS ENTERPRISE TAXATION: CASES AND MATERIALS, 466-81 (3d ed. 2005) (detailing that the tax advantages associated with debt financing of a corporation prior to the time when qualified dividends first were taxed at the same preferential rate as a long term capital gains inspired many corporations to formulate "hybrid instruments" that gave some benefits of equity financing and other tax-related benefits of debt financing). For further evidence that the tax-planning arena does not suffer from lack of innovation, look at the plethora of articles published each year trumpeting new tax-saving techniques. For example, see Forbes.com, http://search.forbes.com/search/find? MT=Tax+savings (last visited Apr. 8, 2008) (listing numerous articles published in Forbes Magazine that deal with tax-saving issues).
126. See, e.g., Wieland & Marshall, supra note 13, at 127 (noting that the existing monetary incentives may not "provide sufficient incentives for conducting pure tax strategy research" and that "[o]utside of the representation of specific clients, therefore, tax strategy research arguably may be under funded").
127. Id.
128. See Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 25-26 (testimony of Richard S. Gruner, Professor of Law, Whittier Law School).
129. Id.
130. See discussion infra Part IV.B.
131. SCHECHTER & THOMAS, supra note 34, § 1.3.1. See also JOINT COMM. REPORT, supra note 17, at 23 (pointing out that "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").
132. See Wieland & Marshall, supra note 13, at 127.
133. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 18 (testimony of Mark Everson, Comm'r, Internal Revenue Service). See also discussion supra Part II.C.1.
134. Notice, moreover, that the Treasury Department and IRS proposed regulations - creating a new category of reportable transaction - would not remedy this problem, given that an quot;invented-around" transaction would not constitute a "patented transaction" under the proposed regulations' definition of a "patented transaction."
135. Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 8 (statement of James Toupin, Gen. Counsel, U.S. Patent and Trademark Office).
136. This number is not unreasonable given that, in 2005, the IRS conducted a search of the 6.8 million patents in the USPTO database and found that approximately 100 of those 6.8 million patents dealt with business methods patents that computed tax impact or effect, but were not necessarily "tax strategies." See id. at 13 (statement of Mark Everson, Comm'r, Internal Revenue Service).
137. I say "at a minimum" because one would expect filings for tax strategy patents to surge even more sharply given that taxes are not confined to the business world; everyone has to pay taxes, so one could expect more people to seek out patents for tax strategies than might seek out other business method patents, which are likely more industry specific.
138. It is always important to remember that receiving a patent for a tax strategy is not tantamount to receiving IRS approval of the strategy. See id. (statement of Mark Everson, Comm'r, Internal Revenue Service). Hence, in our example, a person could have a patent for a tax strategy that the IRS later deems illegal. In that case, few people, if any, would pay to use the patented strategy.
139. See id. at 41 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles) (explaining that many tax lawyers anticipate that if tax strategy patents proliferate, there will be a reduction in federal tax revenues).
140. See discussion supra Part IV.A; Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 25-26 (testimony of Richard S. Gruner, Professor of Law, Whittier Law School).
141. Note also that the proliferation of privately funded tax think tanks might also serve to benefit the upper class more than the middle or lower classes. After all, tax reduction strategies are likely worth more - dollar for dollar - to the rich, and so the rich will likely pay more - dollar for dollar - to use tax reduction strategies. Given that understanding, private firms motivated by profit might develop only those tax strategies that disproportionately help the very wealthy. On the other hand, of course, there may also be some benefits that stem from the proliferation of tax think tanks. Think tanks that publish publicly available materials detailing particular ways to comply with the Internal Revenue Code, for example, might lead to greater net compliance with the Internal Revenue Code, which might serve to offset some of the treasury losses that stem from the implementation of tax reduction techniques. While the scope of the benefits that might stem from a proliferation of tax think tanks is beyond the scope of this Note, it is important to recognize that potential benefits do exist.
142. 35 U.S.C. § 287 (2000).
143. Indeed, while a licensed tax practitioner would likely invent a complicated tax reduction strategy, and a non-tax-savvy layperson may not understand that strategy, that layperson could still implement the strategy at the advice of a tax planner. It is more difficult to imagine an open-heart surgeon instructing a layperson about how to properly implement an intricate open-heart surgical procedure.
144. 42 U.S.C. § 2181 (2000).
145. 35 U.S.C. § 287 (2000).
146. See, e.g., Aprill, supra note 68, at 22-23, 26, 34-36. A full text of the TRIPS Agreement is available at http://www.wto.org/english/ docs_e/legal_e/27-trips.pdf (last visited Apr. 8, 2008). It is important to note, however, that while some commentators have suggested that a safe harbor provision similar to the Physicians Immunity Statute would violate the TRIPS Agreement, Congress has intimated that the TRIPS Agreement does not apply to tax strategy patents. See H.R. REP. NO. 110-314, at n.37 & accompanying text (2007).
147. 35 U.S.C. § 287 (2000). See also JOINT COMM. REPORT, supra note 17, at 15.
148. § 287.
149. See JOINT COMM. REPORT, supra note 17, at 15-16 (citing SCHECHTER & THOMAS, supra note 34, § 3.4 (2004)); Wieland & Marshall, supra note 13, at 141.
150. U.S. Patent No. 6,567,790 (filed Dec. 1, 1999).
151. By contrast, it is much more difficult to imagine a surgeon implementing a process of performing open-heart surgery that is dependent upon utilization of a particular patented tool without using that particular tool.
152. But see Aprill, supra note 68, at 25 (suggesting that "[t]he precedent prohibiting patents for nuclear material and atomic energy is not" closely analogous to proposed congressional prohibition on patents for tax strategies).
153. See Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 41 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles).
154. 42 U.S.C. § 2181(a) (2000).
155. Atomic Energy Act of 1954, ch. 1, § 2(a), 68 Stat. 919, 921 (1954) (codified as amended at 42 U.S.C. § 2012 (2000)).
156. Id. at ch. 1, § 2(d).
157. Id. at ch. 1, § 3(c).
158. See Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 41 (statement of Ellen Aprill, Assoc. Dean of Academic Programs, Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law School, Los Angeles); discussion supra Part IV.B.
159. Patent Reform Act of 2007, H.R. 1908, 110th Cong. (1st Sess. 2007). See also Bennett, supra note 14. The House Judiciary Committee, to whom the bill was referred, articulated its concerns regarding the appropriateness of tax strategy patents in the House Report recommending that the bill pass: (1) tax strategy patents conflict with the primary purpose of U.S. tax laws, (2) granting tax strategy patents would undermine key federal functions, (3) tax strategy patents would likely have adverse consequences for taxpayers and would undermine public confidence in the tax system, and (4) tax strategy patents would foster a more secretive and less cooperative tax-compliance landscape. H.R. REP. No. 110-314, at 38 (2007).
160. The bill has since acquired other cosponsors; an updated list is available at http://www.govtrack.us/congress/bill.xpd?bill=s110-681 (last visited Apr. 8, 2008).
161. Stop Tax Haven Abuse Act, S. 681, 110th Cong. § 303 (2007). See also Press Release, supra note 15. A copy of the Bill is available on Senator Levin's website, at http://levin.senate.gov/ newsroom/release.cfm?id= 269479.
162. S. 681, § 303.
163. See, e.g., Wieland & Marshall, supra note 13, at 142; Stamper, supra note 68; Aprill, supra note 68, at 23 (also noting that patent practitioners will likely strongly oppose legislative action classifying tax strategies as unpatentable subject matter on "the grounds of good patent policy").
164. Other commentators have suggested various alternative approaches to addressing the problems associated with tax strategy patents. See Wieland & Marshall, supra note 13, at 142-43; Aprill, supra note 68, at 20-45.
165. Indeed, recall that the limited statistics currently available reveal that no one has yet attempted to patent an ATAT. See Hearing on Issues Relating to the Patenting of Tax Advice, supra note 2, at 13-14 (statement of Mark Everson, Comm'r, Internal Revenue Service); discussion supra Part II.C.1.
166. See discussion supra Part IV.B.