1. Are Tax Patents Good for the Tax Profession? By Kathy E. Harrington Harrington & Harrington McDonough, GA

2. Patent Law Overview Patent rights – Not affirmative – Only negative, power to exclude Process patent rights (e.g.,TMPs) – Fewer rights – Exclusion from practicing process

3. Patent Infringement – No infringement for merely owning TMP Not promulgating idea Somewhat aligned with govt 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

4. 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

5. 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 actionable

6. 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

7. 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

8. Practicalities 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

9. Practicalities (contd.) Scholarly paper disguise wont 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

10. 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 infringement? – Dozens of steps in variety of transactions – May or may not be interrelated

11. 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!

12. 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 + attorneys fees if discovered

13. 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

14. Ethical Considerations Associated Tax Practitioners (contd.) Privilege & publication issues (contd.) – 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 §10.50(a)

15. Ethical Considerations Associated Tax Practitioners (contd.) 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)

16. Ethical Considerations Associated Tax Practitioners (contd.) 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)

17. 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 ideally: – 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

18. Conclusion 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

19. Tax Method Patents Thank You!