TEI comments on House tax bill: June 3, 2004.

On June 3, 2004, Tax Executives Institute filed the following comments with the House Ways and Means Committee on the impending tax bill. The comments follow up on a March 10, 2004 letter to the House and Senate tax-writing committees.

Earlier this month, the Senate passed S. 1637, the Jumpstart Our Business Strength (JOBS) Act, which would repeal the foreign sales company/extraterritorial income (FSC/ETI) provisions of the Internal Revenue Code, reform and simplify many international tax provisions, and enact various domestic and administrative provisions. The House is now set to consider its own business tax package.

As the preeminent association of in-house business tax professionals, Tax Executives Institute commends Congress for the progress that has been made to comply with the World Trade Organization's decision, which necessitates the repeal of the FSC/ETI provisions, and to enact meaningful reform and simplification of the international tax provisions. TEI represents a cross-section of the business community, and our members know first hand the complexities of the U.S. tax laws and those around the world.

I. Provisions that Should Be Included in the House Bill

S. 1637 includes many provisions that would enhance the competitiveness of U.S. businesses operating here and abroad. Thus, the Institute supports provisions that would--

* provide an election to allocate interest on a worldwide basis;

* expand the de minimis rule under Subpart F;

* increase the foreign tax credit carryover to 20 years;

* permit the recapture of overall domestic losses (similar to section 904(f)'s recharacterization of overall foreign losses);

* eliminate the 90-percent limitation on the use of the foreign tax credit against the alternative minimum tax;

* provide look-through treatment for dividends from noncontrolled section 902 companies;

* permit an election not to use the average exchange rate for foreign tax paid in a nonfunctional currency;

* limit the application of the uniform capitalization rules to foreign persons;

* permit the repatriation of foreign earnings for a limited time;

* revise section 163(j)'s limitations on the deductibility of interest to be more focused; and

* repeal the foreign personal holding company and foreign investment company rules.

These provisions, together with the treatment of the European Union as one country for Subpart F purposes, will effect meaningful reform.

On the domestic side, TEI supports provisions in S. 1637 that encourage domestic manufacturing activities, provide a five-year carryback of net operating losses (as the House did as part of H.R. 3521, the Tax Relief Extension Act of 2003), and extend the research tax credit until December 31, 2005. (We, like the Administration, favor permanent extension of the research tax credit.)

II. Provisions that Should Be Excluded from the House Bill

TEI continues to be concerned, however, about several administrative provisions contained in the Senate bill. TEI believes that the following provisions of S. 1637 are ill-advised, represent poor tax policy, and would be both burdensome and counterproductive:

* "Clarification" of the Economic Substance Doctrine. Section 401 of the Senate bill would provide a statutory definition of the economic substance doctrine that is unnecessary and unwise. Codification of the economic substance doctrine would raise significant issues of statutory construction, impede the courts' ability to rely upon established precedents, and potentially interfere with wholly legitimate business transactions. The courts have demonstrated both a willingness and ability to use existing judicial doctrines (or even create new ones) to combat abuse. Accordingly, this proposal should be rejected.

* CEO Declaration. Section 422 of the Senate bill would require the a company's chief executive officer (CEO) to sign a declaration that the company has in place procedures to ensure that the annual federal return complies with the provisions of the Internal Revenue Code and that the CEO has received reasonable assurances of the accuracy of all material items in the return. While well intentioned, this proposal would consume valuable corporate resources without meaningfully enhancing corporate accountability. In our view, the company's Chief Tax Officer, not the CEO, is the person in the best position to judge the accuracy of a return and the underlying processes to ensure that accuracy. The proposal has the potential for distracting CEOs from activities (including corporate governance) where their professional expertise is best used. It should be excluded from the House bill.

* Denial of Deduction for Certain Fines, Penalties, and Other Amounts. Section 423 of the Senate bill would disallow a deduction for certain fines, penalties, or other amounts paid at the direction of a government entity in relation to a violation of law, investigation, or inquiry into a potential violation of law. Although intended to clarify what fines and penalties are non-deductible under Code section 162(f), the proposal goes much farther, potentially denying a deduction for "other amounts" such as costs associated with safety recalls, aircraft maintenance or updates, food safety or health department directives, or recommendations of the Occupational Safety and Health Administration or the Environmental Protection Agency; rate refunds by regulated entities; and bank examination fees. Given the public policy ramifications of hampering these activities, the proposal should be set aside.

* Tax Shelter Penalties. Sections 402, 403, 404, 405, 416, and 417 of the Senate bill would provide a variety of penalties in respect of abusive tax shelters, including imposition of a 30-percent penalty for non-disclosure of a reportable transaction, a 20-percent penalty for understatements related to a reportable transaction, and a 40-percent penalty for a "noneconomic substance transaction understatement"; limitations on waivers of various penalties; and an extension of the statute of limitations. There is no evidence that the effectiveness of the current penalty regime would be increased by these proposals. TEI believes that consistency, certainty, and fairness in the application of penalties play a bigger role in deterring noncompliance than indiscriminately raising the rates. The proposals should not be included in the final bill.

* Whistleblower Reforms. Section 488 of the Senate bill would amend Code section 7623 to require an award of 15-30 percent of the collected proceeds (including penalties and interest) to individuals who provide information leading to administrative or judicial action in respect of underpayments of tax. There is no penalty for providing false information concerning the underpayments. The proposal would also establish a "Whistleblower Office" within the IRS to analyze and investigate or refer the information, and to determine the amount of the award; the office would be funded, in part, from the amounts awarded under the revised statute. Current law already provides the Secretary of the Treasury discretion to pay monetary awards for furnishing information to the IRS; there is no evidence that the program is not effective in uncovering and deterring fraud. In addition, the high mandatory level of the award--coupled with the lack of a sanction for false reports--could spawn the submission of inaccurate and misleading claims. Finally, the proposal seemingly creates a private right of action for an inherently governmental function, i.e., the determination of tax. For these reasons, TEI recommends that this proposal not be adopted.

Conclusion

Tax Executives Institute appreciates the opportunity to support the FSC/ETI repeal and international reform and simplification and to recommend changes to the pending tax bill. If you have any questions about the Institute's views or if we can be of further assistance as the House considers this important legislation, please do not hesitate to call either Timothy J. McCormally, TEI Executive Director, or Fred F. Murray, the Institute's General Counsel and Director of Tax Affairs, at 202.638.5601.