on September 17, 2007.
The president's top economic adviser, Edward Lazear, is one of two inventors named on a patent application that seeks to help corporations minimize their tax bills.
The application lists Lazear and Swiss economist Alexandre Ziegler as the inventors and 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 tax software company Liquid Engines has claimed ownership of the patent application, although it is not listed as the assignee. White House spokesman Tony Fratto told Tax Analysts last week that Lazear had to sign a legal document that allowed Liquid Engines to pursue the patent and that White House counsel was consulted before Lazear consented.
"He could have been a jerk and they would have been stuck," Fratto said.
The discovery of Lazear's connection to the application prompted immediate criticism, as he 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.
Fratto told Tax Analysts that Lazear stood to gain nothing from the patent "and would not and could not receive royalties" if the patent is approved. According to Fratto, Lazear was listed as an inventor only because he designed an algorithm used in the tax method long before he joined the White House. Fratto said the algorithm was not originally created to be used in any tax strategy and Lazear had no part in any decision to use it in a tax patent.
But Lazear is also listed on another Liquid Engines patent application that uses his invention, and he was actively involved with the company when that application was filed in December 2002.
Lazear helped found Liquid Engines in March 2000. The company bills itself on its Web site as a cash flow and tax management software company and offers products that it promises will "more quickly identify exposures" and "evaluate tax saving ideas."
Both Fratto and Steve Wagner, Liquid Engines vice president of development, said Lazear severed all ties with the company when he was named to the President's Advisory Panel on Federal Tax Reform in January 2005, one year before he joined the White House in his current position. Fratto said Lazear had given up any ownership in the company's intellectual property even earlier, when venture capitalists injected cash into the outfit.
"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 asserted that patents on tax strategies undermine the government's ability to collect revenue, and Alexander agreed that Lazear's ties to the patent are a perfect example of why so many people believe patents on tax strategies should be prohibited.
The tax strategy patent application is at odds with 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 6 statement of administration policy.
Wagner said he considers Liquid Engines' patents and applications to be software patents rather than tax strategy patents. The USPTO, however, classifies Lazear's latest patent application for a "system and method for multistate 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 conflict of interest for Lazear but characterized his patent application as "silly." He said the application's claims are too broad and have little chance of being approved by the USPTO.
Lazear's 2006 patent application builds on the method in his December 2002 application. That application was not classified as a tax strategy patent, but it 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 says. "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 Liquid Engines' current products are based on the invention in the 2002 application. The company's Web site claims its three software packages will manage tax positions, international tax structures, and multistate tax planning.
"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 tax administration problems posed by tax strategy patents. The House earlier this month 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 says 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."
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