Is my loophole really legit?
(FORTUNE Magazine) -- The IRS has a surprising new enemy in the battle against abusive tax shelters: the U.S. Patent and Trademark Office. In recent years the Patent Office has begun granting patents to people who claim to have invented novel ways of avoiding taxes. The trend is part of an explosion in the number of patents granted to financial firms for "business method" innovations. So far 48 patents for tax-reduction strategies have been granted, and at least another 61 applications are pending.
For tax-shelter touts, the patents are a potentially deceptive marketing tool: Just because a process is "patented" doesn't mean it's legal. "A patent carries with it no assurance whatsoever that the process will pass IRS muster," IRS commissioner Mark Everson told a congressional hearing in July. Giving patent protection to even legit tax strategies alarms many experts. "If you can patent an interpretation of the tax law, why not patent anyone's legal advice?" asks Carol Harrington, a lawyer with the firm McDermott Will & Emery in Chicago.
Earlier this year a Florida company called Wealth Transfer Group filed suit against John Rowe, executive chairman of Aetna, alleging that he infringed on the patent it holds for a tax-savings technique involving the transfer of stock options to a certain type of trust because he used a similar technique without paying Wealth Transfer a licensing fee. The case, which has yet to go to trial, is being closely watched.
Some are warning of dire consequences if the court sides with Wealth Transfer. A more practical concern is whether the Patent Office has the ability to review patent applications for tax shelters. After all, the Patent Office has few examiners with knowledge of the arcane world of tax law. One thing is clear: If patenting tax strategies becomes the norm, we'll have to amend the old adage: Nothing in life is certain, except death, taxes--and licensing fees.
From the September 4, 2006 issue