Friday, August 12, 2011

Tax Patents: What's Good for the Goose May Not Be Good for the Gander

Kellie A. Lanford
In May, Chainbridge Software, Inc. (“Chainbridge”), a company based in Fairfax, Virginia, was granted a patent for a computer based method and system for use in determining tax avoidance by taxpayers. More specifically, this method and system is used to detect tax avoidance resulting from unreasonable pricing arrangements between related parties across state lines (“transfer pricing”). According to information provided in the patent:

“. . . corporations may inappropriately reduce tax payments to states by maneuvering income, expenses, and assets solely for the purpose of cutting their taxes. These practices may be aided by major accounting firms and consultants who have developed successful strategies for assisting firms with ‘tax management,’ a euphemism for tax avoidance schemes.”
According to their website, Chainbridge primarily serves the state government tax market group. The website lists the states of Alabama, Minnesota, California, Connecticut, Louisiana, New Jersey, Rhode Island, and the District of Columbia as either past or current clients. This patent potentially provides a state with a means of identifying large corporate tax underpayments – one more way to identify and generate state revenue to reduce those ever-growing state deficits.

Ironically, on Capital Hill Congress is codifying broad patent reform which includes a provision prohibiting patents for tax strategies – that is, taxpayer favorable strategies. As stated in both the House and Senate bills:

“ . . . any strategy for reducing, avoiding, or deferring tax liability, whether known or unknown at the time of the invention or application for patent, shall be deemed insufficient to differentiate a claimed invention from the prior art.”
Both patent reform bills [see H.R. 1249 and S. 23 ] have passed their respective houses. President Obama has indicated that he will sign the bill when it reaches his desk, so all that remains is for the House and Senate to iron out the relatively small differences that exist in the current bill versions.

It’s worth noting that the proposed patent legislation seems to permit disparate treatment between tax strategies that may benefit taxpayers and those strategies that may benefit state taxing authorities – prohibiting accounting firms or consultants to patent strategies that would result in the reduction, avoidance, or deferral of taxes, but seemingly allowing other parties the opportunity to patent strategies that might identify taxpayers who have availed themselves of such tax savings opportunities.

For more information on this topic, see

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