Proposal to require registration of confidential corporate tax shelters.

On November 8, 1995, Tax Executives Institute submitted the following comments to the Joint Committee on Taxation concerning a proposal in the Revenue Reconciliation Act to require the registration of confidential corporate tax shelters. The proposal was among the issues discussed during the Institute's November 2 meeting with the staff of the Joint Committee on Taxation. TEI's submission was developed under the aegis of TEI's IRS Administrative Affairs Committee, which is chaired by Robert L. Ashby of Northern Telecom, Inc.

During our liaison meeting last week, we briefly discussed some of the Institute's concerns about the proposal in the Revenue Reconciliation Act of 1995 that would require the registration of so-called confidential corporate tax shelters (section 12802 of the Senate Bill and section 13602 of the House Bill). You asked us to elaborate on our concerns about the proposal.

General Comments

Tax Executives Institute has grave doubts about the proposal. Although Congress took great strides in 1989 to streamline and improve the Internal Revenue Code's penalty provisions, the proposal suggests that Congress cannot leave well enough alone. The Internal Revenue Code is already replete with provisions aimed at forcing disclosures of questionable positions, curtailing improper "tax shelters," and punishing taxpayers who unduly "push the envelope" in completing their tax returns through explicit penalties (in section 6662) or enhanced interest rates (in section 6621(c)).

Despite this plethora of penalty provisions as well as the registration requirements under section 6111 in respect of tax shelter promoters, Congress seems poised to enact legislation that would require the registration of tax shelters offered under conditions of confidentiality and to apply that registration requirement to taxpayers themselves where the shelter promoter is not subject to U.S. tax laws. Specifically, in such a case, the House and Senate versions of the Revenue Reconciliation Act each provide that a corporate taxpayer that signs a confidential agreement in connection with a "tax shelter" offering must either (i) send a written notice to the promoter of the taxpayer's decision not to participate in the shelter, or (ii) register the shelter with the Secretary of the Treasury, even if the taxpayer ultimately decides not to participate in the shelter.

TEI appreciates the policy concerns that underlie the proposal -- the aggressive use of confidentiality agreements to market 'tax shelter arrangements' and the effect such agreements have on the Internal Revenue Service's ability to identify and staunch unacceptable tax shelter activities. The Institute submits, however, that the proposal is seriously flawed because it would misguidedly and redundantly impose burdens on taxpayers (in contrast to the shelter promoters and their advisers). Taxpayers are already subject to numerous penalty and disclosure provisions. Just last year, Congress amended section 6662 to impose more stringent requirements on corporations seeking to avoid penalties in respect of "tax shelter transactions." That amendment was effective with transactions occurring after December 8, 1994, and therefore it is absolutely inconceivable at this early date to say that additional changes are necessary in' respect of taxpayers. The proposal should be dropped by the conference committee on both policy and administrative grounds.

Registration Requirement Should Not Be Imposed On Corporate Taxpayers

Even assuming that a case can be made for expanding section 6111's tax shelter registration provisions in respect of tax shelters involving confidentiality agreements, TEI objects to the proposal's buckshot approach in defining the scope of the registration requirement. Specifically, in light of the penalty provisions that already apply to corporate taxpayers that participate in confidential tax shelter transactions, it is the height of overkill to impose an additional registration requirement on such taxpayers where the promoter of the shelter is not a U.S. person. It is doubly objectionable to impose the registration requirement on corporate taxpayers that discuss participation in the shelter but ultimately choose not to participate in such shelter (unless the taxpayer promptly notifies the promoter in writing of its decision not to participate).(1) To our mind's eye, imposing a registration requirement on such taxpayers is akin to shooting the hostage who escapes because the kidnapper is not in one's sights.(2)

To the extent that a "backstop" is necessary where the promoter is not subject to U.S. tax jurisdiction, we submit that more appropriate targets of the registration requirement are available -- namely, any U.S. person who serves as an adviser to the promoter. Experience teaches that "plans or arrangements" marketed on conditions of confidentiality are unfailingly accompanied by legal opinions or other analyses attesting to the attendant tax consequences. Where the promoter is not a U.S. person, it is quite likely that one or more of the advisers whose opinions are used in marketing the shelter will be subject to U.S. tax jurisdiction. Hence, we believe that the "backstop" should be those advisers, rather than the taxpayer (who, as previously noted, is already subject to a raft of penalties and other requirements). This could be easily accomplished by including a sentence such as the following at the end of flush language in proposed section 6111(d)(2):

For purposes of this section,

the term "promoter" also includes

any attorney, accountant,

investment banker, or

other adviser whose identity

and views concerning the tax

treatment of the tax shelter

are disclosed in any materials

provided to any person

with whom participation in

the shelter is discussed.

Expanding the definition of promoter to include advisers would properly target the proposal to those who market (or whose views are used in marketing) tax shelters.(3) It would also mean that the requirement in proposed section 6111(d)(3) (captioned "Persons other than the promoter required to register in certain cases" can be deleted without undermining any legitimate purpose that might underlie the proposal.

The Notice/Registration Periods Should Be Extended

Regardless of the registration requirement imposed on promoters (however that term is defined), TEI recommends that the provision be amended to extend the time periods within which taxpayers are required either (i) to provide any notice of nonparticipation (in order to excuse registration) or (ii) to register the shelter.

Notice of Nonparticipation. As approved by the House, a corporate taxpayer that discusses a tax shelter is subject to a registration requirement unless it notifies the promoter in writing of its decision not to participate in the shelter not later than the close of the day on which such discussions began; the Senate Bill extends the notice period to seven days. Not even the week-long notice period in the Senate Bill, however, is realistic. Often, the plans and arrangements that would be subject to the registration requirement are not discussed initially with the individuals who are responsible for ensuring a corporation's compliance with tax filing requirements; rather, a promoter will market its product to the company's Chief Financial Officer or other persons outside the corporate tax department. More often than our members would like to admit, the tax department may not become aware of such discussions until after "the close of the day on which such discussions began" (or even the seventh day after such discussions commenced). At a minimum, therefore, the notice period should be extended to no shorter than 30 days.

Registration Requirement. The proposal does not differentiate between promoters and taxpayers in specifying when a plan or arrangement must be registered: registration is required not later than the day on which the offer to participate occurs. For the reasons set forth above -- this one-day rule -- which is identical in both the House and Senate versions, is wholly impractical.

Indeed, the proposal practically begs noncompliance even if perfect knowledge is assumed by the company's tax compliance personnel, for it would require registration even before the taxpayer is required to provide a notice of nonparticipation to the promoter in order to vitiate the registration requirement. This virtual Catch-22 is illustrated by the following example:

Assume that on Day 1 a taxpayer

discusses participation in the

tax shelter and is unsure whether

to participate. Under the Senate

Bill, the taxpayer has until

Day 7 to provide notice of nonparticipation

to the promoter in

order to avoid the registration

requirement, but the taxpayer

would be required to register by

the end of Day 1. If the taxpayer

decides to participate in the

shelter on Day 2, it will be too

late to register. What is more,

timely compliance with the registration

requirement will be

impossible where the taxpayer

decides not to participate in the

shelter but neglects to provide

the notice of nonparticipation to

the promoter or provides such

notice after Day 7. (Of course, a

corporation that decides not to

participate is not subject to any

penalty even if it fails to provide

the required notice or register

the shelter, but that is another

matter.

TEI believes the "mechanical" defects in how the registration provision applies to taxpayers underscore why taxpayers should not be subject to the registration requirement, especially where they choose not to participate in the shelter. Should a registration requirement be retained in respect of taxpayers that participate in confidential tax shelters, we recommend that the time period for such registration be linked to the filing of the taxpayers' returns. Hence, we recommend that registration be required not sooner than the due date (including extensions) of the return for the year in which the taxpayer participates in the tax shelter. If nonparticipating taxpayers remain subject to the registration requirement, the deadline for their registration should similarly be linked to the due date of the return for the year in which the tax shelter discussions occur.

* * *

Tax Executives Institute appreciates this opportunity to present its views on the proposal to impose a registration requirement in respect of confidential corporate tax shelters. If you should have, any questions about the Institute's position, please do not hesitate to call either Jack R. Skinner at [phone] or Timothy J. McCormally, TEI's General Counsel and Director of Tax Affairs, at [phone].

(1) Under the House Bill, such notification must be given "not later than the close of the day on which such discussion [of the shelter] began"; the Senate Bill extends the notice period from one to seven days. (2) That both the House and Senate versions of the proposal provide that no penalty is to be imposed on a taxpayer for failing to register the tax shelter unless the taxpayer actually participates in the shelters underscores the flawed nature of the proposal. Why impose a requirement to register on those who decline to participate and then excuse noncompliance by such taxpayers? (3) Inasmuch as any legal opinion included in the tax shelter offering would be disclosed to potential "purchasers" of the shelter, we do not believe the attorney-client privilege stands as a barrier to such disclosure; any privilege would seem to be waived by such disclosure to potential participants in the shelter.