Lame ducks and tax patents
The unfinished business awaiting Congress during the lame
duck session this month includes the expiring 2001 and 2003
tax cuts, the normal extender items, the estate tax — and,
many tax professionals believe, a ban on tax strategy patents.
BY RogeR Russell
An opportunity to end tax patents in post-mid-term Congress
The patents threaten American taxpayers,
and Congress should ban them before it adjourns for the year, according to a coalition
of 18 national consumer and taxpayer organizations, including the American Institute
of CPAs, the American Association of Attor-ney-CPAs, and the National Association of
“We cannot afford to postpone addressing
this problem until next year,” the coalition
said in a joint letter to Congress.
Tax patents create a monopoly for patent
holders on certain parts of the Tax Code that
should be public domain, according to the
coalition. “A legislative solution must be pursued immediately if we are to provide taxpayers with equal access to all available avenues
of federal tax compliance,” the letter said.
Legislation introduced in the last Congress
by Reps. Rick Boucher, D-Va., and Bob Goodlatte, R-Va., would have prohibited such patents. Both Boucher and Goodlatte are senior
members of the House Judiciary Committee,
which has jurisdiction over patent legislation.
The bill passed the House in the previous
Congress, but stalled in the Senate and was
re-introduced in the current Congress.
“It has 45 co-sponsors in the House, which
is five more than it had last Congress,” explained Mat Young, director of congressional
and political affairs at the AICPA, which has
been at the forefront of the movement against
tax patents. “It definitely will continue to be a
growing problem,” he said.
A similar bill was introduced in the Senate by Senators Max Baucus D-Mont., and
Chuck Grassley, R-Iowa, and had 29 co-sponsors from both sides of the aisle. If the current
legislation is not passed before the end of the
year, it will be necessary to re-introduce it
again in the new Congress, in January.
117 PATENTS SINCE 1998
Over a decade ago, the patentability of busi-
ness method patents, including tax strate-
gies, was made legitimate by a federal appeals
court. Since the 1998 decision, 117 tax strategy
patents have been issued by the U.S. Patent
and Trademark Office, and more than 150 ap-
plications are pending. The existing patents
cover a wide range of tax-planning vehicles,
including retirement plans, real estate trans-
actions and estate-planning strategies.
SUPREME DECISION ON BILSKI
Many observers felt that any legislation on tax
patents should wait until the Supreme Court
issued an opinion in a federal circuit case, In
re Bilski, which narrowed the scope of business method patents. The case centered on
a 1997 patent application for hedging risks
in commodities trading. The Supreme Court
issued a decision in Bilski earlier this year, but
did not clarify the patentability of tax strategies, noted Young.
“The Supreme Court decision in Bilski
ended up having no real impact,” he said. “If
anything, it made the standard of patentability more confusing.” Therefore, the need for
legislation is greater now, he maintained.
In addition to limiting the ability of taxpayers to utilize the interpretations of tax law
intended by Congress, the patents pose a risk
for tax advisors.
“Tax advisors, who generally are not patent
experts, have the burden to be aware of such
patents, and either provide tax advice that
complies with the patent holder’s requirements, risk a lawsuit for themselves and their
clients, or potentially not provide the most
advantageous advice to clients. Not surprisingly, these patents create a highly burdensome level of cost ultimately borne by taxpayers,” the coalition said.
One of the purposes of the letter is to keep
the issue before legislators as they get ready
to wrap up the 111th Congress, Young explained. “We wanted to keep the attention of
the House and Senate on the issue, and remind legislators how important it is,” he said.
“With the bipartisan and bicameral support
we have, it could be one of the things that gets
done during the lame duck session.” AT
IRS MAY PROBE FORGIVEN
WASHINGTON, D.C. — The Internal Revenue Service could collect more taxes
from forgiven mortgage debt by expanding its information reporting and revising
some of its forms, according to a study
from the General Accountability Office.
IRS Statistics of Income officials estimate that for tax year 2008, the most
current for which data is available, about
126,000 to 169,000 returns included
a Form 982, excluding between $15.2
billion and $24.6 billion of forgiven debt
from taxable income. The IRS estimates
suggest that for about 61,000 to 93,000
of the returns with a Form 982, forgiven
debt for a qualified principal residence
was the only type of forgiven debt, and
taxpayers excluded about $6.4 billion to
$11.8 billion from taxable income.
In addition, because taxpayers excluding multiple types of debt from income
are only required to report the total
amount being excluded and not the
amount for each individual type, the IRS
lacks the data to determine the dollar amount of forgiven mortgage debt
excluded for these taxpayers.
The IRS faces several compliance
challenges in administering this complicated tax provision, the GAO noted. IRS
officials reported that it may be difficult
to collect additional taxes on forgiven
debts, particularly when taxpayers are already insolvent and defaulting on debts.
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