Requiring CEOs to sign corporate tax returns: June 11, 2003.

On June 11, 2003, Tax Executives Institute submitted the following letter to members of the Senate Committee on Finance, urging Congress to abandon a proposal to require Chief Executive Officers to sign corporate tax returns. Originally passed by the Senate as part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the proposal was dropped before the bill was enacted. Senator Charles Grassley, chairman of the Committee on Finance, however, has pledged to support the proposal on future tax legislation.

On behalf of Tax Executives Institute, I submit the following comments on provisions that were included in recent tax legislation that would require the Chief Executive Officer (CEO) of a corporation to sign the corporation's federal income tax returns. As the preeminent association of business tax professionals, TEI shares Congress's interest in maintaining the integrity of the nation's self-assessment tax and financial reporting systems. We fully support the goals of enhancing corporate accountability and improving the tax system, but regret that such proposal would not have the salutary effects hoped for and, indeed, could prove counterproductive. We urge the Committee to abandon it insofar as it would require the CEO to focus on the tax returns of a company rather than the process of ensuring the complete and proper reporting of its tax obligations.

Tax Executives Institute

Tax Executives Institute was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our more than 5,300 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. As an international professional organization, the Institute is firmly dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. TEI also supports efforts to ensure that companies fairly present their financial condition in financial statements and related documents filed with the Securities and Exchange Commission.

CEO Signatures on Corporate Tax Returns

TEI urges Congress to abandon the proposal to require the CEO to sign a corporation's federal tax return and certain other related documents or statements. (1) We well appreciate the desire to enhance corporate governance and accountability in the aftermath of recent financial reporting failures. Regrettably, the CEO signature proposals would not advance that goal. Indeed, such a requirement would place undue burdens on fully compliant companies, distract senior management from pressing duties of managing the business and dealing with customers, and potentially impede competitiveness.

Congress has already acted forcefully in this area. The Sarbanes-Oxley Act of 2002 significantly strengthened the accountability of CEOs and Chief Financial Officers for corporate financial matters, including new and strengthened civil and criminal penalties for violations. CEOs are now required to certify the financial statements of corporations, which contain a provision for taxes. (2) This certification requirement properly and adequately ensures that the CEO is committed to, and responsible for, the fair presentation of the company's financial results, including its tax positions, and that the CEO and the company have taken adequate steps to institute and maintain a process to achieve that result.

The tax affairs of major corporations, especially those with operations in numerous countries, are extraordinarily complicated. The same is true for the technical process of reporting them. For this reason, the day-to-day responsibility for compliance with the technical rules and reporting requirements is prudently delegated to the Chief Tax Officer (or similarly titled individual) who has been specially trained. While the senior officers remain ultimately responsible for the company's compliance with the tax laws--as well as environmental, worker safety, and other laws--rarely would a CEO be personally aware of and conversant with the myriad tax rules that apply to literally thousands of transactions reflected in the company's tax returns. The CEO is typically charged with process-related responsibilities, whereas the Chief Tax Officer is normally given the responsibility for technical legal compliance.

Indeed, the level of detail and specialized knowledge demanded in the preparation and submission of complex corporate tax returns makes it absolutely necessary and proper to delegate responsibility for examining and affirming under penalties of perjury the completeness and accuracy of the return (3) to an employee with the requisite level of professional tax expertise, training, and experience--the Chief Tax Officer.

Given the complexity of most companies' tax affairs, TEI has significant misgivings about the wisdom or practicality of redirecting that task to the CEO. Thus, the proposal should be set aside not to "let the CEO off the hook"--indeed, he or she is already held accountable, both civilly and criminally, for the company's affairs--but for wholly practical reasons. Corporate tax returns are often several thousand pages in length, (4) and making the necessary review and certification of them is not a perfunctory task. In addition to making the required substantive legal and accounting judgments, and familiarizing himself or herself with the facts and circumstances underlying the computations, the officer signing the return must devote substantial time and attention to reviewing and understanding the documents.

The time required for Chief Tax Officers to discharge their review and certification duties is material, even when their full-time position both requires and provides familiarity with the relevant issues in the return. Shifting that responsibility to the Chief Executive Officer would require inordinate time for him or her to acquire the necessary skills and discernment to make required judgments. Indeed, additional time would be required to attain an intimate, working knowledge of transactions with a granularity not otherwise required or helpfully part of his or her day-to-day responsibilities. The time to properly prepare the Chief Executive Officer for the signing of the return would vary from company to company according to size, complexity, and internal policies, but at least one U.S.-based company has estimated that the process would occupy up to one month of each year of the CEO's time (to say nothing of the necessary staff time). The burdens would be especially pronounced in respect of companies that are subsidiaries of foreign companies, whose CEOs may require even more detailed briefings.

In a typical year, corporate tax officials will sign under penalties of perjury hundreds, sometimes thousands, of U.S. federal, state, and local income, excise, and property tax returns, as well as foreign tax returns. (5) These returns routinely contain voluminous schedules that must be examined and then separately signed. (6) If, as often occurs, state and foreign jurisdictions follow suit, the burden on Chief Executive Officers and their staffs could be correspondingly, perhaps exponentially, increased. The diversion of corporate resources from more constructive activities would be unfortunate, without any concomitant enhancement of corporate governance.

Conclusion

We urge Congress to abandon the CEO signature proposal as impractical and unsound. If Congress nonetheless concludes that legislation is appropriate, care should be taken to focus on the CEO's responsibility to reasonably assure that appropriate processes and personnel are in place for the company's compliance with the tax code, and not to examine the voluminous Form 1120 and personally vouch for its contents.

Any questions about the Institute's views should be directed to either Timothy J. McCormally, TEI's Executive Director, or Fred F. Murray, the Institute's General Counsel and Director of Tax Affairs. Both individuals may be contacted at 202.638.5601.

(1) One version of the proposed requirement passed the Senate in S. 476, 108th Cong., [section] 722 (2003). This bill awaits action in the House. Another version passed the Senate as section 332 of the Senate amendment to H.R. 2, 108th Cong. (2003), and was deleted in conference with the House. The report of the Committee on Finance on the latter version suggests that the statutory language should be read more narrowly than might have been the case with its predecessor: "Because the provision amends section 6062, it applies only to the Form 1120 itself (or its equivalent) and any disclosures required under section 6662 or related provisions. It does not apply to any other schedules of attachments." S. REP. No. 108-_, at 70 n.161 (2003).

(2) Section 302 of the Sarbanes-Oxley Act requires principal executive and financial officers to certify in each quarterly and annual report, among other things, that the report does not contain any untrue statement of a material fact or omit to state a material fact, and that the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the company. Section 906 adds a provision to the U.S. criminal laws that contains a separate certification requirement. Section 404 of the Act directs the SEC to adopt rules requiring each annual report of a company, other than a registered investment company, to contain (1) a statement of management's responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) management's assessment, as of the end of the company's most recent fiscal year, of the effectiveness of the company's internal control structure and procedures for financial reporting. The SEC rules implementing section 404 define the term "internal control over financial reporting" to mean a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

(3) The officer currently signing the return, in addition to other attestations contained on subsidiary schedules and attachments, must execute the statement: "Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete." (emphasis added)

(4) See H.R. REP. No. 104-28, Replacing the Federal Income Tax: Hearing Before the Committee on Ways and Means, House of Representatives, 104th Cong. 35-37 (1995) (statement of William G. Dakin, Senior Tax Counsel, Mobil Corporation, and accompanying photograph).

(5) For three companies polled for the data, the average of the total number of federal, state and local, and foreign returns filed on an annual basis is approximately 53,000.

(6) In addition to the signature requirements for a number of supporting forms, signatures are also required for various statements, elections, notices, and revocations. Moreover, signatures are required for grantor trusts, de-consolidated corporate entities (i.e., subsidiaries owned less than 80 percent), and a myriad of partnership returns and extension requests, including situations where the corporation is the tax matters partner of a U.S. partnership. One company informs us that the officer signing the return currently has to sign in 374 places on the documents. Another company tells us that 280 signatures were required for 1,600 statements and elections included in U.S. federal consolidated return.