Tax Executives Institute-Joint Committee on Taxation liaison meeting: November 20, 1996.
1. Introductory Comments
Tax Executives Institute is pleased to have this opportunity to meet with Chief of Staff Kenneth Kies and other representatives of the staff of the Joint Committee on Taxation. TEI's liaison meetings with the Joint Committee staff have afforded each organization an opportunity to articulate technical, policy, and process concerns and to explore how these concerns can best be addressed. We are confident that this year's meeting, focusing on the items discussed below, will be candid and productive.
II. National Commission on
Internal Revenue Service
As a new millennium approaches, the tax system is facing unparalleled challenges, including (1) proposals for fundamental tax reform; (2) a proliferation of calls to "end the IRS as we know it" (and "to pull the tax system out by the roots"); and (3) the chartering of a National Commission on Restructuring the Internal Revenue Service.
As an association of tax professionals who deal with taxes on a daily basis, TEI has long been concerned about the corrosive effect that attacks on the agency's legitimacy can have on the level of voluntary compliance in the United States. We share the view that vigilant oversight of the IRS by Congress and others is absolutely necessary, but also acknowledge that the orderly collection of taxes and the efficient administration of the tax system are in the best interest of the entire country and, further, that adequate funding must be provided for those goals to be attained. Hence, we lament the sometimes virulent attacks that have been launched against the IRS and its employees. To be sure, there are flaws in the current tax system, and there are design and management issues (including those related to tax systems modernization) that must be addressed. TEI sincerely believes, however, that the focus should remain on correcting the problems, not undermining the basic legitimacy of - and hence the public's confidence in - the tax system.
During the past few months, TEI has voiced these sentiments in statements filed with Congress and comments released to the media, and in mid-November, the Institute will underscore its views in testimony before the National Commission on Restructuring the IRS.(1) During the liaison meeting, we request a report on the Joint Committee staff's involvement, if any, with the Restructuring Commission.
III. The Prospects for
Fundamental Tax Reform
A. In General. Regardless of the outcome of the upcoming election, taxes and tax policy will continue to dominate the headlines. There will undoubtedly be renewed calls for fundamental reform of the Internal Revenue Code. Nothing will be resolved during the next few weeks, but during the liaison meeting, TEI welcomes the Joint Committee on Taxation staff's views on the prospects for fundamental reform in the 105th Congress and on the role the Institute can play to ensure that in any reform effort, workable, administrable rules are adopted.
B. International Tax Reform. Senator Pressler has introduced legislation that would provide for much needed simplification of the international tax provisions of the Internal Revenue Code. Among other things, the bill would permit the use of generally accepted accounting standards for purposes of computing Subpart F income, exempt foreign corporations from the uniform capitalization rules, expand the Subpart F de minimis rules, and treat the European Union as a single country for purposes of determining foreign base company sales and services income. Many of these provisions - such as the elimination of the overlap between the CFC and PFIC rules - are long overdue and have been the subject of previous legislative efforts (such as last year's Houghton-Levin bill).
TEI believes that the Pressler bill represents a step in the right direction by generally reducing the transaction costs and the costs of preparing and auditing U.S. corporate tax returns for American companies engaged in international trade. Enactment would not only decrease costs - thereby enhancing the country's competitiveness - but also signal a commitment to the simplification of the tax law generally. The bill would also bring much needed reform to the foreign tax credit area.
TEI recognizes that Congress is in the midst of a debate on the basic structure of the U.S. tax system. We believe, however, that the prospects of fundamental reform should not detract from the important goal of bringing immediate and constructive reform to the international arena. During the liaison meeting, we invite the Joint Committee staff's views on this legislation and the prospects for revising the Code's international provisions, including the prospects for interim international tax simplification. In addition, we welcome comments on possible alternative tax systems including a discussion of territorial systems and the attendant effects on the foreign tax credit system.
IV. Congressional Review of
In March of this year, President Clinton signed legislation (Public Law No. 104-21) that not only increased the public debt limit (which was the principal purpose of the bill) but also changed the process for developing federal regulations, including those issued by the IRS. Under the legislation, no regulation constituting a "major rule" can go into effect until at least 60 days after the regulation is submitted to Congress. Within the 60-day window period, Congress will have the opportunity to review and, if it is so inclined, block the implementation of the regulation by passage of a joint resolution.
During the liaison meeting, we invite a report on how the legislation has affected the development, processing, and review of regulatory projects, as well as the procedures that are being developed by the Joint Committee - including procedures for ensuring a role for taxpayers - to implement the legislation. For example, Chief of Staff Kies has characterized the Treasury and the IRS's promulgation of so-called check-the-box regulations under section 7701 as "a little stunning." Because taxpayers have generally reacted favorably to the cheek-the-box regulations, the comment piqued the interest of TEI. Might that view translate itself into a formal congressional review of the regulations? Does the Joint Committee staff anticipate that congressional hearings will be held on entity classification? What particular concerns with those regulations has the staff identified?
V. Targeted Tax Benefits
under the Line-item Veto
"Targeted tax benefits" are subject to a presidential veto under the Line-Item Veto Act. The determination of what constitutes "targeted tax benefits," therefore, is very important. Chief of Staff Kies has announced that the Joint Committee will soon issue a comprehensive guide on the subject and then invite public comments, which will be taken into account before final guidelines are issued in December. It is quite likely that the proposed guide will be issued by the time we meet on November 20. During the meeting, we invite the Joint Committee's comments on the major issues raised by the guidelines and the Institute's possible role in resolving outstanding issues.
VI. Technical Corrections
Chief of Staff Kies has reported that work is underway both on a general explanation ("bluebook") on the various tax bills that were enacted in the 104th Congress and on technical corrections legislation on those bills. Has the Joint Committee identified any provisions affecting the business community that especially require either clarification in the bluebook or technical correction (other than the excise tax under section 1494(c), which is discussed below in Item VIII)?
VII. Extension of
Congress's retroactive extension of the educational assistance exclusion of section 127 left taxpayers (employers and employees alike) who complied with the law in a worse position than taxpayers who disregarded the expiration of the income exclusion. TEI recognizes that it was Congress that made the policy decision to extend section 127 retroactively, and acknowledges that the position set forth in IRS Information Release 96-36 - requiring the filing of amended returns - can be justified under the statute. We continue to believe, however, that it should have been possible to craft a creative solution - such as permitting an adjustment to 1996 wages where the individual remained on the employer's payroll - that minimizes the adverse consequences for compliant employers, employees, and the fisc while obviating the filing and processing of amended returns. During the liaison meeting, we invite the Joint Committee staff's comments on the process used to extend section 127 and how taxpayers may become more effective in focusing Congress's attention on the need for timely action and practical transition rules.
VIII. Section 1494(c)
Section 1902 of the Small Business Job Protection Act added a new subsection (c) to section 1494, relating to the requirement that a return be filed by persons making a transfer described in section 1491. Although the legislative history of the provision discusses the penalty in terms of the reporting requirements of foreign trusts, there have been reports that the 35-percent penalty may also apply to property transferred to a foreign corporation as paid-in surplus or as a contribution to capital, or to any transfer of property to a foreign partnership. Given the August 20, 1996, effective date of the provision, the penalty represents a potentially harsh trap for the unwary. Does the Joint Committee staff anticipate clarifying this provision in the upcoming explanation of the 1996 law?
IX. Joint Committee Review
of Tax Refunds
Taxpayers continue to be frustrated with the delay in processing claims for refund that must be reviewed by the Joint Committee. The Institute is working with the IRS to expedite the processing of Joint Committee cases, and understands that certain administrative steps will soon be taken to streamline the IRS's procedures. Does the Joint Committee staff foresee making any changes in its procedures concerning Joint Committee cases? Is any consideration being given to increasing the $1,000,000 threshold in section 6405?
X. Distinguishing Between
Capital Expenditures and
Ordinary and Necessary
On November 19, TEI is scheduled to hold separate liaison meetings with the Internal Revenue Service and the Treasury Department, and one of the items on the agenda for both meetings is the recent IRS's actions in respect of the capitalization of expenditures and, in particular, about the penchant of agents to invoke the Supreme Court's decision in INDOPCO v. United States, 503 U.S. 79 (1992), to justify the capitalization of heretofore currently deductible expenses. We intend to emphasize our concerns about the IRS's apparent decision to let the INDOPCO drama unfold through the private letter ruling and technical advice memorandum process rather than to issue published, generally applicable guidance in this area.
In recent weeks, Ways and Means Committee Chairman Archer and other members of the tax-writing committees have themselves expressed concern about the IRS's actions (in particular, in respect of certain airplane maintenance expenses), and earlier this year, Congress confirmed the current deductibility of SAIF payments, even though the treasury Department stated that such legislation was unnecessary. During the liaison meeting, we invite the Joint Committee's views on whether any legislation may be forthcoming in this area.
TEI appreciates the opportunity to present its views and looks forward to its liaison meeting with the staff the Joint Committee on Taxation.