General revenue offset provisions should be stricken from tax title of highway bill: June 7, 2005.

On June 7, 2005, TEI sent the following comments to the Conference Committee on the Highway Reauthorization Bill (H.R. 3). In its comments, TEI urges the committee to strike certain general revenue offset provisions included in the tax title of the Senate version of the bill.

The Senate and House of Representatives have passed bills (H.R. 3) to reauthorize the highway trust fund and renew the related excise tax provisions of the Internal Revenue Code. The tax title of the Senate version of the highway bill also includes general revenue offset provisions (Title V, Subtitle E, Part I) that are ill-advised, wholly extraneous to the purposes of the legislation, and significantly increase administrative and regulatory burdens on taxpayers.

As the preeminent association of in-house business tax professionals, Tax Executives Institute recommends the following provisions amending the Internal Revenue Code should be stricken from the highway bill:

* Reject the "Clarification" of the Economic Substance Doctrine. Codification of the economic substance doctrine is unnecessary, would potentially interfere with legitimate business transactions, and would engender unnecessary controversy and litigation. Similarly, the provision creating a new penalty for "noneconomic transactions" is unnecessary. The proposals should be rejected.

* Reject the CEO Declaration Requirement. The proposal to require a company's chief executive officer to sign a declaration concerning the federal income tax return would needlessly consume corporate resources without enhancing corporate accountability. Current law is sufficient: In addition to the existing requirement for a corporate officer to sign a tax return under penalties of perjury, the internal control requirements of the Sarbanes-Oxley Act over financial matters (which include the provision for taxes) as well as the enhanced tax return disclosure rules and penalties for non-disclosure advance the goal of transparency. This proposal would inject CEOs into the return preparation and approval process and distract them from activities (including corporate governance) where their professional expertise is best used. The provision should be excluded from the final legislation.

* Reject the Whistleblower Provision. The proposal to award a 15-to-30 percent bounty to individuals providing information on underpayments by corporate and other taxpayers and to establish an IRS "Whistleblower Office" is unnecessary and would perniciously outsource an inherently governmental function, i.e., the selection of taxpayers and issues for audit and the redetermination of tax liability. There is no evidence that current law (which authorizes payment of monetary awards to informants) is ineffective in uncovering fraud. The high mandatory level of the proposed new award--coupled with the lack of a sanction for false reports--could spawn inaccurate and misleading claims, which would be both expensive and diverting for the IRS and affected taxpayers to sort out. This proposal should not be adopted.

* Reject Denial of Deductions for Legitimate Expenses. Although intended to clarify what fines and penalties are non-deductible, the proposed amendment of section 162(f) would potentially deny a deduction for "other amounts" such as costs associated with safety recalls, aircraft maintenance, environmental clean up, or compliance with the Americans with Disabilities Act or Occupational Safety and Health Administration Act. Given the public policy ramifications of hampering these activities, the proposal should be set aside.

* Reject the Disallowance of Deductions for Punitive Damage Awards. The proposal to disallow deductions for punitive damages that are paid or incurred as a result of a judgment or in settlement of a claim is misguided. The federal income tax is a tax on net income, which requires taking into account all expenses associated with the production of that business income, including punitive damage awards. Because of the mismatching of ordinary and necessary expenses with the business income that engenders the expense as well as the potential for interfering with the judicious and efficient disposition of tort claims, this provision should be removed from the bill.

* Reject the Amendment of Deferred Compensation Rules. The American Jobs Creation Act of 2004 made sweeping changes to the rules governing deferred compensation arrangements, including the adoption of strict limitations on the ability of employees to make deferral elections with respect to stock options, restricted stock units, and other equity-based compensation. A current proposal to expand these new limitations, which was rejected last year, remains unnecessary, in part because of the other significant changes included in the 2004 legislation. Because the proposal would impinge on the ability of U.S. employers to recruit and retain world-class employees, the provision should be rejected as unnecessary just as it was rejected last year.

If you have any questions, please feel free to contact TEI's Executive Director, Timothy J. McCormally, or Chief Tax Counsel, Eli J. Dicker, at 202.638.5601.