Miscellaneous revenue-raising measures.

On September 22, 1993, Tax Executives Institute submitted the following statement to the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means. The statement, which was signed by TEI President Ralph Weiland, was prepared in connection with three days of hearings the Subcommittee held on 60 miscellaneous revenue-raising proposals.

On behalf of Tax Executives Institute, I am pleased to provide the following comments on several miscellaneous revenue-raising measures that were or will be the subject of hearings by the Subcommittee on Select Revenue Measures on September 8, 21, and 23, 1993. The Institute requests that the comments be associated with the hearing record.

Overview

Don't tax you, don't tax me -- Tax that fella behind the tree.

This aphorism, which has been attributed to former Senator Russell Long, aptly describes the plethora of proposals under consideration by the Select Revenue Measures Subcommittee: an exercise in searching out "that fella behind the tree."To paraphrase Pogo, however, we have found that fella and he is us. Tax Executives Institute concedes that the proposals before the Subcommittee would raise revenue, but respectfully submits that, almost without exception, they do not merit serious consideration. Taken as a whole, they are gargantuan in scope, bereft of detail, generally devoid of any compelling tax-policy basis, blind to the administrative costs they would impose, and driven by nothing so much as the money they would raise and the oxen they would gore.(1)

At any time, the menagerie of proposals before the Subcommittee would be daunting, but at the present uncertain time their advent is especially disconcerting. In the midst of a still-stalled economic recovery, weeks after the enactment of the Omnibus Budget Reconciliation Act of 1993, and days before the President unveils his comprehensive health care proposals, the hodge-podge of proposals stands as an edifice to what is wrong with tax policy in the 1990s. The proposals reflect precious little appreciation for the interplay of tax policy with economic policy and international competitiveness and scant, if any, recognition of the administrative and compliance costs associated with endless tinkering with tax law provisions.

In a word, the proposals before the Subcommittee epitomize "hyperlexis"--excessive complexity in the law--which has been mirthfully defined as "a pathological condition caused by an overactive law-making gland."(2) The proposals, however, are not themselves mirthful: they represent the antithesis of simplification and have a destabilizing effect, not only on the tax system but on international markets and the economy as a whole.

Consider, for example, the proposal to reinstate the withholding tax on interest received by foreigners on certain portfolio investments. Such a proposal ignores that U.S. businesses operate in a global market. Its effect would not be to "punish" foreign lenders but to increase the net cost of borrowing-costs that would be borne by U.S. borrowers (including the government).(3) As the Subcommittee is well aware, the proposal significantly disrupted the international financial markets and recently necessitated a formal disavowal from the Treasury Department. TEI is pleased that the Administration moved quickly to quell the instability in the international markets and that it reiterated its opposition to the proposal during its September 21 testimony before the Subcommittee.(4)

Several other proposals deserve note because they reflect either disregard for proposals Congress has already enacted, misunderstanding of the burdens they would impose on taxpayers, or the type of gimmickry and sleight-of-hand that undermines public confidence in the tax system:

* The proposal to impose a 30-percent excise tax on expenditures of tax-exempt organizations for lobbying (including amounts paid as salaries and an allocable portion of support costs) comes on the heels of OBRA's opprobrious disallowance of deductions for lobbying expenditures (which has a raft of special rules governing expenditures by tax-exempt membership associations). TEI is pleased that the Administration opposed the proposal during its September 21 appearance before the Subcommittee.

* The proposal to increase estimated tax payments under the safe harbor method to 115 percent of last year's liability for individuals with adjusted gross income over $150,000 effectively requires taxpayers to overpay their income taxes in order to avoid any penalty attributable to their inability to estimate their tax liability with certainty. What's more, the proposal comes even before OBRA's change to the estimated tax rules (increasing the applicable percentage rate to 110) has gone into effect and, hence, before Congress could possibly determine whether a further increase is necessary. The Clinton Administration is to be commended for opposing the proposal.

* The proposal to require written substantiation of any meal or entertainment expense claimed as a business deduction or, alternatively, to require written substantiation of any meal or entertainment expense in excess of $10 seems untethered to reality, in that it would impose a requirement to secure receipts from, among other places, fast-food restaurants and vending machines. Moreover, the proposal disregards the OBRA conferees' rejection of a Senate proposal to reduce the substantiation threshold to $20.(5) We are pleased that the Administration shares our opposition to this proposal.

The deja vu quality of many of the proposals--the seeming disregard for the fact that Congress considered and either enacted or rejected similar proposals as recently as two months ago--is disturbing, for it feeds the instability that already marks the tax law. In the aftermath of the Tax Reform Act of 1986, there was much talk of the need for a moratorium on new tax legislation in order to give both taxpayers and the Internal Revenue Service a chance to implement and become accustomed to the massive changes the 1986 Act wrought. Although prospects for a full-scale moratorium were no doubt always illusory, there would clearly be ongoing benefits in adopting a "cooling off period" rule with respect to particular proposals. We applaud the Administration for making this same plea for stability during the Subcommittee's September 21 hearing, and urge the Subcommittee to reject the oft-resurrected proposals with dispatch.

Even more alarming than the "Friday the Thirteenth," Jasonesque character of many of the proposals, however, is their aggregate distension of the Sixteenth Amendment's imposition of a net income tax. People are supposed to be taxed on income not on gross receipts, but certain of the proposals do not concede that. Hence, several of the proposals--those in respect of environmental clean-up expenditures and damages, advertising expenses, and interest on tax underpayments-violate the precept that deductions are generally allowed for the expenses of producing that income.

The proposals also ignore the fact that the United States does not function in a vacuum: it is part of an increasingly interdependent global community. One of the more overreaching proposals would myopically penalize multinational corporations for operating in that global economy by replacing the foreign tax credit with a deduction. Such a proposal would result in double taxation, violate numerous bilateral treaties, and place U.S. companies at a severe competitive disadvantage. Other proposals would undermine the competitive position of the U.S. economy for capital investment and job creation by increasing the cost of doing business in the United States. Whenever a legitimate business expense deduction is denied or an additional compliance cost is imposed, the competitive position of the country as a whole is clearly diminished. That the Clinton Administration generally shares this view is laudable.

As the foregoing discussion makes clear, Tax Executives Institute has significant misgivings about many of the proposals under consideration. Although the Institute endorses the process the Subcommittee has employed to afford taxpayers an opportunity to express their views (other than the untimely issuance of the Joint Committee's description), we view most of the proposals should be promptly and soundly rejected. In the ensuing sections of this statement, we set forth our specific comments on several proposals, and wish to confirm our willingness to meet with the Subcommittee and its staff to elaborate on our concerns.

Deductibility of Environmental Remediation Expenditures

The federal income tax treatment of environmental remediation expenditures affects nearly every taxpayer engaged in manufacturing, natural-resource extraction, transportation, and related industries. Taxpayers face a plethora of costs to comply with myriad environmental laws imposed by federal, state, and local authorities. Although there is no statutory provision specifically governing the federal income tax treatment of environmental costs, taxpayers have generally considered remediation expenditures deductible when incurred on the grounds that such expenditures repair and restore environmentally damaged property to its condition immediately before the condition necessitating the expenditures. As repairs, the expenditures are deductible as ordinary and necessary business expenses under section 162 of the Internal Revenue Code.

Two proposals under consideration by the Subcommittee would affect this long-accepted treatment: the first would disallow the cost of compensatory damages under certain environmental laws, and the second would reverse the longstanding deduction for environmental remediation costs by requiring either capitalization of certain costs or capitalization and amortization of certain expenses over uniform periods. In considering the merits of the proposals, Congress should bear in mind the underlying social policy prompting the enactment of federal, state, and local environmental protection statutes: to promote and protect a clean, healthful environment based on known environmental risks and cost-effective technological responses to prevent the discharge of or to remove environmentally damaging substances. TEI believes that attaining this laudable goal would be seriously impeded by adoption of either proposal. On this basis alone, the proposals should be rejected. The proposals are also flawed as a matter of tax policy.

A. Compensatory Damages for Environmental Lawsuits

If Congress enacted the proposal to disallow deductions for the cost of compensatory damages under certain environmental laws, it would create an artificial distinction in the tax law for certain types of costs associated with the manufacture and distribution of products. More specifically, the costs of compensatory damages arising from other forms of civil liability-for example, product liability claims--would remain entirely deductible, whereas the cost of resolving environmental claims would be nondeductible. No justifiable reason exists for such a distinction. The Administration made this point forcefully during its September 21 testimony.

The proposal should be rejected for another, not insubstantial reason: the cost of resolving environmental lawsuits would substantially increase-by 35 percent (the value of the otherwise allowable deduction). Enactment of the proposal would likely increase the propensity of affected businesses to contest either the fact of liability or the amount of compensatory damages to the absolute limits of the administrative and judicial system. The proposal would thereby perversely undermine what should be a principal societal goal: a rapid response and clean-up of environmental damage.

B. Capitalization of Environmental

Remediation Expenditures

TEI also opposes the proposal to upend the current deduction for environmental remediation costs and to require either (i) capitalization of certain costs or (ii) capitalization of certain costs and amortization of such costs over uniform periods. To our mind's eye, the proposal misapprehends core principles of the tax system as well as the nature and purpose of remediation expenditures.

Although the alternative of permitting amortization of capitalized costs over a specified period is less obnoxious than the proposal simply to require capitalization, TEI believes either option would detrimentally affect the goal of expeditiously and thoroughly remediating environmental damage. Two recent technical advice memoranda issued by the Internal Revenue Service improperly conclude that certain clean-up expenditures should be capitalized, and TEI has prepared a detailed submission demonstrating why the legal analysis employed by the IRS in the rulings was flawed and produced incorrect results. (A copy of our analysis will be provided to the Subcommittee on request.) Although efforts are underway to persuade the IRS administratively to correct its interpretation of the law, a legislative remedy may prove necessary.(6) To the extent legislation is needed to clarify the proper treatment of environmental remediation expenditures, TEI strongly believes that Congress should confirm that section 263--which requires the capitalization of certain expenses--does not apply to most environmental clean-ups.

In conclusion, TEI urges Congress to reject the proposal to disallow deductions for compensatory damages related to environmental lawsuits. TEI also recommends the rejection of the proposal to require capitalization (with or without amortization) of remediation expenditures. Instead, TEI submits that the Subcommittee should confirm that environmental clean-up expenditures are generally deductible when incurred.

Capitalization of Advertising Expenses

A proposal under consideration by the Subcommittee would require capitalization and amortization of advertising expenses over a period of years. TEI recommends that the Subcommittee reject the proposal because it lacks a sound basis in either tax policy or economic effect.

Expenses incurred to promote products, services, or institutional goodwill have been deductible as ordinary and necessary business expenses since the inception of the income tax. The longstanding treatment has been sanctioned by the courts and has been accepted by the IRS, which recently affirmed the generally deductible nature of advertising under section 162 of the Code in Rev. Rul. 92-80, 1992-2 C.B. 57. In that ruling, the IRS averred that there may be some future effect on business activities, as in the case of institutional or goodwill advertising, but that the future benefit is not significant enough to warrant capitalization.

The theory underlying the proposal before the Subcommittee--to the extent there is one--is that advertising expenditures produce a significant benefit beyond the year in which the expenditures are made. There is little or no evidence, however, to support the notion that advertising produces significant future benefits that are separate or distinct from the immediate present benefit that arises from product or service advertising. Nor is there any evidence suggesting that the use of a uniform amortization period in respect of all advertising expenses would be anything but arbitrary and inequitable. (The Administration echoed this assessment during its testimony at the Subcommittee's September 21 hearing.) Thus, the proposal would lead to a substantial mismatching of income and expenses.

Tax policy aside, the proposal flunks the test of sound tax administration. It would require taxpayers and the IRS alike to expend substantial resources in determining what is and what is not advertising. The proposal would doubtless lead to numerous audit disputes, and the resulting uncertainty and instability could not help but impair the smooth operation of the tax system and the competitive position of business taxpayers. Like the uniform capitalization rules (which were enacted in 1986), the advertising capitalization proposal might produce a one-time revenue pick-up for the risc but would impose recurring and onerous recordkeeping and compliance burdens on taxpayers.

Finally, TEI believes that requiring the capitalization and amortization of expenses for some evanescent, undefinable future benefit that is wholly inseparable from the present benefit of advertising would impair the free flow of product and price information to consumers in this country. In the absence of any sound economic evidence that the present commercial benefit of advertising expense may be segregated from a tenuous or incidental future benefit, the proposal should be rejected as arbitrary, unsound, and insupportable.

Stock Options as Qualifying Expenses for Purposes of the Research Tax Credit

A proposal before the Subcommittee would disallow the compensation expense portion of stock options as a qualifying expense for purposes of the research tax credit under section 41 of the Code. Thus, the proposal would decouple the treatment of stock options for income tax withholding and employment tax purposes (in respect of which they are treated as "wages") from their treatment for purposes of the research tax credit. TEI opposes the proposal, and is disappointed that the Administration has stated that it would not oppose the proposal.

Stock options represent a means of compensating employees through performance-based incentives--particularly in technology-based industries where research is critical to the development of products and processes. In addition, stock options generally represent a long-term approach to compensating employees, rewarding those who remain with a company over a long period of time. This is especially important in attracting and retaining a stable group of research employees because research efforts often require a multi-year period. Indeed, in many entrepreneurial companies, stock options are a critical component of total compensation used to attract and retain scientific and engineering talent on a long-term basis.(7)

The proposal to disallow the compensation expense element of stock options as a qualifying expense for purposes of the research tax credit would undermine the incentive effect of the credit by compelling many companies to consume their cash resources to compensate their employees (and thus preserving the amount of the credit to the company) or risk losing staff to better-financed competition. The proposal would thus diminish the chances for success among companies whose principal assets lie in the creative abilities of their research staffs to develop inchoate ideas into commercially successful products.

The proposed disallowance would perversely inhibit the very risk-taking behavior the research tax credit is designed to foster. Accordingly, TEI urges the Subcommittee to reject the proposal to disallow the compensation expense portion of stock options as a qualifying expense for purposes of the research credit.

On-Line Telephone Access to Taxpayer Identification Numbers

A proposal under consideration by the Subcommittee would require the IRS to establish an on-line electronic transmission facility to enable payers to obtain access to taxpayer identification numbers (TINs) on a dial-up basis. TEI supports efforts by Congress to encourage the IRS to exploit emerging technologies to enhance compliance--in the service industry and elsewhere--to minimize payer and payee burden relating to information reporting. We believe, however, that many questions remain before information reporting obligations should be significantly expanded. Consequently, although we recommend that the Subcommittee pursue a telephone verification system, we believe it should move with caution in this area.

During the debate over the Clinton Administration's "service industry non-compliance" (SINC) proposal--a provision ultimately omitted from OBRA--TEI argued that no information reporting regime for services should be imposed unless the IRS were capable of supplying payers with information on a payee's TIN and status on a timely basis. We were pleased that the OBRA conferees agreed that SINC should not be adopted.(8) Even apart from SINC or other efforts to expand information reporting requirements, a TIN-verification program would be helpful in minimizing payer burden. If Congress were to expand the scope of the tax law's current reporting requirements, a verification system would be absolutely essential.

Thus, TEI renews its recommendation that the Congress establish an effective on-line facility permitting payers to verify payee TIN data as an absolute prerequisite to an effective, targeted information reporting regime. With an on-line telephone facility, the IRS would be able to segment taxpayers by their level of compliance with the tax laws. Moreover, through TIN verification, payers would be able to determine whether information returns should be filed or backup withholding instituted with respect to their payees.

While a host of technical and policy obstacles must be overcome before expanded information reporting requirements can be effectively and efficiently imposed, the establishment of an on-line telephone verification facility is clearly a necessary step. TEI urges the Subcommittee to move forward in this area. Even an operational verification system, however, is no substitute for well-defined enforcement programs that are targeted to verifiable areas of noncompliance.

Repeal of Section 530 of the Revenue Act of 1978

A proposal under consideration by the Subcommittee would repeal section 530 of the Revenue Act of 1978 (relating to the classifications of workers as independent contractors) for construction industry workers. TEI opposes the proposal because it would remove the certainty of section 530's safe harbors without providing any basis for resolving employment tax controversies. We are pleased that the Administration similarly opposes the proposal.

Section 530 was enacted in 1978 in response to congressional concern that the IRS had acted too aggressively in classifying certain workers as employees rather than independent contractors under the so-called common law test. Although originally enacted as a temporary measure to afford Congress an opportunity to tailor a permanent, statutory solution, the provision was subsequently made permanent by Congress. In the 15 years since the enactment of section 530, numerous questions have arisen concerning the scope and application of the provision.

TEI supports the statutory clarification of the tax law's worker classification rules and sees benefit in making section 530 part of the Internal Revenue Code. We do not, however, support efforts to strip taxpayers generally-or discrete classes of taxpayers-of the protection of section 530 without substituting a comprehensive set of rules. In the absence of such comprehensive action, the uncertainty and potential for IRS abuse that gave rise to the enactment of section 530 could well reemerge.

Accordingly, we oppose the proposal to repeal section 530 as it applies to workers in the construction industry.

Deduction for Interest Paid on Corporate Tax Underpayments

A proposal under consideration by the Subcommittee would deny corporations a deduction for all (or part) of interest paid to the IRS on tax underpayments. TEI opposes the proposed disallowance for the both policy and administrative reasons, and commends the Administration for announcing its opposition to this odious proposal.

First, the proposal is unjustifiably punitive. Undergirding the proposal is an inference that the underpayment of tax is an act of significant culpability that deserves punishment (by means of disallowing a deduction for interest paid on that underpayment). Thus, the proposal would apparently apply in respect of all interest paid on all tax underpayments, without regard to either the good faith of the taxpayer or the fact that high interest charges in respect of corporate tax disputes are frequently attributable to government-caused audit delays.

Secondly, the proposal is at odds with longstanding and legitimate tax law principles. Under current law, taxpayers are properly accorded a deduction for ordinary and necessary business expenses. Interest paid on business-related indebtedness is one such expense. Thus, if a company borrows to purchase business-related equipment, the interest on the loan is deductible as a cost of doing business. Interest paid to the government on tax underpayments represents the identical type of expense. No policy reason exists to distinguish interest paid for federal tax purposes from other interest payments.

Thirdly, the proposal could disrupt the orderly administration of federal, state, and foreign tax audit systems. Currently, the IRS and other taxing authorities are unable to conduct timely audits of many corporations and regularly seek extensions of the statutes of limitations in order to complete their examinations. If the proposal were enacted and corporations were denied a deduction for interest paid on overpayments in respect of any extended period, taxpayers would likely be less willing to agree to such extensions.

For the foregoing reasons, Congress in 1990 refused to enact a comparable provision,(9) though it did enact an enhanced interest rate in respect of so-called large corporate tax underpayments. Without regard to whether the 1990 provision was justified--and TEI fervently believes it was not-- there is no basis for denying corporate taxpayers a deduction for a legitimate business expense--interest paid on their tax liabilities. Thus, the proposal to disallow a deduction in respect of interest paid on corporate tax underpayments should be rejected.

Increased Interest Rate on Corporate Tax Underpayments

A proposal under consideration by the Subcommittee would increase the rate of interest payable on corporate tax underpayments. Because the proposal would belie the purpose of the Internal Revenue Code's interest provisions--to compensate the government for the time-value-of-money-and would be punitive, TEI joins the Administration in recommending its rejection.

Under section 6621(a) of the Code, a taxpayer is charged interest on underpayments of tax at a rate equal to the federal short-term rate plus three percentage points. In contrast, a taxpayer receives interest on an underpayment of tax at a rate equal to the federal short-term rate plus two percentage points. In 1990, Congress concocted section 6621(c) which increases by two percentage points the interest rate payable by corporate taxpayers on tax underpayments exceeding $100,000. Thus, under this "hot interest" provision, corporate taxpayers now pay a three-percentage-point higher interest rate on large corporate underpayments than they receive on corporate overpayments.

TEI submits that the interest rate differential (with or without regard to its hot interest component) is not only unnecessary, but undermines what should be a precept of the tax system: evenhandedness. The interest rate differential was purportedly enacted because of congressional concern that the interest rate prescribed in the tax law may have caused taxpayers "either to delay paying taxes as long as possible to take advantage of an excessively low rate or to overpay to take advantage of an excessively high rate.(10) Even if this rationale were valid when the interest rate was determined every two years, changes more than a decade ago that required more frequent adjustment of the rate eliminated the potential for any significant differential between the market rate and the tax interest rate. The only reason for the differential-- which would be exacerbated by the proposal before the Subcommittee--is to exact a greater-than-market rate of interest from taxpayers as a punitive measure.

Taxpayers need to know that their government is dealing fairly with them. Taxpayers have no freedom to negotiate interest rates and terms with the government, as they might with a commercial establishment-the government offers taxpayers a deal they cannot refuse. That deal should be fair. Rather than increasing the interest rate differential, the Subcommittee should eliminate it altogether. At a minimum, the proposal to expand the differential should be rejected.

Modification of Inventory Source Rule

A proposal under consideration by the Subcommittee would modify the method by which the sale of inventory property is segregated between U.S. and foreign sources under section 863(b) of the Code.(11) Specifically, the proposal would impose a limit on the amount of section 863(b) income attributable to production activities where the inventory property is sold by the taxpayer to a related person. The amount attributable to production activities could not be less than the portion of the combined taxable income of the taxpayer and the related person attributable to the inventory property that would have been apportioned to production activities under section 863(b) had both parties been treated as one U.S. taxpayer.

TEI joins the Administration in not supporting the proposed modification of the inventory-source rule. The proposal should be rejected because it would adversely affect U.S.based companies that manufacture in the United States and use a foreign subsidiary to market their exports,(12) whereas companies dealing with an unrelated party would not be subject to the same restrictions. When Congress considered and rejected proposed changes to the title passage rule in 1986, the Senate Finance Committee concluded that "with the substantial trade deficits of the United States, it [did] not want to impose any obstacles on U.S. business that may exacerbate the problems of U.S. competitiveness abroad.(13)

The policy reservations expressed by Congress in 1986 remain valid today. Moreover, the proposal raises significant compliance issues since there is no indication how a taxpayer determines the portion of a foreign affiliate's income that is attributable to the exported product. Accordingly, TEI recommends that the proposal be rejected.

Change of Foreign Tax Credit to a Deduction

A proposal under consideration by the Subcommittee would transmute the foreign tax credit into a deduction. (14) TEI strenuously opposes the proposal as misapprehending the overarching purpose of the foreign tax credit and as threatening the competitive position of U.S. business vis-a-vis their foreign competitors. We agree with the Administration that the proposal should be rejected as misguided and counterproductive.

When the income tax was enacted in 1913, taxpayers were granted a deduction for taxes paid to foreign governments. The deduction for foreign taxes was changed five years later to a credit and the reason for the change is as valid today as it was 75 years ago: to avoid the double taxation of income.(15) Although legislation since that time has limited taxpayers' ability to utilize the credit, it remains today the multinational corporation's most significant defense against taxation of the same income by both the country of origin and the United States.

Elimination of the foreign tax credit would not only make manifest the specter of double taxation, but it would violate the numerous bilateral treaties the United States has entered into with its trading partners. It could also invite retaliation by foreign countries against U.S. companies. TEI believes that the provision represents bad tax policy and could seriously harm the competitive ability of U.S. companies operating overseas. Accordingly, the Institute recommends that the proposal be rejected.

Excise Tax on Purchases from Related Foreign Parties

A proposal under consideration by the Subcommittee would impose a five-percent excise tax on purchases of tangible personal property by a U.S. corporation from a related foreign party that fails to provide the IRS with tax information (as required by section 6038A of the Code). Based on the sketchy information available, however, the Institute has significant misgivings about the tax policy and administrative implications of the excise tax proposal.(16) Thus, we share the Administration's opposition to the proposal.

First, the proposal would violate the anti-discrimination clauses of U.S. tax treaties by taxing foreign corporations differently from domestic corporations.

Secondly, there has been no showing that the sanctions currently contained in section 6038A have proven inadequate to secure necessary information for the IRS. Indeed, while cast as an excise tax, the proposal would in reality impose a penalty, and its enactment would exacerbate a problem that Congress vowed to remedy when it enacted penalty reform in 1989: the willy-nilly "piling on" of penalties.

In addition, the proposal raises a whole raft of administrative questions. For example, who would be responsible for collecting the excise tax, the purchaser (U.S. corporation) or vendor (foreign related party)? Would returns be required or would the tax be assessed by the IRS? What "purchases" would be taxable under the proposal? What "tax information" would the corporation be required to provide to the IRS in order to be exempt from the excise tax? In respect of what purchases would the excise tax be imposed? For example, if the foreign related party is determined in 1995 not to have provided requisite tax information in respect of its 1993 return, on what purchases would the tax be imposed? Those in 1993? 1995? The period 1993 through 1995?

Given the lack of specificity concerning the proposal, TEI recommends that it be rejected.

Conclusion

Tax Executives Institute appreciates this opportunity to present our views. If you have any questions, please do not hesitate to call me at [phone] or Timothy J. McCormally of the Institute's professional staff at [phone].

-Notes - (1) The inadequacy of information available to the public about the proposals was underscored by the issuance on September 16after the first day of hearings and mere days before the close of the hearing recorder a description of the proposals before the Subcommittee by the staff of the Joint Committee on Taxation. Staffof Joint Committee on Taxation, Description of Miscellaneous Revenue Proposals (JCS-12-93) (Sept. 16, 1993). The Joint Committee's description contains useful background information on the proposals that could materially contribute to the overall debate on the proposals. That interested parties were effectively denied access to that information in preparing their testimony is at once frustrating and infuriating, and it certainly does not burnish the hearing process. Even with the Joint Committee's description, moreover, interested parties are left guessing about the full scope of many of the proposals.

(2) Bayless Manning, Hyperlexis: Our National Disease, 71 Northwestern University Law Review 767 (1977), quoted in Gordon Henderson, Controlling Hyperlexis The Most Important "Law And ...," 43 Tax Lawyer 177, 183 (1989).

(3) Because foreign lenders possess the leverage in most borrowing transactions, the withholding tax will in effect become an additional expense; U.S. borrowers will be required to gross-up their interest payments to cover the tax, thereby increasing their cost and causing more money to leave the United States.

(4) See Statement of Leslie B. Samuels, Assistant Secretary of the Treasury for Tax Policy, before the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means (September 21, 1993).

(5) Three other proposals before the Subcommittee would increase the withholding rates with respect to bonuses, gambling winnings, and backup withholding. There has been no showing, however, that there have been underpayments of tax with respect to these payments. Hence, the proposals could at best be described as revenue shifters, not revenue raisers, and at worst as smoke and mirrors unbefitting the tax code. We are pleased that the Administration has announced its opposition to the bonuses and backup withholding proposals and its decision not to support the proposal concerning gambling winnings.

(6) During the Subcommittee's September 21 hearing, the Administration announced that the capitalization and amortization proposal was "under study."

(7) Even the ill-advised OBRA legislation restricting the deductibility of compensation expense in excess of $1 million provided exceptions for performance-based incentives, including stock options, in recognition of the importance of stock options as a means of compensating employees.

(8) Contrary to the Administration's statement during the Subcommittee's September 21 hearing, TEI believes that Congress's rejection of SINC was not due to opponents' "misunderstanding" the proposal but rather to legitimate and demonstrable concerns about the burdens that SINC would impose on both payers and payees.

(9) H.R. Rep. No. 101-964, 101st Cong., 2d Sess. 1100-01 (1990).

(10) Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, at 1279 (1987).

(11) The proposal, which is based in part on a provision set forth last year in H.R. 5270 (102d Cong.), would statutorily modify Treas. Reg. [section] 1.863-3(b), which provides that taxpayers may apportion 50 percent of the income derived from the manufacture of products within the United States and their sale outside the United States on the basis of the location of assets held to produce income from the sale; the other 50 percent of the income is sourced based on the place of sale determined under the title-passage rule.

(12) These foreign sales subsidiaries, moreover, produce Subpart F income that is currently taxable.

(13) S. Rep. No. 99-313, 99th Cong., 2d Sess. 329 (1986).

(14) Current law accords taxpayers an election either to deduct foreign taxes or to claim a credit with respect to income (and incomerelated) taxes paid to foreign governments. The proposal would eliminate the election.

(15) See H.R. Rep. No. 65-767, 65th Cong., 2d Sess. 11 (1918). (16) Press Release No. 10 states that the proposal would impose the excise tax on purchases by foreign corporations that fail to provide the IRS with tax information. The Joint Committee's description, however, refers to an excise tax on purchases by U.S. corporations from a related foreign party.