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Headline Legal News

Analysis: You Can't Use That Tax Idea. It's Patented.



The New York Times
Oct. 20, 2006


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

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

Mr. Drapkin is chairman of a task force of the American Bar Association's tax section that will discuss the issue today in Denver. He said that after one conference where tax strategies were discussed, participants got a letter warning that using one idea mentioned would be in violation of a patent.

Why would Congress pass a law allowing such a thing? The answer is that it did not. But a federal appeals court ruled in 1998 that business methods can be patented, and since then the Patent Office has issued 49 tax-strategy patents, with many more pending.

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

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

But if it is legal, the mind boggles at the possibilities. Could I get a patent on taking a deduction for dependents, so that every parent in America would have to pay a royalty to me to take advantage of the tax law passed by Congress?

I presume the patent office would find that obvious, and thus not patentable, but there are plenty of slightly more complicated strategies that might be patentable, particularly considering the fact that patent examiners may not be tax experts.

Indeed, Cheryl E. Hader, a partner at Ropes & Gray who represents Mr. Rowe, argues that the strategy he used was clearly authorized by the tax law and that no patent should have been granted.

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

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

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

In an ideal world, Congress might pass tax laws so simple that clever strategies would be impossible and tax lawyers would need to find other employment. But until that happens, it would seem obvious that Congress would want to assure that all taxpayers are treated equally.

After all, as Mr. Devinsky and his colleagues wrote, ''The successful patenting of tax strategies now limits Congress' ability to shape economic policy through legislation, and places that power in the hands of individual patent holders.''

But in Washington, such things are seldom simple. Asked what he thought Congress would do, Mr. Fuisz said action was possible, recalling that six years ago doctors got Congress to protect them from patent infringement suits over surgical techniques.

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

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

Ain't democracy great?

Copyright 2006 The New York Times Company International News National News New York Regional News Political News Business News Technology News Sports News The New York Times


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