Tax reform tops TEI's fall advocacy agenda: comments also submitted to the MTC, IRS Chief Counsel, and IRS Oversight Board.

"U.S. companies are increasingly forced to build facilities overseas, not merely because that is where our customers are, but because the economic and tax environments are often friendlier," TEI President David L. Bernard told the Senate Committee on Finance on September 20. Testifying on options for reform of the U.S. business tax system, Mr. Bernard urged Congress to strive "to create a tax environment that allows U.S. companies to compete around the world while retaining research, manufacturing, and jobs at home." America's foreign trading partners, he added, are not shy in vying for new plants, research facilities, and distribution centers.

In his oral testimony, the Institute's president outlined four principles that should guide efforts to reform the tax law:

* U.S. Business Does Not Operate in a Closed System. Citing Sub-part and the foreign tax credit regime, Mr. Bernard stated that "[t]he current system places American companies at a competitive disadvantage.

* The U.S. Tax Rate Must Be Competitive. While the United States was "running in place," he explained, "our European trading partners made rate reductions the rule of the day. From 1986 to 1996, the average corporate rate for the 25 countries of the European Union dropped more than 10 percentage points."

* The Tax System Should Not Pick "Winners" and "Losers." Acknowledging that some incentives such as those for research and education have widespread support, Mr. Bernard told the congressional committee that a growing consensus favors lower rates and a broader tax base to reduce complexity, ease tax administration, and minimize the government's role in picking "winners" and "losers."

* The Tax System Must Be Simpler. "Achieving and maintaining an effective balance between fairness and simplicity is not easy. At one extreme, fairness, that is to say, treating similarly situated taxpayers in the same way, demands tax rules to be complex. At the other, simplicity calls out for 'rough justice.'"

"Stated simply," Mr. Bernard concluded, "the more complex the Code, the greater the likelihood for taxpayers to confront interpretative issues and questions that, if not addressed, will spawn opportunities for lawful tax avoidance. Simplifying the Code will also reduce the heavy proxy tax of recordkeeping that can impede routine, day-to-day business transactions."

TEI's written statement is reprinted in this issue, beginning on page 390.

MTC Uniformity Proposal

In a September 7 letter to the Multistate Tax Commission, TEI commented on the MTC's revised Draft Model Uniform Statute on Reportable Transactions and State Filing Positions. The MTC's model statute requires taxpayers to report a "compilation of state return data" to each state.

In a letter from TEI President Bernard, the Institute explained that the revised proposal "remains flawed, reflecting not a meaningful step toward uniformity among the states but rather the ill-advised pursuit of an excessive information gathering policy that would circumvent existing mechanisms to obtain taxpayer information and possibly spawn legal challenges to the MTC's and States' authority." Equally important, he said, the proposal would "impose substantial costs and compliance burdens on taxpayers without any legitimate benefit to the states." TEI urged the MTC to abandon the proposal and work with the Institute and other business representatives to develop a more balanced approach to information gathering.

The Institute urged the draft be set aside, both because it is unclear how the information required by the Model Statute will inform the actions of the states or otherwise advance the MTC's uniformity goal and because the states currently possess such information and can share it through exchange of information agreements.

Acknowledging a suggestion that taxpayers can comply with the draft's requirements by providing copies of every tax return filed with every state, the Institute called the solution impractical. "Given the lack of uniformity among the states, providing the states with all the returns filed in other jurisdictions would either spawn innumerable 'wild goose chases' or, alternatively, constitute a figurative haystack containing, at most, a modest number of needles."

"We therefore strongly urge the MTC and its members to set aside the Model Statute and resume its discussions with the business community," it concluded.

TEI's comments are reprinted in this issue, beginning on page 388. The Institute's September 27, 2005, comments on the original proposal are reprinted in the November-December 2005 issue of The Tax Executive.

Chief Counsel Notice on TAMs

On August 28, TEI submitted comments to IRS Office of Chief Counsel on impending changes to the way in which IRS attorneys provide guidance on taxpayer-specific matters. Specifically, TEI commented on IRS Chief Counsel Notice CC-2006-013, which was issued on May 5, 2006, to address how the recommendations of the Case Specific Advice Task Force would be implemented to improve through the Technical Advice Memorandum process.

In a letter to IRS Chief Counsel Donald Korb, the Institute commended 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," the organization stated. "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 its recommendations, the IRS task force proposed the development 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. 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.

In its comments, the Institute called the proposed time frames "optimistic," particularly when compared with those for the Industry Issue Resolution program. The organization also expressed concern 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. In TEI's view, some review is desirable, particularly where the issues raised could affect areas covered by multiple disciplines. The Institute urged the development of internal procedures to ensure that issues transversing several areas of expertise are carefully considered.

Other areas discussed in the Institute's letter include the Case-Specific Advice Memorandum and several changes in the TAM procedure.

TEI's letter is reprinted in this issue, beginning on page 385.

IRS's Strategic Long-Term Measures

On September 19, TEI responded to a request from the IRS Oversight Board for comments on proposed long-term measures for the IRS. The five measures include the e-filing participation rate for individuals, voluntary compliance rate, individual taxpayer satisfaction index, employee engagement, and non-revenue enforcement activity index.

Although supportive of the goal of increasing the participation rate for electronically filed returns, TEI commented that at this juncture, the benefits of e-filing for businesses inure primarily to the government, while imposing significant implementation costs on business. "The IRS needs to make the benefits of e-filing a reality for corporate taxpayers," the Institute said.

TEI cautioned that steps must be taken to ensure that the measurement of any "tax gap" is accurate. It recommended that efforts to reduce the tax gap should focus on non-compliant taxpayers and not add extra burdens to those that are already attempting to comply with the law. Absent compelling reasons, the organization stated, "the government should not seek to 'offload' compliance costs--e.g., by expanded information reporting--to compliant taxpayers or, alternatively, should consider providing some form of compensation for the burden."

In respect of measuring taxpayer satisfaction with the IRS, the Institute recommended that the measure be expanded to provide a separate score for business taxpayers. It also recommended the addition of a goal based on the modernization of the IRS's technology, "perhaps related to the IRS's e-filing initiative for large corporations, e.g., the elimination of duplicate filings and the streamlining of forms and schedules." Finally, it recommended the addition of a goal based on the currency of audits for corporations in the Coordinated Industry Case program.

The Institute's comments is reprinted in this issue, beginning on page 393.