TEI encourages IRS to reaffirm independence of Appeals: January 17, 2006.

On January 17, 2006, TEI President Michael P. Boyle of Microsoft Corporation sent the following letter to IRS Commissioner Mark W. Everson expressing concern about Announcement 2005-80 on the independence of the Appeals function. The Institute's comments were drafted under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Kelly A. Nall of Electronic Data Systems Corp.

On behalf of Tax Executives Institute, I am writing to express concern about the implications of Announcement 2005-80, 2005-46 I.R.B. 1, on the independence of the Appeals function. Appeals has long been one of the IRS's "crown jewels," and the operational effectiveness of (and public support for) Appeals is without question owing to the organization's independence, which was enshrined in law by section 1001(a)(4) of the IRS Restructuring and Reform Act of 1998 (RRA). To fulfill the statutory mandate, we encourage the IRS to reaffirm its commitment to ensuring the independence of Appeals.

Announcement 2005-80 sets out concession terms for 21 transactions for which the IRS has determined the accuracy-related penalty to be applicable. TEI recognizes that the government's positions on these 21 transactions may ultimately be sustained and further recognizes the IRS's interest in pursuing administrative settlement on terms favorable to the IRS. Until the issues embodied in these transactions are adjudicated, however, the IRS's interpretation of the applicable law is entitled to no more deference than that of the taxpayer. Hence, the conflicting interpretations should be settled, if possible, on the basis of the "hazards of litigation," which take into account both the technical (and often ambiguous) provisions of the Internal Revenue Code and all the facts and circumstances. It is precisely with respect to technical and factual conflicts that the Appeals function has historically played its most important role--by providing a fresh, unbiased assessment of how the law applies to the particular facts of a case. Given the latitude to discharge its responsibilities, Appeals has performed admirably, consistently resolving the overwhelming majority of cases that come before it.

Regrettably, Announcement 200580 threatens to fundamentally change the balance between Examination, Appeals, and taxpayers and to deprive taxpayers of a right conferred by Congress. By asserting that "eligible persons who forgo resolving eligible transactions under this settlement initiative ... should not expect to receive a better offer in Appeals than that offered under this settlement initiative," the IRS seemingly usurps the authority of Appeals to assess (and the right of taxpayers to have Appeals assess) the merits of cases. Let there be no mistake: This is not about tax shelters, but about the fundamental nature of Appeals.

The flaw in the Announcement is illustrated by those transactions involving valuation disputes. See Announcement 2005-80, Section 3, transaction nos. 17 (trust arrangements seeking to qualify for exemption under IRC section 419); 18 (distributions from charitable remainder trusts), 19 (charitable contributions and conservation easements), and 20 (charitable contributions of patents and other intellectual property). How can the IRS ensure the independence of Appeals (as mandated by RRA) while intimating that valuation disputes--which are inherently factual--can be resolved in a formulary, cookie-cutter manner? We submit it cannot. Thus, we were heartened by recent comments by Andrew Earl Blanche that Appeals would continue to play its traditional role in resolving the cases affected by Announcement 2005-80. We ask that the IRS formalize that assurance.

Tax Executives Institute recognizes that a delicate balance must be struck between enforcement efforts and customer service. Because Congress has unambiguously spoken on the issue of Appeals independence, however, the IRS must look for other ways to alter that balance. It cannot simply declare, by fiat, that a fundamental right of taxpayers must be discarded in the agency's fight against tax shelters.

TEI appreciates the opportunity to present its views on this important issue. We would be pleased to discuss it in further detail and to answer any questions that you may have. Please contact Eli J. Dicker, Chief Tax Counsel, at 202.638.5601 or Kelly A. Nall, chair of TEI's IRS Administrative Affairs Committee at 972.605.1217.