Tax Executives Institute-U.S. Department of the Treasury Liaison Meeting Minutes.

February 9, 1999

On February 9, 1999, Tax Executives Institute held its annual liaison meeting with the Assistant Secretary of the Treasury for Tax Policy and other senior representatives of the Treasury Department's Office of Tax Policy. The minutes of the meeting are set forth below.

On behalf of the U.S. Treasury Department's Office of Tax Policy, Assistant Secretary Donald C. Lubick welcomed TEI President Lester D. Ezrati and the other members of the delegation from Tax Executives Institute to the liaison meeting. On behalf of TEI, Mr. Ezrati thanked the Treasury representatives for meeting with the Institute. The U.S. Treasury Department's and TEI's delegations at the liaison meeting are set forth below.

(The order of the items listed in TEI's agenda was changed to accommodate the schedule of the Treasury Department representatives. For convenience' sake, these minutes follow the written agenda.)

Achieving the Promise of IRS Restructuring and Reform

A. Streamlining Oversight. In the interest of time, Messrs. Ezrati and Lubick deferred the discussion of streamlining oversight of the IRS. In response to a question, Mr. Lubick reported that the White House is currently vetting a number of candidates for the IRS Oversight Board and said that the nominees should be announced soon.

B. Global Interest Netting. Mr. Talisman reported that guidance on the global interest netting provisions in the IRS Restructuring and Reform Act is among the top four items on the Treasury Department's priority list. He added that Rita Cavanaugh is replacing Christopher Rizek as the Treasury Department's lead person on the interest-netting issue.

C. Changes in Accounting Methods. Ms. Wielenga said that TEI's principal concern with Notice 98-31 is to ensure that, when finalized, the procedure for initiating involuntary changes in accounting method is even handed and do not inhibit the resolution of cases. The proposed revenue procedure in Notice 98-31, she said, is one-sided because it instructs agents to refrain from making taxpayer-favorable timing adjustments in the course of examinations and, indeed, compels agents to propose a change in accounting method for all timing adjustments. Unless the procedure is modified before its final release, she said, it will limit agent's flexibility to resolve accounting issues at the lowest level.

Ms. Turgeon explained the government's general policy against permitting retroactive accounting method changes. The government departs from that general policy on examination, she said, and imposes unfavorable retroactive accounting method changes in order to encourage taxpayers to voluntarily seek changes for improper accounting methods. Moreover, she said, the rules for taxpayers under examination should not be more favorable than for those not under examination. She explained that if the procedure did not require examining agents to impose accounting method changes for timing adjustments, the Examination Division would likely continue to make the same adjustments from cycle to cycle without ever placing the taxpayer on the proper accounting method. She acknowledged that one outcome of the mandatory imposition of taxpayer-adverse method changes will be to shift more cases to the Appeals level for resolution; nonetheless, agents need an incentive to impose the method change. Before the final version of the procedure is released, however, additional guidance on related procedural matters (e.g., early referral of cases to Appeals and changes to the accelerated issue resolution procedure) will be announced in order to expedite issue resolution.

Mr. Murphy stated that many revenue agents and case managers have voiced concerns that the proposed procedure will hinder issue resolution. As a result, they have recommended against issuing the procedure without substantial modifications. Ms. Turgeon acknowledged that some field agents and case managers have echoed taxpayer concerns. She said that the Examination and Appeals Divisions will be consulted before the final revenue procedure and related guidance are released. Mr. Ezrati noted that the government should weigh the decreased amount of field resources expended on resolving accounting method issues against the substantially increased amount of Appeals resources devoted to such matters. Ms. Turgeon reiterated that, while the government's policy against retroactive changes in accounting methods is firm, the procedure may be ameliorated by, for example, permitting agents (or taxpayers) to net taxpayer-favorable section 481 adjustments against unfavorable section 481 adjustments that arise from proposed timing adjustments. The net unfavorable adjustments, she said, would continue to be made in the years under examination, while net taxpayer-favorable adjustments would be implemented prospectively following a taxpayer's initiating a voluntary change in method. In response to a question, Ms. Turgeon averred that the government has the general authority under section 481 to make unilateral adjustments in respect of expenditures incurred in tax years closed under the statute of limitations. She acknowledged that taxpayers may bear a substantial compliance burden if they are required to adopt a change in accounting method in order to comply with a new court decision. For example, she said, taxpayers in the mutual fund business may not have retained the records necessary to determine the amount of the capitalizable start-up costs for mutual funds established as much as 30 years prior to the decision in FMR v. Commissioner. Hence, she said, it would be difficult for taxpayers in the industry to ascertain the section 481 adjustment necessary to implement the tax accounting method required to comply with that decision. She invited taxpayers to comment on how method changes mandated by court decisions should be implemented and how the recordkeeping burdens should be taken into account.

D. Post-INDOPCO Capitalization Issues. Mr. Shewbridge said that during the liaison meeting earlier in the day with the IRS, Chief Counsel Stuart Brown reported that the IRS is reviewing its guidance process with a view to increasing the amount of guidance issued in the form of generally applicable revenue rulings. TEI, he said, welcomed the development because taxpayer-specific private letter rulings and technical advice memoranda have not significantly advanced the resolution of recurring disputes -- especially over capitalization issues. Examples of capitalization issues that are ripe for general guidance, he said, include costs incurred for ISO 9000 certification, costs of removal, and expenditures to develop a customer base. He said that, while the joint IRS/Treasury Guidance Priority Business Plan is a good tool for managing the government's priorities, the plan can sometimes inhibit the release of guidance for items that are not on the plan. He invited the Department representatives to comment on whether guidance on capitalization issues can be expedited.

Mr. Talisman said that the IRS and Treasury have met frequently about capitalization issues seeking to develop both general and issue-specific guidance. Moreover, the IRS and Treasury Department business plan for the last two years has included a generic item relating to capitalization issues. As a result, the IRS has a green light to address capitalization issues.

Mr. Shewbridge noted that agents often create new theories to justify capitalizing expenditures that have been deducted for years. This frequently results in burdensome information document requests that require taxpayers to produce records that were never created or no longer exist. Ms. Turgeon said that Notice 96-7, which the IRS and Treasury issued in response to taxpayer concerns, requested comments on a "general framework" to resolve capitalization issues. She noted that nearly all the responses submitted by taxpayers and practitioners involved specific issues. Hence, the government has been frustrated in its attempts to devise a general framework for resolving issues. Mr. Murphy noted that taxpayer frustration is heightened not only by the lack of a general framework for resolving capitalization issues, but also by the absence of constraints on the field. Mr. Shewbridge added that nearly every expenditure a company incurs can produce a future benefit that agents will cite to justify burdensome requests for production of records. Distinguishing "significant" future benefits, he said, from merely "incidental" future benefits under the INDOPCO standard is impossible. Hence, controversies on specific issues will continue until the IRS releases generally applicable guidance on such issues. Mr. Miller inquired whether taxpayers are interested in neutral guidance or whether they merely seek to confirm the deductibility of their expenditures. Mr. Ezrati noted that the revenue ruling on the treatment of environmental remediation costs [Rev. Rul. 94-38] provided useful distinctions between capital expenditures and deductible expenses without conceding that all expenditures are deductible.

E. Research Tax Credit. Mr. Rossi said that the recently proposed regulations relating to the research credit could potentially increase the complexity and uncertainty about whether particular research activities qualify for the credit. For example, he said, under the proposed regulations an activity must be undertaken to develop information that exceeds or expands the "common knowledge" of professionals in the field in order to qualify for the credit. Mr. Rossi averred that documenting what is beyond "common knowledge" of professionals in a particular field requires taxpayers to prove a negative and, more important, may lead to a battle of "experts" about what is "common knowledge" at the time that a taxpayer undertakes a research activity. Agents, he said, already use hindsight to argue that what a taxpayer claims is innovative is well known and, hence, not qualified.

Mr. Miller acknowledged that the proposed regulations incorporate several new tests including a new definition for "process of experimentation." In developing the "process of experimentation" standard, he said, the IRS and Treasury Department consulted with officials at the National Science Foundation and the National Institute of Standards. He said that in the classic scientific method, standard laboratory procedures require research to be documented with a contemporaneous recording of thoughts or observations. He explained that, in the Treasury's view, documentation is something that taxpayers would undertake in the normal course of business; hence, the requirement that taxpayers record the results of their experiments will not require taxpayers to alter their recordkeeping practices under section 6001 to generate new records. Nonetheless, he said, the preamble to the proposed regulations acknowledges that documentation methods other than the "labcoat" method may be employed in commercial laboratories. Hence, the preamble invites comments on normal commercial business practices in respect of recordkeeping and documentation of the process of experimentation.

Mr. Ashby said that if IRS examinations were current, taxpayers could more easily show examiners what information is available and also demonstrate how the decision of "what to retain" develops on a day-to-day basis as the research evolves. Over time, he said, documents become lost, especially those that relate to experimental "failures," which can only lead to taxpayer frustration in supporting the amount of credit claimed. Mr. Ashby suggested that the regulations can be improved by establishing audit safe harbors. For example, drawing an analogy to the contract research rules, he said, if a taxpayer were to establish that "x percent" of its expenditures, say 65 percent, qualify for the credit, the agents should be satisfied that all of the taxpayer's expenditures in a particular research activity qualify. Mr. Miller replied that if "neutral" safe harbors beneficial to both taxpayers and the government can be crafted they should be adopted; too often, however, safe harbors only benefit a taxpayer. Mr. Miller explained that the documentation requirement is also intended to forestall a kitchen-sink approach to research credit claims. That is, in the government's view, taxpayers tend to claim every dollar of cost for activities designated as research and development regardless of how tenuous the connection to the taxpayer's research. The documentation requirement, he said, will ensure that taxpayers demonstrate sufficient nexus between the research activities and the costs incurred; otherwise, he said, the credit claimed for the research activities will be reduced.

Mr. Lesser said that, in his experience, revenue agents lack an understanding and appreciation of how much effort and research activity is necessary in order to develop or refine a product to the stage where it is commercially useful. In other words, he said, agents rarely challenge pure or basic research costs conducted in laboratories, but development costs for specific products and processes are frequently challenged. Mr. Miller replied that there are two issues implicit in Mr. Lesser's remarks. First, he said, the proposed regulations and recent case law improve the definition of what constitutes qualified research activities. Second, and more worrisome from the government's perspective, is that revenue agents are not experts in a technological sense and, hence, may have difficulty applying the tests of the proposed regulations to determine whether an activity qualifies. He invited taxpayers to employ the comment process to assist the Treasury Department in developing and refining the proper tests for distinguishing qualified research activities from non-qualified activities.

Legislative Agenda

A. Government Budget for FY 2000 and Administration's Tax Proposals. [Note: The Administration's FY 2000 Government Budget includes a number of provisions to curb corporate tax shelters. Those proposals, together with the Institute's request for updates on the definition of a corporate tax shelter under the 1997 tax act and the need for simplification of the tax laws, which were separate agenda items, were discussed together.]

Mr. Boocock referred to the comments the Institute filed with the Treasury Department in November 1998 on the definition of a corporate tax shelter. He noted that the broad test adopted in the 1997 tax act -- whether a transaction has "a principal purpose of tax avoidance" -- potentially sweeps ordinary business transactions into the tax shelter net wherever a company considers the after-tax cost of a transaction. Moreover, he explained, other transactions specifically sanctioned by the Code -- the low-income housing tax credit for example -- arguably constitute tax shelters since they are undertaken solely for tax savings and without regard for a business purpose. He encouraged the Treasury Department to issue guidance reflecting the Institute's comments on the 1997 act changes. He noted, in addition, that the Administration's legislative proposals to curb aggressive corporate tax shelters underscored the need for threshold guidance defining corporate tax shelters.

Mr. Talisman replied that the current regulations include a carve-out from the definition of a tax shelter for ordinary business transactions as well as for transactions specifically authorized by Congress. Mr. Boocock said that the Institute recommended that the carve-out be maintained. Mr. Lubick agreed, adding that Treasury regulations should neither hinder legitimate business transactions nor deter companies from arranging their business affairs to pay the least amount of tax. He explained that the tax-shelter provisions in the Administration's budget proposals were developed in response to public criticism about questionable transactions that serve no business purpose other than exploiting anomalies in the Code in order to reduce taxes. In respect of the forthcoming tax shelter regulations, he said that the Treasury is developing tests to help taxpayers and practitioners distinguish "the sheep from the goats" in planning their transactions. He invited the Institute to parse the language in the tax shelter regulations and provide comments since the statutory tests in the budget proposals will likely reflect similar tests.

Mr. Talisman added that neither the forthcoming proposed regulations nor the budget proposals are intended to, and should not, inhibit transactions conducted in the ordinary course of business. He explained that the intent of the 1997 legislation is to draw the lines more carefully to inhibit unwarranted transactions. The tests adopted in the proposed regulations, he said, will likely be familiar since they are based on well-known cases and rulings such as the recent decision in ACM Partnership v. Commissioner. In other words, the IRS likely already has the tools necessary to attack the transactions that the statute is aimed at; hence, he said, the regulations should not be surprising. He added that the Department will consider narrowing the definitions in the regulations should public comments prove persuasive.

Mr. Talisman reported that, in conjunction with the Administration's legislative proposals, the Department will release a white paper on corporate tax shelters. Mr. Talisman acknowledged that the tax shelter legislative proposals are, in part, a reaction to articles such as that in the December 14, 1998 issue of Forbes.

He explained that in combating such transactions the Department did not wish to make a complex tax code even more complex by adding an anti-abuse provision to every provision in the code. Instead, he said, the Treasury Department will issue a discussion draft that will serve multiple purposes, including educating Congress and the public about specific types of shelter transactions, providing a general explanation of the rules in the proposed legislation, and soliciting taxpayer and practitioner comments. The white paper, he said, will seek to identify and develop generic standards in order to permit practitioners and taxpayers to distinguish legitimate tax planning from tax shelter transactions. He acknowledged that definitions in the legislation will be a critical threshold issue in applying the rules to transactions that are not identified specifically. Hence, taxpayers and practitioners will be encouraged to provide feedback on where to draw the lines between legitimate tax planning and illegitimate shelter transactions.

Mr. Ezrati inquired why the penalty provisions in the Administration's legislative proposals lack a reasonable cause exception for engaging in a shelter transaction. Mr. Talisman averred that a reasonable cause exception invites taxpayers to engage in opinion shopping. In other words, even though four out of five tax practitioners might decline to give an opinion that a transaction is more likely than not to succeed on the merits, the taxpayer can and will invoke the reasonable cause exception by citing the one practitioner who blesses the transaction. Mr. Ezrati replied that, to the contrary, the lack of a reasonable cause exception can produce exceedingly harsh results. For example, he said, even where most practitioners reasonably conclude that a taxpayer has an 80-percent chance of prevailing on the merits of a particular transaction, a penalty could nonetheless be imposed if the taxpayer were unlucky enough to have its transaction deemed an abusive tax shelter. Mr. Lubick replied that, to alleviate taxpayer concerns about the potential scope of the regulations and the legislation, the white paper will identify transactions that should not be treated as tax shelters. Mr. Talisman added that the paper will confirm that transactions contemplated by the Code, such as the low-income housing credit, will not be considered shelters. Mr. McCormally noted that the real issue is how agents will interpret the regulations and statutes. Mr. Talisman acknowledged that it is impossible to legislate common sense.

Mr. Miller added that, while the current tax shelter registration statute is not perfect, a court might find that the transaction was not a tax shelter but that it was close enough to require registration. As a result, he said, the shelter registration provision will serve a salutary purpose by ensuring that questionable transactions are disclosed for scrutiny. Mr. Lubick added that many transactions are difficult to identify. He urged the Institute to submit comments and identify transactions that it believes are acceptable or not so that the examples can be incorporated in the Treasury's draft white paper.

B. Expiring Tax Provisions. Mr. Lesser said that the current budget surplus affords the government an opportunity to address the research credit and other temporary provisions on a permanent basis. He noted that the intermittent nature of the provisions and the recurring extensions over the last 12 years have undermined the intended incentive effect, especially for the research credit.

Mr. Talisman said that a currently popular debate inside the Beltway is about what to do with the budget surplus. He acknowledged that if part of the surplus were to be used to address tax policy issues, the expiring provisions would be candidates for a permanent legislative solution. Nonetheless, he said, there are a number of anomalies in the Code that are competing with those provisions. For example, he said, the growth in the number of individuals subject to the alternative minimum tax must be addressed soon. Mr. Lubick said that the Treasury Department is sympathetic to the calls for simplification of the Code and attempted to include many simplifying provisions in its budget proposals. Notwithstanding Treasury's desire to provide more simplification, he said, the legislative budget rules (PAYGO) still apply and require the Administration to submit a balanced legislative package to Congress. Hence, including more simplification proposals engendering revenue losses would have required the Treasury to search for and include additional revenue increases in the budget package. Mr. Lubick added that making tax policy often involves balancing a number of competing, even inconsistent, priorities. Mr. Ezrati noted that additional items that Treasury should consider including in its simplification agenda are elimination of the 90 percent limitation on the AMT foreign tax credit limitation and treating the European Union as a single country for purposes of the Subpart F rules.

Requests for Status Report

A. Penalty Study. Mr. Boocock noted that the 1998 IRS Restructuring Act mandates that the Treasury Department and the staff of the Joint Committee on Taxation conduct a joint study of the penalty provisions of the Code and requested a status report. Mr. Talisman said the study is in the initial stages and that the government has received few comments. In addition, several meetings between the staffs of the Joint Committee and Treasury have been held to discuss coordination of the study. He said that the Department has a broad outline of issues that it wishes to address, but that it is too early to comment on the agenda.

B. U.S.-Canada Treaty. Mr. Guttentag noted that a U.S. policy objective in treaty negotiations generally, including those underway currently with Canada, is to obtain and maintain a nil rate of withholding tax on interest and royalty payments. A nil rate for withholding on dividends, he said, has been discussed within the Department, but the negotiating position of the United States is not fixed. Unlike the European Union, he said, the United States has not adopted a uniform policy on dividend withholding. The withholding rate for cross-border dividends within the EU is generally zero, but since a similar concession has not been accorded to the United States by the EU countries, the United States generally adopts a wait-and-see approach in its negotiation of dividend withholding taxes.

In response to a question from Mr. Bocti about Canada's negotiating position, Mr. Guttentag replied that the United States has difficulty persuading the Canadians to adopt a five-percent withholding rate on dividends because of the imbalance in cross-border dividend flows. The imbalance in royalty flows, he noted, is as great or even greater than for dividends. Hence, he explained, in order to achieve a nil withholding rate on trademark royalties, companies must convince Canada's Ministry of Finance that it is in Canada's best interests overall to adopt a zero rate on trademark royalties. The case can be made, he said, that withholding taxes constitute artificial trade barriers that limit the growth in aggregate national income and correspondingly limit national tax revenues. Companies, he said, might be more persuasive than the Treasury Department in making the case that Canada's overall tax revenues will be higher in the absence of a withholding tax on royalties.

Mr. Bocti inquired whether the treaty definition of a "person" will be revised to include a limited liability company. Mr. Guttentag replied that the matter is being discussed with the Canadians; the U.S. position and practice are clear that such companies are included.

Mr. Bocti inquired whether an arbitration provision would be added to the alternative dispute resolution provisions of the treaty. Mr. Guttentag replied that the U.S. Congress frequently objects to arbitration provisions because their effect is to accord to third parties the power to resolve tax liabilities. Congress, he explained, is reluctant to accord anyone other than IRS the power to determine U.S. tax liabilities. Nonetheless, if there are cases where arbitration procedures would be beneficial, he said, they should be brought to the Treasury's attention. He observed that even in the few U.S. treaties that contain arbitration provisions, the procedure is rarely employed. He acknowledged that the presence of arbitration procedures in treaties might compel competent authorities to resolve cases that would otherwise be referred to arbitration. If so, it would be beneficial if examples of such cases can be brought to the Treasury Department to assist it in demonstrating the utility of the procedures to Congress. Mr. Guttentag concluded by noting that mediation provisions generally do not have the same political overtones that arbitration procedures present because, in mediation, the sovereign authority to resolve tax liabilities is not ceded to a third party. Hence, Congress is more amenable to including mediation procedures in tax treaties.

C. Documentation Requirements for Transfer-Pricing Methods. Mr. Boyle noted that the resolution of transfer-pricing cases would be enhanced by having consistent documentation requirements for transfer-pricing methods among the United States's principal trading partners. Mr. Guttentag replied that, clearly, inconsistent documentation requirements would not aid the resolution of cases. Hence, he said, the United States is committed to working toward reasonably uniform standard and will continue to do so at the OECD.

D. Foreign Sales Corporations. Mr. Boyle referred to complaints lodged with the World Trade Organization (WTO) decrying the FSC provisions as an illegal export subsidy. Mr. Guttentag expressed the Treasury Department's gratitude for the assistance that many companies provided in the preparation of the government's brief to the WTO. He noted that the Treasury Department plays a secondary role to the U.S. Trade Representative's Office in the WTO matter. Mr. Guttentag said that the WTO is not a good forum to address tax policy issues.

Mr. Rossi inquired whether the Treasury has considered a legislative substitute for the FSC provisions in the event the WTO rules against the U.S. position. Mr. Guttentag replied that such consideration is premature for if even a rumor of such activity were to circulate, the U.S. position in the WTO suit would be undermined; hence, there has been no discussion of a substitute.

Mr. Boyle noted that recently proposed regulations limit a company's ability to file amended returns to change the transaction-by-transaction grouping of FSC transactions in order to increase the amount of commission payable to the FSC. He said that the FSC rules are complex and questioned whether the proposed rules are unduly stringent in preventing companies from taking a second look at optimizing their FSC calculations. Mr. Guttentag replied that the Treasury and IRS concluded that policy and administrative concerns justify the new restrictions. He noted that many tax elections are irrevocable and that the FSC rules permitted far too much flexibility, creating significant administrative problems during examinations. Nonetheless, he said, the Treasury Department is reviewing the rules and will consider whether some facts and circumstances will warrant merit relief from the "no amended return" rule.

E. Proposed Regulations on Use of GAAP for Earnings & Profits. Mr. Guttentag said that status of the proposed regulations on the use of GAAP for the determination of earnings and profits of controlled foreign corporations is the same as in prior years. He added that the Treasury Department is reviewing whether or how it might apply U.S. GAAP principles in the domestic tax area. He noted, for example, that the rules might be instructive in crafting rules limiting tax shelter benefits. Mr. Ezrati noted that GAAP rules could be employed beneficially to simplify some tax rules, including the treatment of inventory.

On a separate, but related issue, Mr. Lubick noted that the controversy over Notice 98-35 -- relating to the Treasury Department's authority to issue proposed regulations revising the scope of the Subpart F rules -- and other issues such as the active financing exception recently enacted under Subpart F -- prompted the Treasury Department to initiate a study of various issues surrounding the proper taxation of cross-border income under the current deferral regime. He said the Department is attempting to reconcile competing policy goals, including fairness, simplicity, minimizing compliance burdens, increasing competitiveness, tax neutrality, and revenue concerns in evaluating the various principles guiding the international tax regime. In essence, he said, the Department is studying whether the current anti-deferral rules in Subpart F make sense in today's economy. In response to a question, Mr. Lubick said that the Department intends to release its white paper on Subpart F, invite comments, and hold a hearing sometime during the summer of 1999.

F. Electronic Commerce. Mr. Guttentag reported that he was serving as the chair of the Committee on Fiscal Affairs of the Organisation for Economic Cooperation and Development (OECD). The Committee has responsibility for the OECD's working groups studying the tax policy and administrative issues arising from electronic-commerce (e-commerce). He noted that e-commerce is a misnomer for the working group's mission, which is to study the tax policy and administrative issues arising from the use of new technologies. E-commerce, he noted, is only one of the issues on the OECD's agenda. The broader focus is on harnessing technological solutions to improve tax administration, much as the IRS is implementing new technology and training initiatives to improve taxpayer services.

In addition, certain technologies can facilitate abuse by enabling taxpayers to hide transactions or shift income to offshore tax havens. The OECD, he said, is attempting to develop the means to identify and curb such abuses. At the Finance Minister's meeting in Ottawa in October of 1998, the OECD concluded that the assistance and expertise of business representatives will be required on many technological and administrative issues. Hence, five working groups have been formed providing business representatives with the opportunity to shape many aspects and issues of tax policy and administration -- from income and consumption taxes to treaty issues -- affected by technology.

Mr. Guttentag next noted that European Union members are keenly interested in the Advisory Commission on Electronic Commerce established pursuant to the Internet Tax Freedom Act. Mr. Guttentag observed that the Commission will labor under a burden of high expectations because the EU views the United States as a leader in developing innovative solutions to problems related to tax administration. Hence, in analyzing how to apply the technical rules of value-added tax systems to e-commerce transactions, the EU will likely pay close attention to the recommendations the Commission makes in respect of state and local tax issues. Finally, he noted that the Commission's mandate might have spillover effects in other areas. For example, the November 1999 World Trade Organization meeting will address duties and tariffs and their application to e-commerce transactions.

In response to a question from Mr. Rossi, Mr. Guttentag said that the government's role in the different groups varies. In the Advisory Commission on Electronic Commerce, the Treasury Department's role is that of an independent expert and catalyst for action. At the World Trade Organization meetings, on the other hand, the U.S. government is a strong advocate for U.S. business interests. At the OECD working groups on e-commerce, the Treasury Department is an advocate for U.S. business interests, but the policy recommendations are judicious and balanced because the United States might modify its policies to move closer to the European position. For example, the United States might adopt a national consumption tax in the future; hence, the Treasury Department must be careful not to foreclose the country's policy options. Mr. Guttentag reported that the OECD group is debating highly technical issues. For example, he said, the delivery of software over the Internet might be viewed either as a service that is generally subject to VAT or as a cross-border sale of goods exempt from VAT. The U.S.'s position is that the tax consequences should be neutral regardless of the manner of delivery of digital products. The U.S. and European governments agree that issues such as this should be addressed through local country legislation, but attaining consistent resolution will be a challenge.

G. Depreciation Study. Mr. Shewbridge inquired about the status of the Depreciation Study mandated by the Tax and Trade Relief Extension Act of 1998. Mr. Lubick replied that the Office of Tax Analysis is working on the study and he anticipates that it would be released on a timely basis in March 2000.

Conclusion

Mr. Ezrati thanked the Treasury Department representatives for their participation in the meeting. Mr. Lubick expressed his appreciation for the time and effort the TEI representatives put in to prepare for the meeting and urged the Institute to continue to bring issues to the attention of the Treasury Department.

Treasury Department Delegation

Donald C. Lubick, Assistant Secretary (Tax Policy)
Jonathan Talisman, Deputy Assistant Secretary
Joseph H. Guttentag, Senior Advisor to the Assistant Secretary
 for Tax Policy
Robert H. Miller, Deputy Tax Legislative Counsel - Regulatory
 Affairs
Christine Turgeon, Tax Specialist
Lisa Andrews, Director, Public Liaison

TEI Delegation

Lester D. Ezrati (Hewlett-Packard Company), TEI President
Charles W. Shewbridge, III (BellSouth Corporation), TEI Vice
 President
Robert L. Ashby (Nortel Networks Inc.), TEI Treasurer
David L. Bernard (Kimberly-Clark Corporation),
 TEI Executive Committee
Pierre M. Bocti (Hewlett-Packard (Canada) Ltd.),
 TEI Executive Committee
Fred Lesser (Lucent Technologies, Inc.), TEI Executive Committee
Raymond G. Rossi (Intel Corporation), TEI Executive Committee
Terilea J. Wielenga (QAD Corporation), TEI Executive Committee
Stephen W. Boocock (Allegheny Teledyne, Inc.),
 Chair, TEI IRS Administrativ Affairs Committee
Michael P. Boyle (Microsoft Corporation),
 Chair, TEI International Tax Committee
Michael J. Murphy, TEI Executive Director
Timothy J. McCormally, TEI General Counsel and
 Director of Tax Affairs
Mary L. Fahey, TEI Tax Counsel
Jeffery P. Rasmussen, TEI Tax Counsel