TEI comments on Multistate Tax Commission's tax sheltering study: January 23, 2004.

On January 23, 2004, Tax Executives Institute sent the following letter to R. Bruce Johnson, Chair of the Multistate Tax Commission, to relay the Institute's growing concerns about aspects of the Commission's stance in respect of corporate activity to minimize income tax liability. The letter was prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Barbara Barton of Electronic Data Systems Corp.

Tax Executives Institute is concerned about some aspects of the Multistate Tax Commission's activities in respect of corporate activity to minimize income tax liability. While TEI appreciates the concerns of federal and state tax authorities regarding the marketing of inappropriate tax-advantaged products, we regret that the Commission's recent approach to so-called tax sheltering activity (epitomized in its July 15 press release on the topic) may prove counterproductive. Simply stated, the Institute has consistently held that the key to stopping tax abuses lies not in demonizing taxpayers or draconian penalties, but in the effective administration of the tax law, including the ability of examiners to identify and analyze transactions, and, where necessary, to challenge them. To this end, TEI has urged both federal and state policymakers to focus on disclosure-based approaches to address tax shelters.

Taxpayers have a real interest in promoting compliance with the law, both in the sense of their public duty and also in the sense of minimizing the overall tax burden. They also have an interest in promoting good tax administration and a good relationship between tax administrators, taxpayers, and advisors--one that respects their different roles as well as their professionalism. These interests are advanced by a positive agenda and restraint by both tax administrators and taxpayers in the rhetoric used to describe the problems that both groups seek to address. Regrettably, certain statements by the Commission, particularly in connection with the July 15 corporate "tax sheltering" report, potentially undermine the advancement of these mutual goals.

Background

TEI 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 5,400 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe, and deal with the day-to-day implications of the tax laws in effect throughout the country and the world.

As a professional organization, the Institute is dedicated to the development and effective implementation of sound tax policy, to compliance with and uniform enforcement of tax laws, and to reducing the costs and burdens of administration and compliance to the benefit of taxpayers and government alike. Our members recognize that these goals can only be attained through their voluntary actions and their adherence to the highest standards of professional competence and integrity.

Part of TEI's mission is promoting professionalism in both the private and government sectors. To that end, we cooperate and exchange ideas with government tax officials for the purpose of identifying and resolving issues and problems in tax administration. We also encourage the interchange of ideas and mutual assistance among members, and between members and government tax officials. While we may sometimes disagree with the outcomes of those exchanges, we are convinced that candid dialogue ultimately advances our common interests in fair and efficient tax administration.

Discussion

Corporate financial and accounting scandals have been a ready source of headlines for more than two years. Although some cases have implicated tax issues and specifically, arguably aggressive interpretations of ambiguous rules, it would be counterproductive and wrong to exploit the misdeeds of a few to sully the reputation of the business community as a whole. Thus, TEI believes that the Commission's July 15 study, Corporate Tax Sheltering and Impact on State Corporate Income Tax Revenue Collections, fails to appropriately focus on the illegal or fraudulent nature of the actions that underlie nearly all of the high profile cases. That approach regrettably hampers the development of a positive agenda for problem solving and interaction among government and industry tax professionals.

Other commentators have documented their concerns about the study's methodology and its conclusions. TEI's primary concern lies with its narrow view of the state and local tax burden on businesses, and its overbroad (yet undefined) view of what constitutes a tax shelter. The former implicates tax policy--the proper mix of various types of levies on various types of taxpayers. Thus, whereas corporate income taxes account for less than 20 percent of total state and local tax revenues, in 2003 aggregate business taxes (including business property taxes, sales and use taxes on business inputs, and business excise and gross receipts taxes, as well as income taxes) exceeded 40 percent of all state and local taxes. Before inveighing against business for shirking its "fair share," this incontrovertible truth should be acknowledged.

The latter concern (relating to the use of white-hot rhetoric to attack so-called tax sheltering) properly implicates tax administration--whether business taxpayers are complying with their legal obligations. It is in this regard that the study proceeds from a false premise by defining "tax sheltering" expansively, unfairly criticizing wholly legal transactions, and improperly derogating the activities of compliant taxpayers. Gregory v. Helvering, the seminal federal case in the development of the law on "tax shelters," acknowledged "[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statures intended." 293 U.S. 465, 469 (1935) (citations omitted). Ultimately, the taxpayer's actions in that case were upended, but the court wisely declined to sweep all businesses in the net reserved for miscreant taxpayers. Given the complexity of the world economy and the overlapping, sometimes less than clear tax laws and regulations that govern business transactions, it is not surprising that differences of opinion arise. What is absolutely clear, however, is that not ail tax minimization is abusive of established rules of law. Broad labels or emotionally-charged language may imply the opposite, but they do not foster a careful analysis of the applicable rules, and, where necessary, an appropriate amendment of them.

TEI believes the following concepts to be rational and consistent, and suggests they are fundamental to any discussion regarding tax planning and tax shelters:

* Taxes legally owed should be paid.

* Strong enforcement efforts are essential to building a culture of compliance.

* Statutory provisions intended to benefit taxpayers are not "loopholes."

* Tax planning is not per se "tax sheltering"--taxpayers are permitted to structure their affairs in ways that legitimately minimize their tax burden.

Businesses and tax administrators all have an interest in maintaining civil discourse on these problems. TEI recognizes that government tax officials must address activities they consider abusive. We also recognize that ensuring rational treatment and certainty of treatment of particular transactions at both the federal level and among the states is no easy task. But we strongly believe it is past time to put aside the harsh and unfair rhetoric. We will not always agree, but progress will be best achieved in an agreeable environment. The Commission, along with TEI, should be working toward restoring just such an environment.

Conclusion

We look forward to building a better working relationship with the Commission and its member states. We would be happy to meet to discuss our views. Any questions should be directed to Barbara Barton, Chair of the Institute's State and Local Tax Committee, at 972.605.1220, or Fred F. Murray, TEI's General Counsel and Director of Tax Affairs, at 202.638.5601.