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APAs Should Remain Confidential, TEI Says in Brief.

Advance Pricing Agreements -- settlements negotiated between taxpayers and the Internal Revenue Service that can eliminate costly and time-consuming transfer pricing audits and litigation -- should not be subject to public disclosure under the Freedom of Information Act, Tax Executives Institute contended in a brief amicus curiae filed with the United States District Court for the District of Columbia on February 25 in the case of BNA v. IRS. TEI filed its comments (reprinted beginning on page 155) in opposition to a Bureau of National Affairs motion calling for the IRS to release APA documentation.

Until recently, the IRS had opposed BNA's attempt to secure access to the APAs. On January 8, the IRS abruptly reversed its opposition to the disclosure of APAs, and now asserts that APAs should not be considered tax return information and, as such, are not subject to the privacy and non-disclosure protection of section 6103 of the Internal Revenue Code. Instead, the IRS said, APAs are "written determinations" and thus subject to disclosure under section 6110, with certain sensitive items being redacted. APA documents, according to TEI and corporate taxpayers that have participated in the APA program, contain highly sensitive financial and commercial tax return information, and should not be made public. Even redacting specific references to a company's identity, TEI said, provides inadequate protection.

"In 1976, Congress implemented measures to ensure that tax return information remained confidential," said TEI President Lester D. Ezrati, who is General Tax Counsel for Hewlett-Packard Company in Palo Alto, California. "And when the APA program was launched in 1991, it was specifically provided that APAs and supporting information would be subject to the confidentiality provisions of section 6103. The IRS's abrupt about-face on the confidentiality of APAs has jeopardized what has been one of the true `success stories' of IRS reform in this decade. Public disclosure of APAs would significantly decrease the desirability of entering into these agreements in the future and would deprive both taxpayers and governments of this valuable method of addressing tax liability issues."

The importance of the issue of APA confidentiality, said Ezrati, led TEI to call upon the services of Donald C. Alexander, who was IRS Commissioner at the time sections 6103 and 6110 were enacted. Now with the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP, which prepared TEI's brief, Alexander explained that Congress clearly did not intend to require the release of documents such as APAs that contain tax return information. "Sections 6103 and 6110 are highly specific about what can and cannot be released," he stated. "The APA program permits taxpayers to negotiate and settle complex tax liability issues -- matters that were never meant to be made public. The IRS's abrupt concession cannot obscure the fact that APAs constitute protected return information.

"At a recent hearing in early February the court asked the parties what taxpayers thought about the potential release of the APAs," Alexander continued. "TEI -- with its broad base of membership -- has now answered the court's question, namely, that taxpayers entered into these agreements with the expectation that the highly sensitive pricing information they submitted would be kept confidential."

During the Institute's Midyear Conference, both IRS Commissioner Charles Rossotti and Assistant Treasury Secretary Donald C. Lubick expressed their strong support for the APA program. Commissioner Rossotti called the program a "very successful model for ways to do business" and stated that the IRS is considering expanding the concept to other areas.

Assistant Secretary Lubick hinted that Treasury may seek legislation to deal with the disclosure issue. Noting that there may be a distinction between the APA itself and the background documents, Lubick contrasted the limited nature of background documents relating to private letter rulings. He stated, "There is some question about whether the current law adequately recognizes such a distinction and, if does not, legislation to do so may be necessary."

TEI's brief will be considered in conjunction with the review of proposed scheduling orders for the release of the APAs filed by the IRS and BNA. Several unnamed taxpayers have also filed amicus briefs and a decision in the case is expected soon. In a related development concerning the release of a closing agreement involving the Church of Scientology, the court held that closing agreements were not subject to section 6103 because, as negotiated agreements, they are not formally "issued" by the IRS. According to Ezrati, the same logic applies to APAs.
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Publication:Tax Executive
Date:Mar 1, 1999
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