Canadian liaison meetings top TEI's advocacy agenda: comments also filed on cost-sharing regulations; amicus brief filed in Cuno case.

A delegation of TEI members and staff led by Institute President Michael P. Boyle of Microsoft Corporation headed north in early December to meet with representatives of the Canadian Department of Finance and Canada Revenue Agency on income and excise tax issues. Other TEI representatives included Vice President for Canadian Affairs Monika M. Siegmund of Shell Canada Limited; Treasurer Vincent Alicandri of Hydro One Networks, Inc.; Canadian Commodity Tax Committee chair Natalie St-Pierre of BCE, Inc.; and Canadian Income Tax Committee chair David V. Daubaras of General Electric Canada. A smaller delegation also met with representatives of the Canadian Department of Justice.

The first meeting on December 6th with CRA addressed income tax matters. Later that day, there was a separate meeting with CRA on commodity tax issues. The next day, TEI also met separately with the Department of Finance on income and commodity tax issues.

"The meetings TEI holds with the Canadian officials each year are among the most productive liaison activities in which the Institute participates," Mr. Boyle stated. "We've met for more than three decades and the discussions between the two groups are always creative and practical. I'm pleased to be part of this year's delegation."

The four agendas are reprinted in this issue, beginning on page 644. The responses provided by CRA and Finance will be posted on TEI's website upon their release by the government.

Cost-Sharing Regulations

The proposed section 482 regulations on cost-sharing arrangements "threaten to undermine congressional intent to permit companies to conduct their affairs in an effective and cost-efficient manner," TEI recently told the Internal Revenue Service and U.S. Department of the Treasury.

In comments filed on November 28, the organization noted that the new rules assume that taxpayers use cost sharing abusively to disguise the transfer of intangible property outside the United States to an affiliate (often located in a tax haven) at a value substantially less than the fair market value of the intangible property. The regulations are intended to ensure that, where buy-in payments must be made to a participant transferring valuable external contributions to the other participants, such compensation is based on the arm's-length value of what is being transferred.

"The 'investor model' approach prescribed in the proposed regulations," the Institute stated, "goes beyond ensuring that buy-in payments are based on an arm's-length analysis."

The investor model requires that two separate transactions be analyzed (i.e., the buy-in payment and the cost-sharing contribution) as though they were a single investment decision based on an expectation of a given overall return. This linking of the buy-in and cost-sharing contribution analyses "is unnecessary to address the IRS's concerns," TEI stated. "At worst, it deprives a cost sharing participant a fair economic return once that participant has committed to making arm's-length buy-in payments."

Any abuses that may occur with respect to the offshore transfer of intangibles can be better dealt with through application of the existing rules under Treas. Reg. [section] 1.482-4 (relating to the transfer of intangible property) and do not require an upheaval of the existing cost-sharing regulations, the organization opined.

TEI also commented that it is unclear how the specified valuation methods set forth in the proposed regulations interact with the investor model and the realistically available alternative principle. "Equally unclear," TEI noted, "is whether the investor method and the realistically available alternative standards are one and the same, and, even if they are not, why both are necessary."

"This 'belt-and-suspenders' approach introduces greater uncertainty and unnecessary complexity without any correlative benefit. If the government retains the investor model in the final regulations, it should put the realistically available alternative principle aside," TEI stated.

Other issues addressed in the comments included the treatment of an existing R&D workforce in place as a contribution requiring a buy-in; the requirements to compensate for contributed intangibles over the entire life of the cost-sharing agreement and to provide lump-sum buy-in payments for certain external contributions; the prohibition on the contribution of make-or-sell rights; and the requirement to share results on an exclusive geographical basis.

TEI will testify at the December 16 hearing on the proposed regulations. Janice L. Lucchesi of Akzo Nobel Inc., vice chair of the Institute's International Tax Committee, will present the testimony.

The Institute's written comments are reprinted in this issue, beginning on page 628.

Amicus Brief on Constitutionality of State Tax Incentives

On December 1, the Institute filed a "friend-of-the-court" brief with the Supreme Court of the United States in DaimlerChrysler v. Cuno. TEI previously filed a brief urging the Supreme Court to review a decision of a federal appellate court in Ohio which held that State's investment tax credit unconstitutional. In taking the case, the Court asked the parties not only to address whether the tax credit violates the Commerce Clause, but also whether the Cuno respondents have "standing" (i.e., a sufficient stake in the outcome) to challenge the tax credit.

As requested by the Supreme Court, TEI directly addressed the issue whether the citizens group that sued to invalidate the investment credit had standing. To prevail on the issue, the Ohio and Michigan citizens who brought the case must show that they suffered some actual or threatened injury as a result of the unlawful conduct of the State of Ohio in granting tax incentives to DaimlerChrysler and other manufacturers. In addition, the injury must be distinct and palpable, not merely abstract, conjectural, or hypothetical. The Institute argued that Cuno and the other challengers lacked an "injury in fact" that can be redressed by the courts.

The Institute's brief builds on the Commerce Clause arguments presented in its earlier brief, asserting that the tax credit does not unconstitutionally discriminate against interstate commerce. TEI explained that Ohio's investment tax credit has four distinguishing characteristics that render it constitutional:

* Ohio is not discriminating against products manufactured or business operations performed in any other State;

* The investment tax credit is not related to discrete transactions and does not target a particular product or industry;

* The amount of the credit does not change relative to activities in other states; and

* Ohio's statute does not discriminate on its face but rather is freely available to any corporation engaging in the prescribed activities in Ohio.

The case will be argued before the Supreme Court on March 1. A decision is expected by summer.

The Institute's latest brief in the Cuno saga is reprinted in this issue, beginning on page 638. The prior brief was reprinted in the July-August 2005 issue of The Tax Executive.

MTC Reportable Transactions Statute

On September 27, TEI filed comments with the Multistate Tax Commission on its Draft Model Uniform Statute on Reportable Transactions and Inconsistent Filing Positions. That same day, TEI also testified at the MTC public hearing on the proposed statute.

The Institute's testimony, delivered by TEI Tax Counsel Gregory S. Matson, emphasized that States must be mindful of three overarching concerns in adopting a reportable transaction regime: (1) substantially increasing compliance costs without a commensurate improvement in the quality of information supplied to tax officials; (2) increasing uncertainty for taxpayers; and (3) heightening the risk for penalties for foot faults and inadvertent failures to file disclosure statements for reportable transactions.

The Institute encouraged full conformity with federal rules governing reportable transactions as the best way for States adopting such a regime to ensure it does not overburden taxpayers, remains administrable, promotes uniformity, and is fair.

On October 18, TEI followed up with a letter responding to a proposed nexus reporting amendment to the MTC's model statute. The letter urged the MTC to reject the amendment.

The Institute's initial comments and supplemental letter on the proposed nexus disclosure amendment appear in this issue, beginning on page 624 and page 627, respectively.