TEI files comments on IRS Chief Counsel notice on case specific legal advice: letter submitted on August 28, 2006, by TEI President David L. Bernard to Donald L. Korb, Chief Counsel of the Internal Revenue Service.

On behalf of Tax Executives Institute, II am pleased to provide comments on IRS Chief Counsel Notice CC-2006-013 on Incorporating Into Procedures Recommendations of Case Specific Advice Task Force, With Task Force Report. The May 5, 2006, notice provides recommendations of the Case Specific Task Force on improving the manner in which the Office of Chief Counsel provides legal advice to IRS personnel through the Technical Advice Memorandum (TAM) process.

Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 6,000 members represent 2,800 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is 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. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the Chief Counsel notice.

Background

The Chief Counsel task force was formed to study the IRS's Technical Advice Memorandum program and to make recommendations in respect of the process used by the Office of Chief Counsel, both in the field and in the national office, to provide technical legal advice to IRS personnel and taxpayers during the course of tax examinations (so-called case specific advice). A primary reason for doing this was that the IRS (and, in particular, the Large and Mid-Size Business Division) had changed its examination practices to accelerate the time in which examinations are conducted and there was concern that, if Chief Counsel did not adapt to these changed practices, it would be unable to provide appropriate and timely legal advice.

As a preliminary matter, the task force confirmed that the TAM process has evolved and is now being used more as a vehicle for obtaining generic legal advice rather than as a means to render taxpayer-specific guidance. In addition, the task force states that the currency initiative, particularly in respect of cases reviewed by LMSB, has placed a premium on receiving accurate technical guidance as expeditiously as possible.

To address these issues, the task force recommended three new technical advice processes: (i) a streamlined general advice process, (ii) a case-specific process for providing advice to the field, and (iii) a new category of generic, industry-specific legal advice. The Office of Chief Counsel requested comments on the new procedures by taxpayers and practitioners, and accordingly stated that the procedures will not become effective until the annual revenue procedure dealing with such guidance is revised and issued at the end of 2006.

General Comments

TEI commends the Office of Chief Counsel for its efforts to streamline the technical advice process and provide alternatives to obtain timely, issue-specific advice. We agree that the TAM process should be revised to ensure that the procedures do not impede the IRS's currency initiative. We have some concern, however, that two of the three proposals do not involve the taxpayer in the decision-making process, which could lead to less-than-accurate decisions.

In remarks before the ABA Section of Taxation on May 5, 2006, you acknowledged any effective TAM process "must include among its characteristics an honest and forthright effort by the Service and Counsel to reevaluate any positions formulated in either the Case Specific or Generic Legal Advice in light of specific arguments advanced by the taxpayers and their representatives during the TAM process." We strongly agree and urge you to include this guidance in the revised TAM procedure.

TEI's comments are confined to specific elements of the notice, which are boxed and shaded for ease of reference.

A. Development of Generic Legal Advice Memoranda

The task force concluded that because most issues identified by IRS examiners (particularly within the LMSB Division) affect more than one taxpayer, IRS personnel have used the TAM process as more than a vehicle for resolving issues in specific cases. Specifically, Examination teams use taxpayer-specific TAMs on an industry-wide basis and occasionally to obtain generic legal advice or strategic development of a case.

The task force suggested that "a multifaceted approach to the problem is needed that will (a) provide a vehicle for resolving audit issues that affect multiple taxpayers in an industry, (b) give IRS personnel an alternative to the TAM as a vehicle for obtaining timely advice to aid them in case development, and (c) streamline existing procedures to encourage the more timely issuance of TAMs with taxpayer involvement." It proposed the creation of a Generic Legal Advice memorandum that, except in limited circumstances, would be issued and signed by the Associate, Deputy Associate, or Assistant Chief Counsel.

According to the task force, the memorandum will have two primary benefits. "First, it will give the Associate or Assistant Chief Counsel a means of providing advice on issues pending in audits of multiple taxpayers within a particular industry. Second, it will reduce the need for an Associate or Assistant Chief Counsel to delay the issuance of a TAM in order to explore how the issue might be decided on factual patterns that differ from that presented in the TAM. The pending TAM could be issued, and if so inclined, the Associate or Assistant Chief Counsel could use a Generic Legal Advice memorandum to clarify how the issue might be decided or developed in other factual situations."

The task force observed that nothing "prohibits IRS personnel from requesting both a [traditional] TAM and a Generic Legal Advice memorandum on an issue." It suggested that some Generic Legal Advice memoranda may be completed in less than 30 days, and relatively few should require more than 180 days.

TEI Comments

The proposed time frames for completing a Generic Legal Advice memorandum seem optimistic, especially when compared with those for the Industry Issue Resolution (IIR) program. Moreover, we doubt whether a TAM will--or should--be issued when a Generic Legal Advice memorandum is pending (or where the Associate or Assistant Chief Counsel anticipates that a question raised in the TAM process will be considered in a subsequent Generic Legal Advice memorandum).

While the IRS's desire to streamline the current multiple levels of review is understandable and admirable, we have concerns about giving an Associate or Assistant Chief Counsel the authority to issue and sign a Generic Legal Advice memorandum--especially one that he or she can unilaterally originate. From the task force's report, it is unclear what level of review is intended for this advice, but in TEI's view some review is desirable, particularly where the issues raised could affect areas covered by multiple disciplines (e.g., an issue involving the Financial Institutions & Products branch may include an International issue or a Corporate issue). Internal procedures should be developed to ensure that issues transversing several areas of expertise are carefully considered.

Even assuming some level of review is built into the process, the maximum 180-day period for issuing a Generic Legal Advice memorandum seems excessive. Although the notice implies that the process will take fewer than 180 days based upon facts and circumstances, we question whether a half-year target is responsive to the needs of the field or taxpayers. TEI recommends the general benchmark for issuing a Generic Legal Advice memorandum should be no more than 90 days.

B. Case-Specific Legal Advice Memorandum

The task force reported that timeliness concerns have prompted the field to rely more heavily on telephone advice from the National Office. To provide an alternative, the task force proposes the development of a Case-Specific Legal Advice memorandum that would be issued either by field or national office counsel to provide advice on case development. When issued by National Office counsel, "this Case-Specific Legal Advice memorandum would be a vehicle through which field counsel could obtain strategic, tactical, or other legal advice from national office counsel. In general, responses by national office counsel would be issued within 90 days. A stated time frame of 90 days enables national office counsel to appropriately prioritize this type of advice." This type of guidance is similar in purpose to the Field Service Advice memorandum used in prior years.

The task force recommended that appropriate caveats be developed to advise readers that the advice is not a TAM, that it is based on facts provided solely by IRS personnel, and that the legal conclusion might differ if the facts are not as presented."

TEI Comment

TEI believes that the Case-Specific Advice memorandum is a good initiative, especially since oral advice given by Counsel may lead to misunderstandings. The caveats outlined in the report, however, are essential to ensuring that this type of guidance is not distended by the field (in other cases). In addition, we suggest that the taxpayer be provided with a copy of the advice. We also recommend that the memoranda be published (subject to the standard redaction procedures).

C. Change in TAM Procedures: Eliminate Mandatory Conference

The task force proposed several changes in TAM procedures, including the elimination of the mandatory conference of right "in cases where the taxpayer has not participated in the TAM from the outset." Instead, the National Office would have discretion to grant a conference in these cases.

TEI Comment

Precluding the taxpayer from participating in the TAM process gives TEI significant concern. In the past, the taxpayer was not permitted to participate in the Field Service Advice process, and the lack of taxpayer involvement has sometimes adversely affected the quality of the advice and also undermined taxpayer confidence in the process, especially where an anticipated FSA resulted instead in the issuance of a TAM. Under the new procedure, if the taxpayer has no right to participate in the process from the outset (e.g., the expected issuance of a Case Specific Legal Advice memorandum turns into the issuance of a TAM), an automatic exception should apply to the rule for "no mandatory conference of right."

D. Change in TAM Procedure: Dispute Concerning Facts

The task forces recommended that the revised TAM procedure provide that, whenever there is a dispute between the taxpayer and the examination team about the facts, National Office counsel will issue the TAM based on the examination team's version of the facts. The task force explained that "[a]n important purpose of the TAM process is to advise IRS personnel. For this reason, the national office should use the version of the facts developed by the examination team when advising it, and stop the time-consuming practice of issuing two TAMs--one based on the examination team's facts and one based on the taxpayer's facts." It cautioned, however, that, field counsel should be encouraged to assist the examination team in determining the facts. "The interviews [with IRS personnel] showed that many disputes over facts are really disagreements about which facts are relevant, rather than which facts actually occurred, or about ultimate findings of fact. For these disputes, the examination team should submit all facts relevant to either position."

TEI Comment

Issuing advice without resolution of the facts is not an efficient way to resolve issues. Basing guidance on incorrect or incomplete facts only pushes the dispute to additional levels of review--and ultimately to litigation. Taxpayers and the IRS may never reach agreement on some factual issues, especially those involving valuations. Although arguably Technical Advice Memoranda should not be issued where factual agreement does not exist, TEI recognizes that TAMs serve a valuable purpose in the tax compliance process. Accordingly, TEI urges the IRS to adopt a "stipulation of facts" approach to the completion of the factual component of the TAM process. Specifically, facts that both taxpayers and the IRS can agree to (or stipulate) should be identified as such. Facts submitted by the examination team may form the basis of the opinion, but unagreed (or non-stipulated) facts should be identified as well. In this way, if the dispute escalates to Appeals or litigation, the parties can focus their attention and resources only on those facts that are actually in dispute.

E. Change in TAM Procedure: Shorter time Periods

The task force recommended that the periods of time during which taxpayers may provide additional information and appear at conferences be shortened, noting that goal is to encourage taxpayers to gather and submit all relevant information at the time the TAM is requested. It proposed a maximum of 10 calendar days for additional submissions of information, with extensions available in appropriate cases. "In addition, any written brief by the taxpayer after a conference should be submitted in appropriate cases at the discretion of the national office and not submitted as a matter of right by the taxpayer. Similarly, the deadline for submitting them should be set at the discretion of the national office."

TEI Comment

Depending on the information requested and the time of year the request is made, a response time limited to 10 calendar days may be inadequate, especially where holidays are included. The purpose of the information-gathering process is for the taxpayer to present all relevant material in an organized manner to better serve the IRS and the taxpayer; speed should not be exalted over completeness. While the existence, at least in theory, of extensions may ameliorate the situation, the practicality is that 10 days, as the default maximum, is likely to be insufficient in most circumstances. We suggest that 15 business days is more realistic. Moreover, we believe the taxpayer should be permitted to submit a written brief, as long as the time lines are met.

F. Change in TAM Procedure: Effect of Issue in Appeals

The task force recommended that the prohibition on requesting a TAM when an issue is pending in Appeals be eliminated.

TEI Comment

TEI believes that this proposed change should apply to taxpayers as well as the IRS.

G. Change in TAM Procedure: Time Frame for Issuing TAMs

The task force recommended the establishment of a uniform 120-day time frame for the issuance of a TAM. Currently, there is both a 120-day and 180-day time frame for TAMs.

TEI Comment

With the currency initiatives within LMSB examinations, even 120 days may be too long. The IRS should consider shortening the time period even more, perhaps to 90 days after the submission of any materials by the taxpayer.

H. Change in TAM Procedure: Elimination of TEAM Process

The task force recommended that the Technical Expedited Advice Memorandum (TEAM) process be eliminated .It notes that the TEAM process has rarely been used.

TEI Comment

TEI supports this proposed change.

TEI appreciates the opportunity to comment on the Chief Counsel notice. If you need additional information, please contact Kelly A. Nall, chair of TEI's Administrative Affairs Committee, at 972.605.1217 or kelly. [e-mail]; or Mary Lou Fahey of TEI's legal staff at [phone] or [e-mail].