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TEI files friend-of-court brief on deductibility standard, comments on QSLOB and section 9100 regulations.

As Tax Executives Institute's 1990-1991 leadership wound down its year, the Institute filed a brief amicus curiae with the U.S. Supreme Court in a case involving the deductibility of takeover expenses. TEI also commented on the IRS's proposed employee benefit regulations under section 414(r) (relating to qualified separate lines of business) and the proposed rules governing the making of untimely elections under section 9100. In addition, the Institute submitted comments to the House Committee on Ways and Means concerning tax measures affecting the ability of U.S. companies to compete effectively abroad, and geared up to file comments on proposed tax simplification legislation.

The Institute's continuing efforts with respect to Form 5471 and the time period for filing protests are the subjects of separate stories elsewhere in this issue. Also reprinted in this issue, beginning on page 276, are the minutes of TEI's February 14 liaison meeting with the Internal Revenue Service.

Amicus Brief on Deductibility

of Takeover Expenses

TEI's friend-of-the-court brief was filed with the Supreme Court of the United States in a case involving the deductibility of investment banking, legal, and other fees incurred in connection with a takeover. The case, Indopco, Inc. v. Commissioner, relates to expenses incurred by Indopco (nee National Starch & Chemical Corporation in connection with the acquisition of its stock by the Unilever group. The resolution of this issue turns on the interpretation of the Court's 1971 decision in Commissioner v. Lincoln Savings & Loan Association. The amicus brief, which was filed with the Court on June 27, is reprinted in this issue, beginning on page 269.

In its brief, the Institute stated that the Lincoln Savings decision brought much needed certainty to the deductibilty of ordinary and necessary business expenses under section 162(a). In crafting an objective standard, the Court stated that "many expenses concededly deductible have prospective effect beyond the taxable year." It then forthrightly held that what was "important and controlling" was that the payment "serves to create or enhance . . . what is essentially a separate and distinct additional asset . . . ." Thus, although the Court in Lincoln Savings held that the particular expenditure was capital in nature, "it unequivocally rejected the notion that a cost must always be capitalized if the benefit associated with it extends beyond the taxable year," TEI stated.

In Indopco, the lower court abandoned the test enunciated in Lincoln Savings, concuding that the absence of a separate and distinct additional asset did not preclude a finding that the expenditure is capital in nature. The court held tht the "common characteristic of expenses that have been found to be capital, in fact the size qua non of capitalization, is the presence of a not insignificant future benefit that is more than merely incidental." In so holding, the Institute said, the lower court "misapprehended this Court's decision in Lincoln Savings and elevated to controlling status the ancillary criterion of a future benefit." The Institute added that the lower court's opinion "ignored the contrary opinions of six other courts of appeals and spawned tremendous uncertainty with respect to expenses that have unquestionably been held to be deductible under section 162(a)."

With respect to the case's effect on other areas of the tax law, the Institute warned that the opinion "threatens to strip away the relative certainty that taxpayers and the government have found under Lincoln Savings and casts doubt on the deductible treatment of myriad expenditures." The language used by the court is so broad that it undermines the "ordinary and necessary" character of many expenses that have long been held to be deductible, including expenses for repairs, employee training, and advertising, TEI said. The Institute urged the Supreme Court to reverse the lower court's decision.

The Indopco case will be argued some time this fall, and a decision is expected no earlier than January. The Institute's brief was prepared under the aegis of its Federal Tax Committee, whose chair is Lester D. Ezrati of the Hewlett-Packard Company.

Proposed Regulations for

Qualified Separate Lines

of Business

TEI's Employee Benefits Subcommittee took the lead in developing the Institute's June 13 comments on the IRS's proposed regulations under section 414(r) relating to qualified separate lines of business (QSLOB). The proposed regulations contain guidelines and testing requirements allowing employers to meet the nondiscrimination provisions of the Code when establishing substantially different benefit plans for separate lines of business.

TEI's comments, which are reprinted in this issue beginning on page 290, focused on mitigating the rigidity of the rules and the IRS's failure to recognize how unworkable certain of its limited, inflexible tests were when applied to the wide variety of factual circumstances driving the organization and management of lines of business. TEI also commented on the record-keeping burdens imposed to qualify for SLOB relief.

TEI devoted considerable attention to the tests for determination of "separate" lines of business, including separate financial accountability, workforce, management, and tangible assets. Other issues raised were the notice requirements and the administrative safe harbors for determining QSLOBs. Finally, the Institute devoted substantial effort to the allocation of corporate headquarters staff to various lines and the dominant line of business approach for allocating "residual shared employees" (i.e., corporate staff).

The comments were prepared under the aegis of the Federal Tax Committee's Subcommittee on Employee Benefits, which is chaired by David L. Klausman of Allegheny Ludlum Corporation. The following other members contributed also to the development of the Institute's submission: Ralph J. Coselli, Fred Lesser, and Ernie M. Harper.

Section 9100 Regulations

On June 13, TEI filed comments on the IRS's proposed section 9100 regulations, under which the Commissioner is authorized to permit "out-of-time" elections or applications. The principal purpose of the proposed regulations is to extend the Commissioner's section 9100 authority to other than income taxes; the regulations were prompted by the occurrence of a substantial number of "blown" QTIP elections for estate tax purposes.

The Institute's submission, which followed up on comments made during a June 3 public hearing on the section 9100 regulations, is reprinted in this issue, beginning on page 281. The comments, which were prepared under the aegis of the TEI's IRS Administrative Affairs Committee (whose chair is Ralph J. Weiland of Abbott Laboratories), did not take issue with how the regulations accomplished their intended purpose. They did, however,urge the IRS to use the occasion to "rethink and revamp its basic approach to the section 9100 regulations."

Specifically, TEI challenged the assertion that Rev. Proc. 79-63 (which sets forth the standards for section 9100 relief) was being applied by the IRS in a fair and even-handed manner. The Institute contended that section 9100 relief was being granted where the taxpayer's failure to make a timely election was attributable to an error committed by an outside practioner, but that such relief was being denied where the error was committed by a member of the Institute's in-house tax staff. TEI urged the IRS to eliminate the "double standard."

The Institute also urged the IRS to inject the concept of proportionality into a determination whether the taxpayer has exercised "due diligence" (a requirement for section 9100 relief). Specifically, TEI argued that if the taxpayer establishes reasonable tax compliance procedures and internal controls to ensure that its tax return is complete and timely and then makes a good faith effort to ensure that those procedures are followed, it should be presumed to satisfy the due diligence requirement.

International Competitiveness

On June 17, TEI filed comments with the House Committee on Ways and Means on factors affecting the international competitiveness of U.S. companies. The comments, which were filed in connection with a series of hearings that the congressional committee is holding on the competitiveness issue, were prepared under the aegis of the Institute's International Tax Committee, whose chair is Raymond G. Rossie of Intel Corporation. They are reprinted in this issue, beginning on page 284.

TEI stated that where U.S. tax rules restrict the ability of U.S. companies to operate in a cost-efficient manner, the overall competitive position of the Nation suffers. The Institute noted that U.S. tax rules can -- and do -- skew the manner in which U.S. corporations operate overseas, and that Congress should recognize that taxpayers often adjust their activities to minimize their tax liability and that the adjustments not infrequently lead to their engaging in inefficient activities.

The Institute then turned to recent tax law changes that injected undue complexity into the Internal Revenue Code's international provisions. TEI argued that the sheer complexity of those provisions places an horrendous administrative burden on U.S. corporations that is not borne by foreign-based corporations. Thus, even without regard to the tax effect of the rules, U.S. corporations must shoulder monstrously complex and expensive compliance burdens.

Finally, TEI set forth a series of legislative recommendations to reduce the tax law's complexity and thereby enhance competitiveness. Among the issues addressed in the comments are (i) the treatment of dividends from non-controlled section 902 companies (the "10-to-50 baskets" rules); (ii) the translation of foreign taxes for purposes of the deemed-paid credit (the Bon Ami rule); (iii) exemption of foreign corporations from the reach of the Code's uniform capitalization rules; and (iv) the passive foreign investment company rules. The Institute also addressed several possible legislative responses to European unification, including excluding foreign base sales and services income from the definition of FBCI under Subpart F, treating the EC member countries as a single country for purposes of the same-country exception, and reducing the threshold in the high-tax exception from 90 to 80 percent.

Comments on Simplification Bills

TEI's committees are currently in the process of preparing comments on H.R. 2777 and S. 1394, the Tax Simplification Bill of 1991, which was introduced in the House and Senate on June 26. Also under review are H.R. 2775, an "add-on" simplification bill introduced by Ways and Means Committee Chairman Dan Rostenkowski, and several pension and employee benefit simplification bills. The Institute anticipates testifying at hearings on the legislation in late July, and it's testimony will be reprinted in a future issue of The Tax Executive.
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Title Annotation:The Executive Institute, qualified separate line of business
Publication:Tax Executive
Date:Jul 1, 1991
Previous Article:Comments on February 26, 1991, Canadian budget.
Next Article:Keep the money at home: the illusory promise of contract audits.

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