Taxpayers who enter into transactions that involve patented tax strategies would have to report such activities to the Internal Revenue Service under proposed regulations released this week.
While sources indicate that few tax-exempt bond issuers and practitioners use patented tax advice strategies, the rules could impact an ever-widening sector of general tax practice that is seeking to protect its methods and innovations with patents.
The IRS and Treasury Department have expressed concern about patenting tax advice strategies as the practice has grown more popular, arguing that a patent might be interpreted by taxpayers as federal approval of a transaction.
After “careful consideration” of comments received on the issue, the IRS and Treasury said they “believe that adding a new category of reportable transaction” to the federal income tax regulations’ Section 6011 will assist them in “obtaining disclosures of tax avoidance transactions and in providing effective tax administration,” according to the proposed regulations.
The rules would require parties to patented transactions to report their participation to the IRS, under existing rules for “reportable” transactions, via information entered onto Form 8886 and their tax returns.
Certain advisers also would be required to disclose such transactions on a separate form on a quarterly basis.
The regulations would define a patented transaction as one in which a taxpayer pays a fee in any amount to a patent holder, or the patent holder’s agent, for the legal right to use a tax planning method that the taxpayer knows or has reason to know is the subject of the patent.
Under the rules, a taxpayer has participated in such a transaction if his or her tax return reflects a tax benefit from the transaction, including a deduction for fees paid in any amount to the patent holder, or if the tax return reflects a benefit from obtaining a tax planning method patent or income from another’s use of the method. The proposed regulations exclude mathematical calculations or mechanical assistance in the preparation of tax returns from the reportable transactions category.
Comments and requests for public hearings on the proposed regulations must be sent to the IRS by Dec. 26.