on September 13, 2007.
The president's top economic adviser, Edward Lazear, is attempting to patent a way for corporations to minimize their tax bills.
A patent application listing Lazear and Swiss economist Alexandre Ziegler as the inventors was filed with the U.S. Patent and Trademark Office (USPTO) in October 2006, 10 months after President Bush tapped Lazear to be chair of the Council of Economic Advisers.
The discovery of the application prompted immediate criticism of Lazear, who is now listed as the inventor of a current method for corporate tax planning at the same time he is helping drive White House tax and economic policy.
"I think he should promptly cede to the federal government any and all revenue he recovers from this," former IRS Commissioner Don Alexander told Tax Analysts.
A spokesman for Liquid Engines, a tax software company that Lazear helped found in March 2000, confirmed that the company would be the owners of the patent if it is approved. The White House did not respond to repeated calls seeking comment, but Steve Wagner, Liquid Engines vice president of development, said Lazear severed all ties with the company when he was named to Bush's tax reform panel in January 2005 -- a year before he joined the White House in his current position. According to Wagner, Lazear is listed as the inventor only because of design work he did before he left the company for the government.
But Arti Arora, a cofounder of Liquid Engines who was with Lazear at the company through late 2004, was not listed as an inventor on the new application even though she is listed as the co-inventor on all four of Lazear's other published applications.
"You sort of hope that when people are hired to work for the federal government, they're not also working for the other side," said Robert McIntyre, director of Citizens for Tax Justice.
McIntyre claimed that patents on tax strategies undermine the government's ability to collect revenue, and he said it's a clear conflict for Lazear to be pursuing a patent as an inventor while advising the president on tax policy.
According to Alexander, it is inappropriate for a government official responsible for formulating tax policy to patent tax strategies on the side. He called it a perfect example of why so many people believe patents on tax strategies should be prohibited.
Lazear's latest patent application defies warnings from Treasury, the IRS, Congress, and most recently the White House that the recent surge in tax strategy patents is harming the tax system.
"The administration understands the concerns surrounding patent protection for tax planning methods and will work with Congress to address those concerns," the White House said in a September 7 statement of administration policy.
But Wagner said he considers Liquid Engines' patents and applications to be software patents rather than tax strategy patents. The USPTO classifies Lazear's latest patent application for a "system and method for multi-state tax analysis" as a tax strategy.
The application outlines a detailed computer program for analyzing a corporation's structure and finding ways to shuffle, split, or merge its divisions and subsidiaries to achieve tax savings. The background section of the application says the program is intended to analyze the state tax consequences of the "large number of alternative ways to set up an entity structure" so as not to "forfeit potential tax savings."
Charles F. Wieland III, a patent attorney with Buchanan Ingersoll & Rooney PC, has warned about the possibility of people with influence over policy securing patents and then pushing changes in the law that could help them. He said he saw no real conflict of interest for Lazear, but characterized his application as "silly." He said its claims are too broad and have little chance of being approved by the USPTO.
Lazear's 2006 patent application builds on a previous invention by Lazear and Arora that was submitted as a patent application in December 2002 and is still pending. It was not classified as a tax strategy patent application but was clearly designed to achieve tax savings.
"A preferred embodiment of the invention concerns analyzing factor allocation to reduce overall taxes for a company with subsidiaries in regions with different tax laws," the application's abstract said. "The system includes consideration of local, state, federal and international taxes, transfer pricing, tax credit limitations, inter-state allocations in unitary and non-unitary environments, carry-overs, and others."
Wagner said the invention in the December 2002 application also belongs to Liquid Engines and is the basis for its current tax products, which the company promised on its Web site will "more quickly identify exposures" and "evaluate tax saving ideas."
"It's odd to have someone who has a major role in economic and tax policy to be concerned with, at best, tax avoidance, and at worst, something else," said former IRS Commissioner Sheldon Cohen. "If it isn't a conflict, it's damn close."
Both of Lazear's tax software program patent applications are still pending, as it can take years for the backlogged USPTO to work through inventions in the business methods area.
Treasury, the IRS, and some lawmakers in Congress have been working to address the problems to tax administration posed by tax strategy patents. The House on September 7 approved a broad patent reform bill (H.R. 1908) that includes a prohibition on tax strategy patents. A House Judiciary Committee report accompanying H.R. 1908 said that "tax strategy patents negatively impact a broad range of issues, and the legislation would accordingly deem them unpatentable subject matter."
The Senate is also working on a broad bill to overhaul the patent process, but that bill does not appear to include a provision on tax strategies. However, Sens. Carl Levin, D-Mich., Norm Coleman, R-Minn., and Barack Obama, D-Ill., recently introduced a bill (S. 681) that would bar any patent for a strategy "designed to minimize, avoid, defer, or otherwise affect the liability for federal, state, local, or foreign tax."
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact firstname.lastname@example.org