| Statement of Dennis I. Belcher, Partner, McGuireWoods LLP, Richmond, Virginia Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means July 13, 2006 Chairman Camp and distinguished members of the
Subcommittee, I am Dennis I. Belcher, a partner in the Richmond, Virginia office of the law firm McGuireWoods LLP. I have been in the private practice of
law for more than thirty years and have spent my career representing clients in
estate planning. In my law practice, I advise clients on how to minimize
federal and state estate, gift and generation-skipping taxes (“transfer taxes”)
using estate planning techniques so as to maximize the assets passing to family
members and other beneficiaries.
I am currently an officer in the American College of Trust and Estate Counsel (“ACTEC”). ACTEC is a non-profit professional
association comprised of approximately 2,600 lawyers who are selected on the
basis of professional reputation and ability in the field of trusts and estates
and having made substantial contributions to those fields through lecturing,
writing, teaching, and bar leadership activities. I am the past Chairman of
the American Bar Association’s Real Property, Probate and Trust Law Section,
which has approximately 30,000 members who are interested in the areas of
probate, trust law, and real estate law. I am also a member of a Task Force, called
the Patenting Estate Planning Techniques Task Force (the “Task Force”), created
by ACTEC in 2005.
I am testifying today on my own behalf
and on behalf of ACTEC and the Task Force. My testimony represents my own views,
the views of ACTEC and the Task Force, but not those of my firm, any of its
clients, or the American Bar Association.
Summary
From my experience and discussions
with other estate planning professionals, I believe that:
- Patents for tax reduction strategies in the area of transfer
taxation are creating problems for many taxpayers;
- If patents for transfer tax reduction strategies are not
prohibited, this type of patent will in all likelihood expand and create problems
for more taxpayers; and
- Patents for tax reduction strategies should be prohibited either
by the U.S. Patent and Trademark Office or by legislation.
Background
Until 2003, few estate planning advisors[1]
gave consideration to patents when advising clients about estate planning. That
view changed in 2003 when an individual was awarded a patent for an estate
planning technique that the patent holder called a “SOGRAT”.
[2]
(Although the SOGRAT patent was awarded in 2003, anecdotal evidence suggests
there are still a significant number of estate planning advisors who are not
aware that patents can be awarded for transfer tax reduction techniques.) According
to the patent, a SOGRAT involves a grantor retained annuity trust funded with
nonqualified stock options. (A grantor retained annuity trust, referred to as
a GRAT, is an estate planning technique authorized by Congress, the Treasury
Department, and the Internal Revenue Service.[3])
When word of this patent spread through the estate planning community, most
estate planning professionals were shocked to learn that an individual could
patent a common estate planning technique used in connection with a specific
asset, the purpose of which is to allow taxpayers to minimize their federal
estate and gift tax liability, particularly a technique authorized under the
Regulations issued by the Treasury Department and approved in many Internal
Revenue Service rulings.
In response to concerns about the impact of
using patents to restrict the availability of commonly used estate planning
techniques, such as GRATs, experienced estate planning lawyers discussed the
ramifications of such patents at a meeting of ACTEC’s Estate and Gift Tax
Committee in October 2004. I had the privilege of chairing that meeting.
Because of the serious nature of the concerns expressed at this meeting, ACTEC
created the Task Force to study this issue[4].
Once the existence of the Task Force became generally known to the estate planning
community, other professional organizations joined the Task Force.
Organizations with members on the Task Force now include the American Bar
Association’s Real Property, Probate and Trust Law Section, the American Bankers
Association, and the AICPA.[5]
Members of the Task Force agree about the seriousness to taxpayers of the
issues presented by the patenting of estate planning techniques. Although the
Task Force has not completed its study or issued findings or a formal report as
of this date, the Task Force has authorized me to testify on its behalf.
Because ACTEC agrees with the Task Force’s concern, on July 8, 2006, ACTEC also
authorized me to speak on behalf of ACTEC.
The purposes of my testimony are to
(1) inform Congress that a patent of one transfer tax reduction technique, the
SOGRAT patent, is presenting significant problems to many taxpayers, and (2) recommend
that either the U.S. Patent and Trademark Office or Congress prohibit the
patenting of tax reduction strategies before the patenting of this type of
strategy becomes more widespread and affects more taxpayers.[6]
The SOGRAT Patent
In some instances, Congress, the
Internal Revenue Service, and the Treasury Department have authorized tax
reduction techniques which taxpayers may take advantage of to reduce their
federal tax liability. Examples of government authorized tax reduction
techniques in the estate planning area include the federal estate and gift tax
marital and charitable deduction, the gift tax annual exclusion, charitable remainder
and lead trusts, and GRATs. A GRAT is an irrevocable trust in which the
grantor retains an annuity for a fixed term (usually two or more years) and at
the end of the term the remaining trust assets pass to beneficiaries selected
by the grantor (usually the grantor’s family). The grantor transfers assets to
the GRAT that the grantor believes will appreciate significantly over the term
of the trust. Under Internal Revenue Code section 2702, the Regulations issued
by the Treasury Department under section 2702, and rulings issued by the
Internal Revenue Service, the grantor is able to deduct for gift tax purposes
the value of the grantor’s retained annuity, thereby reducing the amount of the
gift to the grantor’s family.[7]
Because of the taxpayer’s ability to transfer appreciation on assets in the
GRAT to family members at a reduced gift tax cost, the GRAT is a frequently
used estate planning technique.
On May 20, 2003, the U.S. Patent
and Trademark Office awarded Mr. Robert C. Slane of Wealth Transfer Group,
L.L.C. a patent for a GRAT funded with nonqualified stock options, which Mr.
Slane calls a SOGRAT (a stock option granter retained annuity trust).[8]
The first claim in the SOGRAT patent is:
A method for
minimizing transfer tax liability of a grantor for the transfer of the value of
nonqualified stock options to a family member grantee, the stock options having
a stated exercise price and a stated period of exercise, the method performed
at least in part within a signal processing device and comprising:
Establishing a
Grantor Retained Annuity Trust (GRAT);
Funding said GRAT
with assets comprising stock options,
The stock options
have a determined value at the time the transfer is made;
Setting a term for
said GRAT and a schedule and amount of annuity payments to be made from said
GRAT; and
Performing a
valuation of the stock options as each annuity payment is made and determining
the number of stock options to include in the annuity payment.
Problems
Created by the SOGRAT Patent
The existence of the SOGRAT patent
is preventing taxpayers from using a government authorized estate and gift tax
reduction technique, thereby presenting problems to taxpayers in planning their
affairs. During one of the Task Force discussions, one Task Force member
reported that the holder of an estate planning patent recently contacted an
estate planning advisor employed by a financial institution and informed the
advisor that the patent holder was the owner of the estate planning technique
suggested by the advisor in a newsletter to clients. The advisor sought legal
guidance on the proper course of action. Notwithstanding that the advisor’s
lawyer believed the patent may be invalid, the lawyer recommended that the
advisor not risk using the patented technique without permission of the patent
holder. The lawyer gave this advice presumably because of the high cost of
defending a patent infringement law suit or prosecuting a suit to invalidate
the patent. After discussions, the advisor agreed not to suggest the use of
the legally authorized estate planning technique in connection with a
particular type of asset without informing clients and their lawyers of the
existence of the patent so that the client and lawyer would be responsible to make
their own judgments about the validity of the patent and the degree to which it
needed to be honored.
There is a lawsuit pending against
a taxpayer alleging the infringement of the SOGRAT patent. On January 6, 2006,
the SOGRAT patent holder filed suit in the Connecticut United States Federal
District Court for infringement of the SOGRAT patent. The defendant in the
lawsuit is Dr. John W. Rowe, the Executive Chairman of Aetna, Inc. The lawsuit
is in the discovery stage and is anticipated to go to trial in 2007. Because I
understand that the lawsuit is being prosecuted vigorously, the lawsuit cannot
be considered a nuisance lawsuit. When this lawsuit was discussed at ACTEC’s
Estate and Gift Tax Committee on July 8, 2006, the vast majority of lawyers present
(more than 100 experienced estate planning lawyers) indicated that they would
not recommend to any client the use of a GRAT funded with nonqualified stock
options without disclosing the existence of the SOGRAT patent and the pending
lawsuit. In addition, these lawyers indicated that they would be reluctant to
allow a client to use this technique without the permission of the patent
holder.
Because I am not trained in
intellectual property law, I cannot comment on the validity or non-validity of
the SOGRAT patent. But, I am qualified to address the taxpayer problems
created by patenting estate tax reduction techniques because of my thirty
years’ experience in representing taxpayers. Like most experienced
practitioners, I am troubled by the SOGRAT patent for several reasons. First,
an individual has been allowed to privatize a tax reduction technique
authorized by the United States government. Second, because GRATs can be and
are used for any type of asset[9],
there is nothing unique about coupling a GRAT with nonqualified stock options.
Because nonqualified stock options have desirable features affecting the
valuation of the options for transfer tax purposes, the use of nonqualified
stock options in a GRAT may be considered rather obvious. In summary, the
SOGRAT patent is creating problems with taxpayers because of the chilling
effect on the use of this authorized technique.
Patenting of
Transfer Tax Reduction Techniques Should Be Prohibited
Because patents of transfer tax
reduction techniques present problems to many taxpayers, the U.S. Patent and
Trademark Office or Congress should prohibit these types of patents for the
following reasons:
- It should be against public policy for a private
individual to patent a technique used to reduce a taxpayer’s tax burden;
- Patenting estate planning techniques unfairly increases a
taxpayer’s costs or the federal estate and gift taxes payable by the
taxpayer if patented techniques are not used; and
- Because a patent on a tax planning technique can add
credibility to the technique, patents on objectionable or aggressive tax
planning techniques can hurt compliance with the federal tax laws.
It is not the function of the Internal
Revenue Service or the Treasury Department to curtail patents of tax planning
techniques. Because of the nature of transfer tax reduction techniques, it may
not be possible for the U.S. Patent and Trademark Office to make an adequate review
of these techniques. Accordingly, a legislative solution may be the
appropriate response to protect taxpayers and to curtail the patenting of all tax
planning techniques before these patents become more widespread.
1. It
should be against public policy for a private individual to patent a technique
used to reduce a taxpayer’s tax burden.
A patent of a tax reduction
technique is unlike other business method patents because it relates to taxes. If
there is a business method patent in a particular area of business, a citizen
has the choice to either pay for the right to use the technique, to engage in
that business activity in a different way, or not to engage in that business
activity at all. A taxpayer who complies with the tax laws does not have that
choice – the taxpayer must pay his or her tax burden. In the familiar of words
of Judge Learned Hand, however, “Any one may so arrange his affairs that his
taxes shall be as low as possible; he is not bound to choose that pattern which
will best pay the Treasury; there is not even a patriotic duty to increase
one’s taxes.”[10]
It should be against public policy to allow a patent of a tax reduction
technique because the patent prevents taxpayers from exercising their right to
minimize their taxes within the limits of the law, and avoiding the activity in
question, the payment of taxes, is not an option.
In addition, patenting tax
reduction techniques allows private individuals to leverage the federal tax
system thereby imposing an additional cost on taxpayers. As the tax rates vary,
the value of a tax reduction technique patent will vary accordingly. Because a
taxpayer pays the patent holder for the right to use a tax reduction technique
to reduce the taxpayer’s tax burden, the patent holder is in effect imposing a
tax in the form of a toll charge on the use of the technique.
There are a small but growing
number of patents in the tax reduction area. If patenting tax reduction
techniques is not stopped, the practice will spread to other areas of the tax
law and affect more taxpayers. Although GRATs are used only by those taxpayers
subject to the federal estate tax, there may be a rush to the U.S. Patent and
Trademark Office when Congress passes the next tax bill with a new tax
minimization provision. The first individual to file a patent should not be
rewarded at the expense of those taxpayers trying legitimately to minimize
their tax burdens. Consider the result if an individual had patented the
transfer of appreciated securities to a charitable remainder trust, a technique
similar in many ways to a GRAT, when Congress first allowed these types of
trusts in 1969.[11]
Because a patent holder cannot be compelled to grant a license for a patent, a
patent holder could have precluded any taxpayer from using a charitable
remainder trust, which was a congressionally authorized tax reduction technique,
to the detriment of taxpayers and charity. Clearly, this is not in the best
interest of the public and should be against public policy.
Patents on tax reduction techniques
are different from other business method patents. Because patents of tax
reduction techniques prevent taxpayers from minimizing a burden imposed by law
and affecting all taxpayers, it should be against public policy to allow
patenting of tax reduction techniques. Thus, either the U.S. Patent and
Trademark Office or Congress should prohibit patents on tax reduction
techniques.
2. Patenting
estate planning techniques unfairly increases a taxpayer’s costs and federal estate
and gift taxes.
Because taxpayers will have to pay
a fee to use an estate planning technique authorized by law, many taxpayers
will be forced to pay more in an effort legally to minimize their federal
taxes. Before an estate planning advisor recommends that a client use a
patented estate planning technique, the advisor has an obligation to point out
the options and risks to the client of using a patented technique. When a
client is considering the use of a patented estate planning technique, the
client has these options: (a) file a lawsuit to invalidate the patent; (b)
ignore the existence of the patent in the hopes that the patent holder will not
discover its use; or (c) pay a licensing fee to the patent holder for the use
of the technique. Because filing a lawsuit to invalidate the patent is expensive,
filing a lawsuit is not a viable option.[12]
If the client ignores the existence of the patent in the hopes that the patent
holder will not discover its use, the risks to the client can be considerable
and can include paying treble damages to the patent holder.
Patenting estate planning
techniques unfairly increases the federal estate and gift tax liability of
taxpayers. Some taxpayers will refuse to pay tribute to the holder of an
estate planning patent. These taxpayers will be forced either to pay more than
their fair share of federal estate and gift taxes or risk being sued for the unauthorized
use of a patented technique. If the taxpayer refuses to pay tribute and does
not want to take the risk of unauthorized use of the estate planning technique,
the taxpayer will be forced to forgo the use of an estate planning technique
authorized by law. Because the taxpayer will not be allowed to use this
technique, the taxpayer will pay more than the taxpayer’s fair share of federal
estate and gift taxes.
Under the ABA Model Rules of
Professional Conduct (the “Model Rules”), a lawyer has a duty to explain issues
that are likely to result in adverse legal consequences to the client.[13]
Thus, an estate planning lawyer may have an ethical duty to learn about the
existence of patents affecting estate planning and inform clients of existing
patents on estate planning techniques sought to be used by the lawyer’s clients.[14]
Under the Model Rules, lawyers must give candid and competent advice using any
“legal knowledge, skill, thoroughness and preparation [which is] reasonably
necessary.”[15] A lawyer must explain a client’s
options to “the extent reasonably necessary to permit the client to make an
informed decision” on a course of action.[16]
Because of the possibility of adverse legal consequences to a client from the
unauthorized use of a patented estate planning technique, a lawyer may have a
duty to (i) determine the existence of any patent on an estate planning
technique under consideration, (ii) inform the client of the existence of all
patents, and (iii) advise the client of the possible adverse consequences of
using the technique without the consent of the patent holder.
By allowing a patent on a transfer
tax reduction technique, a taxpayer will either have to obtain the permission
of the patent holder to use the technique (presumably for the payment of a fee)
or have to forgo the use of the technique. Thus, patented transfer tax
reduction techniques impose an additional tariff for those taxpayers who want
to use legally authorized estate planning techniques to reduce their federal
estate and gift taxes.
3. Because
patents on aggressive tax planning techniques add credibility to an
objectionable or aggressive technique, patents on tax planning techniques can hurt
compliance with the federal tax laws.
Placing what many taxpayers may
interpret as a seal of approval from the U. S. Patent and Trademark Office on
an aggressive tax planning technique could mislead taxpayers as to the legality
of the tax planning technique. Some taxpayers will believe that because a United States government agency has approved the technique, the technique must be a lawful and
appropriate technique. Because a patent on an aggressive tax planning technique
can add undeserved credibility to that technique, patents on tax planning
techniques can hurt the enforcement of the federal tax laws.
Possible Solutions
ACTEC and the Task Force have
struggled with the appropriate solution to protect taxpayers from patents on transfer
tax reduction techniques, particularly techniques authorized by law. Because
ACTEC and the Task Force are not experts in intellectual property, we are
reluctant to make recommendations. But, we will offer some observations. We
see the following options to address this problem: (a) the Internal Revenue
Service could curtail the use of tax planning technique patents; (b) the U.S. Patent
and Trademark Office could curtail the use of tax planning technique patents;
and (c) Congress could provide a legislative solution.
Because it is not the function of
the Internal Revenue Service to curtail patents of transfer tax reduction techniques,
we do not believe that enforcement by the Internal Revenue Service is the
appropriate solution. ACTEC and the Task Force are concerned about relying on
the U.S. Patent and Trademark Office to curtail or eliminate the patenting of
tax reduction techniques, particularly transfer tax reduction techniques. If a
patent examiner is not familiar with estate planning techniques, it will be
difficult for the examiner to determine whether a patent should be awarded for
a particular tax technique for several reasons. Presumably, patent examiners
are generally not familiar with researching tax law and are not experienced in
making the judgments that compliance with tax law requires.[17]
Many lawyers, accountants, and financial planners give estate planning advice
and do not publish their techniques but discuss these techniques in numerous
meetings of professionals. For example, ACTEC’s Estate and Gift Tax Committee
meets three times annually, discusses many estate planning techniques, but only
produces summary minutes of the meetings. Other estate planning professional
organizations operate similarly. It is possible that an estate planning
technique will be discussed and will have widespread use, but a patent examiner
would not have knowledge of the prior use of the technique and mistakenly award
a patent for the technique. Although an individual could challenge the patent
on the basis of prior work, one individual would not have a sufficient interest
in the technique to invest legal fees to challenge the validity of the patent.
If the U.S. Patent and Trademark
Office cannot prevent patents of tax reduction techniques, we hope that
Congress will find that patenting tax reduction techniques is against public
policy and pass legislation preventing these types of patents.
Conclusion
ACTEC and the Task Force on
Patenting Estate Planning Techniques believe that patenting transfer tax
reduction techniques is creating problems for many taxpayers. If patents for
tax reduction strategies are not prohibited, this type of patent will in all
likelihood expand and create problems for more taxpayers. We ask that patents
for transfer tax reduction be prohibited either by the U.S. Patent and
Trademark Office or by legislation.
In closing, I thank the Subcommittee
and its staff for allowing me to give you my views on this topic.
[1]
As used in this statement, estate planning advisors and professionals refers to
lawyers, accountants, financial planners, and insurance professionals.
[2]
Patent No. 6,567,790, Establishing and Managing Grantor Retained Annuity Trusts
Funded by Nonqualified Stock Options.
[3]
Internal Revenue Code section 2702 and Treasury Regulation section
25.2702-2(a).
[4]
In addition to me, members of the Task Force from ACTEC are Louis S. Harrison
and William C. Weinsheimer (Chair of the Task Force).
[5]The representatives from the American Bar
Association’s Real Property, Probate and Trust Law Section include Steve R.
Akers, Christine L. Albright, Alan F. Rothschild, Jr. and Michael D. Whitty.
The representatives from the American Bankers Association include Kathleen C.
Brown, Julianne M. Hallenbeck, and Joseph W. Mooney. The representatives from
the AICPA are Evelyn M. Capassakis, Justin Ransome, and Steven A. Thorne. Ellen
P. Aprill is a liaison to the Task Force from the American Bar Association’s
Section of Taxation.
[6]
The U.S. Patent and Trademark Office classifies patents dealing with tax
reduction techniques as subclass 36T in Class 705. According to the Patent
Office’s website, 48 patents have been issued in that subclass and there are 81
patent applications are pending.
[7]
In the article by Robert L. Moshman, “Good GRATs and Great GRATs – And An
Interview With Robert C. Slane,” The Estate Analyst, April, 2006, the
author stated: “Despite cracking down on estate-freezing techniques, Chapter
14 provided a beautiful safe harbor. The grantor retained annuity trust,
better known as GRAT, is explicitly authorized under section 2702.”
[8]
Patent No. US 6,567,790.
[9]
Estate planning lawyers in my law firm have used GRATs for many different types
of assets, including real estate, marketable securities, stock in private
businesses, and thoroughbred race horses.
[10] Helvering v. Gregory, 69 F.2d 809,
810-11 (2d Cir. 1934).
[11]
Internal Revenue Code section 664.
[12]
According to one source, a suit to invalidate a patent may cost in excess of
$1,000,000. See, “Patenting Tax Strategies,” Trusts and Estates Magazine,
March 2004, page 44.
[13]Model Rules R. 1.4(b), 2.1 cmt.
[14] SeeModel Rules of Prof’l Conduct
R. 1.1, 1.4, 2.1 (1983).
[15]Model Rules R. 1.1, 2.1
[16]Model Rules R. 1.4.
[17]
ACTEC has volunteered to work with the U.S. Patent and Trademark Office to
educate patent examiners on how to research estate planning techniques so as to
determine the existence of prior work. | 
