Treasury Department white paper on corporate tax shelters.

July 9, 1999

On July 9, 1999, Tax Executives Institute submitted the following comments urging the House Committee on Ways and Means to proceed cautiously in including provisions relating to so-called corporate tax shelters in the tax bill scheduled for committee action by July 16. TEI's comments were prepared under the aegis of its Tax Shelter Task Force, which is chaired by Philip G. Cohen of Unilever United States Inc.

On behalf of Tax Executives Institute, I am writing to urge the Committee on Ways and Means to proceed cautiously in including provisions relating to so-called corporate tax shelters in the tax bill the Committee is currently crafting. Inasmuch as the Department of the Treasury's long-awaited "white paper" on corporate tax shelters was released just last week, TEI reluctantly concludes that it would be imprudent to include any tax shelter provisions in the bill scheduled for committee action by July 16. Indeed, because the Treasury's proposals continue to raise as many questions as they answer, we believe taking action at this time would constitute an unjustified and potentially counterproductive "rush to judgment."

Background

TEI is the preeminent association of business tax executives in North America. The Institute's 5,000 members represent 2,800 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound 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. Earlier this year, TEI testified that it "is not among those who believe no problem exists," and we continue to hold that belief. We also believe, however, that Congress's approach to the problem must be measured. Our continuing concern about the Treasury's overall approach to the tax shelter issue, even as refined in the White Paper, prompts this letter.

The Proposals in the White Paper Require Careful Study

On July 1, the Department of the Treasury released The Problem of Corporate Tax Shelters: Discussion, Analysis, and Legislative Proposals, a 188-page "white paper," which had been promised since the release of the Clinton Administration's FY2000 Budget early this year. The White Paper represents the Treasury Department's attempt to synthesize both testimony from congressional hearings and information from other sources. TEI believes the paper's authors should be commended for their willingness to listen and respond positively to some (though not all) of the criticisms leveled at the Administration's initial proposals. TEI is especially pleased that the Administration has moved away from its ill-advised proposal to impose a strict liability penalty in respect of so-called corporate tax shelters. The Treasury Department's acknowledgment that the complexity of current law necessitates the maintenance of a reasonable cause exception represents a major improvement in the Administration's proposals.

Nevertheless, TEI believes that considerable analysis and deliberation is required before legislative action can be taken. It is often said that "the Devil is in the details," and many, many details remain to be specified. Stated differently, the Treasury's proposal continues to be a work in progress. For example, although TEI agrees that there should be additional incentives for promoters, advisers, and taxpayers to meaningfully disclose select transactions, the Institute is very much concerned about the Treasury's new proposal to make senior corporate officers personally liable for misstatements on the disclosure form. To our mind's eye, the case has not been made for either elevating the disclosure requirement above the corporate tax director (tax professionals understand the implications of a penalty-of-perjury statement as well as more senior corporate officers) or for imposing personal (as opposed to corporate) liability. Similarly, we are skeptical of the Treasury's proposal to impose the disclosure penalty even where there is a judicial finding that the transaction in question is not a tax shelter.

More fundamentally, Mr. Chairman, TEI is very concerned about the continuing vagueness of many of the Administration's proposals, and the implication that has for tax administration. To be sure, the Treasury has acknowledged the need to define the term "tax shelter" more objectively, but we question whether the White Paper offers the necessary clarity. Hence, we remain concerned that the proposals will adversely affect the ability of businesses to engage in routine business transactions. Indeed, because the proposals remain largely inchoate, members of Congress -- and the taxpayers who will be directly affected by the proposals -- cannot know for sure how they will operate. (For example, the White Paper refers to "book-tax" differences, but it is unclear what is precisely meant by the term.) Ideally, legislative language should be drafted, released, and appropriately vetted by all interested parties before action is taken. Although the budget process often does not permit a studied review of statutory language, in an area as important as this one it would be a mistake to say "ready, fire, aim."

TEI has established a task force to study the White Paper, but regrettably its work cannot be completed in time for the Committee's mark-up, which the Budget Resolution requires be completed by June 16. Given the delayed re]ease of the Treasury's paper, we suggest that other interested parties find themselves in similar positions. Accordingly, the Institute urges the Committee on Ways and Means not to rush to judgment concerning the Administration's proposals. Rather, the Committee should defer action on the Administration's proposals until interested parties have an opportunity to analyze the White Paper, as well as the Joint Committee on Taxation's still-to-be-released Interest and Penalty Study, even if this means that no legislative action can be taken this summer. Put bluntly, Congress should focus on doing the right thing, rather than doing something now.

Finally, we emphasize that we do not believe a decision to defer action on the Treasury's proposals means that action to staunch abusive tax shelters activities must be held in abeyance. TEI has previously testified that the Treasury and IRS have significant tools with which to address tax shelter activities, and we recommend that Congress instruct that these tools be fully utilized. In addition, we recommend that Congress instruct the Treasury Department to proceed with the issuance of regulations under the tax shelter provisions enacted in 1997. These measured steps will send a powerful message while affording Congress reasonable time to gauge the efficacy of the proposals in the White Paper.