LINDA M. BEALE, Wayne State University Law School
Email: lbeale@wayne.edu

Since the 1998 State Street case, the U.S. Patent and Trademarks Office has been issuing patents on tax planning methods, even including methods that do not require computerized implementation. The tax and intellectual property bars generally have widely divergent views of tax planning method patents. The patent bar tends to view the incentivizing of innovation as a per se public good, while the tax bar expresses concerns ranging from the impact on practice to the impact on the federal fisc.

After a general introduction to the issues raised by tax planning method patents, Part II of the article provides a concise history of business method patents. Part III then sets out important recent developments relating to the patenting of tax strategy patents in three different arenas: Congress, where broad patent reform legislation is under consideration; the courts, where the rush towards an extraordinarily broad interpretation of patent law subject matter eligibility requirements is under question; and the Internal Revenue Service, which has issued proposed regulations to require reporting of transactions that use tax planning method patents.

In that context of across-the-board questioning of the rationales for tax planning method patents, Part IV explores the reasons that the tax bar's views of tax strategy patents diverge so widely from the intellectual property bar's views. Although acknowledging that patents on abusive tax planning strategies would be particularly offensive, this Part emphasizes that patents on legitimate tax planning techniques are also highly problematic. After acknowledging widespread concerns about impact on tax practitioners' practice of the law and lack of Patent Office competence to assess tax strategies for novelty and obviousness, this Part presents a critique of tax strategy patents based on the special attributes of the tax system that set it apart from other areas of the law. The critique rests in particular on three significant concerns: (i) the demand for an external distributive justice criterion rooted in institutions of a democratic polity based on personal liberty and equal respect, (ii) the institutional requirement for congressional authority in setting economic and tax policy through legislation, and (iii) the detriment to the profession from the inappropriate application to the tax laws of the patent law's focus on innovation.

DENNIS J. VENTRY, American University - Washington College of Law
Email: dventry@wcl.american.edu

Over the last several years, federal courts have invalidated abusive transactions by relying heavily on the judicially created economic substance doctrine. These court decisions not only reinforce the vitality of the doctrine, but also reaffirm the principle that literal compliance with statutory tax provisions is simply not enough to secure tax benefits. Despite the impressive anti-shelter effectiveness of the economic substance doctrine, Congress is preparing to straitjacket the doctrine by codifying it under the Internal Revenue Code. Codification is a terrible idea. Reducing the doctrine to an inelastic administrative rule would sap its power and lead to more rather than less abuse by providing clever tax planners an opportunity to occupy and manipulate the statutory line between permissible and impermissible behavior. The power of the doctrine lies in its ability to adapt to new and unforeseen tax planning strategies. Malleable standards are particularly important in tax law, where the law itself can be ambiguous and where application of fact to law contains numerous outcomes, such that determining the right answer is an inherently uncertain proposition. A rigid rule would provide opportunity rather than certainty, and it would foster overaggressive tax planning. The economic substance doctrine regularly acts as the last line of defense against abusive tax avoidance, and its facts and circumstances analysis is better left in the hands of judges than legislative drafters.

GINETTE M. MCMANUS, St. Joseph's University - Haub School of Business
Email: gmcmanus@sju.edu
RAJNEESH SHARMA, Saint Joseph's University - Finance
Email: rsharma@sju.edu
AHMET TEZEL, St. Joseph's University - Department of Finance
Email: atezel@sju.edu

Most states provide income tax exemption for the interest on in-state municipal bond issues, while taxing interest from municipal bonds of out- of-state issuers. This paper discusses the impact and the consequences of the possible elimination of preferential tax treatment for municipal bonds on states, investors and single-state municipal bond funds.

ILAN BENSHALOM, Northwestern University - School of Law
Email: i-benshalom@law.northwestern.edu

The article examines the current U.S. cost sharing regulations (hereinafter, the CSRs) along with the still-pending and highly controversial proposed CSRs (published August 05). After presenting the key difficulties associated with the attempt to source income multinational enterprises (hereinafter, MNEs) derive from intangible assets, the article explains the CSRs' mechanisms, which allow related parties, who share the developing costs of intangibles, to share their fiscal ownership. It further elaborates upon the hollow hope that the CSRs would alleviate the great compliance and administrative burden of pricing affiliated transactions that involve intangibles. After explaining how the CSRs operate, the article explores how MNEs have turned them into a costly loophole to reduce their effective tax rate on income derived from high profile intangibles. This aspect of the CSRs is startlingly missing from the academic and professional literature and is therefore one of the articles' key contributions. The study further identifies why the proposed CSRs' cumbersome solutions offer little to salvage the deficiencies of the current CSRs. This case study of the CSRs raises a number of stimulating conceptual notions regarding the normative right and the practical ability of sovereigns to tax mobile, and difficult to locate, economic activities. To exemplify these notions, the article engages in an original analysis, which demonstrates how the attempt to simultaneously employ conflicting arm's length and formulary sourcing conventions in the CSRs resulted in a conceptual ambiguity. This ambiguity reflects in the CSRs' arrangements and their inadequate performance. I further argue that this vagueness adversely affected the transfer-pricing regime and has eroded the source income tax base. Building on the above analysis, the article offers an alternative original model for sourcing affiliated intangibles-related transactions. This unique formulary model is superior to the current transfer-pricing and CSRs arrangements on the following grounds: it better preserves the integrity of the income tax base, it promotes efficient use of intangible-assets by MNEs, and it reduces compliance and administrative burdens. The article concludes with presenting a broad discussion about the principled pillars of any future reform in the transfer-pricing regime. The discussion promotes the novel notion that a reform should simultaneously employ two sets of mechanisms to breakdown properly the MNEs' source tax base. The first set should rely on transfer pricing methods and should be employed for transactions with reasonable comparables. The second set should employ a difficult to manipulate formulary method for sourcing mobile and/or difficult to compare transactions (such as those involving intangibles). This is a necessary, and attainable, strategic shift in a global economic reality in which the arm's length standard paradigm is no longer applicable and an alternative comprehensive international formulary allocation is not yet foreseeable.

DANIEL M. SCHNEIDER, Northern Illinois University - College of Law
Email: dschneider@niu.edu

This paper examines the use of judicial doctrines in federal tax trial controversies. Despite a taxpayer`s strict compliance with the terms of a statute, a judge may still justify deciding for the government by applying a judicial doctrine. The common wisdom, derived from traditional tax scholarship about these doctrines, is that the doctrines are raised only by the government or the court and can only favor decisions in behalf of the government. A taxpayer may argue that the form of a transaction be set aside in limited circumstances such as fraud, so negating form is a one way street, available only to the government. The literature does not contain any empirical research.

The five most common judicial doctrines, which were analyzed, are: business purpose, economic substance, sham transaction, step transaction, and substance over form.

The hypothesis of this article is that the common wisdom is incorrect. A database was created for this article and consists of those federal trial decisions rendered by the district court, the Tax Court, and the Court of Federal Claims between 1993 and 2006 in which one or more of the doctrines were raised. Data was culled from on-line sources for these cases and for the accompanying briefs, if they were available.

The evidence sustains the hypothesis. Judicial doctrines were raised in a much richer manner than the common wisdom would suggest. Among the results gleaned from the data are:

-All three parties raised doctrines, the court more than the government or the taxpayer. The taxpayer raised doctrines half as much as the government, suggesting the taxpayer's active interest in judicial doctrines. The court's predominant role in raising doctrines appears to have occurred because litigants made more focused arguments, depending upon more specific authorities in their briefs, such as cases or legislative history.

-All three parties raised doctrines, expecting that they would be applied, but the taxpayer argued much more frequently than the court or government that a doctrine it had raised should not be applied.

-Three doctrines could be raised by the taxpayer to its advantage - economic substance, step transaction and substance over form - but the other two could be raised only to benefit the government - business purpose and sham transaction. The litigants, however, did not raise doctrine in a manner resonant with this model.

-The areas of tax law in which doctrines were raised were inconsistent with traditional observations about the areas in which they should have been raised.

-Despite the absolute nature of the one way rule, it was largely ignored when the taxpayer raised a doctrine.

-Doctrines' use in the database could be associated with specific causes. More generally, a party's argument that the doctrine that it had raised be applied in behalf of a specific litigant was predictive of the doctrine being applied in that litigant's behalf. More specifically, and quite robustly, the taxpayer's prevailing in a doctrine's application was associated with use of substance over form and the government's prevailing was associated with the use of the business purpose doctrine.

In addition to the paper's presentation of its result, it underscores the gap between traditional legal scholarship and empirical research. As this paper illustrates, more quantitative analysis can and needs to be done, in law and especially in tax.