[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                     HEARING ON ISSUES RELATING TO


                      THE PATENTING OF TAX ADVICE

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 13, 2006

                               __________

                           Serial No. 109-77

                               __________

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania           JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
RON LEWIS, Kentucky                  STEPHANIE TUBBS JONES, Ohio
MARK FOLEY, Florida                  MIKE THOMPSON, California
KEVIN BRADY, Texas                   JOHN B. LARSON, Connecticut
THOMAS M. REYNOLDS, New York         RAHM EMANUEL, Illinois
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                     DAVE CAMP, Michigan, Chairman

JERRY WELLER, Illinois               MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida                  LLOYD DOGGETT, Texas
THOMAS M. REYNOLDS, New York         STEPHANIE TUBBS JONES, Ohio
ERIC CANTOR, Virginia                MIKE THOMPSON, California
JOHN LINDER, Georgia                 JOHN B. LARSON, Connecticut
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana

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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 22, 2006 announcing the hearing.................     2

                               WITNESSES

James Toupin, General Counsel, U.S. Patent and Trademark Office..     5
The Honorable Mark Everson, Commissioner, Internal Revenue 
  Service........................................................    11

                                 ______

Richard S. Gruner, Professor of Law, Whittier Law School, Costa 
  Mesa, California...............................................    24
Ellen Aprill, Associate Dean of Academic Programs, Professor of 
  Law, and John E. Anderson, Chair in Tax Law, Loyola Law School, 
  Los Angeles, California........................................    36
Dennis I. Belcher, Partner, McGuireWoods LLP, Richmond, Virginia.    42

                       SUBMISSIONS FOR THE RECORD

Gavalis, Albert, Graf Repetti & Co., Llp, New York, NY, statement 
  and attachment.................................................    59
Schreiner, Stephen, Hunton & Williams Llp, statement.............    59


                     HEARING ON ISSUES RELATING TO



                      THE PATENTING OF TAX ADVICE

                              ----------                              


                        THURSDAY, JULY 13, 2006

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:30 a.m., in 
room B-318, Rayburn House Office Building, Hon. Dave Camp 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 226-5911
FOR IMMEDIATE RELEASE
June 27, 2006
SRM-9

                       Camp Announces Hearing on

             Issues Relating to the Patenting of Tax Advice

    Congressman Dave Camp (R-MI), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing on issues relating to the 
patenting of tax advice. The hearing will take place on Thursday, July 
13, 2006, in B-318 Rayburn House Office Building, beginning at 10:30 
a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee and 
for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    In recent years, patents for ``business methods'' have been issued 
by the Patent and Trademark Office. A number of patents have been 
issued for tax reduction strategies, particularly in the area of estate 
and gift taxation.
      
    In announcing the hearing, Chairman Camp stated, ``This hearing is 
an opportunity to explore a relatively recent phenomenon. At first 
glance, it seems odd that anyone should be permitted to patent means of 
complying with federal law. While intellectual property experts rightly 
note that patents can help promote the development of new technologies 
and ideas, tax practitioners have expressed concerns about giving one 
person the ability to charge others for using relatively common 
structures. We also need to get a sense of whether patents may 
contribute to tax avoidance schemes which make the IRS's job of 
blocking tax shelters more difficult in the long run.''
      
    ``There are no preconceived goals here,'' Camp noted. ``We want to 
explore this development and that's why we're inviting the IRS, the 
Patent and Trademark Office, academicians and practitioners to give us 
their views of the practice.''
      

FOCUS OF THE HEARING:

      
    To explore issues relating to the issuing of patents for tax 
reduction strategies, particularly in the area of estate and gift 
taxation.
      

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    Chairman CAMP. Good morning, the Committee on Ways and 
Means on Select Revenue will come to order. Today, we will 
explore a relatively recent phenomenon, patenting tax methods 
and strategies. To date, only a few patents have been issued 
for business methods involving the Tax Code. However, we are 
examining what the practice might mean to taxpayers and the 
legislative process if it expands. This hearing is about the 
overlap of two important Federal policies: patents and general 
tax compliance. With patents, the government seeks to promote 
public access to innovative products and developments by 
providing inventors with the ability to control the use of an 
invention for a period of years. Tax legislation is generally 
written with the idea that the rules, and particularly those 
rules that provide benefits, ought to be equally available to 
every eligible taxpayer.
    Our panelists have been invited to provide us with an 
overview of how key government agencies are dealing with this 
phenomenon and perspectives on potential pluses and minuses 
such patents may have. There are two major issues we will 
explore with them. First, does the existence of a patent appear 
to legitimize an otherwise inappropriate tax arrangement and 
thereby contribute to tax compliance problems or, worse, create 
a misunderstanding of our tax laws. Second, and perhaps more 
important over the long term, is the effect of patents on 
taxpayers seeking to comply with enacted laws intended to 
benefit broad groups.
    Our first panel includes James Toupin, general counsel of 
the Patent and Trademark Office (USPTO) and an individual well 
known to many of us, Internal Revenue Service (IRS) 
Commissioner Mark Everson. Their agencies have been working 
together on matters related to tax patents, including 
increasing scrutiny and awareness.
    The second panel includes Members of the academic 
community, Professor Richard Gruner, who teaches intellectual 
property and Whittier Law School; and Professor Ellen Aprill, 
who teaches tax law at Loyola Law School in Los Angeles. Our 
third witness, Dennis Belcher, is a partner at the McGuireWoods 
Law Firm, who practices estate and trust administration and 
estate planning, as well as serving as the secretary of the 
American College of Trust and Estate Counsel. He will offer a 
perspective from the practitioner's point of view. The panel 
will give Members an opportunity to evaluate the pros and cons 
of patenting tax compliance concepts and views on what might be 
done to expand the transparency of the patent process to reduce 
risks to taxpayers.
    I would now yield to the Ranking Member, Congresswoman 
Stephanie Tubbs Jones, for any remarks she would choose to 
make.
    Ms. TUBBS JONES. Any day I could be Ranking Member or a 
Chair, I can't wait, okay. Hi, everybody.
    Chairman CAMP. Let's hope it is a little bit of a wait.
    Ms. TUBBS JONES. Okay, all right. No offense, Dave. In 
1998, the U.S. Court of Appeals' decision held that tax 
strategies and financial products could be protected as 
patentable ``business methods.'' This has led to the issuance 
of about 40 tax patents by the U.S. Patent and Trademark 
Office, and 60 more are pending. I could go on and read this 
but everybody knows why we are here. I will submit this written 
opening statement for the record. I am pleased to have the 
opportunity to get engaged in this discussion. When I realized 
this is what we were going to do, I called a couple of my 
friends who do patent work and then some who did tax work. They 
said, ``We are not paying any attention to that.'' I said, 
``Wait a minute, it is important.'' So, I sent them the 
information, I am hoping to get some outside response to this 
whole issue.
    Gentlemen, I am glad to have you both here. If you see me 
slip out, it is only for a moment. All of you recognize that 
the Voting Rights amendment Act (P.L. 109-246) is being debated 
this morning, and I have got to go put my two cents in. Once I 
do that, I will go and come back. I am really interested, and I 
thank the Chairman for calling this hearing. I think it is 
going to be very interesting.
    [The prepared statement of Ms. Tubbs Jones follows:]

    In 1998, a U.S. Court of Appeals decision held that tax 
strategies and financial products could be protected as 
patentable ``business methods.'' This has led to the issuance 
of about forty tax advice patents by the U.S. Patent and 
Trademark Office, and sixty more are pending. These patents 
involve, for example, techniques for converting a regular IRA 
to a Roth IRA, creating tax-deferred real estate exchanges, 
enhancing donations of artwork through a tax-exempt 
organization, performing tax computations and tax-advantaged 
transactional structures, and converting future Social Security 
payments into current benefits. The most controversial patent 
to the tax practitioner community is called SOGRAT.
    It involves techniques for transferring appreciated assets 
to family Members while incurring minimal estate and gift 
taxes. Such a patented estate tax strategy, and others that are 
not patented but are still common, begs the question of whether 
we need to eliminate or drastically reduce the estate tax. That 
said, I think that the following basic issues should be 
addressed at this hearing: At the outset, should tax advice be 
eligible for a patent--as an ``invention'' based on 
interpretation of the Tax Code and IRS regulations? Should tax 
patent holders be able to control, and potentially profit from, 
application of the tax laws as enacted by Congress? What role 
does the IRS have to ensure that aggressive tax schemes or 
illegal shelters do not receive patents? Are tax patents being 
used as marketing tools to mislead taxpayers into believing 
that the product they are buying has a federal government 
``seal of approval?''
    I look forward to discussing these issues with the Internal 
Revenue Service, the U.S. Patent and Trademark Office, and the 
tax experts joining us today as witnesses. Thank you, Mr. 
Chairman, I yield back the balance of my time. Chairman Camp. 
Thank you. Again, I also want to welcome our witnesses. We will 
start with Mr. Toupin. Thank you both for being here. I know 
you have very busy schedules. We have your full statements, 
those will be part of the record and you can summarize those in 
5 minutes. You now may begin. Thank you for being here.

  STATEMENT OF JAMES TOUPIN, GENERAL COUNSEL, U.S. PATENT AND 
                        TRADEMARK OFFICE

    Mr. TOUPIN. Chairman Camp, Ranking Member Tubbs Jones, 
members of the Subcommittee, thank you for inviting me to 
testify today on the patenting of business method inventions 
concerning tax strategies. I appreciate the opportunity to 
provide some background on the subject, which I hope will be 
helpful to the Subcommittee.
    In administering the U.S. patent laws, the USPTO takes its 
direction from Congress and our reviewing courts. The current 
act specifies four basic statutory requirements that must be 
met to obtain a patent. The claimed invention must define 
eligible subject matter and have utility. It must be novel. It 
must not have been obvious to a person having ordinary skill in 
the art at the time the invention was made. It must be 
sufficiently disclosed in the text of the patent application to 
show that the inventor had possession of the claimed invention 
upon filing, and the skilled practitioner would be able to 
practice the claimed invention without undue experimentation. 
The threshold inquiry as to whether subject matter is eligible 
to receive patent protection is whether an invention is new and 
useful and whether it fits into one of the enumerated 
categories, which includes any process, machine, manufacturer 
or composition of matter or any new and useful improvement 
thereof.
    As discussed in greater detail in my written statement, the 
courts have recognized the breadth of this statute. In 
particular, the Court of Appeals for the Federal Circuit in the 
1998 decision in State Street v. Signature Financial explicitly 
rejected the notion that a business method exception exists in 
United States patent law. It thus ended any notion that 
inventions deemed to be business methods, by whatever criteria, 
would be excluded from patent ability on that basis alone. 
State Street created a new awareness that business method 
claims could be patented. Patent applications in that area went 
from 1,500 filings in Fiscal Year 1998 to approximately 9,000 
filings in Fiscal Year 2001. Filings are currently running at a 
somewhat lower rate of 8,200 filings a year.
    This expansion of business method patent applications 
created challenges for the USPTO and the business community. 
Because business methods had been commonly not regarded as 
eligible for patenting, examiners did not have available to 
them a large database of prior art. Thus, in a number of areas 
the office undertook extensive outreach to assure that it had 
the best possible information on published business methods.
    In determining novelty and obviousness, the examiner 
consults a variety of databases directed to the subject matter 
being examined. For applications involving tax strategies, the 
resources include U.S. patent databases, foreign databases, IRS 
databases available to the public, and a significant number of 
commercial databases directed to accounting, finance, and 
banking. Moreover, the examiner will under USPTO rules request 
from the applicant information as to which section or sections 
of the Tax Code are applicable so that those sections may be 
consulted.
    To gain knowledge and expand, and improve our examination 
of applications relating to tax strategies, the USPTO has 
partnered with IRS and is currently consulting with the 
American Bar Association's tax section about possible training 
and information exchange opportunities. Our existing 
partnership with the IRS has resulted in training by the IRS 
for our finance examiners on financial products, wealth 
transfer, and pensions. The USPTO also provided a modified 
patent examiner initial training session to selected IRS 
employees. We are looking at proposed training by the American 
Bar Association (ABA) that would complement the training that 
we received and provided to the IRS. We are also discussing 
follow-up training with the IRS on tax strategy matters. We 
will continue to conduct business partnership events with 
Members of the financial services community at large.
    Mr. Chairman, the grant of a patent enables a patent owner 
to exclude for a limited time others from making, using, 
offering for sale, or selling the invention in the United 
States. It is not a license to use the invention or a stamp of 
approval by the Federal government. This principle applies to 
tax strategy patents as well as to any other patent.We at the 
USPTO recognize that the patenting of tax planning strategies 
has raised a number of concerns in Congress, the IRS, and the 
financial services community. We look forward to working with 
all interested parties to make sure that these concerns are 
appropriately addressed within the scope of applicable law. 
Thank you.
    [The prepared statement of Mr. Toupin follows:]
 Statement of James Toupin, General Counsel, U.S. Patent and Trademark 
                                 Office
Introduction
    Chairman Camp, Ranking Member McNulty, and Members of the 
Subcommittee:
    Thank you for inviting me to testify today on the patenting of 
business method inventions, and specifically on those business method 
patents concerning tax strategies. Patents in this area are a topic of 
considerable interest and debate and, as has been the case in the past 
with certain other categories of invention, concerns have been raised 
about whether business methods involving tax strategies should be 
patentable. I commend the Subcommittee for holding this hearing.
U.S. Patent System
    In order to understand the patentability of business method 
inventions, I believe it is helpful to first review the underpinnings 
of the U.S. patent system itself and the role of the United States 
Patent and Trademark Office (USPTO) in administering this system.
    The basis for our patent system is found in Article 1, Section 8, 
Clause 8 of the Constitution, which provides that Congress shall have 
the power:
    ``To promote the progress of science and useful arts, by securing 
for limited times to . . . inventors the exclusive right to their . . . 
discoveries.''
    Thus, in order to promote the disclosure of new inventions, a 
patentee is given the right, for a limited time, to exclude others from 
making, using, offering for sale, or selling the invention in the 
United States.
    Following this Constitutional authority, our Founding Fathers 
designed an extremely flexible patent system based on principles that 
have proven remarkably adaptable in supporting over 200 years of 
economic and technological change. The uniformity and flexibility of 
the patenting standards of novelty, non-obviousness, adequacy of 
disclosure, and utility--coupled with the incentives patents provide to 
invent, invest in, and disclose new technology--have allowed millions 
of new inventions to be developed and commercialized. This has enhanced 
the quality of life for all Americans and helped fuel our country's 
transformation from a small, struggling nation to the most powerful 
economy in the world. Equally as impressive, the patent system has 
withstood the test of time. This is powerful evidence of the system's 
effectiveness in simultaneously promoting the innovation and 
dissemination of new products and processes and the creation of new 
industries and jobs.
Patentability Criteria and ``Business Methods''
    In administering the U.S. patent laws, the USPTO takes its 
direction on what subject matter is patentable from Congress and our 
reviewing courts. The current Act that details the standards of 
patentability, the Patent Act of 1952, specifies four basic statutory 
requirements that must be met to obtain a patent: (1) the claimed 
invention must define eligible subject matter and have utility; (2) it 
must be novel; (3) it must not have been obvious to a person having 
ordinary skill in the art at the time the invention was made; and (4) 
it must be fully and unambiguously disclosed in the text of the patent 
application to show that the inventor had possession of the claimed 
invention upon filing and that the skilled practitioner would be able 
to practice the claimed invention without undue experimentation.
    Before it grants a patent, the USPTO examines each patent 
application to determine whether it meets these four criteria, as set 
forth in title 35 of the U.S. Code. With respect to the statutory 
requirement of eligible subject matter, 35 U.S.C. 101 states that any 
person who ``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 . . .'' subject to the 
conditions and requirements of the law. Thus, the threshold inquiry as 
to whether subject matter is eligible to receive patent protection is 
whether an invention is ``new and useful'' and whether it fits into one 
of the enumerated categories.
    The courts have recognized the breadth of this statute. In the 
landmark case of Diamond v. Chakrabarty, 447 U.S. 303 (1980), the U.S. 
Supreme Court acknowledged that Congress intended the statutory subject 
matter under 35 U.S.C. 101 to include ``anything under the sun that is 
made by man.'' The Supreme Court also noted that there are limits to 
patentability. Indeed, in Diamond v. Diehr, 450 U.S. 175 (1981), the 
Court explicitly identified three specific areas of subject matter that 
are excluded from patent protection. These three areas are: (1) laws of 
nature, (2) natural phenomena and (3) abstract ideas. Thus, an 
invention directed towards a pure algorithm or manipulation of abstract 
ideas with no practical application is not patentable.
    The broad coverage of the Patent Act helps assure that the patent 
system is equally available to provide stimulus for innovation in all 
areas, not just some. The growth and importance of computers have led 
to a significant increase in investment and development in computer-
related processes, particularly with regard to electronic commerce. 
This has inevitably led to more individuals seeking patent protection 
in these areas. In response to this increased patent activity, a number 
of cases arose in the 1990s involving issues of defining the boundaries 
of patent eligibility. Accordingly, the Court of Appeals for the 
Federal Circuit rendered a series of decisions following the Supreme 
Court in Diehr and Chakrabarty that further defined patentable subject 
matter. I would like to briefly discuss these cases, which very clearly 
set forth the standards for patentability according to our patent law.
    In the case of In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994), the 
Court of Appeals for the Federal Circuit, sitting en banc, overturned 
the USPTO and found that inventions that include mathematical formulas 
or algorithms are not unpatentable if they are practically applied. 
Thus, the mere presence of an algorithm within an invention does not 
exclude the entire invention from patentability. The key question to be 
answered is whether the claimed invention, when looked at ``as a 
whole,'' is an abstract idea, such as a disembodied mathematical 
concept, or whether the invention produces a practical application, 
which achieves a ``useful, concrete and tangible result.''
    Four years after In re Alappat came the most well-known case with 
regard to business methods: State Street Bank and Trust Co. v. 
Signature Financial, Inc., 149 F.3d 1368 (Fed. Cir. 1998). The State 
Street case involved a patented data processing system that transformed 
data representing discrete dollar amounts into a final share price 
momentarily fixed for recording and reporting purposes. The Federal 
Circuit noted that a process, machine, manufacture, or composition of 
matter employing a law of nature, natural phenomenon, or abstract idea 
may be patentable subject matter even though a law of nature, natural 
phenomenon, or abstract idea would not, by itself, be entitled to such 
protection. As such, the court held that a machine programmed to 
transfer data which represents discrete dollar amounts into a final 
share price through a series of mathematical calculations does, in 
fact, constitute the practical application of a mathematical algorithm, 
formula, or calculation because it produced a ``useful, concrete and 
tangible result.'' The final share price resulting from this process 
enabled investors and their brokers to make investment decisions for 
investment and tax advantage purposes.
    The significance of State Street goes beyond its immediate holding. 
The Federal Circuit in State Street explicitly rejected the notion that 
a ``business method'' exception exists in United States patent law, 
thereby ending any notion that inventions deemed to be business 
methods, by whatever criteria, would be excluded from patentability on 
that basis alone. Thus, the State Street decision clarifies that an 
invention deemed to be a ``business method'' will be treated in the 
same manner as any other method or process invention. In other words, 
the patent system is technology neutral and there shall be no disparate 
treatment for different categories of inventions. This principle was 
reaffirmed by the CAFC in 1999, where the court remanded the case of 
AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 
1999) to the district court and concluded that had the court applied 
the proper analysis, the claimed telephone call tracking method fell 
comfortably within the ``broad scope of patentable subject matter under 
Sec. 101.''
Business Method Filing Information
    While State Street did not change United States law and practice, 
it did create a new awareness that business method claims could be 
patented. For example, in fiscal year 1998 there were fewer than 1,500 
filings in the U.S. classification area 705, which includes much of 
what is commonly known as computer-implemented ``business method'' 
inventions. By contrast, there were approximately 9,000 filings in 
fiscal year 2001; approximately 7,400 filings in fiscal year 2002; 
approximately 7,700 filings in fiscal year 2003; approximately 8,200 
filings in fiscal year 2004; and approximately 8,200 filings again in 
fiscal year 2005.
    The change in the understanding of the law that led to this 
expansion of business method patent applications created challenges for 
the USPTO and the business community. In particular, because business 
methods had been commonly not regarded as eligible for patenting, 
examiners did not have available to them an extensive database of prior 
art in the form of existing patents. Accordingly, in a number of 
business areas, the Office undertook extensive outreach to the 
concerned public to assure its access to the best possible information 
on published business methods. In the initial period after the State 
Street decision, allowance rates for business method patent 
applications were relatively high, but with the Office's and the 
public's increasing focus on this art, the allowance rate has fallen.
    As of mid-year, fiscal year 2006, the allowance rate for business 
method applications was approximately 20%, which is lower than the 
overall USPTO patent allowance rate of approximately 54% at mid-year.
    Today, the computer-implemented ``business method'' area includes 
business practices in many fields such as health care management, 
insurance and insurance processing, reservation and booking systems, 
financial market analyses, point of sale systems, tax processing, 
inventory management, accounting and financial management.
    In fiscal year 2005 we hired 36 patent examiners in the business 
method area for a total of 132 examiners. Our goal for fiscal year 2006 
is to have a total of 160 examiners in this area by the end of the 
year.
    Recently, subclass 36T in Class 705 has been established and 
dedicated to tax strategies.
    We have identified 41 issued patents related to tax strategy. 
Further, 61 published applications, not yet examined, relate to tax 
strategy.
    The average pendency to first office action in the tax strategy 
area is approximately 44 months and the average pendency to issue or 
abandonment is approximately 50 months. Currently, applications in this 
area filed in May 2001 are receiving their first office action.
Issurance of Patents
    As discussed, the USPTO is charged with examining patents following 
certain patentability criteria as enacted by Congress and interpreted 
by the courts. In examining patent applications, the Court of Appeals 
for the Federal Circuit has recognized that the utility requirement 
under 35 U.S.C. 101 is ``not high.'' Juicy Whip, Inc. v. Orange Bang, 
Inc., 185 F.3d 1364, 1366 (Fed. Cir. 1999). Importantly, the Federal 
Circuit has stated that there is no clear provision that allows the 
USPTO to reject an invention solely on the grounds that the invention 
may be against public policy, specifically:
    The requirement of ``utility'' in patent law is not a directive to 
the Patent and Trademark Office or the courts to serve as arbiters of 
deceptive trade practices. Other agencies, such as the Federal Trade 
Commission and the Food and Drug Administration, are assigned the task 
of protecting consumers from fraud and deception in the sale of food 
products. Cf. In re Watson, 517 F.2d 465, 474-76, 186 USPQ 11, 19 (CCPA 
1975) (stating that it is not the province of the Patent Office to 
determine, under section 101, whether drugs are safe). As the Supreme 
Court put the point more generally, ``Congress never intended that the 
patent laws should displace the police powers of the States, meaning by 
that term those powers by which the health, good order, peace and 
general welfare of the community are promoted.'' Webber v. Virginia, 
103 U.S. (13 Otto) 344, 347-48, 26 L.Ed. 565 (1880). Of course, 
Congress is free to declare particular types of inventions unpatentable 
for a variety of reasons, including deceptiveness. Cf. 42 U.S.C. 
Sec. 2181(a) (exempting from patent protection inventions useful solely 
in connection with special nuclear material or atomic weapons). Until 
such time as Congress does so, however, we find no basis in section 101 
to hold that inventions can be ruled unpatentable for lack of utility 
simply because they have the capacity to fool some members of the 
public. Juicy Whip, Inc., 185 F.3d at 1367-68.
    The USPTO has issued patents to inventions that may arguably be 
illegal at least in certain jurisdictions, and may be considered to be 
immoral or offensive by some. For instance, a patent to a method of 
producing alcoholic liquids from which certain toxic chemicals had been 
removed (1,785,447 issued December 16, 1930) issued during Prohibition, 
even though the method could be used for then-unlawful purposes. Other 
examples include a radar detector (7,023,374 issued April 4, 2006) the 
use of which is unlawful in some jurisdictions; a device for use in 
cock fights (6,928,960 issued August 16, 2005); a gambling device 
(6,540,609 issued April 1, 2003); a method of euthanizing a mammal 
(5,290,775 issued March 1, 1994); and a method of preparing ricin toxin 
useful for toxicological warfare (3,060,165 issued October 23, 1962). 
In issuing these patents, the USPTO has endeavored to carry out its 
mission to grant patents as allowed by law, and to refrain from making 
policy decisions not within its legal authority. To cite the USPTO 
Board of Patent Appeals and Interferences (BPAI) in the context of an 
application for a gambling device, ``this Office should not be the 
agency which seeks to enforce a standard of morality.'' Ex parte Murphy 
, 200 USPQ 801 (Bd. Pat. App. & Interf. 1977).
    Hence, a wide range of products, services and processes may be 
patentable, but their sale or use is subject to applicable federal, 
state and local rules and regulations. Accordingly, while the USPTO may 
grant a patent on a tax strategy, that patented strategy should not be 
practiced or marketed unless it complies with applicable law, rules and 
regulations administered by the Internal Revenue Service.
Examination Process of Tax Strategy Patents
    The examiner who is assigned a patent application involving a tax 
strategy examines that application using the same statutory 
requirements for patentability under 35 USC 101 (useful), 112 
(disclosure requirements), 102 (novel), and 103 (non-obvious) as that 
examiner would use in examining any other technology. In determining 
novelty and obviousness, the examiner consults a variety of databases 
directed to the subject matter being examined to find the best prior 
art. For applications involving tax strategies, the resources include 
U.S. Patent databases, foreign databases, IRS databases available to 
the public, and a significant number of commercial databases directed 
to accounting, finance, and banking. The examiner also has a library 
dedicated to finance and accounting subject matter.
    Moreover, if in the course of examination, the examiner identifies 
a tax strategy claimed or disclosed, the examiner will, under Rule 37 
CFR 1.105, request from the applicant information as to which section 
or sections of the tax code are applicable so that those sections may 
be consulted.
    Importantly, in order to gain knowledge and improve our examination 
of applications relating to tax strategies, the USPTO is working on 
developing two significant relationships. Specifically, the USPTO has 
partnered with the IRS and is currently developing a partnership with 
the American Bar Association's Section of Taxation (ABA) to pursue 
training and information exchange opportunities. The partnership with 
the IRS has resulted in training by the IRS for our finance examiners 
on financial products, wealth transfer, and pensions. The USPTO also 
provided a modified Patent Examiner Initial Training (PEIT) for non-
examiners for selected IRS employees. Topics included: (a) statutory 
requirements of a patent application; (b) concept of prior art under 35 
USC 102 and 103; (c) patentability under 35 USC 102 and 103; (d) 
identifying and searching relevant databases; and (e) and post-grant 
review procedures by the USPTO for issued patents. We are looking at 
proposed training by the ABA that would complement the training 
received by and provided to the IRS. We are also discussing follow-up 
training with the IRS on tax strategy issues.
    Thus, as it has in other areas of business method practice, the 
USPTO is actively seeking assistance to assure that it has the best 
possible information and understanding of the tax strategy area. While 
the USPTO does not employ outside sources or ``experts'' as consultants 
in the examination of specific patent applications directed to tax 
strategies, we are developing the expertise necessary to examine these 
types of applications. Moreover, the publication of applications now 
allows participation by third parties in the examination process.
Publication of Applications
    Approximately 90% of patent applications are published 18 months 
after the earliest effective filing date, although an applicant may 
request that the application not be published if the invention has not 
been and will not be the subject of an application filed in a foreign 
country that requires publication 18 months after filing. Following 
publication, the application for patent is no longer held in confidence 
by the USPTO and any member of the public may gain access through our 
website to the entire file history of the application.
Third-Party Participation During the Examination Process
    The Patent Act places limitations on the USPTO's ability to 
entertain third-party submissions in examining patent applications. In 
particular, 35 USC 122(c) requires the USPTO to ensure that no protest 
or other form of pre-issuance opposition may be initiated after an 
application is published except on consent of the applicant. 
Accordingly, under 37 CFR 1.291 and 1.99, although a third party may 
file a protest against a pending application before the date it is 
published or allowed, once an application is published or a notice of 
allowance mailed, a third-party may only submit prior art, without 
comment.
    After the patent is granted, there are other procedures by which a 
third party may challenge an issued patent.
USPTO Review and Thrid-Party Participation After the Patent Issues
    Post-grant review of patent claims takes place before the USPTO 
under certain circumstances, including when: (1) a patentee files an 
application to reissue a patent to correct at least one error in the 
patent, (2) an applicant and a patentee claim the same invention and an 
interference is declared between the patentee and the applicant, and 
the applicant seeks judgment based on unpatentability of patent claims, 
and (3) a patent owner or third party requests the reexamination of a 
patent.
    Congress has incrementally added to the range of proceedings within 
the USPTO's jurisdiction under which third parties can invoke Office 
review of issued patents. Ex parte reexamination, enacted in 1980, 
permits a third party to petition for reexamination of the patent. In 
1984, section 135 of the Patent Act was amended to allow issues of 
patentability, as well as priority, to be included in interference 
proceedings. As part of the American Inventors Protection Act of 1999 
(AIPA), Congress created inter partes reexamination, whereby the third 
party could participate in the reexamination proceeding and appeal to 
the USPTO's administrative Board of Patent Appeals and 
Interferences.The AIPA's inter partes reexamination practice was 
expanded in 2002 to afford third parties the right to appeal to the 
CAFC.
    The most common third-party participation is through reexamination 
proceedings. An important check on patent quality relates to the 
occasions when prior art (i.e., printed publications and patents) is 
brought to the USPTO's attention that may raise a substantial new 
question of patentability. Often, this evidence may be identified and 
submitted by a third party, such as a commercial rival that wishes to 
challenge the patent's validity. Congress established this 
administrative procedure for the USPTO to take a second look at an 
issued patent and consider questions of validity during the life of the 
patent.
    However, although Congress has increased, through these amendments, 
the USPTO's role in helping guarantee the efficacy of the patent system 
after patent issuance, none of these procedures alone, or collectively, 
has proven sufficient to optimize the USPTO's post-grant capability.
    Accordingly, the USPTO recommended a new post-grant review 
procedure in its 21st Century Strategic Plan. A version of such a 
procedure is currently under consideration in Congress. It would serve 
as a quicker, lower cost alternative to expensive litigation in 
reviewing patent validity questions. Such a procedure would complement 
rather than displace ongoing quality-focused initiatives at USPTO, 
which include measures to address the hiring, training, certification 
and retention of an adequate number of examiners. The USPTO will work 
with Congress and other stakeholders in developing a post-grant review 
procedure that effectively serves the interests of the patent 
community.
Conclusion
    We recognize that the patentability of tax planning strategies has 
raised a number of concerns in Congress, the Internal Revenue Service 
and the financial services community. We look forward to working with 
all interested parties to make sure those concerns are appropriately 
addressed in a manner consistent with applicable law, rules and 
procedures.
    Thank you.

                                 

    Chairman CAMP. Thank you very much. Now the Honorable Mark 
Everson. You have 5 minutes and your statement also will be 
part of the record.

STATEMENT OF THE HONORABLE MARK EVERSON, COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

    Mr. EVERSON. Thank you. Chairman Camp, Ms. Tubbs Jones, 
Congressmen, I am pleased to be before the Subcommittee today 
to discuss this important issue of patenting tax products. At 
the IRS, we constantly work to improve our service to 
taxpayers. By ``service,'' we mean enabling taxpayers to 
understand the tax law and helping them to meet their 
obligations under the Code. Patented products can help 
taxpayers plan for and pay their taxes. Patents can encourage 
the invention of software to make paying taxes easier. In this 
regard, patented or trademark products can ease the compliance 
burden on taxpayers and lessen the enforcement load for the 
IRS. That having been said, taxpayers should understand what a 
tax patent really is, or rather what it is not. A patent is not 
a government seal of approval for a particular product. A 
patent simply protects the invention against infringement by 
others. In the area of tax structures or strategy, a patent has 
no bearing on whether a tax product is legitimate or not. That 
is for the IRS and the courts to determine.
    In fact, over time, proliferation of tax patents may create 
enforcement problems. We have been concerned that some 
taxpayers may attempt to patent abusive tax schemes. 
Fortunately, thus far, we have found little evidence of this, 
but we remain watchful. The rising use of patents for tax 
strategies and structures will also place a burden on tax 
professionals. A lawyer may need to do an extensive search of 
the United States Patent and Trademark Office databases to 
determine whether advice to a client, such as tax planning 
strategies, could be a patent infringement. This can be a time-
consuming and complex process. Without such a search, a 
practitioner could expose himself or herself, or possibly even 
his or her client, to potential liability for royalties or 
infringement litigation.
    Since 2004, the IRS has worked with the Patent and 
Trademark Office to make the tax patent system more transparent 
and make information about tax patents more accessible. A 
classification system has been created to help identify whether 
a patent application includes a tax strategy. We have 
encouraged practitioners, such as the ABA or the AICPA, to 
contribute their expertise to this effort. In sum, we have 
strengthened our relationship with the Patent and Trademark 
Office, and we have increased awareness of the potential for 
misbehavior in the tax patent area.
    Before closing, let me turn briefly to two additional 
subject. First, the President's 2007 budget request for the 
IRS. While I appreciate the difficult choices facing Congress, 
overall I am very disappointed by the funding level established 
by the House bill, which falls over $100 million short of the 
President's request. The House bill would damage our efforts to 
attack the tax gap and reduce the Federal deficit. The bill 
would even result in personnel reductions within the IRS. 
Second, I also urge your support of several legislative 
proposals to strengthen tax administration that accompany the 
budget.
    The most important proposal would mandate reporting to the 
IRS of gross receipts by credit card issuers for their business 
customers. We know that where there is third party reporting to 
the IRS, compliance rates are high because income is reported 
accurately by the taxpayer. I urge you to review the 
President's proposals and actively support them. Thank you.
    [The prepared statement of Mr. Everson follows:]
Statement of The Honorable Mark Everson, Commissioner, Internal Revenue 
                                Service
Introduction
    Chairman Camp, Ranking Member McNulty and members of the 
Subcommittee, I am happy to be here this morning to address the issue 
of patenting tax strategies including potential tax shelters. This is 
an issue with which we have become much more familiar in recent years 
and have worked with the United States Patent and Trademark Office 
(USPTO) as more patents have been granted for tax products.
Framing the Issues
     As the Subcommittee focuses on the larger issue of tax patent 
strategies (TPSs), I think it is important to properly frame the issue 
and understand IRS' role or lack thereof in the patent process.
    First, we need to draw a distinction between the granting of 
patents to tax products or strategies that are in compliance with the 
tax laws, and to abusive tax shelters or other products that may not 
be. On the one hand, the ability to obtain a patent could encourage the 
development of products to help people comply with the tax law, similar 
to other protections of commercial interests such as trademarks and 
copyrights.
    Our operating philosophy at the IRS is that service plus 
enforcement equals compliance. From that perspective, tax 
administration could in fact benefit from the granting of patents to 
tax products that facilitate the ability of taxpayers to plan and 
conduct their tax affairs in compliance with the law. For example, a 
patent for a novel type of tax computation software that makes filing 
easier could benefit many taxpayers. This category of patents is 
potentially helpful to our mission by encouraging needed research and 
innovation by the private sector.
    Second, we recognize that there are substantial policy issues as to 
whether or not business methods involving tax strategies or products 
should be granted protection by the government. Granting patent 
protection to such strategies could limit the use of that particular 
tax strategy by other taxpayers and have a negative impact on their 
ability to comply with the tax law.
    While the policy issues are significant, many are outside IRS' 
jurisdiction and field of expertise. Importantly, the granting of a 
patent on a tax strategy provides protection to the patent holder 
against infringement by other parties, but has no bearing on its 
legitimacy or illegitimacy under the tax laws, which remain under the 
jurisdiction of the IRS.
    Unlike a private letter ruling, a pre-filing agreement, or an 
advance pricing agreement, a patent carries with it no assurance 
whatsoever that the patented process, transaction or structure will 
pass IRS muster. We are concerned, however, that taxpayers may be 
confused about this and may view a patent as a government seal of 
approval of all aspects to which the patent pertains, including the tax 
aspects.
    We understand that some developers of tax-related patents may 
advertise and promote their ``patented'' concepts to the general 
public. We are currently considering ways to reduce the risk of 
taxpayers mistakenly believing that the issuance of a patent is 
indicative that the IRS has approved the particular technique being 
marketed.
    Just so there is no misunderstanding today on this point, let me be 
clear. The grant of a patent for a tax strategy has absolutely no 
impact on IRS' determination of the effectiveness or the legitimacy of 
the strategy under tax law. The IRS will issue a policy statement that 
will make this clear to all taxpayers.
    Third, we recognize that taxpayers may attempt to patent abusive 
tax schemes. As I will discuss later, however, we have not seen such an 
abuse in our review of existing tax patents.
    Finally, patented tax strategies place an increased burden on 
practitioners who, while simply developing good gift, estate or 
business planning strategies for their clients, would be obligated to 
conduct ``due diligence'' searches for existing patents on such 
strategies.
    I will talk later about the patent searches that the IRS has done 
from the USPTO public data base. That experience has taught us that 
patent searches can be cumbersome and time-consuming. This burden is 
accentuated if a patent has been granted for a commonly used ``tried 
and true'' technique within a field. In these cases, a practitioner who 
wishes to use a standard planning technique could expose himself and 
his client to potential liability for royalties or infringement 
litigation.
    As you can see, tax-related business process patents raise issues 
for the IRS. They raise even more complex policy issues for others.
    I would now like to discuss what we have done and are doing to 
monitor tax patents as well as how we are working with the USPTO. The 
point of this work has been three-fold: first, to use the USPTO 
databases as another potential source of information about the 
marketing of abusive tax schemes; second, to detect whether patents are 
being used as a way to avoid other characteristics the IRS has 
identified as indicating potentially abusive transactions; and third, 
to assist the USPTO in carrying out its mission.
Patent Reviews
    IRS's principal interest in patented tax strategies is in 
determining whether promoters are patenting abusive tax avoidance 
transactions (ATATs).
    To that end, in 2004 and 2005 we performed two searches of the more 
than 6.5 million patents in the USPTO data base. The first search, 
conducted in November 2004 was designed to identify patents and public 
applications of known tax shelter strategies, specifically of IRS 
transactions identified as ``listed'' transactions in Notices 2004-67, 
which is the list of thirty transactions that have been determined by 
the Internal Revenue Service to be ``listed transactions'' as of 
October 12, 2004, and Notice 2005-13 which listed another transaction 
on February 28, 2005. That search, which was updated in November 2005 
and again in June 2006, found no evidence of patents or public patent 
applications embodying any of the abusive tax shelters or listed 
transactions.
    A second type of search was conducted in July 2005 and is updated 
periodically. The goal of this search was to measure the occurrence and 
type of business patents that might involve tax strategies. The initial 
search just asked for patents that included the word ``tax'' in 
applications and granted patents in all classifications. Of the 6.8 
million patents in the USPTO data base we had fewer than 300 ``hits''. 
A further analysis showed that approximately 100 of these dealt with 
``Business methods'' and the majority of those appeared to be software 
models for computing tax impact or effect, and not tax strategies.
    We were left with 14 patents and applications primarily in the 
areas of employee compensation, wealth transfer, and financial 
products. Upon initial examination, none of the 14 patents were found 
to be abusive tax avoidance transactions. We have subsequently 
completed our review of 12 of the 14, one of which was allowed by the 
applicant to expire for non-payment of fees. While we do not consider 
them to be ATATs, we are continuing to review two of the transactions 
to fully satisfy ourselves that they do not present compliance risk 
requiring follow up action on our part. Ultimately, we often need to 
see a real world example of how the transaction is carried out before 
we can be confident that the transaction is not abusive
    Based on this analysis, we thus far have not seen the use of the 
patents in developing or marketing aggressive or abusive tax 
strategies, but we continue to monitor on a quarterly basis the USPTO 
tax patent data base.
Working with the USPTO
    Since 2004, we have been working with the USPTO to help it address 
concerns about patents granted. Specifically, we formed a task force 
with members from both agencies to establish the scope of our effort. 
Last summer, we conducted a cross-Agency workshop which encompassed 
topics requested by the USPTO. This was an awareness workshop and was 
similar to what industries have historically done with the USPTO to 
keep them abreast of the latest sources of information, trends in 
practice, and the like. Our goal was to assist the USPTO in developing 
the resources to determine ``prior art'' in the area of tax strategies 
and structures.
    The prior art doctrine is a cornerstone in the patent application 
examination process. Under this doctrine, a patent application should 
be rejected if the subject matter is neither new nor original.
    IRS does not consult with the USPTO in the review of ``prior art''. 
Our contribution to this process would be tangential to our core 
mission. Moreover, if the IRS were to have a special or official role 
in evaluating the novelty and non-obviousness of a patent, this might 
be mistaken for IRS approval of the strategies or structures being 
patented.
    There are also significant confidentiality restrictions on both 
agencies that could hinder a cooperative effort in the review or prior 
art. As a result, USPTO must instead rely on input from the 
practitioner and other stakeholder communities to develop a reliable 
profile of what qualifies as prior art.
    Practitioners are generally the creators of business methods and 
tax strategies. As they have raised concerns, the IRS has encouraged 
practitioner organizations, such as the American Bar Association and 
the American Institute of Certified Public Accountants, to play an 
active role in supplying the USPTO with useful information on business 
methods for consideration as prior art.
    We have also offered USPTO ideas on how to ferret out a tax 
strategy during a patent examination. USPTO has also created a 
classification category dedicated to TPSs. This is a sub-classification 
(36T) of Business Method Patents dedicated to tax strategies. In March 
2006, we began quarterly monitoring of this TPS sub-classification.
    In addition, we consulted with the USTPO in the development of a 
protocol to allow patent examiners, once it is determined that the 
patent has a tax aspect, to request that patent applicants reveal 
specific Internal Revenue Code regulations and procedures affected by a 
patent application.
    These steps should not only make it easier for the IRS to track 
patents of tax strategies and structures, but it should help tax 
professionals identify these patents for whatever purpose.
Conclusions
    In conclusion, Mr. Chairman, the cooperative efforts between the 
USPTO and the IRS have resulted in significant strides in monitoring 
and reviewing tax strategy patents. Transparency of these types of 
patents has increased; USPTO examiners have a broader base of knowledge 
on which to assess patent applications; and the IRS has benefited by 
gaining an understanding of the patent process and the rights a patent 
bestows on its owner. This latter point is a key factor in valuation 
issues addressed by IRS examiners such as donations made under prior 
law, off-shore transfers, and arm's length consideration for patents.
    We recognize that some patents or trademarks actually benefit both 
taxpayers and the IRS in that they protect techniques that ease the 
compliance burden on taxpayers and may lessen the enforcement load of 
the IRS. In addition, while the IRS has worked to gauge the impact of 
patented tax strategies and structures on compliance and 
administration, we have found little evidence to suggest that tax 
shelters or aggressive tax avoidance transactions are being patented. 
But we recognize that the potential for significant problems could 
exist.
    While patenting tax strategies and structures make the transactions 
more transparent, there are several negative by-products to this 
process. First, we believe that the public may be largely unaware about 
both the rights that a patent owner enjoys and the fact that a patent 
does not guarantee that the transaction has the desired tax 
consequences. Let me repeat what I said earlier: a patent for a 
particular technique carries no weight with the IRS in assessing 
compliance with tax laws and regulations.
    Second, we believe that the trend toward increased patents of tax 
strategies and structures places an increasing burden on tax 
professionals. They must do an extensive search of the USPTO data base 
to determine if a particular strategy is protected.
    We will continue to work with the USPTO in targeted areas. We also 
strongly encourage the practitioner community to take an active role in 
assisting the USPTO in addressing developing issues with this evolving 
area of patent law.
    Thank you again, Mr. Chairman for the opportunity to be here and I 
will be happy to respond to any questions that you may have.

                                 

    Chairman CAMP. Thank you very much. Thank you both. Now we 
will have a period of questioning. Mr. Toupin, is tax law 
really appropriate for patents?
    Mr. TOUPIN. Well, the courts have interpreted the broad 
language of the Patent Act that the Act is designed to provide 
innovative stimulus equally across the board and to all forms 
of innovation that meet the broad language of the statute. The 
courts have held that the question of whether or not a 
particular invention may be against some form of public policy 
or may be contrary to the regulatory scheme of another agency 
is not for the patent office to decide. That is rather a 
question for the other regime. Our job is simply to see whether 
or not it meets the criteria for patent ability.
    Chairman CAMP. Mr. Everson, given that much of tax advice 
is done confidentially, is tax law really appropriate for the 
patent process, and, particularly, asking people to pay a 
royalty to comply with the law is what a patent on a particular 
method might do, do you have any thoughts on that?
    Mr. EVERSON. There are a couple of points in there, sir, I 
would suggest to you that one of the real problems is the 
complexity of the Code. That is a huge problem. The President 
has called for simplification. I know that the Congress and 
everybody else want to get that done, it is just hard to do. 
The complexity of the Code creates real reasons for people to 
search for ways to help folks comply. That having been said, 
when you get to the question of seeking to reduce the tax, the 
question is when do you approach that line where you get to 
non-compliance, if you will. My concerns here are with the 
confidentiality of the return, so it is very hard, I believe, 
for the patent folks to understand what is the common practice 
out there. They don't have an ability to look in and see what 
the return is. That is confidential between the practitioner 
and the taxpayer and the service. So, I am not sure that it is 
easy to get an understanding of what is known or prior art--
these are the terms that my colleague is more familiar with 
than I am. So, I think we are applying a set of incentives to a 
different model here, and it is very, very hard to do that 
effectively.
    Chairman CAMP. I realize that the Patent Office, if you are 
patenting a better mousetrap, that doesn't necessarily say that 
it is going to be effective, just as they don't say that this 
necessarily means you are complying with the law. It seems when 
it comes to tax matters, that it is not a golden seal of 
approval, as you were sort of mentioning. How is the average 
citizen supposed to know that because most people are going to 
say this is the government. If I am reading an advertisement 
for a particular method and it has been patented, I am going to 
think the government has looked at it. We realize that there is 
not necessarily a commitment that that is a legal strategy or 
even tax compliance at all but how is the average person 
supposed to figure this out?
    Mr. TOUPIN. Well, I think there are two answers to that 
question. One is that an advisor, relying on the patent, will 
have an ethical obligation to accurately advise the client as 
to the significance of a patent. The second is, and I know that 
the Internal Revenue Service is working on this, to develop 
outreach that would explain the significance of these patents.
    Chairman CAMP. Well, I appreciate both of you being here. 
At this time, I will recognize the gentle woman from Ohio for 
inquiry.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. In my prior life, 
I was the Cuyahoga County prosecutor doing both civil and 
criminal work, and I was a judge for 10 years, eight years in 
general jurisdiction. I am sitting here thinking, saying what 
if this came into my courtroom, what would I have done with 
this particular situation? I am concerned that we would develop 
a patent for tax advice, and I have nothing against tax 
attorneys and I want them to make all the money in the world, 
not all the money, we want to make some too.
    Mr. TOUPIN. The IRS might want to make some.
    Ms. TUBBS JONES. Of course, you will get your piece, you 
always do sooner or later anyway. That would be available to 
some people and not to all people. In my mind, and I am not a 
patent expert, I don't know if our laws contemplated the 
ability of some to access advantages in the Tax Code and others 
to not access advantage. That being said, assume a patent 
application met all the patent law criteria, would or could the 
Patent Office approve a patent for an illegal tax shelter?
    Mr. TOUPIN. Can I address the first part and then the 
second part?
    Ms. TUBBS JONES. No, no. Yes, sure you can.
    Mr. TOUPIN. I think that there is a bit of a confusion 
about what access means in this regard. An alternative strategy 
to patenting is to keep strategies as trade secrets. Now those 
trade secrets may be known to some advisers and not other 
advisers. The existence of a patent--the trade-off for the 
existence of a patent is to make it known to the world. Our 
database is an absolutely terrific body of knowledge for the 
public to access. So, in terms of whether a patent would make a 
strategy more available or less available, it is a bit of a 
trade-off between whether the cost of the license that might be 
requested outweighs the cost of each tax adviser inventing the 
same strategy for each client.
    The second issue is if Members of the tax advice community 
want to establish that certain strategies are well known, they 
will begin to publish the information about those strategies 
that they may not have published previously. So, the net 
effect--it is possible that the net effect of patenting is to 
make strategies more readily available to the public rather 
than less.
    Ms. TUBBS JONES. I see somebody in the audience shaking 
their head. I won't identify who it is but go ahead.
    Mr. EVERSON. Can I jump in for a second before we get to 
that second piece, is that okay?
    Ms. TUBBS JONES. No, go ahead. I could order the head of 
the IRS around. Let me try this one more time. No, I am 
kidding, go ahead.
    Mr. EVERSON. I read the paper that the Joint Committee 
staff put together, which was excellent. One of my favorite 
lines is on page 25. It says, ``Regardless of whether tax 
strategies are socially beneficial, there is no need for patent 
protection''--some people are saying this--``in order to 
encourage their development as they seem able to proliferate 
without such protection.'' I think that is absolutely true. The 
testimony that you submitted talks about the Constitution 
talking about patents and incentives and that sort of thing. In 
our country, you go back to the Boston Tea Party, people have 
been trying to lower their taxes for a long time, and I think 
there is plenty of activity here, so I would question this 
balance as to incentives and protections in this instance.
    Ms. TUBBS JONES. The second question.
    Mr. TOUPIN. The patent examiners are required to examine 
whether or not the patent application--the claimed invention is 
useful. In some of these applications that may or may not 
require examination of whether or not it would in fact achieve 
the advantage claimed. In that context, they are doing a 
scrutiny that is not different from what they do when they are 
looking at a claim to a mechanical invention. In that context, 
they will look to see whether one of ordinary skill in the art 
would believe that the thing would work as claimed. They do 
that on the basis of the information they have. That judgment 
can be challenged in a subsequent infringement action or 
declaratory judgment action if it proves to be incorrect.
    Ms. TUBBS JONES. Well, your answer is yes or no?
    Mr. TOUPIN. They will look to see--if it is claim to a 
specific tax advantage, and that is the only utility claim, 
which I think is a rare--they will look to see whether on the 
basis of the facts they have one of ordinary skill in the art 
would believe that it would be operable as claimed. So, would 
it work? They will look at that issue.
    Ms. TUBBS JONES. So, yes?
    Mr. TOUPIN. Yes.
    Ms. TUBBS JONES. Thanks, Mr. Chairman.
    Chairman CAMP. Thank you. The gentleman from Georgia may 
inquire.
    Mr. LINDER. Mr. Toupin, are there any other business 
practices that have been patented?
    Mr. TOUPIN. Yes.
    Mr. LINDER. Along the same lines as these?
    Mr. TOUPIN. Well, we recently put to the Office of 
Personnel Management (OPM) a request to expand the 
classification for patent examiners and that included incentive 
programs, such as--the subject matters that we were looking at, 
incentive motions, such as coupons, operation research, 
finance, banking and accounting, electronic shopping, health 
care, insurance, inventory controls, business processing. So, 
there is a wide variety.
    Mr. LINDER. This is mostly software?
    Mr. TOUPIN. Oftentimes they will include an information 
technology (IT) application.
    Mr. LINDER. How many of these tax patents have been issued 
so far?
    Mr. TOUPIN. About 40.
    Mr. LINDER. How many are pending?
    Mr. TOUPIN. The published applications are around 60 that 
are pending.
    Mr. LINDER. Do you expect this trend to continue?
    Mr. TOUPIN. Well, the trend is that it is a very low level 
of filings. It is very low in relation to business method 
patents as a whole. It is certainly very low in relationship to 
the 400,000 applications we get a year. The grant rate for 
business method applications has declined over the years since 
State Street Bank. So, my expectation is that the leveling off 
of business method patents as a whole, which we have 
experienced in the recent years, probably is likely to 
continue.
    Mr. LINDER. Does your office make any assessments as to 
whether this procedure or this business practice deals with 
aggressive deducting?
    Mr. TOUPIN. No.
    Mr. LINDER. Have you looked at these, Mr. Commissioner, 
these 40 patents?
    Mr. EVERSON. Yes, sir. I guess we did some searches of the 
database, and we got it down to where we looked at 100 patents. 
Some of them mentioned tax and, they weren't really in the end 
tax products. We got down to about a dozen or more that we were 
potentially concerned with. Thus far, as my testimony 
indicates, we haven't seen any real problems. Now, let me say 
this though, this is very important. What we often find with 
shelters and abusive transactions in general is that somebody 
will structure a transaction and it will be okay. Then a month 
later, there will be another transaction that moves just a tiny 
bit. There is a bell or a whistle that is attached. Then over a 
very long period of time, you have something that has 
approached and then crossed the line. My fear or concern in 
this area is the same thing--you could conceivably patent 
something that would work and then very quickly it could be 
modified, and it would just take a long time through litigation 
and everything else to get it all settled out as to whether the 
product had moved away from a legitimate patent. In the 
interim, there could be a lot of damage to the tax system.
    Mr. LINDER. Well, with 60,000 pages of regulations and 
complexities, I think there are probably dozens and dozens of 
ways to legally abuse the system. I think there are some 
people--there is a huge article about a lawyer in New York City 
who is very smart and he understands the Tax Code as well as 
anyone, and he finds ways to abuse it legally. Even though I 
have a modest tax reform bill that would take us back to the 
Boston Tea Party and solve your complexity at the same time. 
Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Yes?
    Ms. TUBBS JONES. Gentlemen, I am going to leave, as I said 
earlier, but I have some questions I would like to submit for 
the record to get some written responses, if you don't mind. 
One of those is ``Is tax advice legal advice and can legal 
advice be patented?'' That is my kind of curious thinking.
    Chairman CAMP. Yes, and without objection, and if you could 
respond in writing to those questions. The gentle woman from 
Pennsylvania may inquire.
    Ms. HART. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here, and I will certainly review your 
testimony in greater detail. Sorry, I am just walking in. We 
had a little discussion about some of these issues yesterday 
and they really kind of throw more questions open when you 
start looking at this issue. I have maybe the good fortune or 
bad fortune of having served on the Intellectual Property 
Subcommittee and Judiciary before I came to Ways and Means, so, 
now, it is even more--have a bizarre view. So, I guess I am 
most interested in your reflection on what the IRS views as 
listed transactions or tax shelters.
    If there are patents issued for these particular products 
or processes or procedures, I guess in some cases they are, how 
does the IRS pursue compliance? Is there any point at which 
there is some kind of deference given to a procedure because it 
is patented or does it go the other way around with the PTO 
regarding the respect for something that may be or a lack of 
respect for something that may be opposed by the IRS, back and 
forth?
    Mr. EVERSON. As I indicated in the testimony, the actions 
that are taken by the Patent Office have no bearing on how we 
come down on a particular transaction. Now, you mentioned 
listed transactions, those are transactions that we list as 
potentially abusive and subject to scrutiny, special scrutiny 
by our examiners. Someone suggested that what we ought to do is 
make people report whether they are using a patented 
transaction. I would not endorse that at this time for two 
reasons. First, as I indicated, thus far we haven't seen 
substantive problems here. We have theoretical concerns about 
what could happen, but we haven't seen substantive problems. 
Second, we set up a screen, criteria for what people need to 
disclose, and it would be unfair to tar all patents, as long as 
that is the law, with having them be disclosed in the tax 
preparation process since there is no evidence at this stage 
that they are a particular problem.
    Ms. HART. Regarding the process back and forth between the 
agencies, what would trigger a consultation with the IRS and 
the PTO regarding these issues? Is there something that would 
sort of throw up the red flag and actually cause that 
consultation to occur, I guess application for a patent?
    Mr. TOUPIN. Right, as we discussed earlier, there is 
consultation on the overall issue of mutual training. With 
respect to specific consultation on a particular application, 
the PTO is constrained by the laws that are applicable to it. 
It is required to keep applications confidential. Upon their 
publication, it is required not to provide for opposition 
proceedings. So, it is difficult at best for the agency to 
reach out and entertain objection or seek consultation on that 
point.
    Now the Members of the public can submit prior art 
currently for 2 months after an application is published and 
the office is now proposing to extend that to 6 months without 
comment to avoid the statutory prohibition on oppositions. That 
probably doesn't create the opportunity for the kind of 
consultation with the IRS that you are referring to.
    Ms. HART. Yes?
    Mr. EVERSON. I would be very reluctant to have the IRS 
inserted in an actual approval process. The point being that we 
have procedures in place where taxpayers come to us and they 
get private letter rulings, advance pricing agreements based on 
certain factual circumstances. That is the only time when we 
step forward and we look at things in advance. Were we to go 
down this corridor of working on some applications sometimes or 
even all applications, you would be giving broad pre-approval 
to transactions that had not yet taken place, and I think to do 
that would really change the way everything works in a way that 
we would have to carefully consider before we would do that.
    Ms. HART. If the Chairman will indulge just one quick 
follow-up.
    Chairman CAMP. Yes.
    Ms. HART. I appreciate that. So, has there not then been a 
case to this day where--or has there been a case to this day 
where a patent was actually granted and then the IRS came back 
and said this is contrary to the Code?
    Mr. EVERSON. We are just getting into the examination 
stream on some of the issues. As my colleague indicated, this 
has all happened since 1998, I guess when this was started. 
Then you get the application of the use of the patent itself. 
Then years down the road, returns come under audit. So, it is 
too early to say. What I had indicated before is we have 
studied the dozen or so patents that we thought are potentially 
of concern, and we haven't seen a theoretical problem with 
them. I would add, though, that in several instances, if just 
modified slightly, some of those patented transactions could 
cause real problems. So, again, you have to get down, do the 
actual audit, and then make your judgment.
    Ms. HART. Thank you. I thank you, Mr. Chairman.
    Chairman CAMP. Thank you. I understand your testimony, 
Commissioner, that there is no formal process between IRS and 
the Patent Office to examine these business method patents. So, 
how are these brought to your attention, just informally 
looking through the website?
    Mr. EVERSON. I think what the Patent office has done is now 
set a distinct category for these, which makes it a lot easier 
for us to find them and for all interested parties. So, we are 
sort of in the same boat as everybody else. Then, as was 
indicated earlier, we are sharing--as we share with the Patent 
Office emerging concerns on our end and back and forth. So, I 
think we have a good discussion of what is emerging in terms of 
the use of these, but that doesn't tie in in terms of the 
specific time line as to a particular structured transaction or 
strategy.
    Chairman CAMP. Well, the follow-up to that is then if you 
don't readily identify known practices, and then as 
applications come in and a patent is issued. Would the burden 
of challenging that patent fall on the taxpayers who employ 
this strategy? Whose burden is it? This is part of what I think 
we are trying to get at?
    Mr. TOUPIN. Well, there are two elements. First, after a 
patent issues, there is a current process for re-examination of 
a patent. A Member of the public, or even the patentee, 
believes there is new prior art or a new issue of patentability 
involving a prior patent or printed publication that should be 
brought to the Patent Office's attention. The Patent Office has 
also favored legislation that would involve a more broad-scale 
post-grant review of patents, which would probably provide a 
better opportunity for those who might claim that there was a 
prior public use but not necessarily a patent or printed 
publication about it. Apart from that, the burden would be on 
potential users of the patented method through district court 
proceedings.
    Chairman CAMP. It seems as though this is a growing area?
    Mr. TOUPIN. Well, it is hard to know whether 41 issued 
patents since 1998, what the trend is.
    Chairman CAMP. What I see that in your testimony you are 
increasing the number of patent examiners in the business 
method area from 130 examiners to 160 in a year.
    Mr. TOUPIN. In the area of business method patents at 
large, yes. We are now getting 8,500 of those a year, 
applications. We currently have 60-odd published applications 
with respect to this particular subject matter.
    Chairman CAMP. Again, realizing the tax method is a smaller 
part of that growing area, it seems to me that you don't have 
to purchase some of these other products, it is a choice. Every 
American has to comply with the U.S. Tax Code which does make--
again, kind of going back to my original question, is really 
tax law appropriate for patenting given that there is an 
obligation and a legal requirement that you must comply with 
the tax laws. Then to require Americans to pay a royalty to 
then do that in the best possible way seems to me a problem. I 
guess I am more concerned--I realize you don't want to have a 
formal process between the IRS and the Patent Office but how 
then do you coordinate this area because it clearly is--there 
is an overlap here.
    Mr. EVERSON. I think it is a serious problem because there 
is not the transparency. Tax returns are confidential. The 
advice that is given by a professional is confidential. So, 
there is not the visibility of a television set or a drug 
product that is taken out on the market where you say we have 
got a product that does ``X'' and it says ``patent pending'' or 
whatever it says down on the jar and then it is held up to a 
certain scrutiny. That is not what takes place here. So, I do 
find it--I am sure it is a real challenge for people who are 
trying to assess the patent application to get to this novel or 
known standard for just that reason.
    Mr. TOUPIN. The other answer though is that the IRS and the 
PTO over the last year to two have begun an active consultation 
process in terms of mutual training. The advantage of patents 
is that they are published and they can be known about. As 
knowledge of those expands over time, I am sure that, though on 
an interagency exchange basis that is not directed to specific 
applications, that exchange will become better and better 
educated as we deal with more of these.
    Chairman CAMP. Is there any other kind of legal protection 
that might work better than a patent for these tax business 
methods that either of you might comment on? It seems there are 
some drawbacks to the patent process. First of all, the length 
of time of getting it. It looked like 44 months I think in the 
materials I saw, I don't know if that is accurate.
    Mr. TOUPIN. No, we are----
    Chairman CAMP. Doing better than that?
    Mr. TOUPIN. It is very long in many business method areas. 
We are hiring up to try to deal with that problem.
    Chairman CAMP. Yes, so it is a long wait. Is there another 
way that would bring this technology or this information to the 
market sooner and still provide legal protection to the author?
    Mr. EVERSON. I don't think there is a lack of ideas in this 
area, as I have indicated, and as the Joint Committee staff has 
indicated. There is plenty of creativity and, in my view, 
sometimes too much.
    Mr. TOUPIN. One of the consequences of a patent regime is 
that it does encourage those who are using strategies or 
methods of whatever kind who don't want them patented by others 
to publish them. We have worked with a number of areas to 
develop--help them develop ways of publishing their ideas where 
they don't want something patented in ways that we could access 
for purposes of making judgments about patent applications. 
That is a consequence of the patent system that can lead to 
more things being available as a byproduct of patenting.
    Chairman CAMP. All right, thank you. The gentleman from 
Florida may inquire.
    Mr. FOLEY. I arrived late, so I am trying to still get my 
hands around the conversation. Are we talking about patenting 
things like software that applies to tax compliance or are we 
talking about strategies, such as hedging against--using hedge 
funds or some other product in which to avoid taxes?
    Mr. TOUPIN. I think both.
    Mr. EVERSON. I draw the distinction in my testimony, sir. I 
say that because of the complexity of the Code, there are many 
products that help a taxpayer get through this terribly 
burdensome Code. That is a good thing. Your second piece, that 
is the area of concern.
    Mr. FOLEY. Right, because I know into it are some of these 
other software devices or H&R Block named a number of people 
who have software that helps you process your return and make 
certain you have used every calculation necessary to get the 
best possible tax advantage. The other question becomes does 
patent protection provide some legal definition. Remember the 
cases they were using, some large brokerage houses will be 
anonymous for the moment, but using very creative real estate 
shelters and techniques in which to reduce income that have now 
been proven to be fraudulent and challenged in court. Some have 
gone to jail using those concepts. Does the patent provide any 
additional legal protection?
    Mr. TOUPIN. No, and indeed the IRS has found that--looking 
at the patents that have issued, that indeed these aren't 
aggressive. They might be aggressive strategies if they were 
tweaked a little bit but they are not aggressive as patented. I 
think there is a reason for that. That is that the patent puts 
the method out for the whole world to see. Somebody who is 
trying to do something that is not quite kosher might not want 
that strategy being published for the whole world, including 
the Internal Revenue Service, to see.
    Mr. FOLEY. I guess it is still hard to realize that if you 
are into the tax planning process, and the Code is fairly 
specific on items, deductions, and scenarios by which you may 
apply, how this novel idea of using the Code and using what is 
in law becomes patentable. I guess there is where I am 
scratching my head and say if I create a tax shelter like a 
hedge fund that creates an opportunity to shelter money but is 
using every mechanism available to me under the definition of 
Code, why is that a unique enough idea that I get a patent 
protection for it?
    Mr. TOUPIN. Well, there is a variety of these patents and I 
can't speak to any one of them in particular. The original 
State Street Bank decision, which led to this growth, was about 
a means of tracking transactions to maximize the accountability 
of capital gains so that those could be captured and used. It 
was a hub and spoke method for accomplishing that purpose. The 
Federal Circuit Court held that that kind of a method, which 
optimized the ability to use--among other things a tax 
advantage, was useful subject matter that could be patented.
    Mr. FOLEY. So, what they are doing in a particular instance 
is the timing element of their securities or whatever they were 
selling, they were using a program in which to determine 
whether it was ready for capital gains treatment?
    Mr. TOUPIN. I am sorry, Congressman, I am sure that is a 
subject matter that you know a lot more about than I in terms 
of exactly how they are accomplishing.
    Mr. FOLEY. No further questions.
    Chairman CAMP. Thank you. Mr. Weller may inquire.
    Mr. WELLER. Thank you, Mr. Chairman. Welcome to our 
panelists here. This is an interesting hearing, Mr. Chairman. I 
know when I was talking to some constituents yesterday, and I 
was telling them that you realize there are some people who 
want to patent tax advice and tax strategies, and the folks 
back home, their response was, ``You got to be kidding.'' So, I 
appreciate having this what is kind of an unusual subject, 
something that caught a lot of people by surprise that this 
would be occurring, that people would be patenting advice and 
strategies in response to tax law.
    Looking at this, I am interested in knowing the number of 
professionals at the PTO that are actually capable of assessing 
applications for tax patents? It is the novelty and utility of 
devices in which patents are sought requires expertise. I was 
wondering, Mr. Toupin, if you can share with us how many 
professionals with tax law or accounting backgrounds does PTO 
have employed?
    Mr. TOUPIN. If I could read from a sheet of paper for you. 
We currently have 26 examines working in the finance area of 
business methods. Of that number, one examiner holds a Ph.D. in 
finance and is a past associate professor of finance at the 
University of Maryland and a past financial planner. Eight 
examiners have either a MBA or a master's in finance or are 
close to finishing the master's in finance. Four examiners have 
law degrees. One examiner has a master's in economics. One 
examiner worked as a chief accountant in a private firm. Two 
examiners have an undergraduate degree in finance. So, we have 
been looking in this area to put people who have educational 
and professional backgrounds that suit them well to this. As I 
indicated earlier, we have worked with the Office of Personnel 
Management to modify the classification for patent examiners to 
allow us on a pilot basis for a couple of years to hire people 
with financial type backgrounds who do not also have other 
technical backgrounds, and we are hoping to add to our 
expertise in that way.
    Mr. WELLER. So, all these people that you have mentioned, 
what is the number again, 40?
    Mr. TOUPIN. Well, there are 26 and I described----
    Mr. WELLER. Twenty-six but all 26 of them are engaged on 
assessing these applications?
    Mr. TOUPIN. I don't know exactly what the assignment is of 
each of these people. The finance area is broader than the tax.
    Mr. WELLER. You feel there is a need to hire additional 
people to address this type of application?
    Mr. TOUPIN. In the business methods area generally, which 
is a large and expanding area of our practice, we are looking. 
I can't say exactly when we expand that, how many of them will 
specifically be assigned to tax matters.
    Mr. WELLER. Admittedly, this is a new subject for me, 
realizing people are patenting business and tax strategies. How 
widespread is an effort to patent business strategies, 
essentially putting something in paper and saying this strategy 
needs to be patented to protect our intellectual property 
rights?
    Mr. TOUPIN. As I indicated, in terms of tax strategies in 
particular, and that describes a variety of different kind of 
structured processes, we have issued about 40. There are 
published----
    Mr. WELLER. You have issued 40 patents on tax strategies 
already?
    Mr. TOUPIN. Variously described. Some of them may or may 
not exactly fit the definition that you are using, and about 60 
published applications. In the business method area as a whole, 
well, we are running about 8,500 applications a year. So, it is 
a very small part relative to the overall.
    Mr. WELLER. Okay, thank you. Thank you, Mr. Chairman.
    Chairman CAMP. Thank you. Would any other Members seek to 
inquire? All right. I want to thank our witnesses very much for 
their very helpful testimony and appreciate your attendance. 
Thank you very much. We will now begin panel two, including Mr. 
Richard S. Gruner, professor of law at Whittier Law School; Ms. 
Ellen Aprill, associate dean of Academic Programs, professor of 
law at Loyola Law School; and Dennis Belcher, a partner at 
McGuireWoods of Richmond, Virginia. I want to thank you all for 
coming this morning. We do have your written testimony. You 
will have 5 minutes to summarize your statement and then we 
will go to questions after all three of you have an opportunity 
to make your statements. Why don't we begin with Mr. Gruner. 
Again, welcome, and thank you for being here.

STATEMENT OF RICHARD S. GRUNER, PROFESSOR OF LAW, WHITTIER LAW 
                 SCHOOL, COSTA MESA, CALIFORNIA

    Mr. GRUNER. Mr. Chairman and Members of the Subcommittee, 
it is my honor and privilege to be here with you today and 
contribute to the efforts of this Subcommittee. Let me use my 
limited amount of time to summarize how I think we got here on 
this extraordinary occasion discussing the intersection of 
patent law and tax law, two areas of the law that until 
recently most parties would have said could not intersect. Yet, 
here we are.
    The emergence of tax planning patents reflects the 
convergence of three important trends: one legal, one 
technological, and one professional. First, patentable subject 
matter standards have been steadily expanding in scope. Federal 
court standards have recognized over the past two decades that 
our patent system should encourage and reward advances in 
fields as divorced from traditional physical engineering and 
chemistry as bio-engineering, computer software, communication 
information processing, accounting recordkeeping, financial 
investment strategies, and business methods. In this march 
toward ever broader patent system scope, it is a small step to 
extend patents to advantageous tax planning methods, which 
produce important financial results for taxpayers.
    Second, a technological trend. The impacts of computers and 
computer-based analyses have expanded the range of 
sophisticated tax planning strategies that are appreciated and 
implementable. Computer analyses of potential asset and income 
management strategies and tax results have expanded our 
understanding of what is desirable, leading to types of 
potentially patentable tax planning methods which would not 
have been understood a few years ago.
    On the implementation side, computer management and 
tracking processes allow for the implementation of tax planning 
strategies which would not have been possible in an earlier 
era. These developments in computer technologies applied to tax 
planning methods have expanded the range of computer-related 
tax planning patents just as the presence of computers has 
expanded the number of patents in so many fields.
    Finally, a professional change. The increasing issuance of 
patents in the financial and tax planning services fields may 
encourage firms to extend more resources toward the development 
of highly sophisticated methods for tax planning, with the 
amount of those resources augmented by expectations of large 
rewards achieved through patent control of the resulting 
innovations. If a given advance developed by a firm can only be 
marketed by the firm to that firm's particular client set, and 
may become available for marketing by competitors for 
disclosure of the method, the firm pursuing the development of 
the method will only be encouraged to devote such resources to 
the development of the method as will be paid back in extra 
payments from their own clients in later transactions.
    However, if a firm can develop a sophisticated new tax 
planning strategy and know that it can look to patents as a 
source of rewards, the firm will be encouraged to develop that 
strategy with a devotion of greater resources, knowing that all 
the taxpayers who wish to benefit from using the method will 
need to pay a royalty to gain this advantage. Under this latter 
type of system, the full range of taxpayer advantages from a 
given new technique will define the extent of development 
expenditures that are justified in producing it. This system 
will also encourage firms to focus on the types of highly 
innovative, non-obvious extensions of prior designs that are 
capable of qualifying for patents.
    This last analysis suggests why patents on tax planning 
methods, though highly foreign and seemingly dysfunctional to 
tax planners at this time, may ultimately be beneficial to this 
field. If the future of tax planning methods lays in highly 
sophisticated computer-intensive means of asset and income 
management, then substantial development rewards and 
protections may be needed to encourage the invention of these 
methods. Patents on such methods will encourage the very best 
designers of such methods to devote their time to this kind of 
development. Patents will also encourage the devotion of 
extensive combinations of computer and financial accounting 
resources for the development of these methods with the 
knowledge that the successful results can lead to valuable 
patents. This type of development pattern has prevailed in a 
number of other fields where patents serve to allow smaller, 
highly innovative concerns to focus on innovation with the 
assurance that other less innovative firms will need to pay for 
the use of the resulting innovations.
    In short, a patent mediated world of tax planning may be 
one in which greater efforts are devoted to the types of 
innovative tax planning methods that are non-obvious advances 
over prior methods and that can qualify for patents. It may 
also lead to a restructuring in the field where innovators are 
significantly advantaged in competition with non-innovators and 
in which specialists in innovation can be sure that their 
useful results will be paid for by the numerous clients and tax 
specialists who use and benefit from the innovative tax 
planning methods which emerge. Thank you, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Gruner follows:]
Statement of Richard S. Gruner, Professor of Law, Whittier Law School, 
                         Costa Mesa, California
    It is my pleasure to appear today to offer comments on the role of 
patents in protecting tax planning methods. A number of United States 
patents now apply to sequences of steps of asset and income management 
which are aimed at achieving advantageous tax results for taxpayers. 
The developers of these methods have claimed that their tax planning 
steps are significantly new and useful methods for achieving practical 
results and have accordingly obtained patents covering the methods. If 
valid, these patents will preclude other parties from using the 
patented method without the patent holder's permission.
    Patents regarding these techniques are emerging as significant 
concerns within the tax planning community. Tax attorneys and other tax 
planning specialists have raised concerns that patents will limit their 
ability to provide valuable services to their clients and produce 
unexpected patent infringement liability for themselves and their 
clients. At the same time, parties seeking and obtaining these patents 
assert that they have developed advances in tax planning methods which 
are significant departures from earlier methods and deserving of the 
sorts of patent protections and rewards that have traditionally applied 
to useful advances.
    For its part, the United States Patent and Trademark Office (USPTO) 
has implicitly agreed that advances in this field can qualify for 
patents by issuing a number of patents in this domain. Records of 
published patent applications regarding tax planning methods indicate 
that the number of patent applications in this field is growing, 
meaning that the number of issued patents and related patent disputes 
concerning tax planning patents is likely to expand in the future.
    My comments today will not attempt to address all of the legal 
issues that may surround the issuance and enforcement of tax planning 
patents. I will focus on three principle areas. First, I will describe 
the ways that patents may influence the development of tax planning 
methods and other ``intangible inventions'' that entail the management 
of information and other intangible items for personal gain. Second, I 
will describe one of the existing tax planning patents and the manner 
in which it may be enforced against taxpayers, attorneys, accountants, 
and financial institutions. Third, I will suggest actions that will 
improve the quality of patents issued in this area, with the goal of 
maintaining the incentive effect of patents in this important area 
while diminishing the effect of improperly issued patents in deterring 
legitimate tax planning strategies.
I. The Role of Patents in Promoting Tax Planning Innovations
A. Introduction to Utility Patents
    A patent for an invention gives the inventor the ability to control 
the use and commercialization of the invention for a limited period. A 
United States patent is granted based on an application to and review 
for legal sufficiency by the USPTO. Generally, the term of a new patent 
is 20 years from the date on which the application for the patent was 
filed in the United States. United States patents are effective only 
within the United States, U.S. territories, and U.S. possessions.
    The right conferred by the patent grant is to exclude others from 
making, using, offering for sale, or selling the patented invention in 
the United States or importing the invention into the United States. 35 
U.S.C. Sec. 271(a). What is granted is not the right to make, use, 
offer for sale, sell or import the invention, but rather the right to 
exclude others from making, using, offering for sale, selling, or 
importing the invention. Once a patent is issued, the patentee must 
enforce the patent without aid of the USPTO.
    There are three types of patents:
1.  Utility patents covering new and useful devices, materials, and 
        processes;
2.  Design patents covering new, original, and ornamental designs for 
        articles of manufacture; and
3.   Plant patents covering distinct and new varieties of asexually 
        reproducing plants.

    When parties speak of patents, they usually mean utility patents. 
In the remainder of these written comments, the term ``patent'' refers 
to a utility patent. Utility patents are granted for new inventions 
that are useful, including procedures for undertaking a useful task. 
Most tax planning patents will be aimed at protecting useful procedures 
for obtaining desirable tax results.
    Under the Patent Act, any person who ``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,'' subject 
to the conditions and requirements of the law. 35 U.S.C. Sec. 101. 
Advances falling within this statutory definition are ``patentable 
subject matter.'' The word ``process'' in this standard is defined by 
law as a process, act or method. The term ``machine'' as used in the 
statute includes artificially created assemblages that operate on some 
other subject matter, often transforming that additional matter. The 
term ``manufacture'' refers to articles that are made, and includes all 
manufactured articles. The term ``composition of matter'' relates to 
chemical compositions and may include mixtures of ingredients as well 
as new chemical compounds. These classes of subject matter taken 
together include practically everything that is made by man and the 
processes for making the products.
    The Patent Act specifies that patentable inventions must be 
``useful.'' The term ``useful'' in this connection refers to the 
condition that an invention has a useful purpose and operates to 
achieve its intended purpose. Court cases have held that steps for 
expanding financial profits or keeping track of financial activities in 
a useful way are examples of processes that meet the utility 
requirements of the patent statute. In light of this, tax planning 
methods leading to advantageous tax results and lower tax liabilities 
for taxpayers are likely to be seen as having sufficient practical 
utility to qualify for a patent.
    Judicial interpretations of the Patent Act have defined some limits 
on the field of subject matter that can be covered by a utility patent. 
For example, it has been held that laws of nature, naturally occurring 
phenomena, and abstract ideas are not patentable subject matter.
    A patent cannot be obtained upon a mere idea or suggestion. A 
patent is only available for a new machine, manufacture, chemical or 
process with specific, implementable details and not for the idea or 
suggestion of the new invention. A complete description of the actual 
machine or other subject matter for which a patent is sought is 
required in a patent application and in the resulting patent if one 
issues.
    In order to qualify for a patent, an invention must not only be new 
(that is, different from prior designs publicly known as of the date of 
invention), but also a nonobvious departure from the prior knowledge in 
the field. See 35 U.S.C. Sec. 103. In order to determine if this is the 
case, it is necessary to consider the state of the prior knowledge in 
the field (commonly referred to as the ``prior art'') at the date an 
invention was made, the differences of the invention from the prior 
art, and whether a party of average skill in the field was likely to be 
able to develop those differences. If the average practitioner was 
capable of developing the invention under these circumstances, then the 
invention is considered to be an obvious advance and not properly 
patentable. See id.
B. Expanding Application of Patents to Intangible Innovations
1. Open Ended Extension of Patents to New Technologies and Domains
    Some parties have argued that historical notions of engineering and 
patentable subject matter should govern the outer boundaries of the 
patent system. Up until a few decades ago, patents were applied almost 
exclusively to promote the development of physical technologies, 
including physical devices, materials, and processes. A continuing 
emphasis on this history would support a view of the patent system that 
was limited to the types of advances emerging from useful trades or 
industrial activities in the past.
    However, courts have thus far seen the patent system as far more 
dynamic than this. They have interpreted Congress's will in enacting 
patent laws to be that incentives should exist under those laws to 
expand the boundaries of what we consider to be technology and useful 
inventions. With this notion of evolving patterns of innovation and 
product and services characteristics have come major new advances that 
turn primarily on changes in the intangible features of modern goods 
and services. Persons need reach no further than their purses or 
pockets for their cell phones to locate a primary example of this new 
trend in innovation. Cell phone advances have turned largely on 
information processing breakthroughs and the associated abilities of 
companies around the world to implement and manage highly complex 
communication systems to support cell phone calls. Many of the key 
technology breakthroughs in this field were patented under the expanded 
notions of information processing patents and technologies applied in 
recent years.
    In general, courts have adopted a highly inclusive view of what is 
a new and useful advance that is potentially patentable. By viewing the 
patent system as a forward-looking institution with the aim of 
encouraging useful designs well beyond our present knowledge, courts 
have rejected a view of patentable subject matters that would look to 
the past and limit patents to historically important lines of 
innovation. Rather, courts have disengaged definitions of patentable 
subject matter from old notions of technologies or industrial 
practices. Indeed, a failure to take this sort of encompassing view of 
the potential range of patentable inventions would risk rendering the 
patent system irrelevant amidst modern modes of technological advance. 
Actual patterns of technological advance and application should dictate 
the directions of valuable additions to consumer products and the 
patent system must keep up by extending patents to the full range of 
innovations that are widely replicable, distributable, and, therefore, 
of widespread public importance.
2. Emphasis on Patents Regarding New Information Technologies
    The result of this view of patentable subject matter has been a 
trend towards the patenting of advances that emphasize information 
processing methods and devices incorporating such methods. Examples of 
fields in which information processing advances have been highly 
important--as vehicles for both commercially significant products and 
highly valuable patents--have included:
    Biotechnology--Use of DNA-based information for diagnostic 
procedures and biological product designs
    Computer Controls--Use of advanced information processing 
technologies to control older devices and processes
    Communications--Use of new information processing methods to 
increase the volume and quality of communications systems
    Interpretive Systems--Use of information processing advances aimed 
at squeezing new insights out of existent information (e.g., heart 
monitor data processing systems or seismic data analysis systems)
3. Judicial Analyses Embracing Broad Views of Patentable Subject Matter
    While there are many other examples in the case law of federal 
courts, the following highlights illustrate the broadly inclusive views 
that federal courts have taken of patentable subject matters. These 
cases define a path that leads to the coverage of patents for numerous 
information processing advances, financial management methods, and, by 
little or no extension, tax planning processes.
a. Biotechnology
    In Diamond v. Chakrabarty, 447 U.S. 303 (1980), Chief Justice 
Berger, writing for the Supreme Court, held that United States patent 
laws extend to advances in biotechnology including a newly 
bioengineered type of bacteria that was useful in helping to break down 
oil products and clean up oil slicks. The Court observed that the 
patent system should not be limited to older notions of what 
constituted technology or engineering. Rather, the Court felt that 
Congress intended patentable subject matter to include ``anything under 
the sun that is made by man.'' Id. at 308.
b. Computer Systems for Information Processing
    In re Alappat, 33 F.3d 1526 (Fed.Cir. 1994) (en banc) involved a 
computer system for controlling visual output on a video screen. A 
computer system carefully evaluated electronic signals and determined 
how to best display the signals on a video screen. The only new 
components in computer system were the information processing sequences 
defined by the applicable computer program. The Court of Appeals for 
the Federal Circuit found this invention to entail patentable subject 
matter because the system was ``a specific machine that produces a 
useful, concrete, and tangible result.'' Id. at 1544.
c. Financial Information Processing Method
    State St. Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 
1368 (Fed.Cir. 1998) considered a patent on a business method calling 
for central investment of funds from multiple financial institutions, 
with frequent status reports made to the contributing institutions (a 
so called ``hub and spoke'' system of investment and reporting). This 
method was found to be a patentable process because the information 
handling involved had practical consequences in managing funds. The 
Federal Circuit court specifically noted that, given their practical 
consequences, business methods should be treated no differently than 
other practical advances and that innovative business methods should 
qualify as patentable subject matters like other useful advances.
d. Business Record Keeping Method
    The Federal Circuit court reaffirmed its support for business 
method patents in AT&T Corp. v. Excel Communications, Inc., 172 F.3d 
1352 (Fed.Cir. 1999). That case involved a new electronic record 
keeping method for handling information on long distance calls. This 
method was found to be patentable subject matter based on the practical 
usefulness of the method in phone usage record-keeping and associated 
billing systems.
e. Medical Information Processing Method
    In Arrhythmia Research Technology, Inc. v. Corazonix Corp., 958 
F.2d 1053 (Fed.Cir. 1992) the Federal Circuit court considered the 
patentability of a computer-implemented method for interpreting 
heartbeat monitor data to detect possible heart problems. This system 
was patentable because the results it produced were not abstract data 
but rather information ``related to the patient's heart activity.'' 
Patentable subject matter was present here because heartbeat monitor 
signals were ``transformed'' to produce a practically useful result in 
identifying heart abnormalities. Id. at 1059.
4. General Standard For Patentable Subject Matter in Intangible 
        Innovations
    The cases to date--particularly the rulings of the Court of Appeals 
for the Federal Circuit which hears all patent appeals--indicate that a 
new method of undertaking a useful procedure will be a potentially 
patentable innovation if the method:

      Fills a user need with identifiable value;
      Addresses a need shared by multiple parties;
      Operates in a regular manner producing consistent 
results; and
      Is capable of being described clearly so as to permit 
effective evaluation of the innovation and its results by potential 
users.

    See generally Gruner, Intangible Inventions: Patentable Subject 
Matter for an Information Age, 35 Loyola L.A. L. Rev. 355 (2002). An 
innovative tax planning method, capable of use by a broad set of 
taxpayers and producing favorable, valuable tax results, would appear 
to meet this standard for patentable subject matter.
C. Potential Impacts of Tax Planning Patents
    Commentators analyzing the development of patents regarding 
financial services and products have identified a number of ways that 
such patents are changing the way businesses in this field operate. 
These developments concern how businesses in the financial services 
field are perceived by customers, the choices these business make 
regarding the targeting of innovation and marketing efforts, and the 
relative mix of innovators versus non-innovators in the field. The same 
sorts of impacts are likely to be seen in the tax planning field as tax 
planning patents become more common and have greater impact. See, e.g., 
James F. Baueric, ``Beam Me Up, Scotty''; Business Method Patents as a 
Transformational Device in Financial Services, 119 Banking L.J. 376 
(2002); John C. Spaccarotella, Patents Continue to Gain Visibility, 
Value in the Lucrative Derivatives, Hedge Fund, and Allied Financial 
Services Market, Futures & Derivatives L. Rep., Oct. 2005 at 3.
    1. Expertise Validation
    One impact of patents obtained for particular financial services is 
to validate the apparent expertise of the developers of the patented 
services. The issuance of a patent is viewed as a confirmation by the 
USPTO that the patented financial service or product is a distinctive 
departure from the prior knowledge in the field. The approval of the 
patent by the PTO indicates that its neutral patent examiners have 
compared the claimed invention to the prior knowledge in the field and 
found the invention to be a nonobvious addition to that knowledge. The 
patent, as a symbol of the underlying analysis by the USPTO, therefore 
becomes credible evidence of both the newness of the patented invention 
and of the analytic skill of the invention developer in being able to 
produce a nonobvious extension of prior designs.
    This is a reflection of the ``signaling'' role of patents regarding 
technological developments generally. Clarisa Long, Patent Signals, 69 
U. Chi. L. Rev. 625 (2002). As described by Clarisa Long, patents 
provide:
    ``a means of credibly publicizing information. Patents can reduce 
informational asymmetries between patentees and observers. Under some 
circumstances, the informational function of patents may be more 
valuable to the rights holder than the substance of the rights. . . . 
If an easily measurable firm attribute such as patent counts is 
positively correlated with other less readily measurable firm 
attributes such as knowledge capital, then patent counts can be used as 
a means of conveying information about these other attributes. Knowing 
this, firms may choose to obtain and use a portfolio of patent rights 
to signal information about themselves that would be more expensive to 
do through other means. Alternatively, firms can use the patent 
document itself to convey information that would not be as credible 
when revealed in other contexts.'' Id. at 625.
2. Product Differentiation
    Another impact of issued patents in the financial services industry 
is to differentiate products of patent holders from those of 
competitors. A company marketing a particular financial services 
product incorporating a patented features can assure its customers that 
this same product--and whatever advantages it provides--can not be 
obtained from other vendors since the patent involved will preclude 
adoption of the feature in other parties' products and services. 
Through this type of product differentiation, a firm can establish a 
pattern of ``sustainable differentiation'' from its competition built 
on a foundation provided by the firm's patents. See Spaccarotella, 
Patents Continue to Gain Visibility, Value in the Lucrative 
Derivatives, Hedge Fund, and Allied Financial Services Market, Futures 
& Derivatives L. Rep., Oct. 2005 at 3 (noting the potential of 
financial services patents to enhance the marketing of an ``allegedly-
proprietary product and technology to current and potential clients'').
    This type of sustainable differentiation has been seen as highly 
valuable in other fields. In a detailed study of patenting and 
investment generation practices in the computer software field, Ronald 
J. Mann found that venture capitalists were particularly interested in 
patents and associated them with company value because the patents 
provided a vehicle for sustainable differentiation of software 
developers from their competitors. Ronald J. Mann, Do Patents 
Facilitate Financing in the Software Industry?, 83 Tex. L. Rev. 961 
(2005). Mann described the linkage between patent holdings and 
perceived company value in the eyes of venture capitalists as follows:
    ``[F]or firms that have a credible product idea and the expertise 
to implement it, venture capitalists plainly accept the idea that their 
goal is to identify firms that will have sufficient market power to 
earn extraordinary profits. IP protection is important only indirectly, 
as a tool that might provide that market power. The key is 
``sustainable differentiation'': something special about the particular 
firm that will enable it to do something that its competitors will not 
be able to do for the immediate future. . . . [I]t is clear that the 
key to a desirable investment opportunity is in the expectation of 
market power, and all other attributes of the company are indirect 
predictors of that ultimate goal.'' Id. at 975 (footnotes omitted).
3. Channeling Competitors' Actions
    Patent issuance, coupled with substantial publicity regarding a 
patent and its probable enforcement, can be a means to either direct 
competitors' activities away from a particular domain of product 
development and offerings or to compel competitors to seek licenses and 
pay handsome royalties for access to products or services that are so 
essential that they can not realistically be avoided. The motivation to 
either avoid infringement of a competitor's patents or to voluntarily 
seek a license stems from the considerable threat of patent 
infringement damages for parties who make, use, or sell a patented 
invention without the permission of the patent holder.
    In a services setting, persons who undertake a patented service 
even without notice of the patent involved, are liable to the patent 
holder for compensatory damages. 35 U.S.C. Sec. 284. Once a party is on 
notice of a patent and the practices or devices the patent covers, 
subsequent efforts by the party to make, use, or sell the invention 
risk not just compensatory liability, but also further punitive 
liability for willful patent infringement which can equal as much as 
three times the losses of the patent holder. See Stickle v. Heublein, 
Inc., 716 F.2d 1550, 1556 (Fed.Cir. 1983). If the patent holder is a 
producer or provider of competing products or services, the patent 
holder's losses will be measured from the lost sales profits resulting 
from the infringer's conduct, provided that those profits can be proven 
accurately. See Panduit Corp. v. Stahlin Bors. Fibre Works, Inc. 575 
F.2d 1152 (6th Cir. 1978). If the patent holder is not a producer of 
products or provider of services or if the patent holder's lost sales 
profits can not be proven accurately, a patent holder will be entitled 
to recover a reasonable royalty from an infringer equal to the amount 
of the royalty payment that the patent holder and infringer would 
probably have agreed to in negotiations conducted at arms length prior 
to the infringement. Id.; Hanson v. Alpine Valley Ski Area, Inc., 718 
F.2d 1075 (Fed.Cir. 1983).
    When combined with the incremental threat of trebling for willful 
infringement, patent infringement damages can easily rise to large 
levels, making the threat of liability for such damages a considerable 
deterrent to actions even approaching patent infringement.
4. Signaling Future Innovation Strengths
    Patents concerning a particular type of product can also signal 
future business strategies to customers and competitors. The investment 
of large research expenditures in developing new financial products or 
services in a particular area, coupled with the revelation of those 
expenditures through the publication of patent applications or patents 
describing inventions resulting from the innovative efforts, can 
provide business intelligence information to customers and competitors.
    For customers, the message is that the firm involved is serious 
about being a technology and product leader in the domain of the 
innovation being patented, with the possibility of more similar 
advances to come. Such a message can establish a degree of trust in the 
future products of an innovative patent holder that encourages 
customers to establish long term business relationships with the 
innovator.
    For competitors of a patent holder, the implications of a valid 
patent may be that the competitors will find it difficult to pursue 
innovation in the same direction as the innovation covered by the 
patent (since they will need to license rights under that patent in 
order to pursue such innovation) and that the competitors will need to 
pursue other paths of innovation departing significantly from the 
patented approach if they want to be innovators in the same field. This 
pressure to ``design around'' an existing patent and produce 
alternative solutions to consumer problems that are outside the patent 
can drive innovation efforts of competitors into other areas that are 
unaddressed by the patent holder.
5. Increasing Innovation Specialization
    As a patent holder and its competitors pursue different innovative 
paths in reaction to an issued patent, each has incentives to develop 
specialized expertise and knowledge that will aid it in producing 
innovations and, perhaps, additional patents that will reserve a 
particular product niche to the firm. This type of strategy will tend 
to strengthen the specialization and firm differentiation effects in 
the field involved.
    As this process goes forward, specialized innovators may need to 
cross-license patents to and from their competitors so that each can 
gain the specialized advances of the other to produce viable, 
competitive products. The patents that each firm has on their 
specialized advances in the narrow slice of the field where they have 
particularly strong innovative capabilities will become the 
``currency'' with which they can bargain for rights to use the advances 
of their competitors.
6. Rewarding Innovators Over Non-Innovators
    The winners in this sort of arrangement will be those firms that 
have innovations and patents which enable them to be highly successful 
competitors in the field. The losers will be companies with no 
innovations and no patents to bargain with. In effect, this sort of 
process should help to filter out less innovative firms, leaving only 
ongoing innovators that can bargain for the latest designs in their 
fields and keep the firms competitive in consumer markets.
II. Anatomy of a Tax Planning Patent and Its Potential Enforcement
    In order to appreciate the potential scope and enforcement impact 
of patents on tax planning methods, it is useful to consider the terms 
of one of these patents. This section will briefly describe a patent 
issued in 2003 covering a method for achieving an advantageous tax 
result by establishing and managing in a specified fashion a trust 
funded by a particular type of stock options.
A. The SOGRAT Patent
    United States patent number 6567790 purports to protect:
    ``[a]n estate planning method for minimizing transfer tax liability 
with respect to the transfer of the value of stock options from a 
holder of stock options to a family member of the holder. The method 
comprises establishing a Grantor Retained Annuity Trust (GRAT) funded 
with nonqualified stock options. The method maximizes the transfer of 
wealth from the grantor of the GRAT to a family member by minimizing 
the amount of estate and gift taxes paid. By placing the options 
outside the grantor's estate, the method takes advantage of the 
appreciation of the options in said GRAT.''
    U.S. Patent No. 6567790. A ``nonqualified stock option'' for tax 
law purposes is any stock option that does not qualify as an incentive 
stock option (ISO) and which does not receive the favorable tax 
treatment accorded to ISOs. Generally, a nonqualified stock option is 
not taxed at the date it is granted, but is instead taxed upon the 
exercise of the option. The amount subject to tax is the difference 
between the fair market value of the stock on the date of the exercise 
of the option and the exercise price paid for the stock. After the 
exercise of an option, the taxpayer holds the corresponding stock as a 
capital asset and is subject to normal capital gains rules on the 
disposition of the stock.
    Because the GRAT used in this method involves stock options, the 
patent applicant describes this method as involving a ``Stock Option 
Grantor Retained Annuity Trust'' or ``SOGRAT.'' As a further measure of 
intellectual property protection, the patent applicant claims trademark 
protection for the use of the term ``SOGRAT'' (this claim is noted in 
the patent covering the method). In the remainder of this document, the 
above patent is referred to as the ``SOGRAT patent.''
B. Scope of Protection
    The scope of protection granted by this patent can only be gauged 
from the claims stated in the patent. These claims, located at the end 
of the patent document, describe the ``metes and bounds'' of the legal 
rights conferred by the issuance of the patent. The patent holder will 
be able to prevent others from using a tax planning method only if the 
method of the other party is with the description of the protected 
process provided by the claims. In patent law terms, a tax planning 
method of a party other than the patent holder will be infringing if 
the claims describe or ``read on'' the method of that other party.
    The SOGRAT patent has a number of claims describing different 
versions of the claimed method. The first claim is the broadest and 
reads as follows:
    ``What is claimed is:
    1. A method for minimizing transfer tax liability of a grantor for 
the transfer of the value of nonqualified stock options to a family 
member grantee, the stock options having a stated exercise price and a 
stated period of exercise, the method performed at least in part within 
a signal processing device and comprising: establishing a Grantor 
Retained Annuity Trust (GRAT); funding said GRAT with assets comprising 
stock options, the stock options having a determined value at the time 
the transfer is made; setting a term for said GRAT and a schedule and 
amount of annuity payments to be made from said GRAT; and performing a 
valuation of the stock options as each annuity payment is made and 
determining the number of stock options to include in the annuity 
payment.''
    The portions of this claim separated by semicolons identify the 
steps or elements that a tax planning process will need to have to fall 
within this claim and to be infringing. These elements provide a 
checklist for analyzing the activities of other parties for the purpose 
of determining if they are infringing this patent. Using this approach, 
a party would appear to infringe this patent (assuming that the patent 
is valid and enforceable) if the party (using, at least in part, a 
``signal processing device'') completed the following steps:
    1. establishing a Grantor Retained Annuity Trust (GRAT);
    2. funding said GRAT with assets comprising stock options, the 
stock options having a determined value at the time the transfer is 
made;
    3. setting a term for said GRAT and a schedule and amount of 
annuity payments to be made from said GRAT; and
    4. performing a valuation of the stock options as each annuity 
payment is made and determining the number of stock options to include 
in the annuity payment.
    Assuming that a tax planning method had these features, it would be 
infringing, even if the method had other details or characteristics. If 
a method did not include exact counterparts to every one of these 
steps, it would still be infringing if it included an equivalent action 
to each of these steps. A step will generally be seen as an equivalent 
of a claimed step if the alternative step involves a similar means of 
operation, function, and result to the counterpart step in the patent 
claims.
C. Potential Infringers
1. Clients
    Clients for whom tax planning methods are implemented and who 
benefit from the resulting taxation outcomes would be the primary or 
``direct'' infringers of a patented method like that described above. A 
party seeking to implement this strategy without the patent holder's 
permission could be enjoined from doing so. A party who implemented the 
patented method (even without being aware of the patent involved) would 
be liable for patent infringement damages equal to a reasonable royalty 
payment for use of the patented method. 35 U.S.C. Sec. 284. If the 
party was aware of the patent and aware that the course of conduct he 
or she contemplated was apparently covered by the patent, but went 
ahead anyway with the infringing conduct having no good faith reason to 
believe that it was non-infringing or that the patent was invalid, the 
party could be held liable for punitive damages of up to three times 
the patent holders compensatory damages. Id.
2. Attorneys/Accountants
    The federal Patent Act holds persons who induce others to engage in 
patent infringement equally liable with the parties who actually 
undertake the infringement. 35 U.S.C. Sec. 271(b). The notion here is 
that an inducer is essentially an ``aider and abetter'' of the patent 
infringer and should be equally responsible for patent damages. 
Numerous cases hold that persons who instruct others how to infringe a 
patent or who help to design implementations of an infringing design 
are deemed to be inducers of infringement and liable under the Patent 
Act. Since tax attorneys and accountants who specialize in tax matters 
will commonly provide advice, instruction, and relevant document 
creation services aiding clients in setting up tax planning strategies, 
if these professionals are aware that the tax planning methods that 
they are helping clients to implement are patented, attorneys and 
accountants may incur patent infringement liability by inducing the 
patent infringement of their clients.
    In order to establish liability for inducement of patent 
infringement, the following elements must be proven by a preponderance 
of the evidence: (1) an inducer's knowledge of the asserted patent; (2) 
the presence of infringement by the party allegedly induced; (3) an 
inducer's actual intent to cause the acts which he knew or should have 
known would induce actual infringements; and (4) the commission of a 
positive act that materially furthers the infringement, not merely the 
power to act or the failure to act. TI Group Automotive Systems, (North 
America), Inc. v. VDO North America L.L.C., 62 USPQ2d 1599, 1601 (D. 
Del. 2002); see also Black & Decker (US) Inc. v. Catalina Lighting, 
Inc., 953 F. Supp. 134, 138 (E.D. Va. 1997). Where a tax attorney or 
accountant is aware of a tax planning method patent and instructs a 
client or materially assists a client in carrying out the patented tax 
planning method, all of these criteria would seem to be met.
3. Financial Institutions Managing Accounts
    Financial institutions or other entities that agree to carry out a 
patented tax planning method (perhaps by establishing or acting as 
trustee for the relevant trust) may also carry out the patented steps 
and be liable as a direct patent infringer. Here, the financial 
institution would be acting as the agent of the taxpayer for whom the 
infringement was undertaken, but this will not undercut the fact that 
the institution has carried out the patented steps and has acted as an 
infringer.
III. Potential Steps to Limit the Issuance and Enforcement of Improper 
        Tax Planning Patents
    A number of steps may be useful in ensuring that tax method patents 
are limited to innovative tax planning methods that are significant, 
nonobvious departures from prior methods in this field. This section 
summarizes these possible strategies for future action.
A. Identify Field-Specific Prior Art Sources for Use in Patent 
        Examination Processes and Enforcement Disputes
    Tax specialists might profitably work with the USPTO to identify 
publicly accessible sources of information about past tax planning 
strategies so that these known strategies can be taken into account in 
the processing of applications for patents on tax planning methods. 
These prior art sources are different in both location and content from 
many other types of information commonly considered by patent examiners 
and a complete picture of the prior art against which tax method patent 
applications should be measured may require personnel in the patent 
office to gain new information on the sources and meaning of publicly 
available descriptions of ``state of the art'' tax planning methods. 
This same information on sources and implications of prior art, if made 
available to the public, would assist defendants in patent cases to 
challenge the validity of improvidently issued patents on tax planning 
methods.
B. Develop Means to Expand the Knowledge of Patent Examiners Regarding 
        Tax Planning Methods and Improvement Patterns
    To the extent that methods of tax planning and techniques for 
extending prior tax planning methods to produce new methods are 
unfamiliar to patent examiners, presentations by tax practitioners to 
USPTO personnel on current tax planning techniques may be highly 
valuable. These sorts of presentations might be modeled on similar 
information sessions that the USPTO conducted to learn more about 
computer software programming methods and advances in the period when 
software patents and their examination were growing concerns for the 
Patent Office.
C. Encourage the Patent Office to Frequently Reexamine Tax Planning 
        Patents
    The USPTO has the ability to reexamine and invalidate issued 
patents in light of prior art that was not originally considered in the 
initial examination of the patents. Given the uncertain state of prior 
art in the field of tax planning patents, a policy adopted by the 
Patent Office which encourages the submission of prior art in this 
field to trigger reexamination proceedings might be a valuable means to 
ensure that unwarranted patents do not reach the stage of active 
enforcement.
D. Develop an Information Distribution System to Inform Tax 
        Practitioners of Assertedly Restricted Tax Planning Methods
    An additional useful advance might be a system for better informing 
tax practitioners regarding the issuance of patents on particular tax 
planning methods to prevent the inadvertent implementation of a 
patented strategy without gaining appropriate permission from the 
patent holder. This type of information distribution system might be as 
simple as a means for specially flagging patents on tax planning 
methods in the patent records system or otherwise identifying patents 
in this category to facilitate quick searching for patents affecting 
this type of legal practice. The Patent Office has begun to implement a 
special coding system for patents in this field, but it is unclear that 
all of the relevant patents are being identified by the appropriate 
coding. The Patent Office also might consider the issuance of special 
reports on this category of patents given their new character and the 
general unfamiliarity of many tax practitioners with the types of tax 
planning patents that are emerging.
E. Implement a Public Comment System Whereby the IRS Notes the 
        Ineffectiveness or Impropriety of Patented Tax Planning Methods
    As a matter of taxpayer protection, a system under which the IRS 
identifies patented tax planning methods as either abusive or incapable 
of achieving a meaningful tax advantage would help taxpayers and their 
attorneys and accountants to properly discount the value of the 
patented methods involved and to avoid those practices. To the extent 
that recognizing a tax planning method with a patent suggests that the 
method is particularly special and valuable, this type of corrective 
information from the IRS might be needed to ensure that taxpayers and 
tax specialists make decisions about tax planning methods with an 
accurate picture of the merit of the methods involved.
IV. Conclusion
    The emergence of tax planning patents reflects the confluence of 
three important trends in patent law. First, patentable subject matter 
standards have been steadily expanding in scope. Federal court 
standards have, over the past two decades, recognized that our patent 
system should encourage and reward advances in fields as divorced from 
traditional physical engineering and chemistry as bioengineering, 
computer software, communication information processing, accounting 
record keeping, financial investment strategies, and business methods. 
In this march towards ever broader patent system scope, it is a small 
step to extend patents to advantageous tax planning methods which 
produce important financial results for taxpayers.
    Second, the impacts of computers and computer-based analyses have 
expanded the range of sophisticated tax planning strategies that are 
appreciated and implementable. Computer analyses of potential asset and 
income management strategies and tax results have expanded our 
understanding of what is desirable, leading to types of potentially 
patentable tax planning methods which would not have been understood a 
few years ago. On the implementation side, computer management and 
tracking processes allow for the implementation of tax planning 
strategies which would not have been possible in an earlier era. These 
developments in computer technologies applied to tax planning methods 
have expanded the range of computer-related tax planning patents just 
as the presence of computers has expanded the number of patents in so 
many fields. See generally Gruner, Better Living Through Software: 
Promoting Information Processing Advances Through Patent Incentives, 74 
St. John's L. Rev. 977 (2000).
    Third, the increasing frequency of patents in the financial and tax 
planning services fields may encourage firms to extend more resources 
towards the development of highly sophisticated methods for tax 
planning, with the amount of those resources augmented by expectations 
of large rewards achieved through patent control of the resulting 
innovations. If a given advance can only be marketed to a given firm's 
particular client set and may become available for marketing by 
competitors through public disclosure of the method, the firm pursuing 
the development of the method will only be encouraged to devote such 
resources to the development of the method as will be paid back in 
extra payments from their own clients in later transactions. However, 
if a firm can count on patent protections for a new and highly 
innovative tax planning strategy, the firm will be able to afford to 
devote greater resources to the development of the method knowing that 
all taxpayers who wish the benefit of using the method will need to pay 
a royalty to gain this advantage. Under this latter type of system, the 
full range of taxpayer advantages from a given new technique will 
define the extent of development expenditures that are justified in 
producing it. It will also encourage firms to focus on the types of 
highly innovative, nonobvious extensions of prior designs that are 
capable of qualifying for patents. See generally Gruner, Everything Old 
is New Again: Obviousness Limitations on Patenting Computer Updates of 
Old Designs, 9 B.U. J. of Science and Tech. L. 209 (2003).
    This last analysis suggests why patents on tax planning methods, 
while highly foreign and seemingly dysfunctional to tax planners at 
present, may ultimately be beneficial to this field. If the future of 
tax planning methods lies in highly sophisticated, computer-intensive 
means of asset and income management, then substantial development 
rewards and protections may be needed to encourage the invention of 
these methods. Patents on such methods will encourage the very best 
designers of such methods to devote their time to this development. 
Patents will also encourage the devotion of extensive combinations of 
computer and financial accounting resources to the development of these 
methods with the knowledge that successful results can lead to valuable 
patents. This type of development pattern has prevailed in a number of 
other fields where patents serve to allow smaller, highly innovative 
concerns to focus on innovation, with the assurance that other, less 
innovative firms will need to pay for use of the resulting innovations.
    In short, a patent-mediated world of tax planning may be one in 
which greater efforts are devoted to the types of innovative tax 
planning methods that are nonobvious advances over prior methods and 
that can qualify for patents. It may also lead to a restructuring of 
the field where innovators are significantly advantaged in competition 
with non-innovators and in which specialists in innovation can be sure 
that their useful results will be paid for by the numerous clients and 
tax specialists who use and benefit from the innovative tax planning 
methods which emerge.

                                 

    Chairman CAMP. Thank you very much. Ms. Aprill, you have 5 
minutes as well.

STATEMENT OF ELLEN APRILL, ASSOCIATE DEAN OF ACADEMIC PROGRAMS, 
PROFESSOR OF LAW, AND JOHN E. ANDERSON CHAIR IN TAX LAW, LOYOLA 
              LAW SCHOOL, LOS ANGELES, CALIFORNIA

    Ms. APRILL. Mr. Chairman, Members of the Committee, thank 
you for inviting me here today. This morning, I would like to 
discuss three points briefly: first the practical issues raised 
by tax strategy patents, first; second, how we might improve 
the quality of such patents; and, third, how the policy behind 
tax laws and patent laws compare. In brief, I want to suggest 
to you that because tax strategy patents constitute a 
government-granted monopoly regarding interpretation of and 
compliance with Federal laws, they differ from other business 
method patents in ways that raise concerns among all of us and 
require attention from the Subcommittee, the PTO, the IRS, the 
Treasury, and associations of tax professionals.
    First, the impact on tax practice. The adverse consequences 
for infringing or inducing the infringement of patents can be 
substantial. If tax patents proliferate, tax professionals who 
are advising clients on ordinary transactions will need to 
begin to conduct patent searches and seek expert advice to 
protect themselves and their clients. I wanted to stress the 
concern for the individual client. Moreover, the proliferation 
of tax strategy patents could affect professional culture. 
Historically, tax lawyers have shared information and ideas 
freely. If patents become an important part of the landscape, 
the atmosphere will become more secretive, less cooperative, 
and the tax system as a whole will suffer.
    Second, improving the patent examination process. As we 
have heard today, this is a new area for patent examiners. To 
ensure that, the quality of patents that are granted, the tax 
community, both public and private, need to assist patent 
examiners in understanding the tax law and in identifying prior 
art in non-patent literature. As you have heard, such efforts 
have begun and they need to be expanded. As we have also heard, 
under the patent law, however, questions of tax policy are not 
for the Patent Office; they are for Treasury and the IRS to 
decide. I suggest that Treasury and the IRS establish a program 
letting everyone know they are going to be reviewing tax 
patents to prevent any abuses. I suggest that some changes be 
made so that IRS and Treasury can see the patent application 
sooner. Again, I want Treasury to be involved as well because 
of the policy concerns raised by the ordinary transactions, and 
not only the extraordinary tax shelter ones.
    Finally, let me turn to a comparison to patent policy and 
tax policy. The fundamental purpose of providing patents, as I 
understand it, is to promote innovation. Again, as we have 
heard, there does not seem to be a lot of need to provide 
economic incentives for the development, promotion, and 
implementation of tax planning strategies. The purposes of our 
tax laws is to raise money for the government to protect the 
public. Granting a government monopoly in the form of a patent 
that could undermine this key Federal function, the collection 
of revenue, and affect compliance with Federal law seems 
peculiar to me, if not contradictory, and raises fundamental 
questions about the appropriateness of such patents. We need 
the policy people to work on that basic question.
    Of course, any decision to limit patent protection 
legislatively should be taken only after much deliberation and 
study. My hope is that this hearing will be the first step in 
careful consideration of any such step. One idea I would throw 
out for your consideration is parallel a provision that we see 
for medical procedures, to consider having a statutory 
protection against infringement or individual taxpayers in 
their individual capacity and as well as small businesses up to 
a certain amount. Thank you.
    [The prepared statement of Ms. Aprill follows:]
    Statement of Ellen Aprill, Associate Dean of Academic Programs, 
  Professor of Law, and John E. Anderson Chair in Tax Law, Loyola Law 
                    School, Los Angeles, California
    Mr. Chairman and members of the Subcommittee, thank you for 
inviting me to speak here today. My name is Ellen Aprill. I am the John 
E. Anderson Professor of Tax Law and Associate Dean for Academic 
Programs at Loyola Law School in Los Angeles; I have had the privilege 
of serving in the Office of Tax Legislative Counsel in the Department 
of the Treasury in the late 1980's and as a law clerk to the Hon. Byron 
R. White, Associate Justice of the United States Supreme Court, in the 
early 1980's. I am currently a member of the Council of Directors of 
the American Bar Association Section of Taxation. While I first became 
aware of the issues related to the patenting of tax strategies through 
my involvement on the ABA Tax Section, I am speaking today in my 
individual capacity as a tax lawyer and tax professor. My comments 
represent my own personal views and are not necessarily those of Loyola 
Law School or any other organization with which I am affiliated.
    Tax strategy patents are considered a subcategory of business 
method patents.\1\ Representatives of the United States Patent and 
Trademark Office (``PTO''), who have been most generous, gracious, and 
helpful in discussing these matters, have explained that the PTO 
classifies tax strategy patents as subclass 36T in Class 705, ``Data 
Processing: Financial, Business Practice, Management, or Cost/Price 
Determination.'' \2\ The PTO website shows that 48 patents have been 
issued in that subclass and 81 such applications are pending.\3\ These 
tax strategy patents have involved many aspects of the tax law, 
including financial products, charitable giving, estate planning, and 
tax-deferred exchanges.
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    \1\ After State Street Bank & Trust v. Signature Financial Group, 
Inc., 149 F.3d 1368 (Fed. Cir. 1998), held that business methods could 
be patentable subject matter, the number of business method patents 
exploded. Criticism of the concept of business method patents and the 
ability of the PTO to consider adequately prior art quickly followed. 
See Jay Dratler, Jr., Does Lord Darcy Yet Live? The Case against 
Software and Business-Method Patents, 43 Santa Clara L. Rev, 823 
(2003); cf. John R. Allison and Emerson H. Tiller, The Business Method 
Patent Myth, 18 Berkley Tech. L.J. 987 (2003).
    \2\ See http://www.uspto.gov/go/classification/uspc705/
sched705.htm.
    \3\ See http://www.uspto.gov/patft/index.html (using search term 
ccl/705/36T in Advanced Search).
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    The topic of patenting tax strategies raises a broad range of 
issues, from the most theoretical to the most practical. Questions of 
theory and policy include whether it is desirable for the patent law to 
authorize tax strategy patents and whether the government monopoly 
granted to a patent holder is fundamentally inconsistent with the 
policies underlying our tax system. Important practical issues include 
the impact on how tax practitioners advise their clients and their 
potential liability for inducing patent infringement. Issues in the 
middle of this spectrum include questions of institutional capacity, 
namely how best to ensure the quality of such patents.
    Like other tax lawyers who have looked at this issue, I have 
concerns both about tax strategy patents that may not meet the patent 
criteria of novelty and non-obviousness and about others that may be 
novel and innovative, but are inconsistent with our tax laws. My 
testimony will address both categories, although I am, in fact, more 
concerned about the former--tax strategy patents that are not in fact 
novel--than the latter, tax strategy patents that are inconsistent with 
the tax law. I will begin with the practical issues raised by tax 
strategy patents, go on to the consideration of how we might improve 
the quality of tax strategy patents, and end by comparing the purposes 
of the tax law with the purposes of the patent law. In brief, I 
conclude that because a tax strategy patent constitutes a government-
granted monopoly that turns on the interpretation of federal law, tax 
strategy patents differ from other business method patents in ways that 
require attention and action from the PTO, the IRS, associations of tax 
professionals, and this Subcommittee.
A. Tax Strategy Patents Could Change and Burden the Practice of Tax Law
    Compliance with the tax laws is enormously expensive and time 
consuming. However diligent and well-intentioned taxpayers and their 
advisers may be, compliance becomes more difficult every year. 
Proliferation of tax strategy patents will add to that difficulty. Tax 
practitioners and taxpayers will have to become more sensitive to the 
possibility that a tax strategy has been patented and adjust behavior 
accordingly.
    The adverse consequences for violating or inducing the violation of 
patents can be substantial. Patent holders generally seek injunctions 
against alleged infringers as well as any inducers of infringement to 
bar them from acting without paying damages equal to lost profits or a 
reasonable royalty. A taxpayer can infringe a patent without intent or 
actual knowledge of the patent; ignorance of an applicable patent is 
not a defense to an infringement action. Moreover, patents have a 
presumption of validity; an alleged infringer defending use of a 
technique must show the invalidity of a patent by clear and convincing 
evidence. Patent infringement litigation is extraordinarily 
expensive.\4\ Tax advisers whose clients face patent infringement suits 
may themselves face malpractice claims.
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    \4\ In 2005, the American Intellectual Property Law Association 
reported that the average patent infringement case as typically costing 
$650,000 for each party when the amount at risk is less than $1 million 
and $2 million for each party when the amount at risk is between $1 
million and $25 million. Am. Intellectual Prop. Law Ass'n, Report of 
the Economic Survey 22 (2005).
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     As a result, taxpayers, their advisers, and others may need to 
begin considering whether to conduct patent searches in connection with 
any tax planning activity, whether to seek expert advice, and depending 
on the results, what course of action to pursue in response to a 
possible patent claim. One prominent practitioner recently told me that 
a holder of a tax strategy patent obtained the list of all the 
attendees at a meeting held to consider the area of tax law involved in 
the patent. The patent holder sent all of the attendees a letter saying 
that their business activities might be infringing his patent. Some of 
those who received the letter in fact paid royalties, as the least 
costly course of action; others went though the burden and expense of 
asking their lawyers to review the patent to ensure that they were not 
guilty of any infringement.
    Note that these burdens on the tax system are created without 
regard to whether the patent involves a tax strategy that the IRS would 
consider abusive. The mere possibility of a relevant tax strategy 
patent creates the compliance burden. Indeed, if the patenting of tax 
strategies were to flourish, I would expect that the additional burdens 
would be greater in connection with tax strategies that may not in fact 
be novel or non-obvious than they will be for abusive tax strategies. 
Abusive planning techniques not only constitute a relatively small 
percentage of all tax planning, but also receive considerable attention 
from the IRS.
    The proliferation of tax strategy patents would also affect 
professional culture. Historically, the dissemination of tax planning 
ideas has been open and widespread. Tax lawyers and accountants 
currently share information and ideas with each other freely. There is 
an astonishing array and number of meetings, conferences, conventions, 
and listservs where tax planning ideas are shared. Although the patent 
system is designed to encourage the dissemination and discussion of 
ideas and information, many tax lawyers are concerned that the spread 
of tax strategy patents will have the opposite effect, namely, that 
those with new ideas or the beginnings of ideas will hesitate to enter 
into discussion with others. If patents become an important part of the 
tax landscape, the atmosphere could become more secretive and less 
cooperative. The tax system as a whole will suffer if, in order to 
protect their patentable intellectual property, tax professionals are 
no longer willing to discuss, evaluate, and criticize each other's 
insights regarding how to comply with the tax system.
B. The Process of Examining Tax Strategy Patents Could be Improved
  1. Lessons from other kinds of business method patents.
    In order to review the validity under the patent law of 
applications for tax strategy patents, patent examiners need expertise 
in software, finance, and tax. They need to understand the conceptual 
basis of a range of areas of tax--financial products, estate and gift 
tax, pension and deferred compensation, to name a few where tax 
strategy patents already exist. Such expertise is difficult to obtain. 
Few tax lawyers have such broad knowledge in such varied aspects of the 
tax law. Most of us work very hard just to keep up in developments and 
changes in the law in our areas of specialization.
    Tax strategy patents, like all other patents, must be both novel 
and non-obvious. For tax strategy patents, as with other patents, 
examiners look to prior art to determine novelty and non-obviousness. 
Identifying prior art in this area is particularly difficult. This is a 
new arena for patent law, and the traditional source for that 
determination, the body of pre-existing patents, is not helpful. In the 
case of tax strategy patents, to decide whether the idea for which the 
application is made is ``new,'' examiners need to know how to go about 
doing specialized tax research in non-patent literature and must do 
such research as quickly and as efficiently as possible, particularly 
given the severe time constraints they face.\5\
---------------------------------------------------------------------------
    \5\ I understand from the PTO that the average amount of time for 
examining a tax strategy patent is 32 hours.
---------------------------------------------------------------------------
    To a large extent, these issues involving the learning curve of the 
PTO for reviewing tax strategy patents parallel the issues it faced 
with software, Internet and other business method patents after State 
Street Bank.  Solutions found there will apply here as well. In the 
years following the State Street Bank case, which established the 
validity of business method patents, many business method patents were 
subject to criticism as being invalid. Soon after State Street Bank, 
the PTO began partnerships and outreach efforts with business method 
customers, including requests for resources showing prior art and 
expanding non-patent literature information and data bases.\6\ My 
understanding is that this collaboration has been successful and helped 
to improve the PTO review process.
---------------------------------------------------------------------------
    \6\ See http://www.uspto.gov/web/menu/busmethp/partner.htm; Allison 
and Tiller, supra note 1, at 1024-25.
---------------------------------------------------------------------------
    The tax community, both public and private, has begun such a 
partnership with the PTO. I understand, for example, that the IRS 
recently provided several days of training on tax law to those in the 
PTO who examine tax strategy patents. Such training should be done 
regularly. Various associations of tax professionals have begun to 
study tax strategy patents and would be eager to help as well. For 
example, there was an overwhelmingly enthusiastic response when I asked 
tax law professors whether they would be interested in setting up a 
session to give PTO examiners training in how to do tax research 
thoroughly and quickly, and I am currently working with the PTO to try 
to arrange such a session. The PTO and the tax community need to 
continue to expand such efforts. In addition, the private tax bar needs 
to educate its members about the existence of tax strategy patents and 
their impact on tax practice. Such efforts are also underway.
    Moreover, I urge various professional organizations to monitor 
individual applications for tax strategy patents and, as described 
below, to submit instances of prior art in connection with such 
applications. I also recommend that these organizations do regular 
reports on the nature of and issues involving tax strategy patents and 
patent applications. These reports could, for example, survey the 
number of such patents, their subject matter, issues involving prior 
art and non-obviousness as well as issues involving consistency with 
the tax laws. Such reports would enable the bar and policymakers to 
understand better the nature and dimension of this issue.
  2. Special considerations applicable to tax strategy patents.
    Two considerations seem to me to differentiate tax strategy patents 
from other business method patents. The first implicates the 
relationship between utility and public policy in the patent law. Under 
the patent law, a patent must be useful for some valid purpose. The 
usefulness of a tax strategy patent is likely to turn, at least in 
part, on interpretation of the tax law. That is, a tax strategy patent 
may achieve its intended purpose only if a particular interpretation of 
the tax law is correct or, at least, permissible. The issuance of the 
patent, however, does not decide the correctness of the legal 
interpretation. Patents are not a government seal of approval, although 
they are often seen--and marketed--as such.
    Under the patent law, ``[t]he threshold of utility is not high: An 
invention is useful'. . . if it is capable of providing some 
identifiable benefit.''\7\ Although Justice Story wrote in the 19th 
century that inventions ``injurious to the well-being, good policy, or 
sound morals of society'' are unpatentable,\8\ modern courts have 
avoided consideration of broad public policy in awarding patents and 
concluded that ``[t]he requirement of utility' in patent law is not a 
directive to the Patent and Trademark Office or the courts to serve as 
arbiters of deceptive trade practices.''\9\ Such policy decisions, the 
courts have declared, are the duty of other agencies or for Congress 
itself.\10\
---------------------------------------------------------------------------
    \7\ Juicy Whip, Inc. v. Orange Bang, Inc., 185 F.3d 1364, 1366 
(Fed. Cir. 1999).
    \8\ Id. (quoting Lowell v. Lewis, 15 F. Case. 1018, 1019 (C.C.D. 
Mass. 1817)).
    \9\ Juicy Whip, Inc., 185 F.3d at 1368.
    \10\ Id.
---------------------------------------------------------------------------
    Thus, the tax policy issues embedded in tax strategy patents are 
for the Treasury and the IRS, not the PTO, to consider. For many years, 
the Treasury and the IRS have been battling a constant flow of tax 
shelters and other questionable tax avoidance schemes. The IRS must be 
constantly vigilant in identifying new schemes and significant 
variations on old ones that require fresh IRS scrutiny to determine 
their validity under the tax laws. Tax patents, although they offer the 
IRS the advantage of public availability, are likely to make this task 
even more difficult. Patents carry with them the appearance of federal 
government approval and the legal presumption of validity. I am 
concerned that taxpayers and others who consider employing tax strategy 
patents will rely on the appearance of government approval and the 
presumption of validity a patent carries and, therefore, fail to 
evaluate carefully whether the underlying tax strategy actually works. 
If such is the case, the impact on federal tax revenue could be 
substantial.
    To address such tax-specific concerns, I urge the Treasury and the 
IRS to consider establishing procedures by which every patent that 
involves tax strategies interpreting the Internal Revenue Code will be 
subject to IRS scrutiny as soon as possible, which currently would mean 
as soon as the patent application or the patent itself is made public 
on the PTO website. This IRS review would be followed, if needed, by a 
notice along the lines of notices now published in connection with 
potentially abusive tax shelter transactions alerting potential 
investors to possible liabilities if they participate in the 
transaction. The very existence of such a program by the IRS should 
discourage the filing of questionable patent applications. Its benefit 
would, I believe, outweigh the costs to the IRS of establishing such a 
review. Such a program is crucial to our learning the full scope and 
potential impact of the phenomenon of tax strategy patents, in 
particular the extent to which these tax strategy patents involve 
abusive tax shelters.
    The other tax-specific issue relates to procedures for publication 
of patent applications. Under the patent regulations, a member of the 
public can submit publications relevant to a pending published patent 
application within two months of its publication date.\11\ Since 2000, 
patent applications have generally been published within 18 months of 
their filing. However, a patent application can be kept confidential if 
the applicant certifies that the same idea will not be the subject of 
an application filed in another country requiring publication within 18 
months after filing. \12\ Since inventors generally desire protection 
of their ideas in other countries, most patent applications are 
currently made public. I understand that the PTO estimates that 
approximately 10-15% of all patent applications and a slightly larger 
percentage of business method patents are kept confidential.\13\
---------------------------------------------------------------------------
    \11\ See 37 C.F.R. 1.99. Members of the public can also file 
protests based on prior art against pending applications,  see 37 
C.F.R.1.291, and cite prior art to the PTO during any period of 
enforcement, see 37 C.F.R. 1.502, as well as request reexamination, see 
35 U.S.C. 302.
    \12\ 35 U.S.C. 122(b)(2)(B).
    \13\ Allison and Tiller, supra note 1, at 1049 n. 192, observe that 
Europe does not recognize business method patents. Nonetheless, 
applicants may wish to permit the PTO to publish business method patent 
applications, including tax strategy patent applications, even if they 
will not seek foreign patent protection, since publishing a patent 
application offers the advantage of triggering liability for patent 
infringement as of the date of such application, rather than the date 
the patent issues. See 35 U.S.C. 154(d).
---------------------------------------------------------------------------
    For those tax strategy patents that are kept confidential, the 
public will be unable to submit to the PTO publications showing prior 
art, and the IRS will not be able to undertake early consideration of 
any policy issues implicated in a particular tax strategy patent. 
Because of the public policy issues involved in tax strategy patents, I 
urge that the PTO establish special publication rules to give the IRS 
access to all tax strategy patent applications.
    The patent statute allows the Director of the PTO to determine 
``special circumstances'' overriding confidentiality.\14\ The patent 
regulations explain that the PTO, ``either sua sponte or on petition, 
may also provide access or copies of all or part of an application if 
necessary to carry out an Act of Congress or if warranted by other 
special circumstances,''\15\ and I would argue that such access is 
necessary to carry out the Internal Revenue Code. If the IRS had access 
to all applications for tax strategy patents early in the examination 
process, it could review the tax policy issues raised and prepare any 
necessary notices regarding the technique as a matter of tax law, as 
described above, before a tax strategy patent is issued and marketed. 
Meaningful and ongoing interagency cooperation in this regard is as 
essential as continuing education in tax developments for PTO examiners 
in order to monitor this emerging and potentially significant 
development. Efforts of this Subcommittee and its staff can help to 
ensure such cooperation.
---------------------------------------------------------------------------
    \14\ 35 U.S.C. 122(a).
    \15\ 37 C.F.R. 1.14(h).
---------------------------------------------------------------------------
    If the PTO does not believe it has regulatory authority to permit 
the IRS with early access to tax strategy patent applications, 
legislation to authorize and direct the PTO to do so may be appropriate 
and desirable.\16\ Other more general legislative changes to our patent 
law already under discussion, such as expanded post-grant opposition 
that would permit submission of ``the common general knowledge of 
practitioners . . . not fully described in the published literature 
likely to be consulted by patent examiners,'' could also be useful in 
ensuring the quality of tax strategy patents.\17\ Proposed legislation 
applicable to all business method patents would be helpful for the 
issues raised by tax strategy patents as well.\18\
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    \16\ Such legislation would help to guard against tax strategy 
patents that are novel in ways inconsistent with the tax laws, but 
would not guard against the grant of patents for which prior art in 
fact exists. The need for public input on prior art might argue for 
making all business method patent applications or at least all tax 
strategy patents applications public in order that members of the 
public could submit instances of prior art during the examination 
process, but such a change to the patent law would, I realize, alter 
substantially the current balance between public access and 
confidentiality struck by the statute.
    \17\ Bronwyn H. Half and Dietmar Harhoff, Post-Grant Reviews in the 
U.S. Patent System--Design Choices and Expected Impact, 19 Berkeley 
Tech. L. J. 1, 13 (2004) (quoting NAt'l Acad. of Sci., A Patent System 
for the 21st Century (Stephen A. Merrill et al. eds, 2004) at 5. See 
Hearing before the Subcommittee on Courts, the Internet, and 
Intellectual Property of the Committee of the Judiciary, House of 
Representatives, on Patent Quality Improvement: Post-Grant Opposition, 
108th Congress, 2nd Session, June 24, 2004, Serial No. 91.
    \18\ See Hearing before the Subcommittee on Courts, the Internet, 
and Intellectual Property of the Committee of the Judiciary, House of 
Representatives, on The Business Method Patent Improvement Act of 2001, 
H.R. 1332, 107th Congress, 1st Session, April 4, 2001, Serial No. 5.
---------------------------------------------------------------------------
C. Patent Policy and Tax Policy Differ in Important Ways
    The fundamental purpose of providing patents, as I understand it, 
is to promote innovation. While no one can dispute this as a generally 
desirable goal, it would be hard to identify a subject less in need of 
further innovation than tax planning. Existing economic incentives 
already provide ample inducement for the development, promotion, and 
implementation of tax planning strategies.
    The primary purpose of our tax laws is to raise money for the 
government and protect the public fisc. Many, perhaps most, tax 
strategy patents have as their fundamental objective the reduction of 
federal tax liabilities. While taxpayer efforts to reduce taxes are, of 
course, permitted and tax advisers spend many hours in such efforts, 
tax strategy patents seem to me different from such efforts because 
patents constitute a government-sanctioned monopoly. If tax strategy 
patents and their use proliferate, encouraged by the marketing 
advantages conferred by patents' government-granted monopoly and 
presumption of validity, many tax lawyers anticipate that there will be 
a corresponding reduction in federal tax revenues, generating revenue 
losses that would have to be made up from other sources. Granting a 
government monopoly in the form of a patent that undermines another key 
federal function--the collection of revenue--seems peculiar, if not 
contradictory, and raises fundamental questions about the 
appropriateness of such patents.
    Of course, decisions to limit patent protection legislatively 
should be taken only after much deliberation and study.\19\ Experience 
with the review programs by professional organizations and the IRS 
suggested above could be enormously helpful in evaluating whether 
legislation prohibiting tax strategy patents should be enacted. The 
need for careful deliberation, however, does not rule out the need to 
consider such an approach. My hope is that this hearing will be the 
first step in such consideration.
---------------------------------------------------------------------------
    \19\ For Congressional limitations in connection with patents on 
particular technologies, such as the provision immunizing physicians, 
hospitals, and other health care providers for infringement liability 
for using patented medical procedures, see Allison and Tiller, supra 
note 1, at 994 n 19. Congress has enacted some special rules for 
business method patents. The First Inventor Defense Act of 1999, Pub. 
L. No. 106-113, 113 Stat. 1536 (codified as amended at 35 U.S.C. 273), 
creates a special patent-infringement defense if an inventor used a 
business method in secret and was later sued by a patent holder who had 
subsequently been granted a patent on the method.
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D. Summary and Conclusion
    Allow me to summarize the various concerns I have identified. The 
proliferation of tax strategy patents would change and burden tax 
practice. Given such an impact, it is important that we act to ensure 
that the examination process be as accurate as possible, particularly 
with respect to identifying prior art. The PTO should be provided the 
necessary resources and training. Professional organizations have a 
role to play, both in helping to train PTO personnel and in identifying 
prior art. Given the significance of such patents to the proper 
administration of the tax law, I have suggested removing any legal 
obstacles to sharing tax strategy patent applications with the IRS, so 
that the IRS can review all such patent applications and take 
appropriate and early remedial action where necessary. Cooperation 
between the IRS and the PTO is essential.
    I ask that this Subcommittee continue to monitor tax strategy 
patents to determine whether they in fact undermine the efficacy of the 
tax laws and increase tax compliance burdens, as we tax lawyers fear, 
or, instead, provide additional incentives for innovation and increase 
openness regarding new ideas, as patent lawyers suggest. Such a 
determination will be vital to further, informed discussion of whether 
legislation should be enacted to prohibit or limit sharply tax strategy 
patents.
    In closing, I suggest that this Subcommittee view tax strategy 
patents not as an instance of the now-established category of business 
method patents, but as an instance of a potential new category--legal 
method patents. Tax strategy patents differ from other business method 
patents in that they depend on the validity of an interpretation of 
law. If patents are permitted for interpretation of the federal tax 
laws, creative minds coupled with economic incentive will seek--and 
obtain--valid patents relating to interpretations of other areas of 
law, including, for example, litigation strategies. I ask the 
Subcommittee whether this is a desirable goal for a country based on 
the rule of law.
    Thank you very much. I would be pleased to answer any questions.

                                 

    Chairman CAMP. Thank you very much. Mr. Belcher.

  STATEMENT OF DENNIS I. BELCHER, PARTNER, MCGUIREWOODS, LLP, 
                       RICHMOND, VIRGINIA

    Mr. BELCHER. Mr. Chairman, Members of the Subcommittee, I 
want to thank you for bringing this issue to the attention of 
the public. I come to you as a practitioner with 30 years of 
experience. I also come to you as an officer in the American 
College of Trust and Estate Counsel, which is an organization 
of approximately 2,600 lawyers who specialize in estate 
planning. We believe that patenting of tax reduction 
techniques, particularly estate planning techniques or transfer 
tax reduction techniques, is creating a problem for 
practitioners but more importantly a problem for taxpayers. We 
also believe that if this is not addressed early, it will no 
longer just affect a small group of people, it will affect a 
larger group of the taxpayers. As we know, right now there are 
less than 2 percent of the population of the country subject to 
the transfer tax rules. So, when we see a transfer tax 
technique being patented, it is serious to our organization and 
it is serious to our clients but that is less than 2 percent of 
the population. What we are worried about is if we do not stop 
this patenting of tax reduction techniques, it is going to 
spread and affect a larger group of people.
    When we first encountered this was in 2003 when a patent 
was issued that was called a stock option grantor retained 
annuity trust. It is the SOGRAT patent. When we first discussed 
it in 2004, everyone that I talked to was shocked that we had 
to worry about patenting estate planning techniques, 
particularly this one because Congress in 1994 created a 
grantor--created the principles by which you could use a 
grantor retained annuity trust. Then in 1999, a patent was 
filed that was granted and issued in 2003 that took a grantor 
retained annuity trust and coupled it with a non-qualified 
stock option. Practitioners that I deal with have been using 
grantor retained annuities trusts for years, and using them 
with a variety of techniques. For example, in my paper I point 
out that we used agrantor retained annuity trust (GRAT) with a 
thoroughbred race horse. What you want to use a GRAT with is an 
asset that will appreciate significantly in value, such as a 
non-qualified stock option. So, we were surprised when we heard 
about the patenting of the technique. Similar to what Ms. Tubbs 
Jones' colleagues told her when she asked them were they 
worried about it, no, they weren't worried about it. I submit 
that they should be worried about it because in January of this 
year, there was a lawsuit filed against an individual who had 
placed non-qualified stock options into a GRAT, had made a 
filing with the Securities and Exchange Commission (SEC) 
because he was a corporate insider, and then that showed up and 
then he has been sued. If you read the complaint, they leave 
open who else will be sued. You would think that the 
representatives who helped put this together will also get 
sued.
    Now, as Mr. Toupin pointed out, lawyers have ethical 
obligations to point out to their clients the techniques that 
will be used and the drawbacks to the techniques. At a recent 
meeting of the American College of Trust and Estate Counsel, we 
took a poll, if you were advising a client to put non-qualified 
stock options into a grantor retained annuity trust, would you 
be obligated to point out the existence of the V patent? Yes, 
you would. What are the choices that the client will have? 
Ignore the patent and get sued; don't do a technique that has 
been governmentally authorized to minimize legally your 
transfer taxes; or pay a license fee.
    For the reasons that are set forth in the paper, we believe 
that transfer tax reduction techniques, as well as all tax 
reduction techniques, should not be allowed to be patented. It 
should be against public policy that when Congress imposes 
taxes, I have no choice but to pay my taxes. I should be 
allowed to use the principles that Congress has enacted to 
allow me to lawfully reduce my taxes. If someone has a patent 
on it because that person was the first person to get to the 
Patent Office, then I have got to pay a toll charge, a tariff, 
to use it or I just ignore it at my peril. Taxes are different 
than businesses. If there is a patent on a mousetrap, as the 
Chairman pointed out, I can decide to not use the mousetrap, I 
can decided to try to do a better mousetrap, or I could get a 
cat to get the mice, or I can just ignore the mice. With taxes, 
I cannot do that. So, for the reasons that are set forth in our 
testimony, we believe that patents on tax reduction techniques 
should not be allowed. Thank you.
    [The prepared statement of Mr. Belcher follows:]
 Statement of Dennis I. Belcher, Partner, McGuireWoods LLP, Richmond, 
                                Virginia
    Chairman Camp and distinguished members of the Subcommittee, I am 
Dennis I. Belcher, a partner in the Richmond, Virginia office of the 
law firm McGuireWoods LLP. I have been in the private practice of law 
for more than thirty years and have spent my career representing 
clients in estate planning. In my law practice, I advise clients on how 
to minimize federal and state estate, gift and generation-skipping 
taxes (``transfer taxes'') using estate planning techniques so as to 
maximize the assets passing to family members and other beneficiaries.
    I am currently an officer in the American College of Trust and 
Estate Counsel (``ACTEC''). ACTEC is a non-profit professional 
association comprised of approximately 2,600 lawyers who are selected 
on the basis of professional reputation and ability in the field of 
trusts and estates and having made substantial contributions to those 
fields through lecturing, writing, teaching, and bar leadership 
activities. I am the past Chairman of the American Bar Association's 
Real Property, Probate and Trust Law Section, which has approximately 
30,000 members who are interested in the areas of probate, trust law, 
and real estate law. I am also a member of a Task Force, called the 
Patenting Estate Planning Techniques Task Force (the ``Task Force''), 
created by ACTEC in 2005.
    I am testifying today on my own behalf and on behalf of ACTEC and 
the Task Force. My testimony represents my own views, the views of 
ACTEC and the Task Force, but not those of my firm, any of its clients, 
or the American Bar Association.
Summary
    From my experience and discussions with other estate planning 
professionals, I believe that:

      Patents for tax reduction strategies in the area of 
transfer taxation are creating problems for many taxpayers;
      If patents for transfer tax reduction strategies are not 
prohibited, this type of patent will in all likelihood expand and 
create problems for more taxpayers; and
      Patents for tax reduction strategies should be prohibited 
either by the U.S. Patent and Trademark Office or by legislation.
Background
    Until 2003, few estate planning advisors\1\ gave consideration to 
patents when advising clients about estate planning. That view changed 
in 2003 when an individual was awarded a patent for an estate planning 
technique that the patent holder called a ``SOGRAT''.\2\ (Although the 
SOGRAT patent was awarded in 2003, anecdotal evidence suggests there 
are still a significant number of estate planning advisors who are not 
aware that patents can be awarded for transfer tax reduction 
techniques.) According to the patent, a SOGRAT involves a grantor 
retained annuity trust funded with nonqualified stock options. (A 
grantor retained annuity trust, referred to as a GRAT, is an estate 
planning technique authorized by Congress, the Treasury Department, and 
the Internal Revenue Service.\3\) 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 used in connection with a specific 
asset, the purpose of which is to allow taxpayers to minimize their 
federal estate and gift tax liability, particularly a technique 
authorized under the Regulations issued by the Treasury Department and 
approved in many Internal Revenue Service rulings.
---------------------------------------------------------------------------
    \1\ As used in this statement, estate planning advisors and 
professionals refers to lawyers, accountants, financial planners, and 
insurance professionals.
    \2\ Patent No. 6,567,790, Establishing and Managing Grantor 
Retained Annuity Trusts Funded by Nonqualified Stock Options.
    \3\ Internal Revenue Code section 2702 and Treasury Regulation 
section 25.2702-2(a).
---------------------------------------------------------------------------
    In response to concerns about the impact of using patents to 
restrict the availability of commonly used estate planning techniques, 
such as GRATs, experienced estate planning lawyers discussed the 
ramifications of such patents at a meeting of ACTEC's Estate and Gift 
Tax Committee in October 2004. I had the privilege of chairing that 
meeting. Because of the serious nature of the concerns expressed at 
this meeting, ACTEC created the Task Force to study this issue\4\ Once 
the existence of the Task Force became generally known to the estate 
planning community, other professional organizations joined the Task 
Force. Organizations with members on the Task Force now include the 
American Bar Association's Real Property, Probate and Trust Law 
Section, the American Bankers Association, and the AICPA.\5\ Members of 
the Task Force agree about the seriousness to taxpayers of the issues 
presented by the patenting of estate planning techniques. Although the 
Task Force has not completed its study or issued findings or a formal 
report as of this date, the Task Force has authorized me to testify on 
its behalf. Because ACTEC agrees with the Task Force's concern, on July 
8, 2006, ACTEC also authorized me to speak on behalf of ACTEC.
---------------------------------------------------------------------------
    \4\ In addition to me, members of the Task Force from ACTEC are 
Louis S. Harrison and William C. Weinsheimer (Chair of the Task Force).
    \5\ The representatives from the American Bar Association's Real 
Property, Probate and Trust Law Section include Steve R. Akers, 
Christine L. Albright, Alan F. Rothschild, Jr. and Michael D. Whitty. 
The representatives from the American Bankers Association include 
Kathleen C. Brown, Julianne M. Hallenbeck, and Joseph W. Mooney. The 
representatives from the AICPA are Evelyn M. Capassakis, Justin 
Ransome, and Steven A. Thorne. Ellen P. Aprill is a liaison to the Task 
Force from the American Bar Association's Section of Taxation.
---------------------------------------------------------------------------
    The purposes of my testimony are to (1) inform Congress that a 
patent of one transfer tax reduction technique, the SOGRAT patent, is 
presenting significant problems to many taxpayers, and (2) recommend 
that either the U.S. Patent and Trademark Office or Congress prohibit 
the patenting of tax reduction strategies before the patenting of this 
type of strategy becomes more widespread and affects more taxpayers.\6\
---------------------------------------------------------------------------
    \6\ The U.S. Patent and Trademark Office classifies patents dealing 
with tax reduction techniques as subclass 36T in Class 705. According 
to the Patent Office's website, 48 patents have been issued in that 
subclass and there are 81 patent applications are pending.
---------------------------------------------------------------------------
The SOGRAT Patent
    In some instances, Congress, the Internal Revenue Service, and the 
Treasury Department have authorized tax reduction techniques which 
taxpayers may take advantage of to reduce their federal tax liability. 
Examples of government authorized tax reduction techniques in the 
estate planning area include the federal estate and gift tax marital 
and charitable deduction, the gift tax annual exclusion, charitable 
remainder and lead trusts, and GRATs. A GRAT is an irrevocable trust in 
which the grantor retains an annuity for a fixed term (usually two or 
more years) and at the end of the term the remaining trust assets pass 
to beneficiaries selected by the grantor (usually the grantor's 
family). The grantor transfers assets to the GRAT that the grantor 
believes will appreciate significantly over the term of the trust. 
Under Internal Revenue Code section 2702, the Regulations issued by the 
Treasury Department under section 2702, and rulings issued by the 
Internal Revenue Service, the grantor is able to deduct for gift tax 
purposes the value of the grantor's retained annuity, thereby reducing 
the amount of the gift to the grantor's family.\7\ Because of the 
taxpayer's ability to transfer appreciation on assets in the GRAT to 
family members at a reduced gift tax cost, the GRAT is a frequently 
used estate planning technique.
---------------------------------------------------------------------------
    \7\ An the article by Robert L. Moshman, ``Good GRATs and Great 
GRATs--And An Interview With Robert C. Slane,'' The Estate Analyst, 
April, 2006, the author stated: ``Despite cracking down on estate-
freezing techniques, Chapter 14 provided a beautiful safe harbor. The 
grantor retained annuity trust, better known as GRAT, is explicitly 
authorized under section 2702.''
---------------------------------------------------------------------------
    On May 20, 2003, the U.S. Patent and Trademark Office awarded Mr. 
Robert C. Slane of Wealth Transfer Group, L.L.C. a patent for a GRAT 
funded with nonqualified stock options, which Mr. Slane calls a SOGRAT 
(a stock option granter retained annuity trust).\8\ The first claim in 
the SOGRAT patent is:
---------------------------------------------------------------------------
    \8\ Patent No. US 6,567,790.
---------------------------------------------------------------------------
    A method for minimizing transfer tax liability of a grantor for the 
transfer of the value of nonqualified stock options to a family member 
grantee, the stock options having a stated exercise price and a stated 
period of exercise, the method performed at least in part within a 
signal processing device and comprising:
    Establishing a Grantor Retained Annuity Trust (GRAT);
    Funding said GRAT with assets comprising stock options,
    The stock options have a determined value at the time the transfer 
is made;
    Setting a term for said GRAT and a schedule and amount of annuity 
payments to be made from said GRAT; and
    Performing a valuation of the stock options as each annuity payment 
is made and determining the number of stock options to include in the 
annuity payment.
Problems Created by the SOGRAT Patent
    The existence of the SOGRAT patent is preventing taxpayers from 
using a government authorized estate and gift tax reduction technique, 
thereby presenting problems to taxpayers in planning their affairs. 
During one of the Task Force discussions, one Task Force member 
reported that the holder of an estate planning patent recently 
contacted an estate planning advisor employed by a financial 
institution and informed the advisor that the patent holder was the 
owner of the estate planning technique suggested by the advisor in a 
newsletter to clients. The advisor sought legal guidance on the proper 
course of action. Notwithstanding that the advisor's lawyer believed 
the patent may be invalid, the lawyer recommended that the advisor not 
risk using the patented technique without permission of the patent 
holder. The lawyer gave this advice presumably because of the high cost 
of defending a patent infringement law suit or prosecuting a suit to 
invalidate the patent. After discussions, the advisor agreed not to 
suggest the use of the legally authorized estate planning technique in 
connection with a particular type of asset without informing clients 
and their lawyers of the existence of the patent so that the client and 
lawyer would be responsible to make their own judgments about the 
validity of the patent and the degree to which it needed to be honored.
    There is a lawsuit pending against a taxpayer alleging the 
infringement of the SOGRAT patent. On January 6, 2006, the SOGRAT 
patent holder filed suit in the Connecticut United States Federal 
District Court for infringement of the SOGRAT patent. The defendant in 
the lawsuit is Dr. John W. Rowe, the Executive Chairman of Aetna, Inc. 
The lawsuit is in the discovery stage and is anticipated to go to trial 
in 2007. Because I understand that the lawsuit is being prosecuted 
vigorously, the lawsuit cannot be considered a nuisance lawsuit. When 
this lawsuit was discussed at ACTEC's Estate and Gift Tax Committee on 
July 8, 2006, the vast majority of lawyers present (more than 100 
experienced estate planning lawyers) indicated that they would not 
recommend to any client the use of a GRAT funded with nonqualified 
stock options without disclosing the existence of the SOGRAT patent and 
the pending lawsuit. In addition, these lawyers indicated that they 
would be reluctant to allow a client to use this technique without the 
permission of the patent holder.
    Because I am not trained in intellectual property law, I cannot 
comment on the validity or non-validity of the SOGRAT patent. But, I am 
qualified to address the taxpayer problems created by patenting estate 
tax reduction techniques because of my thirty years' experience in 
representing taxpayers. Like most experienced practitioners, I am 
troubled by the SOGRAT patent for several reasons. First, an individual 
has been allowed to privatize a tax reduction technique authorized by 
the United States government. Second, because GRATs can be and are used 
for any type of asset\9\, there is nothing unique about coupling a GRAT 
with nonqualified stock options. Because nonqualified stock options 
have desirable features affecting the valuation of the options for 
transfer tax purposes, the use of nonqualified stock options in a GRAT 
may be considered rather obvious. In summary, the SOGRAT patent is 
creating problems with taxpayers because of the chilling effect on the 
use of this authorized technique.
---------------------------------------------------------------------------
    \9\ Estate planning lawyers in my law firm have used GRATs for many 
different types of assets, including real estate, marketable 
securities, stock in private businesses, and thoroughbred race horses.
---------------------------------------------------------------------------
Patenting of Transfer Tax Reduction Techniques Should Be Prohibited
    Because patents of transfer tax reduction techniques present 
problems to many taxpayers, the U.S. Patent and Trademark Office or 
Congress should prohibit these types of patents for the following 
reasons:
    1.  It should be against public policy for a private individual to 
patent a technique used to reduce a taxpayer's tax burden;
    2.  Patenting estate planning techniques unfairly increases a 
taxpayer's costs or the federal estate and gift taxes payable by the 
taxpayer if patented techniques are not used; and
    3.  Because a patent on a tax planning technique can add 
credibility to the technique, patents on objectionable or aggressive 
tax planning techniques can hurt compliance with the federal tax laws.
    It is not the function of the Internal Revenue Service or the 
Treasury Department to curtail patents of tax planning techniques. 
Because of the nature of transfer tax reduction techniques, it may not 
be possible for the U.S. Patent and Trademark Office to make an 
adequate review of these techniques. Accordingly, a legislative 
solution may be the appropriate response to protect taxpayers and to 
curtail the patenting of all tax planning techniques before these 
patents become more widespread.
1. It should be against public policy for a private individual to 
        patent a technique used to reduce a taxpayer's tax burden.
    A patent of a tax reduction technique is unlike other business 
method patents because it relates to taxes. If there is a business 
method patent in a particular area of business, a citizen has the 
choice to either pay for the right to use the technique, to engage in 
that business activity in a different way, or not to engage in that 
business activity at all. A taxpayer who complies with the tax laws 
does not have that choice--the taxpayer must pay his or her tax burden. 
In the familiar of words of Judge Learned Hand, however, ``Any 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.''\10\ It 
should be against public policy to allow a patent of a tax reduction 
technique because the patent prevents taxpayers from exercising their 
right to minimize their taxes within the limits of the law, and 
avoiding the activity in question, the payment of taxes, is not an 
option.
---------------------------------------------------------------------------
    \10\ Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
---------------------------------------------------------------------------
    In addition, patenting tax reduction techniques allows private 
individuals to leverage the federal tax system thereby imposing an 
additional cost on taxpayers. As the tax rates vary, the value of a tax 
reduction technique patent will vary accordingly. Because a taxpayer 
pays the patent holder for the right to use a tax reduction technique 
to reduce the taxpayer's tax burden, the patent holder is in effect 
imposing a tax in the form of a toll charge on the use of the 
technique.
    There are a small but growing number of patents in the tax 
reduction area. If patenting tax reduction techniques is not stopped, 
the practice will spread to other areas of the tax law and affect more 
taxpayers. Although GRATs are used only by those taxpayers subject to 
the federal estate tax, there may be a rush to the U.S. Patent and 
Trademark Office when Congress passes the next tax bill with a new tax 
minimization provision. The first individual to file a patent should 
not be rewarded at the expense of those taxpayers trying legitimately 
to minimize their tax burdens. Consider the result if an individual had 
patented the transfer of appreciated securities to a charitable 
remainder trust, a technique similar in many ways to a GRAT, when 
Congress first allowed these types of trusts in 1969.\11\ Because a 
patent holder cannot be compelled to grant a license for a patent, a 
patent holder could have precluded any taxpayer from using a charitable 
remainder trust, which was a congressionally authorized tax reduction 
technique, to the detriment of taxpayers and charity. Clearly, this is 
not in the best interest of the public and should be against public 
policy.
---------------------------------------------------------------------------
    \11\ Internal Revenue Code section 664.
---------------------------------------------------------------------------
    Patents on tax reduction techniques are different from other 
business method patents. Because patents of tax reduction techniques 
prevent taxpayers from minimizing a burden imposed by law and affecting 
all taxpayers, it should be against public policy to allow patenting of 
tax reduction techniques. Thus, either the U.S. Patent and Trademark 
Office or Congress should prohibit patents on tax reduction techniques.
2. Patenting estate planning techniques unfairly increases a taxpayer's 
        costs and federal estate and gift taxes.
    Because taxpayers will have to pay a fee to use an estate planning 
technique authorized by law, many taxpayers will be forced to pay more 
in an effort legally to minimize their federal taxes. Before an estate 
planning advisor recommends that a client use a patented estate 
planning technique, the advisor has an obligation to point out the 
options and risks to the client of using a patented technique. When a 
client is considering the use of a patented estate planning technique, 
the client has these options: (a) file a lawsuit to invalidate the 
patent; (b) ignore the existence of the patent in the hopes that the 
patent holder will not discover its use; or (c) pay a licensing fee to 
the patent holder for the use of the technique. Because filing a 
lawsuit to invalidate the patent is expensive, filing a lawsuit is not 
a viable option.\12\ If the client ignores the existence of the patent 
in the hopes that the patent holder will not discover its use, the 
risks to the client can be considerable and can include paying treble 
damages to the patent holder.
---------------------------------------------------------------------------
    \12\ According to one source, a suit to invalidate a patent may 
cost in excess of $1,000,000. See, ``Patenting Tax Strategies,'' Trusts 
and Estates Magazine, March 2004, page 44.
---------------------------------------------------------------------------
    Patenting estate planning techniques unfairly increases the federal 
estate and gift tax liability of taxpayers. Some taxpayers will refuse 
to pay tribute to the holder of an estate planning patent. These 
taxpayers will be forced either to pay more than their fair share of 
federal estate and gift taxes or risk being sued for the unauthorized 
use of a patented technique. If the taxpayer refuses to pay tribute and 
does not want to take the risk of unauthorized use of the estate 
planning technique, the taxpayer will be forced to forgo the use of an 
estate planning technique authorized by law. Because the taxpayer will 
not be allowed to use this technique, the taxpayer will pay more than 
the taxpayer's fair share of federal estate and gift taxes.
    Under the ABA Model Rules of Professional Conduct (the ``Model 
Rules''), a lawyer has a duty to explain issues that are likely to 
result in adverse legal consequences to the client.\13\ Thus, an estate 
planning lawyer may have an ethical duty to learn about the existence 
of patents affecting estate planning and inform clients of existing 
patents on estate planning techniques sought to be used by the lawyer's 
clients.\14\ Under the Model Rules, lawyers must give candid and 
competent advice using any ``legal knowledge, skill, thoroughness and 
preparation [which is] reasonably necessary.''\15\ A lawyer must 
explain a client's options to ``the extent reasonably necessary to 
permit the client to make an informed decision'' on a course of 
action.\16\ Because of the possibility of adverse legal consequences to 
a client from the unauthorized use of a patented estate planning 
technique, a lawyer may have a duty to (i) determine the existence of 
any patent on an estate planning technique under consideration, (ii) 
inform the client of the existence of all patents, and (iii) advise the 
client of the possible adverse consequences of using the technique 
without the consent of the patent holder.
---------------------------------------------------------------------------
    \13\ Model Rules R. 1.4(b), 2.1 cmt.
    \14\ See Model Rules of Prof'l Conduct R. 1.1, 1.4, 2.1 (1983).
    \15\ Model Rules R. 1.1, 2.1
    \16\ Model Rules R. 1.4.
---------------------------------------------------------------------------
    By allowing a patent on a transfer tax reduction technique, a 
taxpayer will either have to obtain the permission of the patent holder 
to use the technique (presumably for the payment of a fee) or have to 
forgo the use of the technique. Thus, patented transfer tax reduction 
techniques impose an additional tariff for those taxpayers who want to 
use legally authorized estate planning techniques to reduce their 
federal estate and gift taxes.
Because patents on aggressive tax planning techniques add credibility 
        to an objectionable or aggressive technique, patents on tax 
        planning techniques can hurt compliance with the federal tax 
        laws.
    Placing what many taxpayers may interpret as a seal of approval 
from the U. S. Patent and Trademark Office on an aggressive tax 
planning technique could mislead taxpayers as to the legality of the 
tax planning technique. Some taxpayers will believe that because a 
United States government agency has approved the technique, the 
technique must be a lawful and appropriate technique. Because a patent 
on an aggressive tax planning technique can add undeserved credibility 
to that technique, patents on tax planning techniques can hurt the 
enforcement of the federal tax laws.
Possible Solutions
    ACTEC and the Task Force have struggled with the appropriate 
solution to protect taxpayers from patents on transfer tax reduction 
techniques, particularly techniques authorized by law. Because ACTEC 
and the Task Force are not experts in intellectual property, we are 
reluctant to make recommendations. But, we will offer some 
observations. We see the following options to address this problem: (a) 
the Internal Revenue Service could curtail the use of tax planning 
technique patents; (b) the U.S. Patent and Trademark Office could 
curtail the use of tax planning technique patents; and (c) Congress 
could provide a legislative solution.
    Because it is not the function of the Internal Revenue Service to 
curtail patents of transfer tax reduction techniques, we do not believe 
that enforcement by the Internal Revenue Service is the appropriate 
solution. ACTEC and the Task Force are concerned about relying on the 
U.S. Patent and Trademark Office to curtail or eliminate the patenting 
of tax reduction techniques, particularly transfer tax reduction 
techniques. If a patent examiner is not familiar with estate planning 
techniques, it will be difficult for the examiner to determine whether 
a patent should be awarded for a particular tax technique for several 
reasons. Presumably, patent examiners are generally not familiar with 
researching tax law and are not experienced in making the judgments 
that compliance with tax law requires.\17\ Many lawyers, accountants, 
and financial planners give estate planning advice and do not publish 
their techniques but discuss these techniques in numerous meetings of 
professionals. For example, ACTEC's Estate and Gift Tax Committee meets 
three times annually, discusses many estate planning techniques, but 
only produces summary minutes of the meetings. Other estate planning 
professional organizations operate similarly. It is possible that an 
estate planning technique will be discussed and will have widespread 
use, but a patent examiner would not have knowledge of the prior use of 
the technique and mistakenly award a patent for the technique. Although 
an individual could challenge the patent on the basis of prior work, 
one individual would not have a sufficient interest in the technique to 
invest legal fees to challenge the validity of the patent.
---------------------------------------------------------------------------
    \17\ ACTEC has volunteered to work with the U.S. Patent and 
Trademark Office to educate patent examiners on how to research estate 
planning techniques so as to determine the existence of prior work.
---------------------------------------------------------------------------
    If the U.S. Patent and Trademark Office cannot prevent patents of 
tax reduction techniques, we hope that Congress will find that 
patenting tax reduction techniques is against public policy and pass 
legislation preventing these types of patents.
Conclusion
    ACTEC and the Task Force on Patenting Estate Planning Techniques 
believe that patenting transfer tax reduction techniques is creating 
problems for many taxpayers. If patents for tax reduction strategies 
are not prohibited, this type of patent will in all likelihood expand 
and create problems for more taxpayers. We ask that patents for 
transfer tax reduction be prohibited either by the U.S. Patent and 
Trademark Office or by legislation.
    In closing, I thank the Subcommittee and its staff for allowing me 
to give you my views on this topic.

                                 
    Chairman CAMP. Thank you and thank you all for your 
testimony. I think you have all raised many good points. My 
question is, and I guess all of you can chime in, Ms. Aprill, 
you stopped short of saying that we should not allow tax 
strategy patents. What do you think about just not allowing tax 
strategy patents?
    Ms. APRILL. We would have to draw some hard lines. We still 
want the kind of patents that help you file your tax return. We 
have drawn other hard lines before, and I think it is something 
we need to consider while making to make sure it doesn't have 
untoward effects. I certainly wouldn't rule it out. This 
reminds me of the issues we have with the business purpose test 
in the tax law. We want taxpayers to have purposes other than 
tax to do certain transactions, not simply to tax savings but 
their financial savings as well. We would have to decide how we 
could draw the line here. If we could draw a good line, I would 
be very happy. I just wouldn't want to be confident that we 
have drawn a good line.
    Chairman CAMP. Mr. Belcher, you mentioned the case of the 
lawsuit, yes, I have some trouble with the notice aspect. I 
realize the patent is a public filing but, as you go to the 
website, and you read the one sentence summary, it doesn't 
necessarily give you any indication of what the patent might 
really be about. Is there a best way to put taxpayers and tax 
preparers and advisers on notice that a particular tax method 
is restricted through the patent process?
    Mr. BELCHER. Well, Mr. Chairman, you raise a very good 
point because I submit until this hearing that very few 
practitioners worried about patents on tax techniques. So, I 
think that the notice is going to be well-received in the 
public and they are going to be worried about it. Also, I worry 
as my obligation to my client is to advise a client on 
techniques. Every morning, I receive a publication from the IRS 
where I see the latest rulings and the latest announcement from 
the Internal Revenue Service. So, when I have meetings that 
day, I am up to date on what is going on. Will I be required to 
subscribe to a service or something or go on the Patent Office 
website and look at every technique, and not just look at the 
one blurb summary, which is very difficult to determine what it 
is, but to actually have someone go in and look at the file. 
So, I think it is going to be a serious problem. You have got 
several approaches to that. You could have a government agency 
issue a notice of what a tax technique is, but I am not sure 
that that is a workable solution. So, I see notice as a real 
problem for taxpayers.
    Chairman CAMP. I think I understand your testimony, you 
draw a distinction as well between a process of maybe a 
computer program versus the actual sort of legal or tax 
strategy of compliance?
    Mr. BELCHER. This Subcommittee and the House Committee on 
Ways and Means draw lines all the time, and they don't make 
everybody happy where they draw the lines but they do draw the 
lines. I think, I could see a good logic to drawing a line 
between a method to compute taxes or to manage taxes versus a 
technique to reduce taxes. I find it personally offensive that 
Congress gives us principles that allow me to encourage my 
clients to reduce their taxes and then I have to pay somebody 
or a client has to pay somebody, the patent holder, to take 
advantage of the technique that Congress has provided.
    Chairman CAMP. Yes, that is the point I made to the other 
panel, which was it is obligatory to comply with our tax law 
and then you have to pay a royalty to do that in certain ways. 
I have a problem with that whole thing which I think you are 
sort of underscoring as well. All right, thank you. The Ranking 
Member, Ms. Tubbs Jones from Ohio, may inquire.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. I missed your 
testimony, but I have been reading last evening and a couple of 
days before. My question to Mr. Belcher is--Mr. Belcher, how 
many clients have you had that you have been required to pay a 
royalty, if you are permitted to tell me without disclosing any 
confidential information, for use of a patented tax whatever 
the heck it is?
    Mr. BELCHER. None but, as I pointed out earlier, what I 
worry about are two aspects of this. First, there is a lawsuit 
pending against an individual who used a grantor retained 
annuity trust, which was authorized by principles announced by 
Congress and by the Internal Revenue Service through numerous 
rulings, and if you read that complaint, it is against the 
person, the taxpayer who created the trust. If you read that 
complaint, it states there may be others who participated in 
that. So, as a lawyer, I worry about my liability for doing 
that. Now, my choices are----
    Ms. TUBBS JONES. Okay, as a lawyer and judge--I don't have 
a lot of time so make your answer short.
    Mr. BELCHER. Yes, ma'am.
    Ms. TUBBS JONES. Go ahead, finish.
    Mr. BELCHER. What I worry about is the spread of the 
patenting. It is just affecting a limited number of people now. 
In the future, it could affect a lot more.
    Ms. TUBBS JONES. Good lawyers are able to argue the other 
person's side. Tell me if you are stepping in the shoes of the 
lawyers who was helping his client obtain a patent, what would 
your argument be to me in favor of these?
    Mr. BELCHER. That I have been very fortunate to take a 
advantage of an area where the law is unclear and able to 
extract fees.
    Ms. TUBBS JONES. Sure, Mr. Gruner, yes, sure?
    Mr. GRUNER. I might answer that question. I think the case 
here for individual clients or for the system as a whole is 
that the availability of these patentsincents the very best 
people who are capable of non-obvious insights on how to extend 
tax planning methods, incents those people to pay attention to 
these problems and to invest substantial time in the 
development of new methods and then to disclose the results, 
none of which may happen in the absence of these patent 
incentives, that even if you get the best people to work on 
them, they are going to devote that method to the clients of 
one firm, which is not then going to be available to the public 
generally.
    Ms. TUBBS JONES. So, your argument is that by patenting it, 
we at least open it to the rest of the world?
    Mr. GRUNER. We bring forward new techniques that might not 
occur at all and then as to those incremental techniques, we 
bring them to the world. So, it is two things.
    Ms. TUBBS JONES. Can I limit the royalties?
    Mr. GRUNER. Well, the royalty is only as much as that 
method advantages you. You are not going to pay for a method 
that only advantages you a small amount over other alternative 
methods.
    Ms. TUBBS JONES. So, I get to use it, I get to take a look 
at it, apply it to my cost or my tax situation, and then if I 
don't use it, I don't pay a royalty?
    Mr. GRUNER. Exactly, you only pay a royalty up to the 
amount that it looks good to you.
    Ms. TUBBS JONES. How much is a general royalty, to your 
knowledge? Anybody know what the royalty is?
    Mr. GRUNER. I am not aware of how these particular patents 
are being licensed but it would be limited by how much the 
taxpayer perceived the method as being advantageous.
    Ms. TUBBS JONES. Ms. Aprill?
    Ms. APRILL. Which question would you like me to answer?
    Ms. TUBBS JONES. Any of them or just tell me whatever you 
want to say.
    Ms. APRILL. My concern is that we have a lot of these being 
granted that I think are not obvious and not actually novel. My 
understanding of other areas of business method patents is that 
the area where the PTO granted them got narrowed in part 
through legislation, very, very expensive legislation carried 
on by very, very big corporations. Given the fact that we are 
talking about individuals and estate planning at the moment, we 
might not have the same incentives in the system to get the law 
developed in the way we need to in order to make sure that we 
only encourage innovation and not discourage compliance.
    Ms. TUBBS JONES. Well, then you are suggesting that the 
Congress, that we need to go back and re-think or re-look at 
that legislation that allowed these things to develop?
    Ms. APRILL. Others have tried but I would urge you to do it 
again.
    Ms. TUBBS JONES. Okay. Let me say for the record, as I said 
earlier, I have been talking to my tax friends, tax lawyer 
friends, and patent lawyer friends, and they were saying, 
``Huh?'' So, I faxed this information out all over the world to 
my colleagues and friends, and I am interested to see what they 
have to say when it comes back. Personally, I think we could 
spend our time better on tax policy other than this because 
there are a lot of other issues that would benefit the greater 
good than this particular policy, and I have some real 
concerns. Thank you.
    Chairman CAMP. Thank you very much. Mr. Foley may inquire.
    Mr. FOLEY. I share that same concern, and I have got 
friends who have great ideas and they are waiting for patents 
to take place to protect their ingenuity. The Patent Office is 
working on one I think is an abstract area of law, which 
troubles me. I would rather them work on the technology and 
innovation side and put their people protecting patent rights 
rather than in this ambiguous area. I am really troubled 
because, I think as Mr. Belcher said, if I read the Wall Street 
Journal today and see some tax policy, think of my client, I am 
just reading part of it, I don't have a chance to do the whole 
article, so I don't catch the part that says this is a patented 
protected tax strategy. I just merely see tax protection, blah, 
blah. So, I go to the--wow, that applies to my case, that is 
interesting. Let me run the numbers. I go do my work. I think I 
can save my clients quite a bit. That is a very creative and it 
is in the Code, it is allowable. It has been tested. I am going 
to recommend it. So, the question to you, 6 months later, he 
gets a notice to appear or a lawsuit that he has used 
somebody's technique.
    Now that seems troubling to me, that what is out there in 
the common universe--think about it, Google is now a verb, to 
Google is to search. Ultimately at the end of the day, it is 
still a search engine. So, if America Online (AOL) has a search 
engine or any other computer has a search engine, that no 
longer should be rendered un-useable because Google has created 
a brand name. Everybody still should be able to search because 
they have created a proprietary software or system gives them 
the right to perfect that system and market that system, and 
they have done a very good job of it. That shouldn't prohibit 
anyone else downstream from saying, ``I want to create a search 
engine too.
    I am going to call it something else but it will function 
all the same. It may not be as successful, but I am going to do 
it.'' So, I really do have trouble with establishing patents on 
things that would normally be as a result of sheer reading the 
tax code and saying if I maintain this schedule of assets based 
on this date and hold assets until that date. I am either 
eligible for capital gains or treatment, short- or long-term, 
that is not too complicated. Some of these other areas you talk 
about are when you are talking about trusts and estates and 
meshing of assets. Yes, that is an interesting formulation and 
one that probably deserves a little bit more thought. What 
creates that novel idea, if it is allowed by the Tax Code, then 
why is it patentable for an outside vendor to say--different 
for software, if I create a program by which you can create 
this opportunity, I have a right to pursue my patent, but I 
don't think the methodology should necessarily be. Yes?
    Mr. GRUNER. I just wanted to draw a comparison to other 
areas where the law defines required conduct and then the 
patent system works within that required conduct. For example, 
in the environmental area, the product safety area, the law 
requires certain conduct to be maintained and then a whole 
bunch of patented methods are devices are used to adhere to 
that conduct. We have no hesitancy in encouraging innovation in 
those conduct details through the patent system in those kind 
of settings. It seems to me that what is going on here is 
essentially the same thing, people may be incented to work out 
inner details of how to comply with the Tax Code in innovative 
ways through the incentives o the patent system.
    Mr. FOLEY. Give me one area where it would innovative, that 
would be so different than anyone else who has the technology, 
the capabilities to sit down--how could it change the outcome 
is the law is specific?
    Mr. GRUNER. Well, I think the types of patents that are 
coming forward are indicative of the direction, I don't want to 
try to defend the particular patents that have been issued 
because some of them may be just obvious extensions. If one 
came up with estate planning management technique that was 
highly intricate, highly computer managed, and which at the end 
of the process you define what kind of estate transfers were 
occurring and then apply the appropriate tax result and tax 
rule and got to the appropriate result, that kind of innovation 
as to how estates were managed would be a sort of innovation 
that might not occur, and the implementation be a complex 
computer technology, might not occur absent these kind of 
incentives.
    Mr. FOLEY. Then, I would apply for a patent on my software 
because it is truly a software platform.
    Mr. GRUNER. Well, it is going to be a mixture. The method 
would include some software steps and that is what these 
patents generally are.
    Mr. FOLEY. So, you are saying there is a duality there.
    Mr. GRUNER. Yes.
    Mr. FOLEY. They are both a system as well as an idea.
    Mr. GRUNER. Typically, because it is the computer stuff 
that makes them new, if at all, in other words, that is where 
they are arguing their new extension lays and therefore their 
grounds for patenting.
    Mr. FOLEY. Well, I seem to be hearing two different things. 
I heard about a technology, which is what I believe should have 
a right to patent protection, and a technique that is used 
simply by taking tax law and using it to its best opportunity.
    Mr. GRUNER. I think the distinction that was trying to be 
made there was between administrative efficiency, programs that 
might allow a taxpayer to account for their assets and income 
more efficiently but didn't change the ultimate result under 
the Tax Code versus conduct-oriented software, for example, 
managing estate in a certain way, that did in fact reduce the 
taxes that were paid. These patents cover both those kinds of 
technologies.
    Mr. FOLEY. If I could just, Mr. Chairman, I know my time is 
up, but it still invokes some double jeopardy for the tax 
preparer who has the same concept and idea, hasn't impinged on 
this patent, simply using his knowledge and expertise and 
coming up with the same result is subject to potential lawsuit.
    Mr. GRUNER. It is going to be a problem because many of 
these methods have been used in secret for some time. That same 
problem arose in the software industry when software 
techniques, which had been used in private company 
environments, were then patented by other parties, and indeed 
that type of problem led to the prior user defense we see as to 
certain business methods.
    Ms. TUBBS JONES. Just a quick question in that line, Mr. 
Chairman, thank you. Prior to 1988 and these different products 
being patented, lawyers were as smart and as innovative and as 
intelligent and on and on, and on, and nobody contemplated that 
this would be a patentable subject. Or maybe they contemplated 
and said, the hell with that, that is crazy, that just is not 
going to happen or did they?
    Mr. GRUNER. Well, in general the whole business method area 
was thought to be outside the patent system until the State 
Street decision confirmed the opposite. So, although people 
might have thought vaguely about patents, they thought that the 
law was against them. The State Street decision clearly stated 
that financial methods and now tax planning methods and other 
business methods, other advantageous business practices are 
patentable. Now, we are still looking for new----
    Ms. TUBBS JONES. I can characterize those judges, as some 
my colleagues do, judges making law, right?
    Mr. GRUNER. No.
    Ms. TUBBS JONES. Go ahead.
    Mr. GRUNER. Indeed, they were following the law as they 
understood it, and many commentators thought the same.
    Ms. TUBBS JONES. You didn't get that but it is okay.
    Mr. GRUNER. I got it.
    Ms. TUBBS JONES. Go ahead, I am sorry.
    Mr. GRUNER. Many commentators thought that was the law as 
well, hence, clients didn't seek patents or innovators didn't 
seek patents in this area, which now leads to part of our 
problem. We don't have a patent record of past innovations that 
would now inform current patent issuance decisions.
    Ms. TUBBS JONES. Thanks, Mr. Chairman.
    Chairman CAMP. Thank you and the gentlewoman from 
Pennsylvania may inquire.
    Ms. HART. Thank you, Mr. Chairman. This just gets more 
interesting and more interesting as time goes by. I said to my 
LD as I walked out of the room to take a call, the things that 
Mr. Belcher said were exactly what I was thinking. So, with 
that having been said, I have a question regarding I guess 
public policy issues. The Patent and Trademark Office is 
looking at an application. Is there some kind of public policy 
bar that would lock them from issuing a patent for something 
that they would just, without checking with the IRS, but they 
still would know would be illegal or have some inclination to 
believe would be an illegal scheme? Is there something out 
there now that you would use?
    Mr. GRUNER. The issue would be one of utility. An advance 
has to have practical utility to be patentable. So, if it were 
purely illegal, presumably its consequences are negative and 
has no utility. The problem though for the Patent Office is 
they don't know that with any firm clarity.
    Ms. HART. Right.
    Mr. GRUNER. Therefore, they are loathe to make that call as 
a matter of patent issuance.
    Ms. HART. So, there is no burden really on them to do that?
    Mr. GRUNER. They are unlikely to find out.
    Ms. HART. Until later, after they have put a lot work in. I 
am sorry, Ms. Aprill?
    Ms. APRILL. Many of these are not going to be clearly 
illegal. They are not going to be something that specifically 
violates the current law or that the IRS has said you do this 
particular thing and we say it doesn't work under the tax law. 
They are going to be gray areas.
    Ms. HART. It is like the whole area, the gray area, I 
think. Okay. How about the compliance burden challenge? Mr. 
Belcher, in your testimony you mentioned that you have a bunch 
of choices you are going to have to make with a client as far 
as compliance. Are you going to have to do a patent search 
every time you try to do estate planning for your client?
    Mr. BELCHER. I think to carry out my ethical obligation to 
my client, I am going to have to be aware of whether there is a 
patent on a technique that I am using or recommending to the 
client so the client can make the choice of trying to get a 
license or a royalty to paying a royalty to use that. So, I 
think it will be a serious compliance burden.
    Ms. HART. Okay, and just a general question for all three 
of you. I was a private practice lawyer for 13 years and 
sitting in a room with a client, trying to do the best for them 
that I could possibly do, every plan is different so you are 
going to come up with something different for every client and 
you are going to have this challenge then with basically every 
client.
    Mr. BELCHER. Yes, and the problem with the patents is that 
they will have multiple different patent claims. So, you will 
have to establish--you are going to have to worry about whether 
you are violating any of those patent claims. The problem that 
with business methods you will have, as Ms. Aprill said, you 
will have litigation that will establish the parameters because 
you will have big corporations going after it.
    Ms. HART. Yes.
    Mr. BELCHER. When you have got just taxpayers, a taxpayer 
hears that there is a potential issue, the taxpayer is going to 
say, ``Well, I am not going to use it because I am not going to 
take the risk.''
    Ms. HART. Right. Go ahead.
    Mr. BELCHER. So, it will be the uninformed who will end up 
being hurt by this.
    Ms. HART. In a lot of ways, I represent a lot of small 
towns and small business people and small family businesses and 
that sort of thing, they are going to probably be the most at 
risk if someone decides to go after them.
    Mr. BELCHER. If the patent of tax reduction techniques 
continue, it is accurate that right now it is not a major 
problem because less than 2 percent of the people are faced 
with transfer tax issues, but once it moves in in greater 
threat in the income tax area--I will give you the one example 
that we thought about is a charitable remainder trust that 
Congress created in 1969. Let's assume that I go down to the 
patent office and I patent a charitable remainder trust funded 
with multiple securities. Well, obviously, Congress has allowed 
charitable remainder trusts for a lot of different policy 
reasons. Well, I now control it. Sure, I can license it or I 
can decide not to license it at all. I am just going to keep 
it, and I am just going to let my friends use it. Who is going 
to challenge that? There is not one taxpayer who will have 
enough interest, economic interest to challenge these. What we 
have been told is that the cost of challenging a patent may 
exceed $1 million.
    Ms. HART. I am concerned about us, and I will just stop, my 
goal obviously here is to make sure that we are not restricting 
what would be sort of a natural response to a taxpayer doing 
what he or she is supposed to do to comply with the law. In 
some ways it seems like we are doing that. As a matter of 
policy, would any of the three of you suggest that we should 
put forth some restrictions as to what types of things should 
be exempted from patent or is that sort of too esoteric a 
question?
    Mr. BELCHER. Personally, I think that any tax reduction 
technique should not be patentable period. Because that 
prohibits, that prevents access to minimizing your taxes 
through lawful techniques or lawful principles announced by 
Congress. When you get into methods or calculations or 
assistance in managing assets, I think that Richard is exactly 
right. I don't see any problem with patenting that.
    Ms. HART. There is software and there is some specific--did 
you want to expand on that a little bit?
    Chairman CAMP. The gentlewoman's time has expired.
    Ms. HART. Oh, I am sorry.
    Chairman CAMP. Mr. Gruner, if you want to answer briefly.
    Ms. HART. The red light is not facing me.
    Mr. GRUNER. Quickly, on the level of whether we need to 
change the law to exclude certain types of patents, I think the 
law is correct as it stands, the law says only non-obvious 
extensions should be patentable. What we need is a better 
definition of what is the obvious technique and capability in 
the tax planning field so that matters within that range of 
normal expansion, day to day effort of tax specialist lawyers 
is not being patented because the record of skills and range of 
those non-patentable inventions is correctly documented and 
available to the Patent Office.
    Ms. HART. Okay, so there is actually a line we could find.
    Mr. GRUNER. It currently includes that line, we just need 
more information to better implement.
    Ms. HART. Okay, thank you. Thank you for your indulgence, 
Mr. Chairman.
    Chairman CAMP. Thank you. I guess just to sum up, my 
question for each of you, I would like you just to respond 
briefly, is we have heard this about drawing a line between 
methods and strategies, and in your opinion, each of your 
opinions, could you answer whether or not you think that it is 
possible legislatively, you are the experts in this field, to 
draw the line for tax strategy purposes, the line between 
methods and strategies?
    Mr. GRUNER. Well, I think that the two are going to blur 
together. If the question goes to the notion of could we define 
a tax method exception to the patent law, it would be, I think, 
quite difficult because of the blurring between financial 
advantage generally and tax advantage specifically unless we 
were to exclude financial methods entirely from the patent 
laws, which would be a dramatic change after the State Street 
opinion. So, I think it would be quite difficult to separate 
tax planning strategies from financial methods more generally.
    Chairman CAMP. All right, Ms. Aprill, do you have an 
opinion?
    Ms. APRILL. I think it would be difficult. I think we 
should try but because it was difficult. I suggested another 
way of going to protect individual taxpayers in their 
individual capacity and small businesses, in order to avoid 
some of the difficult line drawing.
    Chairman CAMP. All right, Mr. Belcher?
    Mr. BELCHER. I think there are a lot of bright people who 
can draw those lines and so I think you can.
    Chairman CAMP. Well, thank you and thank you all----
    Ms. TUBBS JONES. One more quick question?
    Chairman CAMP. Yes, yes.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Assuming all we 
have discussed, I am curious whether you think down the line 
all these bright and intelligent lawyers will then be seeking a 
patent on legal advice for picking a jury, setting up the 
insanity defense, all kind of other things that go on in the 
course of a trial? I see some frowns being made back there 
but--real stunned, but I am stunned.
    Mr. BELCHER. What is to prevent it?
    Ms. APRILL. Indeed, when I talk to a lot of patent people 
when I was working on this and several of the patent professors 
said to me, ``We have been worrying for years about legal 
method patents, and I want you to think about this not as a 
form of business method pattern but a form of legal method 
patent.''
    Chairman CAMP. Mr. Gruner?
    Mr. GRUNER. Well, let me just say that it is not as scary 
as that suggests because the techniques used in the courtroom 
and legal practice generally are the common techniques. That is 
the methodology that is already known.
    Ms. TUBBS JONES. Lawyers don't think they are common but go 
ahead.
    Mr. GRUNER. Those are not going to be non-obvious methods 
if in fact the skills that lawyers have used for years to pick 
a jury are brought forth as a possible patent.
    Ms. TUBBS JONES. Are you a trial lawyer?
    Mr. GRUNER. I'm sorry?
    Ms. TUBBS JONES. Are you a trial lawyer?
    Mr. GRUNER. No.
    Ms. TUBBS JONES. I thought so.
    Chairman CAMP. All right, thank you. Any other questions? I 
want to thank the panel. This was an excellent hearing, and 
very much appreciate all of your effort and testimony. Thank 
you very much. This hearing is now adjourned.
    [Whereupon, at 12:05 p.m., the Subcommittee was adjourned.]

    [Questions From Ms. Tubbs Jones to Mr. Toupin follow:]

    Question: Of all of the tax patents that have been issued to date, 
how many have generated fees or profits under a licensing agreement for 
the patent holder? Is the motive behind seeking a patent to generate a 
profit or simply to protect one's ``invention''?
    Answer: We are unable to respond to the first question because the 
USPTO does not require, request or compile information regarding the 
amount of fees or profits received by any particular patent owner or 
category of owners under licensing agreements.While the motive or 
motives behind seeking a patent vary among inventors, generating a 
profit and protecting one's invention are certainly primary motivating 
factors.
    Question: To your knowledge, how many of the patents that have been 
issued are being ``marketed'' by the patent holder? That is, how many 
of the tax strategies that have received patents do you know are being 
``shopped around'' to taxpayers?
    Answer: We are unable to respond to these questions because the 
USPTO does not require, request or compile information as to whether a 
particular patented invention is ``marketed'' or the nature or extent 
of commercialization, if any, of a patented invention.
    Question: If taxpayers are believing that a particular tax strategy 
has some sort of ``seal of approval'' because it has been patented, 
then should the IRS not be intimately involved in the process of 
issuing tax patents? To what extent is the IRS currently involved?
    Answer: Current patent law governing the USPTO's authority and 
operations does not permit the IRS to be ``intimately involved in the 
process of issuing tax patents.'' In general, applications are by 
statute confidential for the first eighteen months and, while most are 
published upon expiration of that period, the Patent Act forbids the 
USPTO to entertain third-party protests to published applications. 
Indeed, the IRS has expressed its reluctance to be involved in 
consideration of individual patent applications. Similarly, though such 
a belief might arise in other areas, no other governmental agency with 
regulatory authority over particular goods, services or practices is 
``intimately involved'' in the process of examining patent applications 
that may relate to those goods, services or practices.
    While the IRS does not have any direct involvement in the process 
of issuing tax patents, the IRS and the USPTO have partnered to pursue 
mutually beneficial training and information exchange opportunities. 
IRS personnel have provided training to USPTO patent examiners on 
financial products, wealth transfer and pensions. The USPTO has 
provided modified patent examiner initial training to selected IRS 
employees. We look forward to continuing these training and 
information-sharing programs.

                                 

    [Questions From Ms. Tubbs Jones to Mr. Everson follow:]

    Question: To your knowledge, how many of the patents that have been 
issued are being ``marketed'' by the patent holder? That is, how many 
of the tax strategies that have received patents do you know are being 
``shopped around'' to taxpayers?
    Answer: Based on our focused review of 14 patents and published 
applications we observed little conspicuous marketing of the related 
patents. In one case a web-site restriction (we needed to be a client) 
hampered our ability to drill into the site without a client password. 
Nevertheless, it is important to note that there is no requirement in 
US patent law to work (or market) the patented invention.
    Question: If taxpayers are believing that a particular tax strategy 
has some sort of ``seal of approval'' because it has been patented, 
then should the IRS not be intimately involved in the process of 
issuing tax patents?
    Answer: No. The process of examining and granting patents is 
outside the IRS' jurisdiction and expertise. Importantly, the granting 
of a patent on a tax strategy provides protection to the patent holder 
against infringement by other parties, but has no bearing on its 
legitimacy or illegitimacy under the tax laws, which remain under the 
jurisdiction of the IRS. The IRS is, however, considering taking steps 
to clarify for taxpayers that the tax treatment of a strategy is 
unrelated to any patent protection and that a patent is not an IRS 
``seal of approval.''
    Question: To what extent is the IRS currently involved?
    Answer: The IRS has no involvement with the USPTO in the patent 
review process and does not review patents to determine whether they 
are valid or meet the criteria for patentability. We monitor the USPTO 
database to gauge the level and type of potential Tax Strategy Patents. 
When warranted, we review public applications and previously granted 
patents to learn more about the strategy in order to assess the extent 
of potential aggressiveness of the strategy/technique and to gain 
insight into areas where activity is occurring. Furthermore, in the 
summer of2005 we conducted a cross-Agency workshop that encompassed 
topics requested by the USPTO. This was an awareness workshop and was 
similar to what industries have historically done with the USPTO to 
keep them abreast of the latest sources of information, trends in 
practice, and the like. Our goal was to assist the USPTO in developing 
the resources to determine ``prior art'' in the area of tax strategies 
and structures.
    Question: Of those tax patents that you have reviewed, how many do 
you think are abusive tax shelters?
    Answer: In 2004 and 2005, we performed two searches of the USPTO 
data base. The first search, conducted in November 2004, was designed 
to identify patents and public applications of known tax shelter 
strategies. Specifically, we were looking for transactions the IRS has 
identified as ``listed'' transactions in Notices 2004-67 and 2005-13. 
These Notices describe over thirty transactions the IRS considers tax 
avoidance transactions. That search, which was updated in November 
2005, and again in June 2006, found no evidence of patents or public 
patent applications embodying any abusive tax shelters or listed 
transactions.
    Question: How many do you think are aggressive--there is a good 
likelihood that if audited the legality of the tax strategy will be 
challenged by the IRS?
    Answer: It is impossible to definitively determine that a patented 
structure will constitute an aggressive tax strategy as used by 
taxpayers. This determination is inherently factual and depends on how 
the transaction is implemented in the real world. However, we have 
reviewed patents and applications to determine whether, as described in 
the application itself, the patented structure represents a high risk 
of aggressive tax planning. We conducted this type of search in July 
2005, and update it periodically. The initial search just asked for 
patents that included the word ``tax'' in applications and granted 
patents in all classifications. We had fewer than 300 ``hits''. A 
further analysis showed that approximately 100 of these dealt with 
``business methods'' and the majority of those appeared to be software 
models for computing tax impact or effect, and not tax strategies.
    We pared the potential population to 14 patents and public 
applications primarily in the areas of employee compensation, wealth 
transfer, and financial products. Upon initial examination, none of the 
14 patents were found to clearly involve abusive tax avoidance 
transactions. We have subsequently completed our review of 12 of the 
14, one of which was allowed by the applicant to expire for non-payment 
of fees. While we do not consider them to be abusive tax avoidance 
transactions, we are continuing to review two of the transactions to 
fully satisfy ourselves that they do not present an apparent compliance 
risk requiring follow-up action on our part.
    Question: Of those tax patents that you have reviewed, how many 
would you say are common tax strategies and how many are truly unique?
    Answer: Considering our lack of expertise in the patent review 
process and the difficulty in determining ``uniqueness,'' most (11 of 
the 14) of the tax strategy patents and public applications reviewed 
involved strategies familiar to us and thus appear to be commonly used 
``tried and true'' techniques. Of course, it is USPTO's role to decide 
whether these patents meet the criteria of patentability, such as 
novelty and non-obviousness.

                                 

    [Submissions for the record follow:]
            Statement of Gavalis, Albert, New York, New York
Patenting tax-advice as a form of further-protecting otherwise 
        privileged material
    Upon ``conceptually'' reviewing excerpts from a pending tax-case 
review June 20, 2006 Wall Street Journal article by Jesse Drucker, 
pages C-1 and C-3, where a particular ``. . . company plans to protect 
privileged communications with its lawyers,'' the article goes on to 
quote the company's tax-VP:
    ``Just as the IRS relies on the law to keep communications with its 
attorneys confidential, the law also protects the confidential legal 
advice that citizens receive from their attorneys.''
    However, the article further goes on to state that:
    ``The courts long have held that, in certain situations, the 
attorney-client privilege can't be invoked if the client shares the 
communications with outsiders,'' [such as] ``. . . outside auditors . . 
.''
    The article concludes with the juxtaposition of competing forces 
where while on the one hand:
    ``Tax lawyers have expressed concerns that the IRS's position will 
prompt companies to stop sharing tax lawyers' analysis to outside 
accountants, leaving them with less information when auditing public 
companies for the protection of investors.''
    On the other hand:
    ``. . . accounting regulators are `not going to stand for' 
accountants blessing transactions without seeing all documentation.''
    As such, the issue at hand would lend themselves towards the 
further protection of tax advice in ``patented'' form.
    In order for companies to maintain additional protection that 
otherwise evaporates when attorney-client privileged material is 
disseminated to outside auditors, This ``REQUIRED dissemination'' of 
OTHERWISE-privileged attorney-client material to outside auditors WOULD 
BENEFIT FROM additional protection that ``patenting'' would lend itself 
towards providing.

                                 

          Statement of Stephen T. Schreiner, Hunton & Williams
    Having followed with great interest the testimony from the July 13 
``Hearing on Issues Relating to the Patenting of Tax Advice,'' I offer 
the following statement which reflects my personal views as a patent 
attorney and not necessarily the views of my partners, my firm, or its 
clients:
    I am a registered patent attorney with nearly 10 years experience 
in preparing, prosecuting, and enforcing patents. Prior to that, I 
worked as an electrical engineer for the Department of the Navy for 
nearly 9 years.
    It goes without saying that the Patent Law is esoteric in general 
and can be particularly elusive when it comes to new technologies. We 
have seen these debates play out multiple times over the last 10-20 
years, such as on whether man-made forms of life can be patented (early 
80's), whether software can be patented (mid-90's), and whether 
business methods can be patented (late 90's).
    In every case, we have seen that the Patent Law is a unitary, 
flexible system that is adapted to take on new technologies. Each of 
the above debates played out in similar fashions. First, there was an 
expression of profound surprise, even outrage by some, that certain 
types of new technology might be susceptible to patenting. Then there 
was robust debate.
    But eventually these issues were resolved in favor of allowing the 
disputed technology to be patented so long as it satisfied the long-
standing core requirements for a patent: (1) the invention has utility 
(is useful in some way), (2) the invention is novel (is new), and (3) 
the invention is not obvious (is not a trivial variation of what is 
already known by the public).
    I submit that the issue of the patenting of tax strategies--which 
is really a subset of the business methods category--is resolved in 
exactly the same manner: the tax strategy invention at issue should be 
considered for a patent only if it can meet the utility, novelty, and 
nonobviousness requirements like any other invention.
    I respectfully submit that some of the discussion, especially that 
leading up to the hearing, lost focus of the fundamental utility/
novelty/nonobviousness standards that act as a filter in our patent 
system:
    1. The tax strategy issue was incorrectly framed as ``should 
somebody be able to patent a method of complying with the law?``
    That is not the issue, nor the proper path of inquiry. Many 
different types of patentable inventions involve a manner of complying 
with the law, but they are not impermissible for that reason. Just a 
few examples of very legitimate inventions that involve compliance with 
the law:
    a. Improved cruise control device--allows you to comply with the 
State speed limit.
    b. Improved machine to weigh trucks before departure to ensure they 
are not overloaded per State law.
    c. Improved airplane navigation system to ensure Federal FCC 
altitude limits, etc. are observed.
    d. Improved baby seat that meets baby seat requirements of State 
law.
    e. Improved seat belt system that meets seat belt requirements of 
State/Federal law.
    g. Improved catalytic converter to more effectively meet State 
emissions requirements.
    h. Improved car engine to meet State or Federal requirements on gas 
mileage minimums.
    From the legal standpoint, that is, under the Patent Law, all of 
the above types of inventions are eligible for patents notwithstanding 
that they involve legal compliance.
    From a policy standpoint, so long as a patent does not effectively 
prevent compliance with the law--i.e., it does not effectively 
``preempt'' the law because the patent is so broad--there should be no 
issue.
    2. The issue, like nearly all of these kinds of these discussions, 
turns on the long-standing standards for what can be patented: 
something that is useful, new, and not obvious. And, of course, the PTO 
must have or develop a good library of ``prior art'' (documenting 
technology already in the public domain) to make that assessment. But 
that is nothing new here.
    Thus, a patent that is so broad that it prevents compliance with 
the tax law should never be granted because it cannot be new or non-
obvious. In short, the existing filters in our Patent System will 
operate to prevent such a patent from being granted.
    3. The IRS's main issue is that the emblem of a patent may give 
consumers the impression that the patented tax algorithm is legal and 
IRS-approved. Of course, as a matter of law, a patent does not provide 
right to use, only a right to exclude.
    By way of example, one can invent a very patentable nuclear reactor 
technology based on cold fusion or a new drug that halts the aging 
process. If those inventions actually work, the inventor will receive a 
patent that provides him/her exclusive rights. But that does not mean 
that the law will permit the inventor to build the reactor in his/her 
back yard or start marketing those new pills.
    In sum, no patent provides Governmental approval to use the 
invention. Thus, the issue that concerns the IRS, while it is a real 
issue of potential significance, is not an issue of the substantive 
Patent Law. Rather, it is one of building consumer awareness in a 
particular area where patents might be susceptible to being 
misrepresented by the unethical. Building consumer awareness through 
advertising and/or appropriate regulations by the PTO/IRS is the 
solution, not outlawing tax strategy patents altogether.
    4. Finally, the position taken by several witnesses that tax 
attorneys and wealthy tax clients deserve special treatment so as not 
to be burdened with tax patents is unpersuasive. If doctors and 
patients have to observe patent restrictions on new medical techniques 
and new medicines that may have life-altering consequences, I cannot 
fathom any moral, legal, or policy basis for why tax attorneys and 
their clients should be enjoy a special exemption from the Patent Laws 
that the medical profession does not.
    In closing, I thank the Subcommittee and its staff for allowing me 
to give my views on this topic.

                                 
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