Debate, Top Government Speakers Mark TEI Conference in Historic Philadelphia.

Approximately 700 TEI members and guests gathered in the seat of liberty in October to hear debates and commentary on the hottest topic of the year -- corporate tax shelters -- from government representatives, tax practitioners, TEI members, and a single reporter. The four-day conference was held from October 24-27 in Philadelphia and provided participants with an opportunity to discuss effective tax rates, discovery requests, debt instruments, technological changes, and international audit issues.

On Tuesday afternoon, Deputy Treasury Secretary Stuart E. Eizenstat outlined the Administration's four criteria for making tax policy decisions. Any proposal must be fiscally responsible, he said, as well as fair. It must also promote economic prosperity and growth and be simpler for ordinary taxpayers. Mr. Eizenstat called progressive taxation the bedrock of the tax system.

Referring to the recent court decisions in the Compaq and Winn-Dixie cases, the Deputy Secretary asserted that a strong economic substance doctrine is needed to combat abusive tax shelters. Litigation is an inefficient means of resolving such issues, he asserted. He expressed an interest in working with the Institute to resolve this problem. [Editor's note: TEI testified at the November 10 hearing on corporate tax shelters. Its testimony is included in this issue, beginning on page 494.]

Earlier that day, Lindy Paull, Chief of Staff of the Joint Committee on Taxation, provided a succinct outline of two studies by the Joint Committee staff and the Treasury Department on the penalty and interest provisions of the Internal Revenue Code. One major difference between the two studies is the interest-rate differential: The Joint Committee staff recommends eliminating the differential, whereas Treasury would retain it. Another difference is the standards for the accuracy-related penalty. For both taxpayers and return preparers, under the Joint Committee staff proposal, the minimum standard for each undisclosed position on a tax return would be that the taxpayer or preparer must reasonably believe that the tax treatment is "more likely than not" the correct tax treatment under the Code. For disclosed positions, the Joint Committee staff would require both substantial authority and adequate disclosure and would eliminate the reasonable cause exception of section 6664(c)(1). In contrast, the Treasury Department would retain the "substantial authority" standard for undisclosed positions and raise the standard for disclosed items to a "realistic possibility of success" for both taxpayers and preparers.

Ms. Paull predicted that a hearing on the two studies will be scheduled soon. (The hearing was scheduled and subsequently postponed.) [The Institute's written statement on the two studies is included in this issue of The Tax Executive, beginning on page 504.]

Ms. Paull noted that one-third of the Joint Committee report dealt with the issue of corporate tax shelters. Referring to comments about the need for a clear definition of the term "corporate tax shelter," she opined that the definition can be "fuzzier" if it is used as a red flag for disclosure. "There are some pretty aggressive transactions out there," she said, and the problem is how you balance the 99 percent that are okay with the small percentage that are not. The tax-writing committees will have a hard time dealing with the issue, she stated, concluding that the focus will be on disclosure, registration, and enhanced penalties.

In his remarks on Monday afternoon, IRS Commissioner Charles O. Rossotti announced an agency initiative to identify and stop transactions with no business purpose other than generating tax savings. He pledged that the IRS would work cooperatively with taxpayers not to disrupt legitimate tax planning. Commissioner Rossotti also provided an update on the IRS reorganization, thanking TEI for its help. The IRS hopes to begin implementation of the new Large and Mid-Size Business Operating Unit by March. The Commissioner added that the IRS is still working on its balanced measurement criteria for employees. He concluded by thanking the Institute for its support and technical expertise during the design and implementation phases of the reorganization.

The author of one of the more significant court opinions on corporate tax shelters -- ACM Partnership v. Commissioner -- addressed the registrants on Wednesday morning. Judge David Laro of the U.S. Tax Court urged the business executives to resist the pressure to engage in abusive transactions. He outlined factors to be reviewed in determining whether a business purpose exists, including consistency of results, the costs of the transaction, the pre-tax profit, and the comparison of pre-tax profit and tax benefits.

Acknowledging that courts do not make tax policy, Judge Laro noted that the recent cases could lead someone to conclude that legislation is not required to combat abusive shelters. "Resist the deals that lack economic substance," he advised, "You know which ones they are."

The Treasury Department's views on corporate tax shelters were presented on Sunday afternoon by Tax Legislative Counsel Joseph Mikrut. Treasury continues to believe that legislation is necessary, he said, adding that the codification of the economic substance doctrine is a critical part of the solution. Elevating the judicial doctrine to codified law will diminish the amount of litigation, he averred.

Mr. Mikrut's presentation was part of a three-hour symposium on corporate tax shelters that included a debate on whether legislation is necessary to address the issue. Former Joint Committee Chief of Staff Kenneth J. Kies, now with the accounting firm of PricewaterhouseCoopers, opined that there is "no evidence" to support the need for a legislative fix. Mr. Kies's views were in stark contrast to those expressed by Lee A. Sheppard, an editor with Tax Notes magazine. Ms. Sheppard supported the call for legislation, including a list of transactions that would be considered legitimate under current law.

In a change of pace on Monday morning, Utah Governor Michael O. Leavitt, a member of the Federal Advisory Commission on Electronic Commerce, discussed the ubiquitous sales tax and its role in electronic commerce. He asked whether the sales tax will remain a viable means of funding state and local government in the future in the face of the growing use of the Internet to purchase items. Governor Leavitt admitted that the current system with 7,000 taxing jurisdictions is completely unworkable and called for a radical simplification.

The governor stated that the increasing use of cross-border transactions to move goods and services is "our generation's challenge." Ultimately, he predicted, electronic commerce will reshape society and government. The states have a responsibility to voluntarily create regimes in which sellers will be willing to collect taxes. "It is this group that will ultimately solve the problem [of tax collection]," he added, urging the participants to become involved in the debate and the solution.

The Sunday night banquet saw the installation of Charles W. Shewbridge, III, of the Atlanta Chapter as President of the Institute. Mr. Shewbridge succeeded Lester D. Ezrati of the Santa Clara Chapter.

Also at the banquet, two former Presidents were honored for their long and distinguished service to the Institute. TEI's 1988-1989 President Larry R. Langdon of the Santa Clara Valley Chapter and 1985-1986 President Charles W. Rau of the BaltimoreWashington Chapter were each granted Honorary Membership in the Institute. Mr. Ezrati presented Mr. Langdon, his former boss, with the award, while Mr. Shewbridge presented Mr. Rau's award.

In their remarks, both award recipients emphasized the advantages of Institute membership. Mr. Langdon urged the group to "keep doing what you do so well -- technical and professional education, networking, and providing input to government officials." Mr. Rau graciously thanked the Institute Board of Directors and members for the honor, adding that he looked forward to a restful retirement after his years of service to the Institute and the industry.

Later in the week, Mr. Shewbridge presented TEI's President's Award to James Hutchison of the Toronto Chapter and Paul J. Schaffhausen of the Chicago Chapter. Former IRS Commissioner Sheldon Cohen received the Institute's Distinguished Service Award on Monday.

During the conference, the State and Local Tax Committee acknowledged the longstanding contributions of Fred Bifulco, a former member of the Institute and a frequent speaker at TEI's state and local tax course.

The Institute's next conference will be held on March 18-22, 2000, at the Grand Hyatt Hotel in Washington, D.C. Registration information will be sent to the membership soon.