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Minutes of 1989 TEI-IRS liaison meeting: April 26, 1989.

Minutes of 1989 TEI-IRS Liaison Meeting April 26, 1989

1. Call to Order

Acting Commissioner of Internal Revenue, Michael J. Murphy, called the meeting to order and welcomed the delegation from Tax Executives Institute. The following individuals comprised the Internal Revenue Service's delegation to the liaison meeting:
 Michael J. Murphy Acting Commissioner of
 Internal Revenue
 Charles H. Brennan Deputy Commissioner
 Robert F. Hilgen Assistant to the Senior
 Deputy Commissioner
 David G. Blattner Assistant Commissioner
 John D. Johnson Assistant Commissioner
 (Planning, Finance
 and Research)
 Donald E. Bergherm Assistant Commissioner
 John T. Ader Acting Deputy Assistant
 Commissioner (Collection)
 Damon O. Holmes Asst. to the Commissioner
 (Taxpayer Ombudsman)
 Gayle G. Morin Acting Asst. to the Commissioner
 (Legislative Liaison)
 /Director, Legislative
 Affairs Division
 James J. Keightley Acting Chief Counsel/Assoc.
 Chief Counsel (Litigation)
 Kenneth Klein Associate Chief Counsel
 Steven R. Lainoff Associate Chief Counsel
 Charles S. Triplett Deputy Associate Chief
 Counsel (International)
 T. Timothy Tuerff Special Assistant to Chief
 Kenneth E. Kempson Assistant to Deputy Chief
 James D. Bridgeman Special Assistant to Assoc.
 Chief Counsel (Technical)
 Bruce N. Davis Special Assistant to Assoc.
 Chief Counsel (Technical)
 Leslie S. Shapiro Director of Practice
 Roger Plate Director, Research Division
 B. Raiford Gaffney Program Analyst, Executive
 Alvina McHale Public Affairs

Tax Executives Institute's delegation to the meeting was composed of the Institute's Executive Committee, the chairs of its Federal and International Tax Committees, and its professional tax staff. The following individuals comprised the delegation:(*)

(*) Two members of the Institute's Executive Committee - Robert L. Fealy and Paul M. Zagortz - were unable to attend the meeting.

Larry R. Langdon, TEI President

Hewlett-Packard Company

William M. Burk, TEI Senior Vice President

CPC International Inc.

Michael J. Bernard, TEI Treasurer

Mobil Corporation

Linda B. Burke

Aluminum Company of America

Reginald W. Kowalchuk

Bank of Nova Scotia

Robert H. Perlman

Intel Corporation

Neil P. Wissing

Weyerhaeuser Company

Paul H. Freischlag, Jr., Chair, TEI Federal

Tax Committee

The Stop & Shop Companies, Inc.

Bernard J. Jerlstrom, Chair, TEI International

Tax Committee

The Lubrizol Corporation

Thomas P. Kerester

TEI Executive Director

Timothy J. McCormally

TEI Tax Counsel

Mary L. Fahey

TEI Assistant Tax Counsel

2. Introductory Remarks

On behalf of the IRS, Mr. Murphy thanked TEI for the reception held the previous evening at TEI Headquarters, which afforded representatives of both organizations the opportunity to talk informally. Turning to the annotated agenda for the meeting, he said that several interesting topics were scheduled for discussion. He stressed the IRS's willingness to listen to the Institute's concerns and assured TEI that the IRS would continue to be responsive during the interregnum between Commissioners.

On behalf of TEI, Mr. Langdon stated that the agenda represented the evolving relationship between the Institute and the IRS. He noted that TEI's members were "key customers" of the Internal Revenue Service. He added that the two organizations have had many noteworthy successes throughout the years - as a result of formal liaison meetings and the Institute's submissions and testimony, informal meetings between TEI members and National Office representatives, and the activities of the Institute's local chapters with District and Regional Office personnel. He commended and thanked the IRS for its "open door" policy.

TEI explained that the theme of its meetings with the Treasury and Joint Committee staff the previous day was the increasing complexity of the tax system and the pressures that complexity placed on tax executives and administrators as well. TEI stated that one solution to "the complexity conundrum" may be increased IRS and taxpayer involvement in the legislative process. TEI suggested that the Treasury and Congress should consult more closely with the IRS in developing legislative proposals in order to prevent the enactment of unadministrable statutes. Although acknowledging IRS concerns with perceived taxpayer abuses, TEI stated that too frequently the abuses are more perceived than real and that too much complexity stems from those perceptions. In other words, in an effort to close "tax pinholes" - to anticipate and prevent any "unintended" benefits - Congress, Treasury, and the IRS create impossibly complex statutory and regulatory provisions. TEI stated that the tax laws would never be "simple" - the economic environment in which business operates will not permit that - but that greater efforts can and should be made to rein in complexity.

3. Corporate Tax Gap

The first subject discussed was the corporate tax gap. TEI expressed concern about the tendency in recent years to treat corporate taxpayers as a "target" - both legislatively and administratively. This trend has manifested itself, for example, in the somewhat beguiling characterization of proposals to curtail corporate tax benefits or preferences as "reforms" (thereby stifling a policy-based debate on the merits of the proposals). Similarly, the IRS has shifted its audit resources to the corporate community - especially to taxpayers in the Coordinated Examination Program (CEP) - and justified its actions by "yield" statistics and concerns about the growing nature of the corporate tax gap.

TEI pointed out that CEP taxpayers have historically had an open, straightforward, and professional relationship with the IRS. That is why the CEP program has been successful. Notwithstanding this relationship, concerns about the "tax gap" and about whether the corporate sector is paying its fair share have in recent years contributed to a heightened adversarial relationship. TEI believes that the measurement of "fairness" should be based on solid information and not on questionable statistical analysis. In this regard, the Institute suggested that recent analyses of the corporate tax gap do a disservice to both the corporate community (especially large corporations) and the tax system as a whole.

TEI referred to the Summer 1988 issue of Statistics of Income Bulletin (Volume 8, No. 1, pages 23-28) which contained a report prepared by the IRS's Research Division entitled "Gross Tax Gap Trends According to New IRS Estimates, Income Years 1973-1992." A detailed rebuttal of the report is set forth in the Institute's written agenda. TEI's principal point was that the report (as well as the underlying tax gap study) sends a series of strong negative - and incorrect - messages about corporate tax compliance. For example, the report suggests that, if a tax incentive (such as the investment tax credit) is eliminated, then taxpayers will utilize an alternative (improper) means to effect the same tax savings. In addition, the report measured the size of the tax gap based on audit adjustments proposed by IRS examiners - even though a large number of such adjustments were reversed by the IRS itself as cases worked their way through the administrative process. TEI added that if the figures were adjusted to reflect assessed amounts, the voluntary compliance rate for corporations in 1988 increased from 83 percent to 86.9 percent - higher than the compliance rate for individuals. TEI concluded that the report created the potential for serious misinterpretation.

Mr. Murphy replied that the IRS appreciated TEI's concerns, agreeing that it was necessary to place all the facts "on the table." He pointed out that the SOI report dealt with a broad range of corporate taxpayers - not simply those in the CEP program or those represented by TEI's membership. Mr. Plate advised TEI that the IRS was preparing a new research report that would focus on the net tax gap. In this regard, he stated that the IRS itself is reviewing the tax gap estimation methodology and assured TEI that its comments would be taken into account as the new report is prepared. TEI asked whether further adjustments would be made to reflect amounts refunded to taxpayers following successful litigation, and Mr. Plate answered that he was uncertain.

In this general regard, Mr. Blattner noted that the IRS had not dramatically shifted the allocation of its audit resources from individuals to the corporate sector. From 1982 to 1988, the amount of IRS time devoted to corporate audits increased from 17 percent to 20.8 percent. (The number of corporations increased from 6,500 to 9,200.) In other words, Examination has not substantially modified its behavior in response to the tax gap studies.

4. The Need to Strike a Balance: Administrative

Complexity versus Theoretical Purity

TEI pointed out that the development of tax legislation and regulations requires a careful balancing of myriad, competing interests: national goals with respect to international trade, competitiveness, and economic growth (and the interaction of the tax rules with other legislative programs); concern about the IRS's various, competing "constituencies"; prevailing economic theories; and a healthy respect for what is "do-able" - by both government (primarily the IRS) and taxpayers. Too frequently theoretical purity has been exalted above practical realities, however, and the result has been a statutory scheme that - without regard to its merits on theoretical grounds - the IRS cannot administer and taxpayers cannot comply with.

TEI stated that the Treasury, IRS, and the staffs of the tax-writing committees have an affirmative obligation to ensure that administrative concerns are bought to the legislative (and administrative) table and that the specter of complexity not be given short shrift in the drive for theoretical purity. In this regard, TEI summarized its survey on the administrative burden spawned by the Tax Reform Act of 1986.

Mr. Murphy agreed that one solution to the complexity problem was better coordination between the Treasury, IRS, and Congress, as well as better communication between taxpayers and the government. He stated that coordination between the Treasury, IRS, and Joint Committee staff should increase with the appointments of Kenneth Gideon and Fred Goldberg (respectively, as Assistant Treasury Secretary and IRS Commissioner) and with Ronald Pearlman's being Chief of Staff of the Joint Committee. He stated that this "team" is well qualified to deal with the complexity issue.

Mr. Tuerff added that TEI is not the only entity concerned about the complexity of the Code; the IRS is also trying to make its voice heard in the legislative arena. He noted that, although the Tax Reform Act of 1986 had proven difficult to administer, the IRS had been successful in developing several sets of rules that eased an otherwise more burdensome statutory scheme. He added that the IRS is constantly seeking ways in which implementation of the Act can be simplified. Obviously, however, the IRS is in many instances constrained by the Code in developing safe harbors or simplified methods.

Mr. Klein reported that the IRS and Treasury had formed a simplification task force that will report soon on methods to simplify the regulatory process. The study, which will invite public comment, will present a series of recommendations. Mr. Klein pointed out that the IRS cannot re-write a complex statute, but it may work to reduce areas where the complexity is exacerbated by the regulations. He questioned, however, whether taxpayers would be willing to accept safe harbors that - in order to minimize the problem of "adverse selection" (only electing a safe harbor when it benefits you) - represented "rougher" justice; in other words, a safe harbor would be available, but the substantive result might be harsher than the result available under the more complex general rule.

Mr. Lainoff suggested that taxpayers faced a trade-off: if regulations are less complex, they will provide less guidance and taxpayers will face greater uncertainty and risks. TEI stated that taxpayers may be willing to accept such trade-offs, depending upon the issue.

Mr. Murphy stated that the IRS was willing to listen to TEI's suggestions concerning the regulatory process. He noted that the Commissioner's Advisory Group was interested in the whole area of simplification and retroactivity, adding that it had been worthwhile to revisit the area.

5. The Changing Nature of the Taxpayer-IRS


TEI expressed concern that the overall "tone" of the taxpayer-IRS relationship had changed in recent years, becoming more adversarial and, in some cases, even strident. Such a change could impair the overall effectiveness of the Coordinated Examination Program (CEP). TEI also commented on the increasing difficulty taxpayers are experiencing in obtaining extensions of time to respond to information document requests or to file a protest and the increasing frequency of penalty assertions.

Mr. Blattner agreed that success of the CEP program depended on taxpayer-IRS cooperation. He added that the CEP branch chiefs were particularly sensitive to the manner in which CEP audits are conducted. He pointed out that the IRS has 1,550 pending CEP cases and suggested that problems with an audit should be brought to the attention of the CEP branch or division chief and, in some cases, the District Director.

With respect to the extension of time requests to file protests, Mr. Blattner stated that the IRS emphasizes the use of Forms 5701 in order to give taxpayers advance notice of potential adjustments. TEI pointed out that issues raised in the Form 5701 may not be included in the agent's final report. Taxpayers hesitate to use their limited resources to begin preparing a protest when the issue may never be presented. Mr. Blattner replied that such instances should be the exception, not the rule; taxpayers should be informed when an issue is withdrawn. He asked TEI to notify him if the problem persists.

Mr. Blattner stated that extensions of time to file protests are considered on a case-by-case basis. Automatic extensions will not be granted, but in most cases the first request will generally be approved. Further extensions may have to be approved by the division chief.

TEI stated that, despite its concerns about the CEP program, Institute members generally believed the program worked well. Stating that, as a general rule, examining agents are well qualified and trained, the Institute stated that the purpose of its comments was to ensure that the CEP program would remain effective. Mr. Blattner agreed that care should be taken not to impair the overall effectiveness of the CEP program. He added that one of the IRS's concern was that more than half of the IRS's CEP examiners will be eligible for retirement within the next five years; he explained that the IRS is trying to fill this potential experience gap now through extensive training courses.

With respect to the assertion of penalties, Mr. Blattner stated that few section 6661 penalties are asserted against CEP taxpayers. He asked TEI to supply Mr. Holmes with data concerning situations in which penalties are "stacked," i.e., the assertion of a section 6661 penalty is coupled with an alternative assertion of the negligence penalty. He suggested that this may be an appropriate issue to discuss with Larry Phillips, Milwaukee District Director and head of the IRS's CEP-Quality Improvement Project, when he meets with TEI on June 28.

TEI expressed concern that "tinkering" with the CEP program may lead to the deterioration of an effective program, citing the potentially adverse effects that could accompany the routine involvement of Counsel staff in the examination process. Mr. Blattner stated that the goal of the Phillips' team is to improve the CEP program. One aspect that will be addressed in the team's final report will be the involvement of Counsel in the audit process. Mr. Blattner added that the use of Counsel will not be routine, since the IRS lacks the staff to routinely assign Counsel personnel to audits. Mr. Keightley agreed, stating that Counsel's role will generally be limited to a small number of cases and taxpayers will invariably be aware of that involvement. Mr. Murphy pointed out that the use of Counsel is part of the IRS's quality initiative; he explained that too frequently the IRS has been forced to concede issues because they were improperly developed by the field. He invited taxpayer comments concerning any abuses in this area.

With respect to the role of the IRS Appeals Division, Mr. Keightley agreed that the Appeals Division should remain independent. He stated that the increased use of Counsel was not meant to undermine the Appeals process; rather, the IRS views the use of Counsel as a form of control over the quality and focus of examinations - a means, as it were, to better develop cases for Appeals. In this regard, Mr. Tuerff suggested that the ratio of "dropped" to "initiated" issues (as a result of Counsel's involvement) was 10 to 1. TEI stated that, although it empirically could not disprove or confirm those figures, they did not comport with the reports it had received from TEI members. (In this regard, the Institute acknowledged that the IRS's "satisfied customers" would be less likely to bring Counsel's involvement to TEI's attention than "dissatisfied customers.")

TEI suggested that the use of Counsel produced delays in the settlement of cases. Mr. Murphy repeated the IRS's willingness to consider the Institute's concerns about Counsel's involvement. In this regard, he stated that taxpayers should not overlook the District Director as a resource in such cases (for example, to address possible abuses).

6. Administrative Procedures Act

TEI questioned the propriety of issuing temporary regulations (which take effect immediately or even retroactively) or issuing temporary regulations concomitantly with proposed regulations, so that taxpayers are denied an opportunity to comment on the new rules before they take effect (as provided for under the Administrative Procedures Act (APA)).

Mr. Tuerff stated that, because of the vast changes wrought by the Tax Reform Act of 1986, the IRS had started using Notices and other vehicles as alternatives to proposed or temporary regulations in an effort to issue guidance as soon as possible. He acknowledged the importance of complying with the APA, but stated that, since the IRS viewed most of its recent regulations as interpretative (rather than legislative) in nature, the promulgation of the regulations was not subject to the APA. Mr. Klein agreed, adding that the IRS was committed to the proposed regulatory process and that taxpayers' comments on proposed and temporary regulations would certainly be taken into account when final regulations are issued under the 1986 Act.

7. Specific Technical Issues

a. Subpart F: High Tax Exception. Section 954(b)(4) of the Code now provides that income otherwise taxable under Subpart F may be excluded if the taxpayer is "subject to an effective rate of income tax imposed by a foreign country greater than 90 percent" of the U.S. rate. The temporary regulations provide that this high tax exception is applicable only if the income was subject to creditable foreign taxes and such taxes were paid or accrued (or deemed paid or accrued) with respect to the item of income. TEI pointed out that the payment or accrual of taxes should not be equated with being "subject to" foreign taxes. A taxpayer may have no, or a low, foreign tax liability in a given year and still be "subject to" a high effective tax rate. It recommended that the regulations be revised to eliminate the paid or accrued requirement.

Mr. Lainoff stated that the Treasury and IRS were willing to re-think their positions with respect to the high tax exception, possibly providing a safe harbor for taxpayers operating in high tax jurisdictions. He cautioned, however, that such a safe harbor would add to the complexity of the regulations.

b. Section 905(c): Notice of Redetermination of Foreign Tax. Mr. Lainoff reported that TEI's comments concerning the 90-day rule (requiring redeterminations of foreign taxes received within 90 days of the filing of a return) and the 180-day rule (requiring the filing of an amended return within 180 days of a redetermination of foreign tax) were well taken and that the IRS was in the process of amending the regulations.

c. Section 861: Sourcing of State Income Taxes. Although TEI's written comments seriously disagree with the assumptions underlying the proposed and temporary regulations issued under section 861, TEI and the IRS "agreed to disagree" about the basic premise of the allocation and apportionment regulations and focus instead on the administrative burden imposed by the regulations.

TEI expressed particular concern about Examples 25 through 29 which require the calculation of hypothetically apportioned state taxes for states that impose no income tax (or income-based franchise tax) and, hence, have no rules for computing taxable income or apportioning such income. TEI pointed out that taxpayers simply do not maintain - and, with respect to the retroactive application of the regulations, could not have anticipated the need to maintain - the information required to perform the calculations.

Mr. Lainoff agreed that the complexity of the regulations was a real concern for the IRS. He stated that the IRS was interested in receiving comments on other methods of allocation. TEI pointed out that the effective date of the regulations (applicable for taxable years beginning after December 31, 1976) exacerbated the problems, especially where taxpayers were involved in disputes with the states; the practical effect of the regulations was to require allocation of taxes retroactively for state tax years before the stated effective date.

Mr. Tuerff stated that the effect of the regulations on disputes involving state tax years prior to 1977 merited further discussion. It was agreed that TEI and the IRS would meet at a later date to investigate ways in which the methodologies established by the regulations could be simplified. (Note: A follow-up meeting with Messrs. Lainoff and Tuerff, and other IRS representatives, was held on June 9, 1989.)

d. Section 864(e): Allocation of Overhead Expenses. TEI explained that to allocate and apportion expenses (other than interest) under the section 864(e) temporary regulations taxpayers must use the apportionment factors of all members of the consolidated group. This "single taxpayer rule" also requires the elimination of interaffiliate transactions and property that are duplicative with respect to the measure of apportionment. TEI pointed out that the elimination of interaffiliate transactions essentially requires taxpayers to maintain two additional systems of tax accounting (making a total of four) for calculating regular taxable income and alternative minimum taxable income.

Mr. Lainoff expressed interest in learning more about the effect of the single taxpayer rule and suggested that this topic would also be appropriate for discussion at a later date. (Note: A follow-up meeting with Messrs. Lainoff and Tuerff, and other IRS representatives, was held on June 9, 1989.)

e. Section 482 White Paper. Although TEI had not yet filed its formal comments on the October 18, 1988, discussion draft on intercompany pricing (the Section 482 White Paper), the Institute's agenda for the liaison meeting summarized TEI's concern about several issues, including the following: the White Paper's emphasis on the basic arm's-length return method (BALRM), the unavailability of data, the need to consult with treaty partners, the rejection of safe harbors, and the proposed use of penalties.

TEI pointed out that the White Paper seems to require the use of BALRM which the study states "will probably be appropriate for most manufacturing affiliates" and "should be widely applicable." Mr. Triplett stated that it was not the intent of the White Paper to make BALRM the definitive method for pricing intercompany transactions. He agreed that in many cases the use of inexact comparables may be preferable. Mr. Lainoff added that the IRS is still reviewing the thousands of pages of comments submitted with respect to the White Paper and that specific areas may be reconsidered. He stated that the IRS hopes to issue proposed regulations before the end of the year.

With respect to the availability of the data necessary to determine an arm's-length price, TEI stated its belief that the White Paper's BALRM proposal presumes too much in terms of the information readily accessible to a taxpayer. The Institute pointed out that many companies do not have access to profit margins, let alone the allocable operating expenses, of third-party marketing distributors, the royalty rate charged by a competitor to a third party, or a competitor's gross margin on a particular product.

Mr. Triplett said that the IRS had encountered problems in the Tax Court with limitations on its discovery rights and that the intent underlying the White Paper was to obtain the information necessary to determine the "correct" transfer price during the examination phase of the process. He added that the IRS did not, however, want to sweep all taxpayers into section 482's "web" of data collection. He stated that the IRS was interested in working with taxpayers in obtaining the data necessary to compute transfer prices and welcomed input on the means to obtain, limit, and refine the needed information.

With respect to the consultation with treaty partners, Mr. Triplett assured TEI that the IRS was involved in an ongoing effort to work with other countries in establishing guidelines for implementation of the commensurate-with-income standard. He stated that to date reactions of the Unites States's treaty partners to the White Paper were mixed, adding that the IRS will continue to consult with U.S. trading partners before issuing regulations to ensure that taxpayers are not "whipsawed" in the competent authority process.

TEI expressed its disappointment in the White Paper's rejection of safe harbors in the section 482 area. TEI pointed out that the White Paper misapprehends why taxpayers frequently would elect a safe harbor: to obtain certainty in administration even where the safe harbor may be economically detrimental.

Mr. Triplett replied that the IRS was willing to work with TEI and other taxpayers to establish audit guidelines and provide direction for field agents. Mr. Lainoff added that the IRS was considering implementation of a rulings procedure whereby taxpayers could receive an advance ruling that their transfer pricing methodologies were in accord with arm's-length principles.

TEI questioned whether taxpayer compliance would indeed be enhanced, as the White Paper states, by the "proper assertion of appropriate penalties," specifically citing section 6661 and its interaction with section 367(d). The Institute reiterated its belief that, in complex areas (such as section 482) where reasonable persons can differ, the assertion of penalties is improper. Mr. Triplett replied that the IRS is continuing its review of the penalties area, citing its intent to assert penalties only in cases of clear abuse. Mr. Lainoff pointed out that any proposals for new penalties under section 482 would be made in context of the IRS Task Force now charged with reviewing the entire penalties area.

f. Section 1060: Allocation Rules for Certain Asset Acquisitions. TEI commented that, although the temporary regulations contain detailed instructions with respect to situations in which the buyer and seller are in agreement concerning the allocation of consideration, they fail to address situations where an agreement cannot be reached, pointing out that section 1060 does not mandate such an agreement. TEI further suggested that if an agreement is reached between the parties, a presumption should arise that the allocation is correct.

Mr. Klein agreed that an allocation agreement is not required under section 1060, but pointed out that the statue is premised on the theory that the buyer and seller will be in agreement. He questioned whether, with the repeal of the capital gains differential, sufficient tension still existed between the buyer and seller to justify a presumption of correctness. He stated that the agreement of the buyer and seller should certainly be a factor considered in determining whether the allocation was reasonable, but that the presence of an agreement should not rise to the level of a presumption, at least in a tension-free environment.

TEI suggested that the final regulations should exclude covenants not to compete from the purview of section 1060 since such assets are not usually considered assets of the acquired trade or business, but rather are separate agreements between the buyer and the seller's major stockholders or employees. Mr. Klein acknowledged that the temporary regulations treated covenants not to compete as assets of the trade or business, but stated his willingness to revisit the issue.

g. Section 401(k): Cash or Deferred Arrangements. TEI referred to the proposed regulations relating to qualified nonelective contributions and qualified matching contributions that may be treated as elective contributions, and to the treatment of certain nonelective contributions and elective contributions as matching contributions. TEI pointed out that the regulations fail to address whether such elections may be made on a plan-by-plan basis where a plan is aggregated under Treas. Reg [section] 1.401(k)-1(b)(5). In addition, the proposed regulations provide that, in order to be eligible to aggregate, plans must have the same plan year. The regulations also fail to address, however, the time period in which aggregation must occur and the effect of certain acquisitions on the aggregation rules.

Mr. Kempson stated that most of TEI's comments on the section 401(k) regulations were valid and will be considered for incorporation into the final regulations. In this regard, a contact was given for detailed discussion of these issues. Mr. Klein agreed that further clarification of the regulations may be needed and suggested that a meeting be scheduled to discuss TEI's suggestions. (Note: A follow-up letter was sent by the Institute to Mr. Kempson on June 29, 1989.)

h. Package Design Costs. TEI referred to Revenue Ruling 89-23 (which provides that package design costs are capital in nature and generally have a useful life of more than a year); to Revenue Procedure 89-16 (which sets forth procedures for taxpayers to obtain the expeditious consent of the Commissioner to change their method of accounting for package design costs); and to Revenue Procedure 89-17 (which provides that taxpayers whose accounting method with respect to package design costs is consistent with the revenue ruling may elect to amortize future package design costs using a 60-month deemed useful life rule).

Although TEI was still in the process of preparing comments on the recently issued ruling and procedures, the Institute reiterated its long-standing position that package design costs are properly deductible under section 162 in a manner consistent with the current deductibility of expenses related to the selling or marketing of products or the expansion of a taxpayer's existing business. TEI stated that the new ruling and procedures only compound complexity problems. The revenue procedure would require taxpayers to reconstruct the total of their package design costs - all the way back to 1913 - and determine which of those costs relate to non-abandoned package designs. That amount must be brought into income over the section 481 spread period (generally, six years). Given the absence in Revenue Ruling 89-23 of a comprehensive definition of package design costs or any detailed guidance on what constitutes "abandonment" of a design, the task confronting taxpayers is daunting. Even on a going-forward basis, the challenges posed by the IRS's package design cost position should not be underestimated.

TEI pointed out that the IRS should separately address design structure and design graphics because taxpayers are permitted to amortize structure-related costs (such as molds) over a three-year period. No sound tax policy exists for permitting taxpayers to elect a 60-month amortization period for post-effective date design costs, while denying such an election for pre-effective date costs. TEI suggested that the IRS withdraw the new ruling and procedures to allow time to fully assess both the substantive and procedural issues raised.

Mr. Klein responded that the IRS is aware that the ruling and procedures raise numerous theoretical and practical issues. He stated that Revenue Ruling 89-23 does not, however, represent any change in position by the government; the IRS has always contended (as a "theoretical" issue) that package design costs are capital in nature. Mr. Klein pointed out that the capitalization of such costs has been an on-going source of friction between the government and taxpayers for many years. Many cases have been settled, leading the IRS to believe that a five-year amortization period was appropriate.

Mr. Klein added that the IRS was re-thinking the compliance problems associated with the reconstruction of costs back to 1913 and that some relief with respect to this provision may be forthcoming. He cautioned, however, that the IRS would not make the revenue procedure prospective from the date of issuance.

8. Administrability Index

In its written and oral submissions, TEI has consistently recommended that the administrability of legislative proposals be taken into account at the time legislative proposals are considered by the tax-writing committees. Specifically, TEI recommended that the IRS - as the enforcement agency - be required to testify before both the House and Senate tax-writing committees on all tax legislation to ensure that clear, administrable, and cost-sensitive rules are enacted into law. TEI expressed approval of a recent IRS initiative to develop an "administrability impact" statement (akin to the environmental impact statement required by the National Environmental Policy Act), which attempts to measure the compliance burden posed by proposed tax law changes as well as the proposal's estimated effect on the IRS.

Ms. Morin expressed appreciation for TEI's support and confidence in the IRS as the proper agency to review the administrative complexity issue. She added that many times taxpayers' interests parallel those of the IRS. Often, she stated, administrability takes a "back seat" to policy or revenue considerations. Through the index, the IRS is attempting to achieve policy goals while limiting the complexity of various legislative proposals.

Ms. Morin pointed out that the IRS recently sent two papers to the Treasury Department discussing the administrability of the capital gains and child care proposals. She added that the keys to success in this area are early participation in the process and access to congressional personnel.

In response to a question, Mr. Murphy stated that TEI can aid this process by continuing to insist that the administrability of tax proposals be considered.

9. Offsets

TEI pointed out that the liaison meetings' agendas have for several years included an item relating to the business master file (BMF) offset program. Because of concerns expressed by TEI, other organizations, and individual taxpayers - as well as those raised internally within the IRS - the program has been in suspense for some time. On March 30, 1989, the IRS announced that the BMF offset program will be reinstituted effective July 1. Reportedly, under the new program, a taxpayer will be notified of the availability of any unclaimed credit in its account and will be asked where the credit should be applied; if the taxpayer does not respond, the IRS will use its discretion in determining where the credit should be applied and send the taxpayer a settlement credit. TEI expressed concerns about the resumption of the offset program.

Mr. Ader stated that the IRS intends to monitor the resumption of the offset program closely in an effort to ensure a "fail-safe" system. Two Service Centers will be used to evaluate the success of the program and, with the help of the Problems Resolution Office and the Ombudsman, the IRS National Office will receive feedback from taxpayers very quickly. (Note: Subsequently, the IRS decided to perform this review in all 10 Service Centers.) Automatic offsets will be limited to a single taxpayer, not the entire corporate group. In cases where the credits claimed on the taxpayer's return are less than those credited to the account, taxpayers will be provided with a notice concerning the amount and character of the overpayment. The notice will provide the taxpayer with 14 days in which to either tell the IRS where to apply the credit(s) or to request a refund. Taxpayer correspondence related to this program will receive priority treatment in the Service Centers.

TEI questioned whether 14 days was sufficient time in which to respond to the notice. (Note: The IRS subsequently announced that, after receiving a notice, taxpayers would have 30 days in which to respond before the overpayment would be available for potential offset.) Mr. Murphy stated that the IRS is aware of TEI's concerns about the offset program. Because of this concern, the IRS has provided for special handling of objections at the Service Centers. He asked TEI to assist the IRS in monitoring the program and reporting on any problems that may arise.

10. Concluding Remarks

On behalf of TEI, Mr. Langdon thanked the IRS for meeting with the TEI delegation and devoting the time and effort to review and discuss TEI's comments.

On behalf of the IRS, Mr. Murphy again thanked TEI for its gracious hospitality in hosting the reception the previous evening. He stated that the meeting had been extremely worthwhile and allowed for continuity between the two organizations. He added that the IRS will in the future attempt to ensure that the messages concerning its positions are clearly relayed to taxpayers.

PHOTO : State and Local/Property Tax Course: Tom Reilly, chair of TEI's State and Local Tax Committee, discusses the course with two members of his staff - Rebecca Lawrence and Mark Kadner.

PHOTO : TEI's Newest Chapter: The charter members of the San Antonio Chapter rose during Region VIII's Annual Conference, which was held in San Antonio. The chapter's first president, Clem Wydra, holds the charter.
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Publication:Tax Executive
Date:Jul 1, 1989
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Tax Executives Institute-Internal Revenue Service Liaison Meeting Minutes.
TEI Means Opportunity ... for Education, for Networking, for Results.
Liaison meetings, congressional hearing dominate scene: TEI testifies on IRS budget and priorities; meets with Treasury, IRS, and LMSB; renews push...
TEI meets with IRS, Treasury, and Hill Staff.
TEI gives e-filing frosty reception: TEI discusses e-filing mandate, 2004 Act Guidance, and other key issues during Washington liaison meetings;...

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