Winter activities confirm institute's expertise as TEI slaloms way to center platform with golden liaison meetings, amicus brief. (TEI's Own Olympic Fever).

While it may have been tempting to become mere observers -- to watch the USA's Timothy Goebel win a bronze medal in figure skating; to gasp when Apolo Ohno went down in the short track just yards from winning the gold; to learn the intricacies of the skeleton, halfpipe, and curling; and to see Canadians Jamie Sales and David Pelletier win a controversial second gold medal in pairs skating -- TEI stayed on top of its form when competing its two favorite winter months: tax policy and administration.

Liaison activities in both Canada and the United States dominated TEI's ski slope. In December, the Institute met with the Canadian Department of Finance and the Canada Customs and Revenue Agency in Ottawa. In January, TEI President Bob Ashby testified before the IRS Oversight Board. And in February, TEI representatives travelled to Washington to hold their annual liaison meetings with officials from the IRS's Large and Mid-Size Business Division and Treasury Department's Office of Tax Policy, as well as the staff of the Joint Committee on Taxation.

And, thus far, there have been no judging controversies over the Institute's filing of an amicus brief on the deference to be accorded temporary regulations, support for adequate funding for the IRS, criticism of the agency's Code V reporting requirements, or recommendations concerning Ontario sales tax on software.

Canadian Activities

In December, a delegation led by Canadian Regional Vice President Alan Wheable met with representatives of the Canada Customs and Revenue Agency and Department of Finance to discuss excise tax issues. (Mr. Ashby joined Mr. Wheable, Senior Vice President J.A. (Drew) Glennie and other members of the delegation to meet with Finance representatives.) Representatives of the Institute and CCRA discussed a wide range of issues, including the Administrative Monetary Penalty System (which will soon be adopted by CCRA's Customs Branch), the Export Distribution Centre Program, documentation and claims for input tax credits in respect of procurement card purchases, and the voluntary disclosure program. The agenda for the CCRA excise tax meeting is reprinted in this issue, beginning on page 67. CCRA's responses to the issues raised during the December 4 meeting are posted on TEI Online. Note: The agenda for TEI's separate meetings with CCRA and Finance on income tax issues were printed in the November-December 2001 issue of the magazine.

During its December 5 meeting with the Department of Finance, TEI raised concerns about zero-rating for intangible personal property under the Excise Tax Act and harmonization of the various sales tax systems in Canada. The delegation also provided suggestions concerning the need to simplify and expand the rules for the tax-free transfers of business assets. The agenda for the meeting is reprinted in this issue, beginning on page 79.

TEI also submitted written comments to the Ontario Ministry of Finance on ways to simplify and clarify Ontario's taxation of software. In a December 19 letter to Peter Des-champs of Ontario's Office of the Budget and Taxation, Toronto Chapter President David Penney explained that Ontario's Retail Sales Tax Act currently treats tangible personal property (including computer programs) as taxable. "Many current administrative problems would be resolved by treating software separately and making conscious decisions about the taxation related to its development, manufacture, supply, and related services," he stated. The chapter also recommended the adoption of a de minimis rule for software-related services and that software retain its characterization as custom when licensed to a group of related companies.

The chapter letter, which followed up on a November I meeting and was approved by the Institute's Executive Committee, is reprinted on page 64.

IRS Oversight Board

The IRS Oversight Board was established as part of the IRS Restructuring and Reform Act of 1998, and annually holds a public hearing to solicit the public's views on important issues of tax administration and the operation of the tax system. (It has no role in respect of the development of tax policy.) TEI President Bob Ashby was asked to testify at a January 29th hearing on ways to reduce taxpayer burden. His testimony concluded that the IRS could reduce burden in four primary ways:

* Implement innovative ways of doing business, such as resolving issues before a return is filed, improving the currency of audits, expanding the use of statistical sampling, and increasing the use of record retention agreements and electronic communications.

* Provide prompt and effective guidance on the tax laws, especially in areas such as capitalization and the research tax credit.

* Provide sufficient funding for IRS operations, particularly in the areas of training and technology.

* Simplify the tax laws.

TEI's written testimony is reprinted on page 61 of this issue.

U.S. Liaison Activities

On February 4 and 5, TEI met with the IRS's LMSB Division, the Treasury Department, and the Joint Committee staff to discuss a broad range of tax policy and administration issues.

In its February 4 meeting with LMSB Commissioner Larry Langdon, Division Counsel Linda Burke, and other LMSB representatives, TEI commended the IRS for developing new issue-management techniques that provide taxpayers and IRS personnel with more timely, focused guidance. The Institute cautioned, however, that taxpayer- and industry-specific guidance is no substitute for generic guidance.

Other issues discussed during the meeting included ways to improve the post-filing process, the use of programs such as pre-filing agreements and "fast track" appeals, and the administration of research credit claims. Technical issues reviewed by the group included the recent tax shelter disclosure announcement and revision of the instructions to the Form 1139.

At its February 5 meeting with Assistant Treasury Secretary Mark Weinberger and his staff, TEI turned to a discussion of the research tax credit regulations. The Institute noted that the recently re-proposed regulations "represent a commendable and bold change in course," by conforming more closely with congressional intent to provide a salutary incentive for research activities. Properly administered, the new rules should also diminish the scope, number, and degree of audit controversies about qualified research activities, TEI stated. There is still some concern, however, about the definition of "gross receipts" and other issues under the rules.

The Institute also commended the Treasury Department for the recent advanced notice of proposed rulemaking on capitalization issues. TEI has consistently encouraged the issuance of bright-line rules that will quell the frequent disputes and needless controversies that have arisen since the INDOPCO decision, the organization stated. "Hence, we are pleased that the Treasury and IRS have announced the notice of proposed rulemaking."

Later that day, the Institute met with Chief of Staff Lindy Paull and other staff of the Joint Committee. There, the delegation focused on the potential for legislation, particularly in light of the recent congressional attention on tax and accounting issues relating to corporations. The opportunities available for simplifying the tax law were also discussed.

The agendas for the LMSB and Treasury Department meetings are reprinted in this issue, beginning on pages 85 and 82, respectively. The minutes of the meetings will be published in a future issue of The Tax Executive. (Because of its similarity to the Treasury agenda, the agenda for the Joint Committee meeting has not been reprinted.)

Code V Reporting

In a December 14 letter from TEI President Bob Ashby, the Institute urged the IRS and Treasury Department to eliminate the Code V reporting requirement. The comments respond to the IRS's Announcement 2001-92, which extends until 2003 the optional period for separate reporting of any compensation arising from the exercise of any employer-provided nonstatutory stock options. Under the announcement, the amount of compensation from the exercise of nonstatutory stock options included in boxes 1, 3, and 5 must also be shown separately in box 12 of Form W-2, using Code V.

"While appreciating the extension of the period for optional reporting of compensation arising from the exercise of employer-provided nonqualified stock options," TEI stated, "we believe that Announcements are an improper means through which to impose a mandatory wage-information reporting requirement."

There is no compelling tax compliance justification for mandatory separate reporting, the Institute explained. TEI also questioned the IRS's authority to impose separate reporting. "Sections 6041 and 6051 authorize the Internal Revenue Service to mandate the collection and reporting of compensation information. Neither statute, however, specifies separate reporting of the spread between the nonqualified stock option price and its fair value." The organization urged that the announcement be withdrawn. Failing that, the reporting requirement should be issued in the form of proposed regulations to afford taxpayers the benefit of the formal notice-and-comment period.

The Institute's comments are reprinted in this issue, beginning on page 58. TEI's August 17, 2001, comments on the Code V requirements were reprinted in the September-October 2001 issue of The Tax Executive.

Microsoft Amicus Brief

On December 20, TEI filed a friend-of-the-court brief urging the U.S. Court of Appeals for the Ninth Circuit to overturn the Tax Court's decision in Microsoft Corporation v. Commissioner. The substantive tax issue in the case is the definition of the term "export property" for purposes of the Internal Revenue Code's foreign sales corporation provisions. The Tax Court found that Microsoft's computer masters were not "export property" and upheld the validity of a temporary regulation, concluding -- without discussion -- that "[g]enerally, temporary regulations have binding effect and are entitled to the same weight as final regulations."

TEI's brief focused on the question: To what extent should a court defer to a temporary tax regulation? The lower court's opinion was issued before the U.S. Supreme Court issued its opinion in United States v. Mead Corporation, relating to the deference to be afforded interpretative rules, the Institute explained. Under Mead, it argued, "temporary regulations are not entitled to the same weight as final regulations."

Mead sharply limits the class of interpretative rulings entitled to controlling weight, TEI noted, generally reserving that high degree of deference to regulations promulgated through notice-and-comment rulemaking or a formal adjudication. Interpretations not meeting these requirements may qualify only in rare circumstances where it can be shown there was congressional intent to speak with the "force of law."

The regulation at issue in the case suffered the lack of notice and comment, the Institute said. Although issued in 1987, it remains "temporary" 14 years later and has not been subject to the rigors of the notice-and-comment process. Although comments were solicited on contemporaneously issued proposed regulations, the IRS and Treasury have made no amendments to reflect the comments or given any indication why they were rejected. Such a lack of administrative process deprives a temporary regulation of any basis for the highest standard of deference. TEI urged the court to scrutinize temporary regulations under the standard enunciated by the Supreme Court in 1944 in Skidmore v. Swift & Co. -- merely as rules entitled to respect as "a body of experience and informed judgment to which courts and litigants may properly resort for guidance."

A decision in the case is expected later this year. The Institute's amicus brief is reprinted in this issue, beginning on page 52.

IRS Funding

On January 11, TEI President Bob Ashby sent a letter to Treasury Secretary Paul O'Neill and Office of Management and Budget Director Mitchell Daniels concerning the need for adequately funding the IRS.

"If the leaders of the IRS are to continue their efforts to rebuild the agency's credibility and effectiveness," TEI stated, "the agency must be assured that the programs needed to implement its mission will be fully and consistently funded." Although we recognize that the IRS has experienced some problems with its inventory management, "the agency has made substantial progress in dealing with internal management issues." If the IRS is to succeed in reinventing itself as a modern, customer-focused agency, it must have adequate funding for its service initiatives, TEI concluded.

The Institute's letter is reprinted in this issue, beginning on page 60.