IRS Proposes Reporting Requirement for Transactions Involving Patented Tax Planning Methods

Today the IRS published a proposed rule that will add “patented transactions” to the categories of reportable transactions under the federal income tax regulations.  The proposed rule defines a “patented transaction” as “any transaction for which a taxpayer pays (directly or indirectly) 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 a reason to know is the subject of the patent.”  Patented transactions also include any “transaction for which a taxpayer (the patent holder or patent holder’s agent) has a right to payment for another person’s use of a tax planning method that is the subject of the patent.”   When the new rule is final, any person who pays or receives a fee for the right to use a patented tax planning method will be required to report the payment/receipt as a reportable transaction.  The proposed rule defines a “tax planning method” as “any plan, strategy, technique or structure designed to affect Federal income, estate, gift, generation skipping transfer, employment or excise taxes.” Although the number of issued patents covering tax planning methods is relatively small, the rules may be the IRS’ reaction to legislative action that seeks to ban tax patents altogether.  In fact, the patent reform bill passed by the House of Representatives on September 7 includes such a ban.