[Congressional Record Volume 153, Number 177 (Thursday, November 15, 2007)]
[Senate]
[Pages S14491-S14493]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BAUCUS (for himself, Mr. Grassley, Mr. Levin, Mr. Wyden, 
        Mr. Obama, and Mr. Bingaman):
  S. 2369. A bill to amend title 35, United States Code, to provide 
that certain tax planning inventions are not patentable, and for other 
purposes; to the Committee on the Judiciary.
  Mr. BAUCUS. Mr. President, I am pleased to join with my Colleague 
Senator Grassley in introducing legislation to provide that certain tax 
planning inventions cannot be patented.
  America's patent system promotes innovation and competitiveness in 
all industries.
  Article 1, section 8 of the Constitution authorized Congress to 
establish a patent system. That system is meant to protect inventors 
and promote the progress of science and ``useful arts.'' Today, we 
refer to this as technological innovation.

[[Page S14492]]

  In the Patent Act of 1793, Congress enacted a broad definition for 
inventions that can be patented. But conditions were included. The 
definition for what could be patented in 1793 is remarkably similar to 
the definition in the United States Code today. And not every process 
or discovery is patentable.
  In 17th century England, the Crown would grant a monopoly over a 
particular business line. Peter Meinhardt, in his book, ``Inventions, 
Patents and Monopoly,'' described these ``letters-patent'' that 
provided exclusive manufacturing rights as enriching ``the grantee at 
the expense of the community.'' This is what our Founders and Congress 
sought to avoid.
  Today, a number of attorneys and accountants have begun applying for 
and obtaining tax patents. These involve financial products, banking, 
estate and gift, and tax preparation software.
  The U.S. Patent and Trademark Office has granted at least 60 of these 
tax patents. About 90 applications are pending.
  I have heard from tax practitioners, including those in Montana, who 
fear that tax patents will impede their ability to provide advice to 
their clients. They are concerned that even obvious applications of the 
tax law may become protected by tax patents. They also tell me that 
some tax strategy patent applications appear to be for tax shelters and 
other tax-motivated transactions.
  The Treasury is also concerned about patent protection for tax 
planning methods. In September, Treasury issued proposed regulations 
requiring the disclosure of transactions that use a patented tax 
strategy.
  While this is a step in the right direction, these rules do not go 
far enough to fix the real problem.
  A taxpayer shouldn't be in the position of choosing to file a return 
and pay a patent holder a fee for using a tax strategy in the return. 
No one should have to pay a toll charge to comply with the tax laws.
  They also should not have to conduct a due diligence check every time 
that they comply with the tax laws to see if they are infringing a tax 
patent.
  As I understand it, a taxpayer might use a tax strategy based on 
advice from a tax practitioner. The practitioner would prepare and file 
a tax return using the patented strategy. The tax practitioner's 
advice, the taxpayer's use of the transaction, and the preparation and 
filing of the tax return could all be considered patent infringement.
  These tax patents can also create traps for the unwary. If taxpayers 
used a patented strategy, not knowing that it is not permitted under 
the Internal Revenue Code, they could be subject to additional taxes, 
penalties and interest.
  Congress has previously enacted laws to limit what can be patented. 
Limiting patentability for tax patents is another situation where 
Congress must act.
  I introduce our bill today with Senator Grassley. There are a number 
of cosponsors from both sides of the aisle.
  It would provide that the Patent Trademark Office could not issue 
patents for tax planning inventions.
  Tax planning inventions are generally tax plans, strategies, 
techniques, schemes, processes, or systems that are designed to reduce, 
minimize, avoid, or defer a taxpayer's Federal or State tax liability.
  There is an important exception. This change would not affect the use 
of tax preparation software to help practitioners and taxpayers prepare 
tax or information returns.
  Title 26 of the U.S. Code contains the Internal Revenue Code, a 
public law that is available to everyone. No one should have the 
capability to monopolize the tax law through the patenting of tax 
strategies. This is why I believe that these tax planning inventions 
should not be granted patent protection.
  I urge my colleagues to join us in support of this legislation.
  Mr. President, I ask unanimous consent that the text of the bill and 
an analysis of the bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2369

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. TAX PLANNING INVENTIONS NOT PATENTABLE.

       (a) In General.--Section 101 of title 35, United States 
     Code, is amended--
       (1) by striking ``Whoever'' and inserting ``(a) Patentable 
     Inventions.--Whoever'', and
       (2) by adding at the end the following:
       ``(b) Tax Planning Inventions.--
       ``(1) Unpatentable subject matter.--A patent may not be 
     obtained for a tax planning invention.
       ``(2) Definitions.--For purposes of paragraph (1)--
       ``(A) the term `tax planning invention' means a plan, 
     strategy, technique, scheme, process, or system that is 
     designed to reduce, minimize, avoid, or defer, or has, when 
     implemented, the effect of reducing, minimizing, avoiding, or 
     deferring, a taxpayer's tax liability or is designed to 
     facilitate compliance with tax laws, but does not include tax 
     preparation software and other tools or systems used solely 
     to prepare tax or information returns,
       ``(B) the term `taxpayer' means an individual, entity, or 
     other person (as defined in section 7701 of the Internal 
     Revenue Code of 1986),
       ``(C) the terms `tax', `tax laws', `tax liability', and 
     `taxation' refer to any Federal, State, county, city, 
     municipality, foreign, or other governmental levy, 
     assessment, or imposition, whether measured by income, value, 
     or otherwise, and
       ``(D) the term `State' means each of the several States, 
     the District of Columbia, and any commonwealth, territory, or 
     possession of the United States.''.
       (b) Applicability.--The amendments made by this section--
       (1) shall take effect on the date of the enactment of this 
     Act,
       (2) shall apply to any application for patent or 
     application for a reissue patent that is--
       (A) filed on or after the date of the enactment of this 
     Act, or
       (B) filed before that date if a patent or reissue patent 
     has not been issued pursuant to the application as of that 
     date, and
       (3) shall not be construed as validating any patent issued 
     before the date of the enactment of this Act for an invention 
     described in section 101(b) of title 35, United States Code, 
     as added by this section.
                                  ____


                              Tax Patients


                              Present Law

       Patents have increasingly been sought and issued for 
     various tax-related inventions, including strategies for 
     reducing a taxpayer's taxes.
       In a 1998 case, State Street Bank, the U.S. Court of 
     Appeals for the Federal Circuit (''Federal Circuit Court'') 
     held that a method of doing business could be patented. The 
     case involved a data processing system for a partnership 
     structure of mutual funds that had advantageous tax 
     consequences. The case has been considered a key decision 
     allowing the patenting of business methods of all types. 
     Since 1998, numerous tax-related patents have been issued or 
     applied for, in some cases involving tax strategies less 
     related to computer or other mechanical data processing 
     systems. More recently, the Federal Circuit Court has 
     indicated that some business methods are unpatentable.
       The patents that have been granted or applied for have 
     involved many aspects of the tax law, including financial 
     products, charitable giving, estate planning, and tax 
     deferred exchanges.


                           Reasons for Change

       Tax-related patents, if valid, remove from the public 
     domain particular ways to satisfy a taxpayer's legal 
     obligations. Tax-related inventions that have been patented 
     cannot be practiced without the permission of the patent 
     holder. Thus, a tax-related patent may have the effect of 
     forcing or encouraging taxpayers to pay more tax than they 
     would otherwise lawfully owe, either because taxpayers are 
     not able to engage in a particular transaction or financial 
     structure without the permission of the patent holder or 
     because, if permission is granted, such permission requires 
     payment of an undesirable charge. Taxpayers might seek other, 
     more questionable alternatives to the patented invention in 
     an attempt to avoid the scope of the patent. Unauthorized use 
     of patented inventions may have adverse consequences for 
     taxpayers or their advisers, who may face patent infringement 
     suits for using, or suggesting use, of patented tax-related 
     inventions. This could undermine uniform application of the 
     tax laws, decrease public confidence in the nation's tax 
     laws, and increase public dissatisfaction with tax laws if 
     compliance must be accompanied by patent searches and 
     licensing.
       The availability of patent protection also could encourage, 
     in a variety of ways, the

[[Page S14493]]

     further development of aggressive tax shelter transactions or 
     of transactions that do not achieve the expected tax results. 
     For example, tax-related inventions do not necessarily have 
     to deliver their claimed tax benefits to be eligible for a 
     patent; yet strategies or methods that do not achieve the 
     intended tax result might be marketed as ``legitimate'' based 
     on the existence of a patent.
       Finally, the creativity and ingenuity reflected in many tax 
     planning techniques developed over the years without patent 
     protection suggests that even without such protection there 
     are sufficient incentives for tax planning innovation.


                        Explanation of Provision

       Under the provision, a patent may not be obtained for a tax 
     planning invention.
       A tax planning invention means a plan, strategy, technique, 
     scheme, process, or system that is designed to reduce, 
     minimize, avoid, or defer, or has, when implemented, the 
     effect of reducing, minimizing, avoiding, or deferring, a 
     taxpayer's tax liability, or is designed to facilitate 
     compliance with tax laws, but does not include tax 
     preparation software and other tools or systems used solely 
     to prepare tax or information returns.
       The term ``taxpayer'' is defined as an individual, entity, 
     or other person (as defined in section 7701 of the Internal 
     Revenue Code of 1986).
       The terms ``tax,'' ``tax laws,'' ``tax liability,'' and 
     ``taxation'' refer to any Federal, State, county, city, 
     municipality, foreign, or other governmental levy, 
     assessment, or imposition, whether measured by income, value, 
     or otherwise.
       The term ``State'' means each of the several States, the 
     District of Columbia, and any commonwealth, territory, or 
     possession of the United States.
       No inference is intended as to whether any business method, 
     including any tax-related invention, is otherwise patentable 
     under present law, or as to whether any software is entitled 
     under present law to patent protection as distinct from 
     copyright protection.


                             Effective Date

       The provision takes effect on the date of enactment.
       The provision shall apply to any application for a patent 
     or application for a reissue patent that is (a) filed on or 
     after such date of enactment; or (b) filed before such date 
     if a patent or reissue patent has not been issued pursuant to 
     the application as of that date.
       The provision shall not be construed as validating any 
     patent issued before the date of enactment for an invention 
     described in section 101(b) of title 35, United States Code, 
     as amended by this section.

  Mr. GRASSLEY. Mr. President, this legislation that Senator Baucus and 
I are introducing changes the current rules governing tax patents. 
Recently, the U.S. Patent and Trademark Office, PTO, has allowed the 
patenting of tax strategies. Because of the serious policy concerns 
about this practice, our legislation would make tax strategies an 
unpatentable subject matter.
  Tax patents are a relatively recent phenomenon. The rise of these 
patents can be traced back to the 1998 opinion of the Federal Circuit 
in State Street Bank v. Signature Financial Group that rejected a per 
se rule that business methods could not be patented.
  As of September 2007, the U.S. Patent and Trademark Office had 
identified 60 issued tax related patents, with another 99 published tax 
patent applications pending. The recent growth of these patents, 
coupled with their deleterious effect on the tax system, necessitates 
legislative action in this area.
  Tax patents undermine the integrity and fairness of the Federal tax 
system. They place taxpayers in the undesirable position of having to 
choose between paying more than legally required in taxes or paying a 
royalty to a third party for use of a tax planning invention that 
reduces those taxes.
  A patent holder can preclude others from using their tax strategy. 
This may result in taxpayers paying more in taxes than is otherwise 
legally required. An exclusive proprietary right should not be granted 
for methods of compliance with the tax law, which is obligatory for 
all.
  The patentability of tax strategies also adds another layer of 
complexity to the tax laws by requiring patent searches and potential 
exposure to patent infringement suits.
  This legislation contains a general prohibition on ``tax planning 
inventions,'' with an exception for tax preparation software and other 
tools or systems used solely to prepare tax or information returns.
  I hope that we can move this legislation quickly. The House has 
already included a version of prohibiting tax strategy patents in their 
comprehensive patent reform bill. The Senate should act as well.
                                 ______