Dividend tax exclusion, provision of tax services, LMSB initiatives top items discussed at TEI's midyear conference: former IRS Commissioner Rossotti honored.

The 53rd Midyear Conference was a grand success. Although the onset of war with Iraq triggered nearly 100 cancellations, attendance at the spring meeting still exceeded 500, with everyone benefitting from the unparalleled opportunity to attend outstanding educational sessions and network with their peers. At the conclusion of the conference, TEI President J.A. (Drew) Glennie expressed the Institute's appreciation to TEI's committee chairs who planned the technical sessions; to the outside speakers and members who served as speakers, panelists, and moderators; and to the tax executives who travelled to Washington for the conference.

A highlight of the conference was the participation--for the first time in 41 years--of the U.S. Secretary of the Treasury, and the decision of C-SPAN to telecast Secretary John Snow's keynote address several times marked another first for the Institute. In 1962 the participating Secretary of the Treasury was Douglas Dillon.) Other 2003 keynoters were Assistant Treasury Secretary Pam Olson, acting IRS Commissioner Bob Wenzel, LMSB Commissioner Larry Langdon (in his final TEI appearance before retiring in May), and Daniel Goelzer of the Public Company Accounting Oversight Board.

The conference's technical sessions were both timely and tremendous. Whether the subject was Sarbanes-Oxley, tax shelters, R&D, Canadian tax developments, or business activity taxation at the state level, participants were treated to practical and insightful presentations. A CD-ROM containing the handout materials will be available later this spring. (It will be available for sale to non-conference registrants.) Photographic highlights of the conference will be reprinted in the May-June issue of The Tax Executive, and posted to the website by mid-April.

Keynote Addresses Raise TEI's Profile

Treasury Secretary John Snow opened the Midyear Conference with a spirited defense and unflagging commitment to enact the centerpiece of the Bush Administration's budget proposals--the dividend tax exclusion. Noting that the United States is second only to Japan in its taxation of capital, Secretary Snow remarked that the tax law tilts in favor of the use of debt. Taxpayers can deduct interest, he stated, but dividends are taxed. "We are seeking to eliminate that tilt in the Code," he said.

Mr. Snow emphasized the corporate governance benefits that could flow from enactment of the dividend exclusion proposal. Referring to the scandals that have eroded investor confidence in the financial reporting system, the Treasury Secretary noted that "you can't fake cash." He predicted that the elimination of the tax on corporate dividends will have a positive effect on the stock market by encouraging companies to pay more dividends. The proposal "makes good economic sense," he said, because "you can never go wrong when you make the economy more efficient."

Secretary's Snows remarks were followed by a panel discussion of the legislative prospects for enactment of the President's budget plan. John Buckley, Chief Tax Counsel (Democratic Staff) for the House Committee on Ways and Means, called the dividend tax exclusion proposal the most significant corporate change he'd seen in his tenure on the Hill. He agreed with Secretary Snow that the proposal will likely produce a temporary increase in the complexity of the tax law, but suggested that the complexity will be permanent.

Other panel members included Mark Prater and Russ Sullivan, Chief Tax Counsel, Republican and Democratic Staff, respectively, for the Senate Committee on Finance, and Robert Winters, Special Counsel (Republican Staff) for the Ways and Means Committee. Mr. Winters predicted that energy legislation and international issues such as the possible repeal of the FSC/ETI regime will also be high on the legislative agenda, while Mr. Sullivan singled out corporate tax shelters, inversions, and bonus depreciation as possible tax-related issues to be resolved in the upcoming year.

In response to a question about a proposal to require the disclosure of corporate tax returns, Mr. Prater noted the disturbing trend in differences between book and tax income. Because of the Enron scandal, legislators will likely press for more transparency, he stated. Mr. Buckley added that the calculation of the proposed dividend exclusion will also increase the pressure on businesses to disclose their returns.

The legislative panel was moderated by TEI Senior Vice President Raymond G. Rossi and Fred F. Murray, General Counsel and Director of Tax Affairs.

Sarbanes-Oxley and the Provision of Tax Services

Referring to Sebastian Junger's recent bestseller, Daniel Goelzer noted on Tuesday morning that the enactment of the Sarbanes-Oxley Act last year was the result of "a perfect storm"--the rare combination of factors that lead to an unprecedented event. A member of the Public Company Accounting Oversight Board (which was established by the Act), Mr. Goelzer outlined three factors leading to the enactment of "the most-far-reaching reform of American business practices since the time of Franklin Roosevelt":

* The loss of public confidence in financial reporting;

* The loss of public confidence in the auditing profession; and

* The loss of the public's money.

The result was a congressional debate on how, not whether, to regulate the accounting profession and restrict non-audit services. The final bill passed with only three negative votes.

Mr. Goelzer stated that Congress "clearly believed that auditors needed to get back to auditing and stop serving as management consultants for their public company audit clients." He touched on two additional factors that may affect how the Board regulates the provision of tax services: the release of the staff of the Joint Committee on Taxation's report on Enron's use of tax shelters and the decision of Sprint's board of directors to ask two executives to resign for their participation in tax shelters.

In my personal view, Mr. Goelzer said, "auditors should not be in the position of marketing tax shelters to their audit clients." I have no problem with auditors assisting their clients with traditional tax "compliance," he added. "Auditors have long played a part in return preparation and have advised their clients on the complexities of the tax code and how it affects the client's tax liabilities. But tax services that go beyond that--especially the marketing of novel, tax-driven, financial products--raise serious issues."

"If audit committees accept the Conference Board's advice and refuse to approve auditor-provided tax shelters," Mr. Goelzer concluded, "this problem should go away without the need for anyone to adopt more rules." While it may be difficult to draft rules to define an aggressive tax shelter, he added, "I think that, like pornography, most audit committees will know it when they see it."

LIFE and Other LMSB Initiatives

During the conference, Assistant Treasury Secretary Pamela Olson paid tribute to TEI's former president, Larry Langdon, who will soon step down as Commissioner of the IRS's Large and Mid-Size Business Division. The opportunity to work with Mr. Langdon has been the high point of my time at Treasury, she stated, referring to a quote by former Treasury Secretary Larry Summers that "policy design without policy implementation is almost meaningless."

Ms. Olson noted that one of LMSB's key initiatives--the limited issue focus examination--"may well transform tax administration, moving it beyond what Larry and his team have achieved so far." Still to be considered, she added, are three important questions:

* Who should be audited?

* How should they be audited?

* What should be audited?

"It remains an unappreciated but enormously significant point," the Assistant Secretary stated, "that, with limited resources, every decision to devote additional resources to a taxpayer or to an issue means that another taxpayer or another issue will go unexamined." That is one reason it is important for Treasury and IRS to work together, she said. "We can assist the IRS in the issue identification process through more and better and timely published guidance."

In discussing recent corporate scandals, Ms. Olson offered two examples of TEI members who represent ordinary people showing extraordinary character every day. In both cases, she stated, the members discovered millions of dollars in errors in calculations by the IRS. Yet, both companies informed the IRS of the mistakes. "These examples are not unusual," she said. "I'd wager that most of you in this room hand the IRS in the course of an audit changes to your company's tax return that increase tax liability."

Ms. Olson closed by saluting TEI and its members, who contribute so much to sound tax administration and the development of sound tax policy. "You make the job of those of us in government much easier than it would otherwise be," she said.

LMSB Commissioner Larry Langdon used TEI's conference to announce that the IRS will soon issue a new mechanism to deal with claims raised by taxpayers late in the audit process. Possibilities being considered include establishing a deadline for claims or moving claims to the next audit cycle. Mr. Langdon also discussed the new LIFE initiative, the pre-filing agreement program, and the fast-track settlement procedure.

Canadian initiatives were also discussed during the three-day conference. Len Farber, General Director of Legislation, Tax Policy Branch, Department of Finance, focused on his country's efforts to remain competitive and offer a clear "Canadian advantage" to businesses. Mr. Farber also mentioned several tax incentives for research and development activities, capital gains, venture capital, and qualified limited partnerships that are "creating a real tax advantage for Canada." Mara Praulins, Director of International Tax Operations for Canada Customs and Revenue Agency, joined Mr. Farber on the panel.

Other government participants included Daniel Rosen, LMSB Industry Counsel for the Research Tax Credit; Frank Katz, General Counsel for the Multistate Tax Commission; Jodi Cohen, Special Assistant to the Assistant Treasury Secretary; and Andrew Keyso, IRS Senior Attorney.

Commissioner Rossotti Honored

On Monday, TEI President Drew Glennie presented Charles Rossotti with TEI's Distinguished Service Award for his exemplary service as Commissioner of Internal Revenue.

"Charles Rossotti became Commissioner," Mr. Glennie stated, "during a time of great challenge for the IRS, a time when Congress was considering the IRS Restructuring and Reform Act of 1998." Calling him a "businessman and visionary," Mr. Glennie recalled that the former Commissioner "undertook to bring more business-like practices to the IRS's practice and procedures, including the modernization of its computer systems." He also continually reached out to TEI and other tax organizations, TEI's president said, adding that Mr. Rossotti "batted .1000 in appearances at [TEI's] conferences, addressing 10 of 10 meetings during his tenure."

"He left the IRS a much stronger and more productive agency," Mr. Glennie concluded.

Before presenting the award, Mr. Glennie introduced acting IRS Commissioner Robert Wenzel, who expressed the agency's appreciation for Mr. Rossotti's leadership, as well as the contributions of Mr. Langdon, whose luncheon address followed the award presentation.

LMSB Bonus Sessions

After the Midyear Conference ended, registrants were offered the opportunity to attend several "bonus" sessions offered by the LMSB Division on the LIFE initiative, international issues, abusive tax avoidance transactions, the guidance process, and process and procedures. TEI members moderating the sessions included TEI IRS Administrative Affairs Committee chair David Bernard and TEI members Michael Boyle, Kelly Nall, and Christopher Riley, as well as TEI Executive Director Timothy McCormally and General Counsel Fred Murray.