Sen. Levin Says Tax Strategy Patents Are 'Terrible Idea'

Mr. President, I want to thank my colleagues, Senator Leahy who is the Chairman of the Judiciary Committee and Senator Grassley who is the Ranking Republican, for including in the Patent Reform Act a provision that a number of us have been working on for several years to stop the granting of tax strategy patents.

The key provision contains the text of legislation that Senators Baucus, Grassley and I, as well as others, introduced earlier this year, S. 139, the Equal Access to Tax Planning Act, to end the troubling practice of persons seeking patents for tax-avoidance strategies. Issuing such patents perverts the tax code by granting what some could see as a government imprimatur of approval for questionable or illegal tax strategies, while at the same time penalizing taxpayers seeking to use legitimate strategies.

Since 1998, when federal courts ruled that business practices were eligible for patent protection, the Patent and Trademark Office has issued more than 130 patents for tax strategies, with more than 150 applications pending. These patents are a terrible idea for two reasons.

First, they may be providing unintended support for abusive tax shelters. Some unscrupulous tax shelter promoters may claim that the patent represents an official government endorsement of their tax scheme and evidence that the scheme would withstand IRS challenge. Given the well-documented problem we have with tax avoidance in this country, allowing persons to patent tax strategies is not only a waste of government resources needed elsewhere, but an invitation to wrongdoers to misuse those government resources to promote tax avoidance.

Second, the granting of tax patents threatens to penalize taxpayers seeking to use legal tax strategies to minimize their tax bills. If a tax practitioner is the first to discover a legal advantage and secures a patent for it, that person could then effectively charge a toll for all other taxpayers to use the same strategy, even though as a matter of public policy all persons ought to be able to take advantage of the law to minimize their taxes. Companies could even patent a legal method to minimize their taxes and then refuse to license that patent to their competitors in order to prevent them from lowering their operating costs. Tax patents could be used to hinder productivity and competition rather than foster it.

Federal patent law is supposed to encourage innovation, productivity, and competition by encouraging inventors to innovate, secure in the knowledge that they can profit from their efforts. In the tax arena, there is already ample incentive for taxpayers to seek legitimate ways of reducing their tax burden, as the wealth of advice and consulting in this area demonstrates. Injecting patents into the mix encourages abusive tax avoidance while raising the cost of legal tax planning at the same time, both to society's detriment.

I introduced the first bill to ban tax patents back in 2007. Since then, Senators on both sides of the aisle have been trying to get this problem fixed. The language in the bill before us today is designed to put a halt to the issuance of patents for tax strategies once and for all, including for the 155 pending applications. Although the bill does not apply on its face to the 130 plus tax patents already granted, if someone tries to enforce one of those patents in court by demanding that a taxpayer provide a fee before using it to reduce their taxes, I hope a court will consider this bill's language and policy determination and refuse to enforce the patent as against public policy.

The tax-patent provisions of this bill are significant, but they are not the only reasons to support passage. This legislation will create jobs, help keep our manufacturers competitive and strengthen and expand the ability of our universities to conduct research and turn that research into innovative products and processes that benefit Michigan and our nation. It also will assist the new satellite Patent and Trade Office that will be established in Detroit by modernizing the patent system and improving efficiency of patent review and the hiring of patent examiners. One objective of the new office in Detroit is to recruit patent examiners to reduce the backlog of patent applications. This legislation is a huge step forward in that effort.