[Congressional Record Volume 157, Number 31 (Thursday, March 3, 2011)]
[Senate]
[Pages S1197-S1202]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
THE BUDGET
Mr. ISAKSON. Madam President, on June 27, 2010, President Obama made
the following statement:
I hope some of those folks who are hollering about deficits
and debt will step up, because I'm calling their bluff.
I am stepping up. At the same time, I also want to call the
President's bluff. I think we are at a serious point in time in our
history, and we need to be realistic about what confronts us ahead of
time.
The biggest bluff this year in the Congress was the 2012 budget
presented by the President which did not take any of the
recommendations from his own deficit commission--by the way, I was one
of the Republicans who supported that--and instead locked in a 25.4-
percent increase in spending over the last 2 years and made it
permanent by calling it a freeze. It raises taxes in the outyears and
dedicates a higher regulatory environment in the United States of
America. None of that does anything to reduce the debt or the deficit.
In fact, the President's budget actually makes it worse.
But it is fair to ask people to step up. The American people are
asking us to step up. They want us to do what they have been doing in
the last 3 years: sit around their kitchen table, reorganize their
priorities, spend within their means, and reduce their debt and the
deficit. The very least they should ask of their country is their
country to do the same thing they have had to do. In large measure, we
have been the contributor to the protracted nature of the current
recession.
Now, everybody knows there are two ways to reduce the deficit in the
short run and the debt in the long run. One way is to cut spending. But
that is not the only way. Another way is to raise revenue and increase
income. And that is not just by raising a tax, that is by improving
business opportunity and the expansion of opportunity in America. There
is a third way: by changing the processes by which we regulate and make
decisions, by looking at reforms that in the outyears make a difference
for all of us.
On the spending side, the spending cuts are going to be difficult.
They are going to be modest compared to what our deficit really is. But
they are going to send a signal to the world that we are finally going
to get serious about our spending level, and the majority of the rest
of the world already has--whether it is Great Britain or many of the
other countries in the European Union.
So spending cuts are important. But spending cuts in and of
themselves will not solve the entire problem. In fact, H.R. 1, in the
House, which made reductions of $61 billion, was a modest start at a
long-term process. But it sent us in the right direction, and it called
the bluff the President was talking about by making real, significant
proposals.
Secondly, in terms of raising revenue, we raise revenue by expanding
opportunity, not by raising the rate of tax, but, as his deficit
commission said, by lowering the rate of tax, doing away with
deductions that are specialized and targeted in nature and giving
business the encouragement to expand.
A funny thing happened to me on January 3 of this year in Atlanta,
GA, right after the first of January. I went to the OK Cafe in downtown
Buckhead, GA, for a breakfast. That is the gathering place for most
Atlanta businesspeople on the north side of town. I was going to have a
business meeting, and Steve Hennessy walked in, one of the largest
automobile dealers in the United States. He happened to come up to me.
He rushed toward me. He had his arms open. I thought I was going to get
a good luck hug, a ``go to Washington and do a good job'' type speech.
Instead, he put his finger right on my nose and said: Johnny, I just
had to hire two compliance officers to comply with Dodd-Frank, and I
lost a salesman. I am spending more money complying and less money
producing.
That is one of the things this administration has done in tremendous
quantity to put us in a very difficult situation. Every agency is
promulgating rules and regulations at a rapid rate--regulations that to
comply with cost new employees, more expense in operating a business,
and less capital investment in what that business does.
It is very important that the President understand what happens; that
is, regulation has consequences. Right now the regulatory volume of the
United States being proposed by this administration is unsustainable.
It is costly, and it increases the debt and the deficit of the United
States of America. Quite frankly, it is a reach far beyond where
government should go.
I am the first person to support occupational safety, the first
person to support financial security, the first person to support
transparency. I will always fight to see that our government is
transparent and our rules are fair and our occupational safety is good.
But to overreach, to go beyond our reach, is just wrong.
I will give you a couple of examples. Georgia is a large agricultural
State. Yesterday I was with some cotton farmers who were bemoaning the
fact of the most recent proposal to regulate agricultural dust. The EPA
actually wants to regulate the dust created by a plow or a tractor or a
truck on a dirt road on a farm, to say that the farmer must make sure
that dust stays within the confines of his hedge row or his fence
line--meaning we are going to try to control nature? Well, how is he
going to do it? By hiring water trucks to follow behind his tractor to
tamp down the dust? That is a reach too far.
To categorize milk as oil and to say farmers who run dairies have to
have storage tanks for milk that are equivalent to storage tanks for
petroleum, that is just crazy. It is a reach too far, and it makes the
ability to do business tougher, the ability to make a profit more
impossible, the amount of revenue produced less because it is less
profitable, and it protracts our debt and our deficit problem.
So when the President talks about calling bluffs, I am willing to do
it. I am willing to sit down and talk about the hard issues. In fact, I
am willing to tell the story about how in certain measure myself and
everybody else born after 1943 in America is an example of some of the
things we need to do.
In 1983, I was 39 years old. Social Security sent out their annual
report on the stability of the Social Security fund and said it was
going broke; that if we did not do something we were going to run out
of Social Security benefits in the early 2000s.
Well, that worried everybody. But Tip O'Neill, a great Speaker and a
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Democrat, and Ronald Reagan got together at the White House, and they
said: We have a problem.
Ronald Reagan said: Well, I don't want to raise the payroll tax.
Tip O'Neill said: I don't want to lower the amount of the benefit.
They looked at the actuary and said: What do we do? And he said:
Recast the eligibility. Push it into the outyears, and that will get
the system calibrated and back to actuarial soundness.
So they sat down with the actuaries at the table and said: I tell you
what we are going to do. We are going to preserve everybody's Social
Security eligibility today. But for those people born after 1943 and
before 1947, we are pushing them out from age 65 to age 66. I was born
in 1944. With a stroke of a pen, Ronald Reagan and Tip O'Neill changed
my eligibility by 1 year. But they changed mine and millions of other
Americans at the lead of the baby boomers, recalibrated the system, and
put Social Security in actuarial soundness until 2050. Then they added
2-month increments for eligibility beyond, where eventually the law now
takes Social Security eligibility to 67.
The President's commission recommended doing a similar thing over the
next 50 to 75 years to push eligibility out so that benefits are not
cut. Eligibility is changed but taxes do not go up. Eligibility is only
changed, and when you become eligible to collect.
We already know that when Social Security was formed originally, most
people did not live to the eligibility age of 65, and today most
everybody does. Our lifespans are a longer time, and that is what has
gotten the system actuarially unsound.
So I do not think it is right to say that nobody has answered the
call on debt and deficit reduction. I do not think it is right to say
that our bluff--we have not been bluffing anybody, neither did the
President's debt and deficit commission. They called our hand by giving
us consequential recommendations that work and in the long term make
the future of America bright.
This problem is not a partisan problem; it is a bipartisan problem.
The parties have contributed each to the other to cause the problem. We
need to sit down together and begin solving it but not making it a
political issue for the 2012 election with no solutions. Instead of
bluffs, we ought to make constructive proposals. Instead of speeches on
the floor that run time, we ought to be offering amendments on the
floor that make a difference in terms of the debt and the deficit of
the United States of America.
This is the greatest country on the face of this Earth, and it is
because people trust it. But if we continue to look the other way as
our debt and our deficit increases, that trust will dissipate and our
interest rates will go up, the cost of goods and services will be
inflated, and America will be in trouble.
I close by telling a brief story about a speech I made in Albany, GA,
last year in November, when I was talking about the debt and the
deficit, talking about some of the solutions we have talked about. I
kept talking about a trillion this and trillion that, and saying one
day soon we are going to owe $14 trillion.
A farmer at the back of the room at the rotary club raised his hand
and said: Senator, I only went to Dougherty County High School. I don't
know how much $1 trillion is. How much is it?
Well, I stumbled and I stammered, and finally, I said: Well, it is a
lot. I could not think of how to quantify it.
I got home that night, and my wife said: What is wrong? I said: Well,
I got stumped today.
She said: What was the question?
I said: The question was, how much is a trillion?
She said: What did you say?
I said: Well, it is a lot.
She said: Well, that was stupid.
I said: Well, give me a suggestion.
And she is always right.
She said: Well, why don't you just figure out how many years have to
go by for 1 trillion seconds to pass. Then people will understand how
much $1 trillion is.
So I did the math. I multiplied 60 seconds times 60 minutes times 24
hours times 365 days. I got on the calculator, and the calculator only
went to 12 digits. So I had to go to the computer to get something that
would go to 13 digits, which is a trillion. I divided that product into
1 trillion.
Do you know how many years have to pass for 1 trillion seconds to go
by? Madam President, 31,709. And we owe $14 trillion. At a dollar a
second, for over 400,000 years, we could solve our problem. That is a
huge problem. But we have the benefit of the time value of money and
the hope and opportunity of the greatest country on the face of this
Earth.
So I call the President's bluff. Let's sit down together and talk
about the tough things. Let's talk about the shared sacrifice. Let's
talk about the benefit that comes from responsibility, frugality, and a
commitment to the principles of our Founding Fathers and always
remember the principle that less debt is better, and we should never be
a country controlled by those we owe. Instead, we ought to be a country
loved by those we protect.
Madam President, I yield the floor and suggest the absence of a
quorum.
The PRESIDING OFFICER (Ms. Klobuchar). The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. GRASSLEY. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
Mr. GRASSLEY. Madam President, I understand there are questions about
what the tax strategies portion of the bill does and who it impacts. So
I want to take a few minutes to address those questions.
In simple terms, a tax strategy is any method for reducing, avoiding,
or deferring tax liability based upon the tax law--including
interpretations and applications of the Internal Revenue Code,
regulations, and related guidance.
A tax strategy can be as simple as a plan to buy tax-exempt bonds or
invest in an IRA to reduce your tax liability or as complex as some
sort of sale-leaseback tax shelter involving multiple domestic and
foreign corporations and partnerships.
A tax strategy patent, which is what we are talking about in this
bill, is just that--a patent on a particular tax strategy.
Madam President, I ask unanimous consent to have printed in the
Record an article from a publication called the Tax Adviser. This
article provides some examples of tax strategies that should not be
patented.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Tax Advisors, Aug. 1, 2007]
Patenting Tax Ideas
(By Justine P. Ransome, J.D., MBA, CPA; and Eileen Sherr, CPA, M.Tax)
Executive Summary
TSPs have been issued in many areas, and many applications
are currently pending.
Such patents thwart Congressional intent and undermine the
integrity of, and the public's confidence in, the tax system.
AICPA will continue to work with the IRS, USPTO, Treasury
and Congress to handle--and hopefully resolve--this emerging
issue.
One of the greatest challenges tax practitioners face in
providing quality tax services to clients is to keep abreast
of the ever-changing complexity of the tax law. Added to this
challenge is the burden of determining whether the chosen
advice is another party's exclusive property. While this may
seem absurd, in the real world of tax consulting, tax
advisers must now contend with certain practitioners and
companies seeking patents to protect their exclusive right to
use various tax planning ideas and techniques they claim to
have developed.
Tax practitioners may be surprised to find that tax
strategies they have used routinely in practice are now
patented and unavailable for use without the patent holder's
permission. The trend of patenting tax strategies is on the
rise. This article explores tax-strategy patenting. It
provides an overview of the issue and discusses the AICPA's
concerns and activities to keep its members informed, as well
as its attempts to seek a legislative remedy that will stem
the tide of these types of patents.
Background
The Patent Act of 1952 provided that patents may be granted
for innovations that are useful, novel and nonobvious. Under
35 USC Section 271, a patent gives its holder the exclusive
right to make, use and sell the patented idea. The
consequences of infringing a patent can be substantial. The
remedies for patent infringement under 35 USC Sections 283
and 284 include injunctive relief and money damages equal to
lost profits or a reasonable royalty. Money damages can be
tripled in cases of willful infringement, as authorized under
35 USC Section 284; under 35
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USC Section 285, attorneys' fees can be awarded to the
prevailing party in exceptional cases. Issued patents are
presumed valid; under 35 USC Section 282, an accuser must
overcome this presumption with clear and convincing evidence
to invalidate a patent. Even if an accused is not found
liable, defending a lawsuit can be costly.
In 1998, the Federal Circuit, in State Street Bank & Trust,
held that business methods are patentable. Since this
decision, patents for business methods have flourished. In
some cases, these patents involve processes that would seem
to be neither novel nor nonobvious (i.e., other reasonably
intelligent people would come to the same or a similar
conclusion when confronted with the same or similar issue).
Recently, the Supreme Court held that the long-standing
test used by the lower courts to determine whether an idea
was nonobvious was not being applied correctly (and, in fact,
was being applied too strictly). The opinion stated that for
an idea to be nonobvious, it must be (1) one that would not
have occurred to persons of ordinary skill and intelligence
in the field of endeavor involved; or (2) previously
available knowledge that would have caused a person of
ordinary intelligence to affirmatively believe that the idea
would not work. Since this decision was just handed down, it
remains to be seen what effect it will have on the
proliferation of patents for business methods in the future.
The patenting of business methods has recently crept into
the practice of tax planning. At press time, 60 tax-strategy
patents (TSPs) have been granted; 86 are pending. There may
be additional TSPs; about 10% are generally unpublished,
because applicants can elect not to publish a patent if no
protection is being sought in a foreign jurisdiction. Also,
it can take up to 18 months for a patent application to be
published and listed on the USPTO website. As discussed
below, many of these patents deal with planning techniques
routinely used by tax practitioners in delivering tax
services to clients.
Reasons for Concern
SOGRAT patent: The primary catalyst for the concern of the
AICPA and other tax practitioners was a 2006 infringement
suit over the ``SOGRAT patent.'' Awarded by the USPTO on May
20, 2003, to Robert C. Slane of Wealth Transfer Group LLC,
the SOGRAT patent describes an estate planning technique that
uses grantor retained annuity trusts (GRATs) to transfer
nonqualified stock options (NQSOs) to younger generations,
with few or no gift tax consequences.
GRATs are permitted under Sec. 2702 and the regulations
there under. Many estate planners are familiar with, and
routinely use, GRATs to shift a variety of different types of
assets to younger generations. Thus, it came as quite a
surprise to many estate planners when an article touting the
estate tax benefits of placing NQSOs into a GRAT noted that
the technique had been patented by one of that article's
authors. This surprise grew into concern when the patent
holder instituted the above-mentioned patent infringement
suit against a taxpayer who implemented the technique without
its permission.
Warning letters: As previously stated, money damages can be
tripled in cases of willful infringement (which requires
knowledge of the patent). Some patent holders have resorted
to mail campaigns and/or press releases touting their patents
and warning other tax practitioners that they may be
infringing on said patents. For example, one patent
infringement warning letter addressed a method for financing
future needs of an individual or future intentions on the
death of such person, and a method for investing long-term
assets of tax-exempt charities. The letter noted that the
allowed claims in the patent involve investments used for
charitable remainder trusts, pooled-income funds, charitable
gift annuities, charitable lead trusts and permanent
endowment funds.
Part of this patent resembles the facts and results of
Letter Ruling 90090471 and TAM 9825001. In those rulings, the
IRS permitted a net-income charitable remainder unitrust to
invest in a tax-deferred annuity contract for the purposes of
controlling the timing and amount of income distributions and
to otherwise provide a guaranteed death benefit payable to
the charitable remainder interest holder. The patent purports
to achieve a similar result through the use of tax-deferred
arrangements.
The patent holder also sent a press release to the Planned
Giving Design Center (PGDC), a professional organization that
provides advice on charitable planning and taxation. An
article written by the PGDC's editor noted that the letter
ruling and TAM are well known to members of the insurance
community in particular, ``which have since facilitated
thousands of annuity invested charitable remainder trusts
since 1990.'' The article further noted that these rulings
are also well known to the IRS, which issued them and
subsequently discussed such arrangements in its 1999
Continuing Professional Education text. The IRS also added
these rulings to its annual ``no-ruling'' list as it studied
whether they conveyed an inappropriate tax benefit to
taxpayers. The article noted that all of these events
occurred well in advance of the date the holder applied for
his patent (2004).
In light of that patent, the AICPA and American Bar
Association (ABA) asked the USPTO whether IRS rulings were
considered ``prior art'' (and, thus, not novel) if they were
not listed in the ``Other References'' section of a patent
application. The patent application did not contain a
reference to either ruling. The USPTO replied that, although
it had not required such information in the past, it would
start requesting it for financial-type patents under its Rule
105 (which is used to ask applicants for more information).
Sec. 1031: A patent relying heavily on Sec. 1031 has also
drawn tax advisers' attention. The ``Section 1031 deedshare
patent'' involves a method and investment instruments
(deedshares) for performing tax-deferred real estate
exchanges. The patent follows the result in Rev. Proc. 2002-
22. Its exclusive licensee, CB Richard Ellis Investors,
L.L.C., has publicized and warned that it will aggressively
pursue patent enforcement.
Deferred compensation: A patent on hedging liabilities
associated with a deferred-compensation plan was granted and
assigned to Goldman Sachs & Company. The patent purports to
provide a mechanism to hedge the compensation expense
liabilities of an employer providing deferred compensation to
one or more employees.
IRAs: A patent has been granted to evaluate the financial
consequences of converting a traditional IRA to a Roth IRA.
It describes a computer-implemented process for computing the
tax consequences of converting to a Roth IRA and various
options for funding the taxes, such as term insurance to fund
the Federal tax liability of early withdrawal for premature
death, calculating the entire rollover amount and financing
the tax and insurance premium.
FSAs: A patent has been granted on flexible spending
accounts (FSAs). The patent sets forth a method to calculate
costs using a ``health cost calculator'' and ``flexible
spending account calculator.''
FOLIOfn: The trend to patent tax ideas is only in its
infancy; however, several individuals and companies already
have applied for multiple patents. For example, FOLIOfn,
Inc., a brokerage and investment solutions company, holds
three TSPs. It has developed methods for tracking and
organizing investments and has patented mechanisms and
processes that allow users to view and manipulate potential
tax consequences of investment decisions. Several of
FOLIOfn's other business-method patents are in practice via
large licensing agreements. The company is similarly looking
for licensing opportunities for its three TSPs but has not
yet secured any deals.
As far as the AICPA is aware, only one of its members (a
sole practitioner) has applied for a TSP. The AICPA Tax
Division staff discussed the issue with that member. The
AICPA has confirmed that, currently, none of the ``Big Four'
accounting firms holds TSPs.
AICPA Issues
In a Feb. 28, 2007, letter to Congress, the AICPA outlined
its concerns and position on patenting tax strategies. Its
position is that TSPs:
Limit taxpayers' ability to use fully tax law
interpretations intended by Congress;
May cause some taxpayers to pay more tax than Congress
intended or more than others similarly situated;
Complicate the provision of tax advice by professionals;
Hinder compliance by taxpayers;
Mislead taxpayers into believing that a patented strategy
is valid under the tax law; and
Preclude tax professionals from challenging the validity of
a patented strategy.
The AICPA is concerned about patents for methods that
taxpayers use in arranging their affairs to minimize tax
obligations. TSPs may limit taxpayers' ability to use fully
interpretations of law intended by Congress. As a result,
they thwart Congressional intent and, thus, undermine the
integrity of, and the public's confidence in, the tax system.
TSPs also unfairly cause some taxpayers to pay more tax than
(1) intended by Congress or (2) others similarly situated.
The AICPA believes that the conflict with Congressional
intent highlights a serious policy reason against allowing
patent protection. Allowing a patent on a strategy for
complying with a law or regulation is not sound public policy
because it creates exclusivity in interpreting the law.
The AICPA is also concerned with tax law simplicity and
administration. TSPs greatly complicate tax advice and
compliance. Tax law is already quite complex. The AICPA
believes that the addition of rapidly proliferating patents
on tax-planning techniques and concepts will render tax
compliance much more difficult.
Because TSPs are granted by the Federal government, the
AICPA is concerned that they pose a significant risk to
taxpayers. Taxpayers may be misled into believing that a
patented tax strategy bears the approval of other government
agencies (e.g., the IRS) and, thus, is a valid and viable
technique under the tax law. However, this is not the case;
the USPTO does not consider the viability of a strategy under
the tax law. The USPTO is authorized only to apply the
criteria for patent approval as enacted by Congress and as
interpreted by the courts. The IRS is not involved in the
USPTO's consideration of a TSP application.
The AICPA is concerned that tax professionals also may be
unable, as a practical matter, to challenge the validity of
TSPs as being obvious or lacking novelty, due to their
professional obligations of client confidentiality. Tax
advisers may also find it difficult to defend patent-
infringement lawsuits due to client confidentiality. The
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USPTO will also find it difficult, if not impossible, to
determine whether proposed tax strategies meet the statutory
requirements for patentability because tax advice is
generally provided on a confidential basis.
The usefulness of TSPs is also questionable. The AICPA
believes that some of these patents may be sought to prevent
tax advisers and taxpayers from using otherwise legally
permissible tax-planning techniques, unless they pay a
royalty.
The AICPA is concerned that both tax practitioners and
taxpayers may be sued for patent infringement, whether or not
the infringer knew about the patent. A taxpayer can infringe
a patent without intent or knowledge of it; ignorance of an
applicable patent is not a defense. Practitioners must be
aware that once they know that a particular tax strategy is
patented, using that strategy without the patent holders
permission may expose them to claims of willful infringement
and triple damages. Unfortunately, the current environment
may leave some practitioners with no recourse, other than
engaging patent counsel to review and monitor techniques they
routinely use.
Advocacy Efforts and Communications
Background: In November 2005 and February 2006, the AICPA
Trust, Estate & Gift Tax TRP discussed this emerging issue
with IRS representatives. In addition, AICPA President Barry
Melancon discussed this issue with then-IRS Commissioner Mark
Everson on Oct. 17, 2006, advising him of the AICPA's concern
and desire to take legislative action.
In January 2006, the AICPA Tax Division's Tax Executive
Committee (TEC) decided to form the PTF. This article's
authors chair and staff that task force, respectively. The
PTF was formed with both large- and small-firm members, from
various technical areas of the AICPA Tax Division, including
individual, international, partnership, S corporation, tax
policy and legislation, and trust, estate and gift taxes. The
task force held several conference calls and meetings,
including one call with a patent expert who explained the
basis for patents and the application process.
In June 2006, the TEC authorized some PTF members to
participate in a joint multi-professional organization task
force (including the AICPA, the ABA's Real Property, Probate
and Trust Law Section and Tax Section, the American College
of Trust and Estate Counsel and the American Bankers
Association) on the issue. The joint task force had several
conference calls; its chair attended a PTF meeting in
November 2006.
In July 2006, prior to the Congressional hearings on the
issue, the PTF discussed its concerns with Capitol Hill
staff. This article's authors attended the hearing, then
updated AICPA Tax Division members about the issue and
hearing via an electronic alert (e-alert) in August 2006.
In October 2006, the AICPA up-dated members via an update
to state CPA societies. In February 2007, the AICPA sent to
the leadership of the House and Senate tax-writing and
judiciary committees its position on tax-strategy patenting,
including legislative proposals. E-alerts went out to the
AICPA membership and were included in the April 2007 issue of
the AICPA's The CPA Letter. In addition, PTF members authored
Journal of Accountancy articles on the subject.
In March 2007, the PTF drafted and submitted comments to
Treasury on the regulations for ``reportable transactions.''
These comments recommended that Treasury not require
taxpayers to report patented transactions as reportable
transactions, but require the patent holder or USPTO to
disclose when the patent is issued.
The AICPA Congressional and Political Affairs group has
made TSPs a top priority and is in discussions with Congress
and its staffs, as well as the USPTO's General Counsel and
Director of Business Method Patents, to develop and enact
legislation designed to bar grants of, or provide immunity
for taxpayers and practitioners from liability related to,
such patents. Currently, the AICPA's legislative efforts are
focused on the judiciary committees, which consider and vote
on any patent legislation.
Action: The AICPA has taken a pro-active role against the
patenting of tax ideas. Most of its efforts are reflected in
a website it has created on the subject, which contains:
AICPA comments to Congress, Treasury and the IRS, updates
to members, and its PTF roster;
Comments of other groups and the Joint Committee on
Taxation;
USPTO links;
Information on specific TSPs;
Related articles and other information; and
Links to additional resources.
Recommended Steps
To minimize potential liability until a legislative
solution is enacted, tax practitioners should take the
following steps, as appropriate, in response to TSPs:
Stay current on matters regarding TSPs by continually
visiting the AICPA website on the subject.
Read articles and attend conferences about TSPs.
Continually visit the USPTO website to determine if a tax
idea, technique or strategy that a tax practitioner intends
to recommend to a client has been issued a patent or if one
is pending.
If a strategy is either already patented or is similar to a
patented strategy:
Advise the client about the patent's existence, the options
available and the associated risks;
Determine whether patent counsel is needed to further
investigate the patent; and
If there is a relevant patent, determine whether to
negotiate with the patent holder to be able to use the
strategy.
Proposed Legislative Solution
The AICPA has considered various administrative solutions
to this issue and concluded that they are insufficient. In
its Feb. 28, 2007, letter, it encouraged Congress to develop
legislation to eliminate the harmful consequences of TSPs by
either (1) restricting the issuance of such patents or (2)
providing immunity from patent infringement liability for
taxpayers and tax practitioners.
HR 2365, legislation sought by the AICPA to limit damages
and other remedies with respect to patents for tax-planning
methods, was introduced by Rep. Rick Boucher (D-VA) on May
17, 2007, with initial co-sponsors Reps. Bob Goodlatte (R-VA)
and Steve Chabot (R-OH). Reps. Boucher, Goodlatte and Chabot
are senior members of the House Judiciary Committee, which
has jurisdiction over patent legislation. The bill was
referred to that committee. As of May 30, 2007, 14 cosponsors
had signed onto the bill. AICPA efforts and discussions
continue with other members of Congress, including members of
the Senate Judiciary Committee. On May 16, 2007, Reps. Lamar
Smith (R-TX), Boucher and Goodlatte sent a letter requesting
a hearing on the issue to Howard Berman (D-CA), chairman of
the House Judiciary Committee Subcommittee on Courts, the
Internet, and Intellectual Property.
The Future
The AICPA continues to work with Congress to make
legislative changes regarding the patenting of tax
strategies. It is also currently working with the USPTO to
determine how both organizations might work together to
better scrutinize such patent applications. The AICPA will
continue to focus its legislative efforts on the judiciary
committees and to work with the USPTO, IRS and Treasury, as
well as other professional groups, to educate tax advisers on
TSPs and to enhance the flow of information among the groups.
The PTF and the AICPA will continue to update its website
with additional resources for members, develop other
educational and practice-oriented tools and study and address
related professional ethical issues.
Conclusion
Practitioners and taxpayers need to (1) be aware that TSPs
are being granted and (2) review planning approaches and
consider consulting with patent counsel, if appropriate. Tax
advisers should ask clients about their use of tax
strategies, as they may be unknowingly using patented ones.
The AICPA will continue to work with the IRS, USPTO, Treasury
and Congress to handle--and hopefully resolve--this emerging
issue.
Mr. GRASSLEY. Tax strategies are bad because they allow the tax law
to be patented. A patent gives the holder the exclusive right to
exclude others from using the patented invention. A tax strategy patent
makes taxpayers choose between paying more than legally required in
taxes or providing a windfall to a tax strategy patentholder by paying
a royalty to comply with the tax law.
Tax strategy patents add another layer of complexity to the tax laws
by requiring taxpayers or their advisers to conduct patent searches and
exposing them to potential patent infringement lawsuits.
If a tax strategy patent is granted for a tax shelter designed to
illegally evade taxes, the fact that a patent was granted may mislead
unknowing taxpayers into believing the obvious: That the strategy is
valid under the tax law when, in fact, it might not be.
Tax strategies are not like other inventions because everyone wants
to pay less tax. Tax strategy patents are on the rise, which then means
more and more legal tax strategies are unavailable or, obviously, more
expensive for more and more taxpayers.
Madam President, I ask unanimous consent to have printed in the
Record a letter. This letter, which is from a coalition of 15 consumer
groups, including the umbrella group for public accountants, the Tax
Justice Center, and the U.S. Public Interest Research Group, provides
more information on why tax strategy patents are bad for taxpayers.
There being no objection, the material was ordered to be printed in
the Record, as follows:
February 2, 2011.
Re Tax Strategy Patents.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary, U.S. Senate,
Washington, DC.
Hon. Charles Grassley,
Ranking Member, Committee on the Judiciary, U.S. Senate,
Washington, DC.
Dear Gentlemen: On behalf of our 15 national organizations
representing consumer, taxpayer, charitable, financial
planning, and
[[Page S1201]]
tax advisor groups, we commend you for including a provision
in S. 23, The Patent Reform Act of 2011, to address the
serious problem of tax strategy patents. Similar to
legislation recently introduced by Senators Baucus and
Grassley, S. 139, we believe that this pro-taxpayer measure
is a critical component of any comprehensive patent reform
effort. The ongoing, serious concerns associated with tax
strategy patents pose a significant threat to American
taxpayers and businesses, and we believe that Congress must
prioritize fixing this problem as soon as possible.
As the Senate Judiciary Committee moves to mark up S. 23,
we ask you specifically to champion this provision, and
aggressively oppose any efforts to weaken or remove it. There
is too much at stake to allow special interests to try to
monopolize methods of Federal tax compliance, leaving
American taxpayers potentially subject to lawsuits.
royalties, and a much more complicated, expensive tax code.
As you know, the problems associated with tax strategy
patents are multiple and quite complex. First, such patents
may limit the ability of taxpayers to utilize fully
interpretations of tax law intended by Congress--effectively
creating a monopoly for the patent holders to determine who
can and cannot utilize parts of the tax code. Furthermore,
tax advisors, who generally are not patent experts, have the
burden to be aware of such patents, and either provide tax
advice that complies with the patent holder's requirements,
risk a lawsuit for themselves and their clients, or
potentially not provide the most advantageous advice to
clients. Not surprisingly, these patents create a highly
burdensome level of cost ultimately borne by taxpayers.
These patents already affect a myriad of tax planning
vehicles, including retirement plans, real estate
transactions, deferred compensation, financial investments,
charitable giving, and estate planning transfers. We are
concerned that the U.S. Patent Office may permit the
expansion of these types of patents into additional areas
broadly affecting average taxpayers. For example, there are
pending patents that would affect taxpayers' ability to
create a financial plan for funding college education,
utilize incentive programs for health care savings account
cards, insure against tax liabilities, and use life insurance
to generate income.
As of now, the numbers of tax strategy patents have grown
to over 130 issued and more than 150 pending. We fear this
trend is likely to continue to grow exponentially without
your leadership. Legislation must be passed quickly if we are
to provide taxpayers with equal access to all available
avenues of federal tax compliance.
As you know, there is broad, bipartisan, and growing
support for this legislation. In the 111th Congress,
Congressmen Rick Boucher and Bob Goodlatte introduced H.R.
2584, a similar initiative which ended the Congress with 45
cosponsors. That legislation built off of the passage of
comprehensive patent reform legislation, passed by the House
in the 110th Congress, which included its own tax strategy
patents provision. In addition, Senators Baucus and Grassley
previously introduced legislation on this topic in the 110th
Congress, garnering 30 cosponsors, including then-Senator
Barack Obama. The National Taxpayer Advocate, Nina Olsen, has
also publicly stated her support for a legislative solution
to this problem. Clearly, with such overwhelming support and
momentum over the last several years, the time has come to
finally enact this proposal and send it to the President.
Thank you again for your leadership on behalf of American
taxpayers. Please contact any of us if we can assist you as
you move forward on this important matter.
Sincerely,
Barry C. Melancon, CPA, President and Chief Executive
Officer, American Institute of Certified Public
Accountants; Nicole Tichon, Executive Director, Tax
Justice Network USA; Jo Marie Griesgraber, Executive
Director, New Rules for Global Finance; Richard M.
Lipton, Chair, American College of Tax Counsel; Linda
Sherry, National Priorities Director, Consumer Action;
Karen M. Moore, President, The American College of
Trust and Estate Counsel; Tanya Howe Johnson, President
and CEO, Partnership for Philanthropic Planning;
Raymond W. Baker, Director, Global Financial Integrity;
Edwin P. Morrow, CLU, ChFC, CFP',
RFC', Chairman and Chief Executive Officer,
International Association for Registered Financial
Consultants; H. Stephen Bailey, President,
International Association for Registered Financial
Consultants; Michael Nelson, Executive Vice President &
Chief Executive Officer, National Association of
Enrolled Agents; Gary Kalman, Director, Federal
Legislative Office, USPIRG; Kevin R. Keller, Chief
Executive Officer, Certified Financial Planner Board of
Standards; Marvin W. Tutle, CAE, Executive Director/
CEO, Financial Planning Association; John Akard Jr.,
JD, CPA, President, American Association of Attorney-
Certified Public Accountants; Robert S. McIntyre,
Director, Citizens for Tax Justice.
Mr. GRASSLEY. Section 14 of the bill, which has been before the
Senate for the last week or more, prevents patenting of tax law. It
provides that a strategy that relies on the tax law to reduce, to
avoid, or to defer tax liability cannot be novel or nonobvious.
So a strategy for reducing, avoiding, or deferring tax liability will
be deemed insufficient to differentiate a claimed invention from the
prior art for purposes of evaluating an invention under section 102 or
section 103 of the bill that is before us. This ensures that taxpayers
and their advisers will then be guaranteed equal access to the tax
laws, and that is obviously the fair way to do it. It is the
commonsense way to do it.
So I wish to be clear that tax preparation software is not a tax
strategy. Senior policy and examination staff from the Patent and
Trademark Office agree that such software is not a tax strategy.
I also have letters from H&R Block, KPMG LLP, and Grant Thornton that
state that the underlying language does not impact their software
patents. Again, I ask unanimous consent to have these letters printed
in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
H&R Block,
Washington, DC, February 10, 2011.
Hon. Charles E. Grassley,
Ranking Member, Senate Judiciary Committee, Dirksen Senate
Office Building, Washington, DC.
Dear Ranking Member Grassley, Our company has reviewed the
language in Section 14 of the Patent Reform Act of 2011, now
pending in Congress. Although H&R Block holds and is seeking
numerous patents pertaining to methods of delivering tax
advice and tax return preparation, H&R Block's inventions do
not, by their nature, reduce, avoid, or defer tax liability.
Therefore, at this time, we do not have any major concerns
regarding the language in the Act that statutorily deems that
all strategies for reducing, avoiding, or deferring tax
liability are `in the prior art' and not patentable.
Nonetheless, we should mention that H&R Block is concerned
about the precedent that this bill will set. Our fear is that
Congress is going down the path where, in the future, it will
simply declare ``not patentable'' any subject matter it deems
to be unpopular or politically unfavorable.
Sincerely,
Brian Donohue,
AVP, Government Relations.
____
KPMG LLP,
Washington, DC, February 25, 2011.
Hon. Patrick Leahy, Chairman,
Hon. Charles Grassley, Ranking Member,
U.S. Senate Committee on the Judiciary 224 Dirksen Senate
Office Building Washington, DC.
Dear Chairman Leahy and Ranking Member Grassley: We would
like to commend you on the inclusion of section 14--a ban on
the patenting of tax strategies--in S. 23, the Patent Reform
Act of 2011, recently approved and reported by the Committee.
We agree with the sentiments expressed by Sen. Grassley on
February 3rd that ``[i]f firms or individuals were able to
hold patents for these strategies, some taxpayers could face
fees simply for complying with the tax code.'' Taxpayers
should not be forced to choose between paying more tax than
they are legally obligated to pay or paying royalties to a
third party with a patent on a legal method of complying with
tax law. Tax strategy patents create higher costs and produce
confusion for taxpayers and their advisors.
As noted by the AICPA in its letter to you, tax strategy
patents undermine Congressional authority, intent, and
control of tax policy, and would create inequalities among
taxpayers. No person should hold exclusive rights over how to
comply with the Tax Code.
We are a firm with extensive experience in the provision of
tax advice to clients, and we are a firm that develops its
own proprietary tax tools, including computer software. We
therefore appreciate the proper balance between the
protection of intellectual property rights and the public
policy concerns implicated by extending that protection to
patents on tax planning. This bill gives proper deference to
the rights of the taxpayer and the already complex
requirements of a tax advisor. We therefore urge inclusion of
section 14 by the Senate in the final version of S. 23.
Respectfully yours,
KPMG LLP.
____
Grant Thornton,
Washington, DC, February 24, 2011.
Re: Tax strategy patent legislation.
Hon. Patrick J. Leahy,
Chairman, Committee on the Judiciary, U.S. Senate,
Washington, DC.
Hon. Charles Grassley,
Ranking Member, Committee on the Judiciary, U.S. Senate,
Washington, DC.
Dear Gentlemen: I am writing to offer Grant Thornton's
strong support for the tax strategy patent provision included
in the patent reform legislation (S. 23) recently approved by
the Senate Judiciary Committee and now poised for full Senate
consideration. I would like to commend you for your
commitment to addressing the problems created
[[Page S1202]]
by tax strategy patents and for including the tax strategy
patent provision in S. 23.
Patents on tax strategy methods threaten the integrity,
fairness, and administration of the tax system, and Grant
Thornton believes resolving this problem must be an essential
component of any patent reform legislation. Grant Thornton
wants to encourage you to aggressively oppose efforts to
remove or weaken the tax strategy patent provision in S. 23.
Tax strategy patents grant private legal parties virtual
20-year monopolies over particular methods of compliance with
U.S. tax laws. Taxpayers cannot satisfy their legal
obligations using a patented interpretation of the tax code,
allowing patent holders to privatize tax provisions that
Congress intended for everyone. This makes a uniform
application of the U.S. Tax Code impossible, potentially
forcing taxpayers to pay more tax than Congress intended and
more tax than similarly situated taxpayers. Tax strategy
patents threaten to undermine public confidence in the
nation's tax laws, hinder compliance, and mislead taxpayers
into believing that a patented strategy has been approved by
the IRS solely because a patent was granted. In addition, tax
strategy patents increase the costs and burdens of
compliance. Preparers and taxpayers must not only determine
the proper tax treatment of an item, but also whether that
treatment is covered by a patent, whether the patent might be
infringed by properly reporting the item, and whether the
patent is valid.
Grant Thornton believes that no one should have a patent on
the application of the law to the facts and that the granting
of tax strategy patents should be prohibited by legislation.
Grant Thornton supports the provision in Section 14 of S. 23,
which is based on the freestanding legislation S. 139. The
new provision builds on previous legislative efforts that
enjoyed wide bipartisan support in both chambers. In the
110th Congress, the House passed a patent reform bill that
would have barred tax strategy patents.
The new language in S. 23 would designate any claim on a
patent application for a ``strategy for reducing, avoiding,
or deferring tax liability'' as indistinguishable from prior
art, and thus preclude applicants from using a tax strategy
as the point of novelty. Grant Thornton believes this
provision needs to be enacted quickly. Over 130 tax strategy
patents have already ben approved and more than 150 are
currently pending.
Grant Thornton agrees that patents should continue to be
available for tax preparation software, so long as the patent
does not extend to tax strategies embedded in the software.
Grant Thornton believes the bill sufficiently addresses the
serious concerns raised by tax strategy patents without
infringing on the rights of others to copyright, trademark or
patent software that assists in the implementation of tax
planning.
Grant Thornton is the U.S. member firm of Grant Thornton
International, one of the six global accounting, tax and
business advisory organizations. Through member and
correspondent firms in over 100 countries, including 49
offices in the United States, the partners and employees of
Grant Thornton member firms provide personalized attention
and the highest quality service to public and private clients
around the globe.
Sincerely yours,
David B. Auclair,
Managing Principal, Washington National Tax Office.
Mr. GRASSLEY. However, now, in order to allay the concerns of Intuit,
makers of Turbo Tax, I have worked with Senator Baucus to make clear
that tax preparation software such as Turbo Tax is not a tax strategy.
Financial management software, however, is a little murkier. While
products such as Quicken and QuickBooks are not tax strategies, tax
strategies can be embedded in financial management products and
software. The investment banks and the law firms that have patented tax
strategies often use software that could be deemed financial management
software. The Tax Adviser article I mentioned earlier and got unanimous
consent to have printed in the Record describes some of these. With
financial management software, patent claims that include inventions
that are severable from tax strategies may be entitled to patent
protection, but the tax strategy itself will remain available to all
taxpayers.
So it is important to protect intellectual property rights for true
tax preparation and financial management software. However, we must be
sure to protect the rights of taxpayers to have equal access to legal
tax strategies.
I yield the floor, and I suggest the absence of a quorum.
The PRESIDING OFFICER. The clerk will call the roll.
The bill clerk proceeded to call the roll.
Mr. LEAHY. Madam President, I ask unanimous consent that the order
for the quorum call be rescinded.
The PRESIDING OFFICER. Without objection, it is so ordered.
____________________