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CEO signature requirement deleted from tax bill TEI presses for its Abandonment; Institute analyzes International Accounting Standards, IRS claims process, stock option withholding, and FIE/NRT legislation. (Recent Activities).

Urging Congress to abandon proposals to require the CEO to sign a corporation's federal tax return remained high on TEI's legislative agenda as summer approached. On June 11, the Institute filed comments with the Senate Finance Committee, urging Congress to abandon the proposal, which would require the CEO to "focus on the tax returns of a company rather than the process of ensuring the complete and proper reporting of its tax obligations." The proposal passed the Senate as part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, but was deleted before the bill was enacted.

In opposing the legislation, TEI noted that Congress has already acted forcefully to enhance corporate accountability. "The Sarbanes-Oxley Act of 2002 significantly strengthened the accountability of CEOs and Chief Financial Officers for corporate financial matters, including new and strengthened civil and criminal penalties for violations," the Institute stated. "CEOs are now required to certify the financial statements of corporations, which contain a provision for taxes. This certification requirement properly and adequately ensures that the CEO is committed to, and responsible for, the fair presentation of the company's financial results, including its tax positions, and that the CEO and the company have taken adequate steps to institute and maintain a process to achieve that result."

Although the provision was not included in the most recent tax bill, significant support remains in the Senate to resurrect it later in the session. One version passed the Senate (S. 476) and currently awaits action in the House. "TEI will continue to highlight the problems with this proposal, which not only misapprehends the role of the CEO and the tax director, but also minimizes the safeguards that already exist," TEI President J.A. (Drew) Glennie stated. "The proposal should be abandoned or, at a minimum, at least significantly recast to better accomplish its goals without unduly burdening compliant companies."

TEI's letter is reprinted in this issue, beginning at page 222.

Withholding on Nonqualified Stock Option Exercises

On June 9, TEI wrote to the Treasury Department and IRS to request the issuance of guidance clarifying when income tax withholding and employment tax deposits are due following the exercise of nonqualified stock (NQSOs). During its February liaison meetings with the IRS Large and Mid-Size Business (LMSB) Division and the Treasury Department, TEI expressed concerns about reports that the IRS was asserting or threatening assertion of penalties against employers for failing to timely deposit employment and income tax liabilities where such amounts exceeded $100,000 and were not deposited by the day after the exercise of the NQSOs. Noting the lack of clear guidance on the date wages are considered paid upon the exercise of NQSOs, TEI contended it would be inequitable for the IRS to assert penalties. Equally important, the Institute said it would be burdensome for employers to comply with a stringent interpretation of the "next-day" deposit rule--especially those subject to the semiweekly deposit schedule--upon exercise of NQSOs.

The letter noted that an LMSB Field Directive issued on March 14, 2003, instructed IRS agents, solely for penalty purposes, not to challenge the timeliness of employment and withholding tax deposits exceeding $100,000 that arise from the exercise of the stock options, so long as the deposits are made within one day of the settlement date of the option. TEI commended LMSB for issuing the Field Directive, but recommended more up-to-date guidance on the timing of tax deposits in respect of the exercise of NQSOs. Specifically, since most NQSO plans are administered through stock brokers and the cash for the exercise price and employment and withholding taxes is not available to the employer on the date of exercise, TEI supported the issuance of NQSO rules of administrative convenience for FICA, FUTA, and income tax withholding similar to those set forth in Notice 2001-73 for statutory stock options. The letter suggested that employers should be permitted to make the requisite tax deposits within a reasonable period of time following an NQSO's settlement date. A reasonable period of time for making the deposit following the employer's receipt of notice from the broker that an option has been exercised would, TEI said, be no earlier than the deposit date for the employer's next regularly scheduled payroll processing period for "cash" wages.

TEI's comments are reprinted in this issue of the magazine, beginning at page 257. In a related action, TEI submitted a letter to LMSB Commissioner Deborah M. Nolan, commending the Division for issuing the March 14, 2003, Field Directive limiting the application of the penalty for failure to timely deposit withholding taxes on the exercise of nonqualified stock options.

IAS and the Consolidated Tax Base

On May 30, TEI filed comments with the European Commission on the application of International Accounting Standards (IAS) and the implications of introducing a consolidated tax base for companies' European Union-wide activities. TEI's European Chapter, working with the International Tax Committee, prepared the comments on an EU consultation document, which explores whether the introduction of IAS as a common set of accounting standards in the EU might afford the establishment of a common consolidated tax base.

While applauding efforts to reduce costs and provide greater certainty, the Institute cautioned that tax and accounting principles frequently diverge for sound policy reasons. TEI recommended that any initiatives--particularly those designed to simplify the existing systems of taxation in the EU--progress incrementally through well-defined proposals. "Such an approach would allow both taxpayers and Member States to evaluate and react to new rules, project their effects upon their operations, and plan for and measure the effects of the incremental change," the organization stated.

TEI's submission was developed following a March workshop in Brussels hosted by the European Commission Directorate-General, Taxation and Customs Union Tax Policy to discuss the consultation document. At the workshop, members of the European Chapter participated in a wide-ranging discussion of the document with representatives from academia and business, accountancy, and other tax groups.

TEI's letter to the European Commission is reprinted in this issue, beginning at page 238.

Managing Refund Claims

On May 22, TEI submitted comments on an LMSB proposal for managing IRS resources when a claim for refund is filed during the examination process. The comments, which took the form of a letter from TEI President Drew Glennie to LMSB Senior Industry Adviser W. Kurt Meier, critiqued a proposal to require claims to be filed within 90 days of the opening conference, regardless of the amount of time allotted to the audit cycle.

For taxpayers using the IRS's limited issue focused examination, or LIFE, process, claims would be subject to the time and materiality thresholds agreed upon in the memorandum of understanding. Although taxpayers have a statutory right to file claims anytime within the applicable statute of limitations, the procedure would require claims filed after the 90-day deadline to be worked as part of a separate claims cycle with its own estimated completion date, unless the Team Manager determines to work the claim as part of the normal audit cycle.

In its letter, TEI commended LMSB for seeking a uniform solution in respect of the management of claims. The Institute suggested, however, that more flexibility should be built into the procedure. "TEI finds the 90-day time frame troubling, particularly in respect of examinations that often take 24-36 months to conduct," Mr. Glennie stated. "The audit is an interactive process and the vast majority of taxpayers make every effort to file their claims as soon as possible."

The Institute recommended that the time for filing claims be an item discussed and agreed upon during the development of the audit plan. One alternative, TEI stated, would be to provide that the cut-off date is the half-way point of the audit. "Such an approach should permit the examining team to work the issue in the normal course of the audit without unduly straining IRS resources."

TEI's comments also included individual member responses to the proposed procedure. The letter and attachment are reprinted in this issue, beginning on page 252.

Proposed Canadian Legislation: Foreign Investment Entities and Non-Resident Entities

On May 16, TEI's President submitted a letter to Canadian Minister of Finance John Manley commenting on draft legislation relating to Foreign Investment Entities (FIE) and Non-Resident Trusts (NRT). The letter outlines a number of reasons, in TEI's view, the legislation is fundamentally flawed and should be withdrawn.

The letter traces the development of the legislation as well as TEI's comments and actions in respect of previous drafts of the FIE/ NRT legislation, including meetings with representatives of the Department of Finance. The letter also elaborates on the concerns expressed in TEI's letter of December 16, 2002, requesting that the effective date of the October 2002 draft of the legislation be deferred if the legislation is not withdrawn altogether. (Previous submissions on the FIE/NRT legislation are reprinted in the March-April 2001, November-December 2001, and January-February 2003 issues of The Tax Executive.)

Mr. Glennie said that, "although the legislation's objective of curbing illegitimate tax avoidance effected through 'transfers to offshore trusts and accounts' is unassailable, ... the proposed new and complex FIE and NRT provisions are not necessary to achieve the government's aims." Current law, the letter continues, provides the government substantial tools to curb tax-motivated transfers, noting that judicial decisions have vindicated the policy underlying section 94.1 of the Income Tax Act and enhanced that provision's efficacy in combating tax avoidance effected through offshore investment funds.

As important, the letter said, the scope, nature, and far-reaching effect of the proposed legislation go far beyond the stated purpose of combating "tax avoidance." Indeed, TEI said, the proposed legislation implements a comprehensive new regime for taxing indirect foreign investment and substantially overlap the foreign accrual property income (FAPI) system of taxing foreign affiliates.

Fundamentally, TEI said, the draft legislation is unworkable and should be withdrawn, among other reasons, because it is overbroad and would ensnare numerous compliant taxpayers and legitimate commercial transactions; overlaps significantly with the foreign affiliate regime as well as section 17; and seeks to impose myriad reporting requirements for information that either unavailable generally or likely unavailable to a Canadian taxpayer that is a minority investor.

Finally, TEI's letter urged that the implementation of the proposed legislation be delayed substantially in order to afford taxpayers time to undertake a proper analysis, consult with the government, and implement the necessary information system changes in order to comply.

TEI's comments on the draft legislation are reprinted in this issue, beginning at page 241.

Minutes of Liaison Meetings

On February 25, 2003, a delegation from TEI, led by President Drew Glennie, met with representatives of the United States Treasury Department Office of Tax Policy, including Assistant Secretary for Tax Policy Pamela F. Olson. The agenda for the meeting is reprinted in the March-April issue of The Tax Executive. The minutes of the liaison meeting are reprinted in this issue, beginning at page 233.

The minutes of TEI's February 24, 2003, liaison meeting with the Commissioner Larry R. Langdon, Division Counsel Linda B. Burke, and other representatives of the IRS Large and Mid-Size Business Division are also reprinted in this issue, beginning at page 226.

19th Annual High Technology Tax Institute

(co-sponsored by San Jose State University's College of Business Tax Policy Institute and TEI)

November 3-4, 2003

Crowne Plaza Cabana Hotel Palo Alto, CA

Topics include:

* Next Wave of 482: Cost Sharing Stock Options, Buy-Ins, Shared Services

* Yin and Yang of IP Incentives: Section 367 and Other Barriers for Leaving vs. Incentives to Migrate

* High Technology VAT and Customs Issues

* Corporate Governance Issues: Tax Shelters and Sarbanes-Oxley

* International Current Tax Developments that Impact High Tech Companies

* Domestic and State & Local High Tech Tax Current Developments

* Utilizing Losses in Troubled Time--Section 108, 382, 165(g) (3) and Capital Losses

* Smorgasbord of Alternative Dispute Resolutions--LIFE, Fast Track, PFA, IIR, APA, etc., A View from the Trenches

* Accounting for Income Taxes: Impact of FASB and IASB Domestic and Foreign ESOs, and Purchase Accounting

* Practical Aspects of Doing Business in China

Keynote Speeches by: Pam Olson Assistant Treasury Secretary (Tax Policy)

Deborah Nolan LMSB Commissioner

For more information or to request a brochure, call Dr. Stewart Karlinsky, Director of the Tax Institute at 408.924.3463, or e-mail to karlinsky_s@cob.sjsu.edu

Online registration available at: http://www.cob.sjsu.edu/taxinstitute
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