Are Tax Patents Good for the Tax Profession

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					Are Tax Patents Good for the Tax
        By Kathy E. Harrington
       Harrington & Harrington
           McDonough, GA
          Patent Law Overview
• Patent rights
  – Not affirmative
  – Only negative, power to exclude

• Process patent rights (e.g.,TMPs)
  – Fewer rights
  – Exclusion from practicing process
       Patent Infringement
– No infringement for merely owning TMP
   • Not promulgating idea
   • Somewhat aligned with gov’t re: tax
     avoidance (exclusion of others)
– Infringement requires ALL or
  SUBSTANTIALLY ALL steps by infringer
  • old Steps not infringing
  • new in combination w/old may infringe
      Infringement Detection
– Detection generally requires evidence of practice
– Processes may be difficult to detect
   • Steps may not occur simultaneously
   • Steps may occur outside presence of person
   • Steps may be difficult to connect in series
– No door-to-door searches!
– Examiner or auditor may be the only one with a
  full view – confidentiality may deter detection
         Imputed Infringement
• Inducing infringement by another
  – Urging another to take claimed steps AND
  – Receiving economic benefit
     • Payment may be enough
     • Urging less than all steps may not be actionable
     • Benefit for old steps alone may not be
                   Old Steps
• Old steps are noncritical steps
• Substantial non-infringing use outside process
• Example:
  – 10 claims, 8 old, 2 new
  – Practicing 8 old steps is non-infringing
  – Practicing all 10 steps may be infringing with
    showing that 2 new steps were purposefully
    joined with 8 old steps
         Examination of TMPs
• New area
• Full exam requires search of
  – ALL US Tax Code & Regs (past and present)
  – EVERYTHING written in any country or language
• May not be examined fully!
• TMPs likely overbroad, subject to re-exam
• Chill on advertising by tax professionals
  – Anti-taxpayer result, IRS may favor
  – Best planning may be private under privilege
• Tax avoidance purpose may wreck benefits
  – IRS pronouncement
  – Court holding
  – Congressional action
  – Modest mention of tax scheme may avert
          Practicalities (cont’d.)
• Scholarly paper disguise won’t work
  – scholarly papers generally do not include specific set
    of steps required for TMP
  – scholarly papers generally do not include concrete
    result required for TMP
• Clients may avoid practitioner with TMP
  – Fear IRS will target client along with TMP holder
  – Listed transactions, audit focus on industry
  – Surreptitious use by client + disconnect with TMP
    holder may decrease chance of detection
           Pertinent Questions
• When is TP prohibited from performing steps?
  – Single (new) step?
  – Subset including at least one new step?
  – Old steps practiced + seminal step IRS approved?
• Who could connect steps to charge
  – Dozens of steps in variety of transactions
  – May or may not be interrelated
            Pertinent Questions
• Measure of damages on finding infringement?
   – Lost profits?
   – Value of tax reduction obtained?
• Seeking lost profits worth trouble?
   – Taxpayer practicing once for own use?
   – More than once?
   – Discoverable?
• Chill on litigation?
   – What if practiced steps for years?
   – publication of business in litigation may make
     infringement case for TMP holder!
        Ethical Considerations
     Unassociated Tax Practitioners
• Avoiding professional negligence
  – Scan all issued patents, published applications
  – ID tax planning techniques to be avoided
  – Inform client
  – Include disclaimer in fee agreement
• What if informed client practices steps?
  – Deliberate infringer
  – Treble damages + attorney’s fees if discovered
          Ethical Considerations
        Associated Tax Practitioners
• TMP application puts clients under scrutiny
   – Lawyer as representative of clients
   – § 1 Preamble; Conflict of Interest Rules 1.7(a) and
     (c)(3); C230 §10.29(a)

• Privilege & publication issues
   – No privilege for position on tax return
   – C230 required disclosure kills remaining privilege
   – 18 month pub unless agree not to file foreign, then
     only published at issue (could be years)
   – Hi profile method may destroy its success
   – Patent may make method identifiable
        Ethical Considerations
 Associated Tax Practitioners (cont’d.)
• Privilege & publication issues (cont’d.)
   –   Publication may put client into audit lottery
   –   Publicity may undermine ability to bargain
   –   Tough to allege no part of patent from client files
   –   Confidentiality Rule 1.6(a); 26 USC § 7525(a)(1); Conflict of
       Interest Rules 1.7(a) and 1.7(c)(3); C230 §10.29(a).

• Patent made to attract clients
   –   May be adverse to client
   –   May invoke disciplinary process
   –   May be adverse to TMP holder professionally
   –   Conflict of Interest Rules 1.7(a) and (c)(3); §17 Scope; C230
        Ethical Considerations
 Associated Tax Practitioners (cont’d.)
• Patent license
   – Adversarial relationship
   – Charge for use of technique puts at odds w/client
   – Fees Rule 1.5; C230 §10.27(a); Specific Prohibited Transactions
     Rule 1.8(a).
• Fee splitting with co-inventor or co-principal
   – Professional Independence Rule 5.4(a) and (b); C230 §10.27(a).

• Policy review request to government
   – Invites attention of Congress & IRS for rule changes
   – May be adverse to client
   – Publicity Rule 3.6(a)
        Ethical Considerations
 Associated Tax Practitioners (cont’d.)
• Value of patent questionable
   – IRC impermanent, ever-changing
   – Showing hand to detriment of clients
   – May fill in willfulness element against client if charged
     with improper position, tax avoidance, or evasion
• Tax effect
   – Identifies technique
   – May cause failed transaction
   – Advisor Rule 2.1; C230 §10.27(a)
                   Helpful Hints
•   TMP confidential until issue (no foreign TMP)
•   Separate entity to hold and exploit TMP
•   Entity no more available to clients than others
•   Company interested in TMP business should
    – be non-attorneys, non-CPAs, non-EAs
    – have no contact w/practicing attorney, CPA, or EA (like
      tax research company, etc.)
    – hire inventors who are not practitioners or
    – purchase patents from disconnected practitioners
• TMP applicants generally large companies
• Sole practitioners and CPAs planning for
  individuals under confidentiality:
  – Low risk
  – Skilled, can deviate from strict ambit of claims
• Advertisers with same objective as TMP more
  aware of issued patents for avoidance
• May publish alternatives as defensive pub
Tax Method Patents

  Thank You!