Tax strategy patents may be headed for ash heap

Now that the Senate has approved a ban on patents for tax strategies, proponents are turning their focus to the House.

The Senate last Tuesday overwhelmingly passed, 95-5, a bill that includes a provision that prohibits individuals or firms from trade-marking a particular way of paying taxes or achieving an exemption.

The prospects for the bill are unclear in the House, which is just beginning to draft a similar measure. But the Senate vote “is a big step forward for taxpayers,” said Phillips Hinch, assistant director of government relations at the Financial Planning Association.

“We’ll be lobbying the House to make sure that provision gets into the House bill, as well. They’re still in the discussion phase,” Mr. Hinch said.

Under current law, financial planners must be aware of the various patents that are in force in the welter of U.S. tax rules.

For instance, there is a patent on how to put stock options into a grantor-retained annuity trust. If a planner wanted to recommend such a strategy, he or she would have to get permission — or risk litigation.

The situation hinders the creation of tax plans, according to the FPA.

“The tax code should be a document for everyone to use,” Mr. Hinch said.

Prohibiting tax strategy patents drew bipartisan support in the Senate.

“Taxes are a responsibility we share, and tax strategies should not be hijacked and monopolized for profit,” Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said in a statement.

Tax strategy patents are increasing, said Sen. Charles Grassley of Iowa, the ranking Republican on the committee. “More and more legal tax strategies are unavailable or more expensive for more and more taxpayers,” Mr. Grassley said in a statement.

“It’s important to protect intellectual-property rights for true tax preparation and financial management software. At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. That’s necessary for fairness and tax compliance.”

E-mail Mark Schoeff Jr. at [email protected].