Announcement 95-2: Appeals mediation.

On March 1, 1995, Tax Executives Institute submitted the following comments with the Internal Revenue Service on Announcement 95-2, relating to a mediation proposal under consideration by the IRS. The comments, which took the form of a letter to James A. Dougherty, IRS National Director of Appeals, elaborate on comments made by TEI during a February 23 public hearing on the proposal, and address the proposed scope of the mediation procedure, confidentiality concerns, and the future disqualification of the mediator in related matters (among other matters). The Institute's comments were developed under the aegis of the IRS Administrative Affairs Committee whose chair is Robert D. Adams of Halliburton Company. Mr. Adams testified on TEI's behalf at the IRS's February 23 public hearing. The following members of the Institute also contributed to the development of TEI's submission: Robert L. Ashby of Northern Telecom Inc., Robert J. McDonough, Jr. of Haemonetics Corporation, Kelly A. Nall of Electronic Data Systems Corporation, Sandy J. Navin of General Mills, Inc., Robert H. Proehl of BellSouth Corporation, Anthony W. Rackley of The Williams Companies, and Harold N. Weber of General Motors Corporation.

Tax Executives Institute is pleased to offer the following comments on Announcement 95-2, relating to the proposed mediation procedure under consideration in Appeals. The announcement was published in the January 9, 1995, issue of the Internal Revenue Bulletin (1995-2 I.R.B. 59). A public hearing on the procedure was held on February 23, 1995, at which TEI was represented by Robert D. Adams, chair of the Institute's IRS Administrative Affairs Committee.

Introduction

Tax Executives Institute commends the IRS for issuing Announcement 95-2. TEI has long supported Appeals' mission to resolve tax controversies without litigation. We wholeheartedly agree with the IRS that mediation is the logical extension of the Appeals process. Successful mediation should not only reduce the costs of resolving cases, but also engender fewer disputes about implementing settlements. It should also foster mutual respect between the taxpayer and the IRS by keeping the relationship on a more cooperative, less adversarial basis.

The Institute believes mediation should be permitted after good-faith negotiations between the taxpayer and Appeals prove unsuccessful. Mediation - as a last-ditch procedure before litigation - will afford the taxpayer and the IRS one final opportunity to resolve issues. Starting this process before the parties reach the courtroom is surely a victory for sound tax administration. We do not, however, believe that mediation should be viewed as appropriate in every case.

TEI applauds the IRS for moving to make traditional alternative dispute resolution techniques available. The more opportunities taxpayers and the IRS have to resolve their disputes (including refund claims) outside the courtroom, the better. We believe the scope of the mediation procedure should be limited only by the Appeals' mission statement. Hence, we encourage the agency to broaden the scope of the mediation procedure. The IRS should extend mediation to docketed and non-CEP cases and encourage its use in resolving all manner of tax issues, while remaining vigilant that mediation not become just another layer of bureaucracy that will impede the process.

Mediation Procedure

A. Scope of the Procedure

Under the proposed procedure, mediation will be initially limited to Coordinated Examination Program (CEP) cases assigned to Appeals Team Chiefs; it will not be available for docketed cases, Industry Specialization Program (ISP) issues, or Appeals Coordinated Issues (ACI). In addition, the procedure provides that mediation is appropriate for factual issues, such as valuation, reasonable compensation, and transfer pricing issues. Generally speaking, TEI believes the scope of the mediation procedure should be broadened, especially during the test period. We also think that the procedure should accord taxpayers and the IRS maximum flexibility in structuring the mediation arrangement to fit their particular facts.

1. Docketed Cases and ISP and ACI Issues. TEI believes that there is no sound reason for limiting the procedure to non-docketed cases. We recognize that there may be more time pressures on Appeals and taxpayers with respect to docketed cases. Given the speed and flexibility of the process, however, the mediation procedure may actually facilitate the resolution of docketed cases before trial. Because of the voluntary nature of the procedure, the IRS could simply decline to use mediation if time were a factor in a particular docketed case. Mediation has been successfully used in civil cases to reduce crowded court dockets, and there is no reason it should not apply in tax cases.

Moreover, we believe that mediation can be effectively utilized to resolve ISP and ACI issues. To foster the IRS's goal of uniformity in these cases, the ISP or ACI specialist could be made a part of the IRS's negotiating team. Again, the voluntary and non-binding nature of the mediation procedure should afford the IRS ample protection from being whipsawed or otherwise disadvantaged in any particular case.

2. Dollar Limitation. The Institute questions limiting the mediation procedure to CEP cases involving an Appeals Team Chief. This restriction essentially imposes a high threshold, usually requiring $10 million or more in amounts at issue in a given case. Although this limitation may be contemplated only during the test period, TEI believes that cases not involving such high stakes may be easier to resolve through mediation. In other words, lowering the dollar volume of the cases selected for mediation may produce a more realistic assessment of the procedure's efficacy. The more varied the types of cases included in the test, the better the ability of the IRS to evaluate the procedure.

3. Non-CEP Cases. TEI understands the IRS'S decision to limit the procedure to CEP cases involving Appeals Team Chiefs during the test period. Nevertheless, we urge the IRS to keep an open mind about expanding the procedure to non-CEP taxpayers, especially if the amount at issue exceeds a stated threshold (say, $1 million). Indeed, we believe that mediation may be even more useful in non-CEP cases. For example, experience teaches that reasonable compensation issues - which have been targeted under the proposal - are much more likely to arise in non-CEP cases. Finally, because of its relatively low cost, mediation should be particularly attractive to smaller taxpayers.(1)

4. Issues To Be Mediated. The procedure's list of issues to be considered for mediation is very limited and could be viewed as exclusive. To avoid this interpretation, the procedure could specifically provide, "Mediation is permissible on all issues, but is particularly encouraged for valuation, reasonable compensation, and transfer pricing issues." We believe that this broadening of the procedure's scope is especially important during the test period to provide a valid assessment of the procedure. In other words, experience may demonstrate that mediation should be limited to certain types of issues, but the test should be broad enough to enable the IRS to gather sufficient information on the types of disputes susceptible to resolution through mediation and, therefore, make an informed decision on the matter.

Moreover, we urge the IRS to make the process available with respect to all tax issues, factual and legal. Such an approach would obviate the need to differentiate between legal and factual issues (which is not always clear cut) or to deal with mixed questions of law and fact. More to the point, we sincerely believe there is as much to be gained from settling legal issues as from settling factual ones.

B. Denial of Request to Mediate

Section 1 of the proposed procedure provides that both the taxpayer and Appeals must agree to mediate. If they do, they must contact the Assistant Regional Director of Appeals - Large Case (ARDA-LC) to seek approval. If the request is denied, the procedure states that there will be no formal appeal procedure . . . for the denial of a mediation request," although the taxpayer may request a conference to discuss the denial.

TEI appreciates the IRS'S desire not to laden the procedure with efficiency-robbing minutiae. We suggest, however, that the Appeals Officer's refusal to mediate should be subject to a review by the ARDA-LC. If the ARDA-LC decides to mediate the case notwithstanding the Appeals Officer's contrary recommendation, the IRS should consider assigning another Appeals Officer to represent the IRS in the mediation.

C. Involvement of Decision-Makers

Section 3 provides that the participants attending the mediation for the taxpayer and Appeals must have decision-making authority. TEI believes such a provision is entirely appropriate (especially during the test period). Specifically, the Institute believes that an essential part of mediation is the ability of the parties to shake hands at the end of the process and know they have a "done deal."

Thus, TEI has some concern about the statement that mediation will be "[n]onbinding on the parties, with settlement authority remaining with Appeals." It may well be that this statement is intended to emphasize the voluntary nature of the procedure and the decision-making authority of the Appeals personnel involved in the mediation. The statement may be construed, however, as saying that Appeals (i. e., someone other than the IRS'S representative to the mediation) may revisit a settled issue after the parties have reached an agreement.

TEI believes that it is important for the mediation procedure to be perceived as fair by both parties. We strongly recommend that the IRS clarify that once the participants in the mediation reach an agreement, that agreement will be binding on both the taxpayer and the IRS. In other words, Appeals personnel - other than the Appeals participant in the mediation process - may complete the paperwork necessary to effectuate the settlement, but will not be able to "second guess" an agreed-upon mediated settlement.

D. Selection Criteria for Mediators

Section 7 of the proposed procedure provides several criteria for selection of the mediator, including "previous mediation experience." Nowhere is this term defined. We recommend the IRS provide guidance on the type of experience or training required of mediators, especially since a significant group of potential mediators - Appeals Officers - may lack formal mediation training. TEI recommends that the procedure also stress the importance of the mediator's having substantial tax experience.

E. Issues Covered

Section 8 of the proposed procedure provides that the taxpayer and Appeals will coordinate the preparation of a discussion summary for consideration by the mediator. Preparation of a single summary may lead to delays, for example, where the issue is fact-dependent and the parties cannot agree. Indeed, the whole process would likely be expedited by the parties' giving the mediator, on a confidential basis and before the mediation actually begins, their respective analyses of each party's strengths and weaknesses. (We understand that such a procedure is frequently followed in non-tax mediation.) Consequently, TEI recommends that, if the parties cannot agree on the summary of facts and issues within a specified time frame, each party to the mediation should be permitted to submit its own summary of the issues. Moreover, we believe the mediator should have discretion to request additional information or to conduct supplemental research in facilitating the resolution of the case. We agree, however, that the mediator should not serve as a fact finder; rather, the mediator's role should be to assist the parties in evaluating the strengths and weaknesses of their respective positions and thereby facilitate settlement.

F. Confidentiality

Section 10 of the proposed procedure provides that "[t]he taxpayer and persons invited to participate by a taxpayer shall not voluntarily, or through discovery or compulsory process, disclose any information regarding the mediation process or any communication made during the mediation process, including the settlement terms, except as provided in 5 U.S.C. [sections] 574 and as permitted under the Federal Rules of Evidence."(2) TEI recommends that the procedure clarify that the disclosure restrictions apply equally to the IRS. We also suggest that the IRS revisit the issue of the application of section 7214(a)(8) to an Appeals mediator and evaluate whether, at a minimum, further guidance should be provided both to taxpayers and the affected Appeals Officers on the mediator's obligations under that provision.

G. Disqualification

Section 12 of the proposed procedure provides that the mediator and his or her firm will be disqualified from representing or otherwise participating in any pending or future action substantially related to the subject matter of the mediation, including those between persons or entities not parties to the mediation." TEI believes that the scope of the disqualification provision needs to be clarified in respect of outside mediators and Appeals personnel. For example, if an issue in controversy involves the application of section 482, is the mediator's firm barred from representing any unrelated person or entity with a section 482 issue? If so, the restriction is too broad in scope.

TEI believes that many taxpayers seeking mediation will seek the involvement of an independent party, rather than Appeals personnel, as the mediator. The proposed disqualification requirement, however, may have of the effect of severely (and, in our view, unnecessarily) restricting the pool of qualified private practitioners available to mediate a dispute. It might also disqualify Appeals personnel from handling future cases, thereby depriving the IRS of its most experienced and talented people. A more reasonable approach would be to circumscribe the disqualification, for example, by restricting the mediator and his or her firm from any further involvement in (1) the specific dispute being mediated, and (2) any related issue involving the same taxpayer or a related entity within a specific time frame (say, one to two years).

Conclusion

Tax Executives Institute appreciates this opportunity to present our views on Announcement 95-2, relating to the proposed mediation procedure under consideration in Appeals. If you have any questions, please do not hesitate to call Robert D. Adams, chair of TEI's IRS Administrative Affairs Committee, at [phone] or Timothy J. McCormally of the Institute's professional staff at [phone].

(1) If concerned about the optimal use of scarce resources, the IRS might consider limiting the expansion of the procedure to non-CEP cases only where the taxpayer agrees to use a mediator from Appeals (thereby avoiding the cost of an outside mediator) or agrees to bear the full cost of an outside mediator. (2) Section 574 of title 5 of the United States Code imposes strict rules of confidentiality on the mediator and the parties involved in the mediation except in certain circumstances, such as an agreement by the parties, as statutory requirement of disclosure, or an order of a court. Rule 408 of the Federal Rules of Evidence provides that compromise negotiations are not admissible in court. The rule does not, however, require the exclusion of any evidence otherwise discoverable or offered for another purpose (such as proving bias.)