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TEI welcomes spring with a shower of technical activities: comments filed on 2004 Act, e-filing mandate, and auditor independence, withholding, and GST issues.

The first quarter of 2004 saw a continuation of TEI's dialogue with the Internal Revenue Service and the U.S. Department of Treasury on guidance priorities under the American Jobs Creation Act (AJCA). Through conference calls and correspondence, the Institute remains as a forceful advocate in behalf of its members regarding their most pressing needs for guidance. In addition, the Institute has initiated a project to help the IRS's Large and MidSize Business Division identify implementation challenges relating to the new law.

"Perhaps not surprisingly," TEI's President Judith P. Zelisko noted recently, "the dividend repatriation provision and the domestic manufacturing deduction lead the list of areas where prompt guidance is urgently needed. We are pleased with the speed and depth of the guidance issued by the government."

During a March 11 meeting with representatives of the Treasury Department and IRS Office of Chief Counsel, TEI focused on the need for additional guidance in respect of section 965 relating to incentives to reinvest foreign earnings in the United States. TEI commended the government officials for the guidance set forth in Notice 2005-10 with respect to expenditures for worker compensation and benefits (other than expenditures for executive compensation).

The government also clarified the rules relating to advertising expenditures for intangible property such as brand names or trademarks. IRS Deputy Chief Counsel Nicholas DeNovio stated during the meeting that advertising expense is generally incurred with respect to intangibles such as trademarks or brand names, adding that there is no requirement to allocate advertising expense between the intangible brand and the tangible product.

In respect of the domestic manufacturing deduction under section 199, TEI discussed issues relating Internet delivery of software, contract manufacturing, the "item-by-item" computation, and the manufacturing safe harbor.

Minutes of the Institute's meeting with the IRS and Treasury are reprinted in this issue, beginning on page 180. Also reprinted here beginning on 185 are minutes of the Institute's February 9 liaison meeting with the IRS Large and Mid-Sized Business Division.

E-Filing Mandate

The temporary and proposed regulations requiring large corporations to electronically file their 2005 tax returns were the subject of comments filed on March 4. Paul O'Connor of Millipore Corporation, IRS Administrative Affairs Committee chair and Stephen Francis of General Electric testified on the mandate at the IRS's March 16 public hearing and strongly urged the government to delay the mandate for at least one year.

In his testimony, Mr. O'Connor voiced TEI's support for the e-filing concept, but cautioned that mandating a goal "does not ensure its implementation, regardless of how laudable it is and regardless of the good faith of the IRS, software vendors, and taxpayers themselves." Based on discussions with IRS officials, taxpayers, and software vendors, he stated, the Institute had concluded that the IRS has mandated the impossible, at least for the bulk of the companies represented by TEI's membership."

Mr. O'Connor explained that many TEI members use multiple software programs to prepare the various components of their tax returns. No program currently exists to integrate or aggregate the data from the array of programs currently used.

"To be sure," he added, "not all corporate taxpayers--perhaps not even a significant percentage--may find themselves in this predicament, but to dismiss the concerns of large corporations as emanating from 'outliers' or exceptions is not to solve the problem, it is to ignore it. To paraphrase Hans Christian Andersen, if the mandate is the Emperor, we regret to say it is wearing no clothes."

Mr. Francis, GE's Tax Systems Manager, discussed the technological challenges of the new rules. "Perhaps the most important issue with the proposed regulations is how taxpayers are to comply with the law," he said. "The regulations mandate electronic filing of corporate returns, but fail to identify how that is to be done." He confirmed the Institute's commitment to work with the IRS to resolve the technical issues, but expressed concern about the ability of taxpayers, software vendors, and the IRS to meet the deadlines imposed by the regulations.

"The regulations seem to be based on a number of misconceptions, the first of which is the assumption that taxpayers use only one form of software to prepare their returns," Mr. Francis explained. "In reality, taxpayers may use several types of software--including Excel spreadsheets and 'home-grown' programs--to prepare their returns. In addition, many companies use third-party services to prepare selective schedules, which are not (and will not be) integrated with the primary tax compliance software. The software programs are not compatible with one another, and currently significant manual operations are required to move from the programs to the final Form 1120 that must be filed with the IRS under penalties of perjury."

Mr. Francis also expressed concern that the e-filing system has not been stress tested under real filing conditions. "Although the IRS has undertaken an engineering study to test the system," he said, "we believe that this should have been done before e-filing was made mandatory."

Given the scope of unresolved technological issues, TEI recommended the following areas as being appropriate for hardship waiver:

* Software vendors used by the taxpayer are unable to produce the necessary software to e-file any return or schedule within a reasonable time period (perhaps six months before the end of the year for which the return is to be filed);

* Significant flaws in external or internal during the first three months of the year in which the return is to be filed;

* Significant testing yields the conclusion that software vendors must be changed in order to comply with the e-filing mandate; and

* Attempts to timely file the return electronically (including extensions) are unsuccessful because of transmission errors (such as Internet traffic, misrouting of information packets, or disconnects in the transmission).

The Institute also recommended that the purchase and use of software developed by an approved vendor be sufficient evidence that a taxpayer has made a good faith effort to comply with the regulations.

"Ready or not, the e-filing mandate is still on the table," TEI President Judy Zelisko noted after the testimony, "and we will continue to work with the IRS on implementation issues relating the mandate." Ms. Zelisko reported that Institute representatives had already met several times with the IRS to address e-filing-related technology issues.

For example, also in March, 23 TEI representatives from 19 corporations met with IRS officials and tax software vendor representatives (CorpTax, Vertex, RIA InSource, and Tax Technologies) to discuss e-filing compliance. Alternatives to filing a single integrated file were explored, including the possibility of filing only certain forms and schedules in the mandate's first year, a multi-year phase in, the use of PDF attachments, and the possibility of filing the return on a CD.

A smaller group of TEI representatives met with the IRS on April 7-8 to discuss those forms and attachments which could be submitted in Adobe Acrobat format. The Institute is exploring the potential size of such files and reviewing a draft instructions for taxpayers that may want to e-file their own returns, rather than rely on transmission by a vendor.

"Additional meetings with the IRS and software vendors will be held during the next two months," Ms. Zelisko concluded. "This is definitely an area where issues change rapidly and TEI will keep on top of them."

The Institute's written testimony on the e-filing regulations is reprinted starting on page 190.

PCAOB Comments

On March 1, TEI filed comments with the Public Company Accounting Oversight Board on the Board's proposed ethics rules concerning independence, tax services, and contingent fees. The proposed rules, issued by the Board in December 2004, provide guidance regarding whether certain tax services rendered by an SEC registrant's audit firm impair the audit firm's independence and thus should preclude the audit firm from rendering an opinion on the client's financial statements.

In its comments, the Institute noted that the proposed rules were sound and represented a balanced approach to the difficult line drawing that the PCAOB must undertake. The Institute focused its comments on three proposed rules related to tax transactions, tax services for senior officers and pre-approval requirements stemming from its concern about the ability of audit clients to obtain professional tax services that they deem best suited to render that advice.

In respect of tax transactions, TEI observed that the proposed rule and explanatory release did not address the meaning of the phrase "planning, or opining on the tax treatment of a transaction." The Institute sought clarification that the intent of the rule "is to permit an audit firm to render an opinion on the fairness of the financial statement presentation of a transaction's tax effects so long as the audit firm has not rendered advice in respect of the merits of a transaction ... or for protection of the audit client from the assertion of penalties by the tax authorities or the courts." In addition, TEI noted that an auditor should be permitted to address, in response to a client's request, whether the firm believes the transaction is a listed transaction (or substantially similar to a listed transaction), a confidential transaction, or an aggressive tax position.

Referring to the proposed rule that a registered public accounting firm is not independent of its audit client if the firm or any affiliate of the firm provides tax services to an officer in a "financial reporting oversight role," TEI recommended that the PCAOB consider clarifying which officers are subject to the rules, perhaps by cross reference to the SEC's definition of an officer for purposes of the insider trading rules under section 16 of the Securities Exchange Act. "At a minimum," TEI added, "the rules should clarify specifically that employees who serve in an overseas assignment working for a subsidiary of the registrant-issuer are not covered unless they serve in a 'financial reporting oversight role' for the registrant-issuer."

The proposed rules also provide that, in connection with seeking audit committee pre-approval to perform tax services for an audit client, a registered firm is required to provide the audit committee with a copy of the engagement letter, any amendment to the engagement letter, or any other agreement between the firm and the audit client disclosing the scope of the services and fee structure, including any fee-sharing arrangement. The Institute characterized this rule "far broader than necessary," noting that it imposes undue burdens on clients and audit committees as well as audit firms.

"The proposed rule would effectively eliminate the flexibility that the SEC's rules afford to audit committees to decide which tax services engagements are material and warrant detailed review, which can be addressed summarily, and which can be given a blanket annual pre-approval subject to client personnel adhering to the policy guidelines adopted by the audit committee or the full board of directors in connection with the approval of the tax services," the organization said. It recommended that the PCAOB consider permitting accounting firms to submit a description of the key terms of their agreements along with a detailed summary of the services to be provided in respect of each material engagement.

The Institute's letter is reprinted here, beginning on page 185.

Flat Rate Supplemental Wage Withholding

TEI also submitted comments to the IRS on proposed regulations amending the optional flat rate income tax withholding rules applicable to supplemental wages paid by an employer to employees. The proposed regulations also address the mandatory maximum flat rate income tax withholding requirement set forth in the AJCA for supplemental wages in excess of $1 million dollars.

In its comments, TEI stated that although the proposed regulations provide a generally workable framework for complying with the amended provisions, employers require additional time to design, develop, test, and implement integrated payroll systems that will satisfy the new rules. Before the enactment of the AJCA, the Institute explained, employers were not required to (i) track all "supplemental" wages, and, more important, (ii) test the cumulative "supplemental" wages paid year-to-date on a continuing basis against a fixed-dollar threshold for purposes of applying the withholding tax rules.

For these reasons, TEI recommended that the effective date of the regulations be deferred until the later of January 1, 2006, or six months following release of final regulations. The organization also recommended adoption of rules of administrative convenience. Finally, TEI suggested that the IRS announce interim relief permitting employers (and other payers) to use a reasonable, good faith effort to comply with their withholding obligations. "Such relief should include a waiver of reporting and withholding penalties (and interest) as well as a waiver of the employer's (or third-party payer's) potential withholding tax liability," TEI said.

The Institute's comments on the proposed regulations are reprinted here, beginning on page 196.

GST on Insurance Claims

On March 29, following up on discussions during the Institute's December 7, 2004, liaison meeting with Canada Revenue Agency, TEI provided comments on the draft Revised GST Memorandum 17.16--GST/HST Treatment of Insurance Claims. In a letter from TEI President Judy Zelisko to Dawn Weisberg of CRA's Excise and GST/HST Rulings Directorate, the organization provided recommendations concerning vehicle repairs for a leased vehicle covered by an insurance policy and those repairs for a leased vehicle if the lessor is not the recipient of the service.

The Institute's letter is reprinted in this issue, beginning on page 194.


* Minutes for TEI-LMSB Liaison Meeting, page 175

* TEI-Treasury Department and IRS Joint Meeting, page 180

* PCAOB's Proposed Ethics and Independence Rules Concerning Independence, Tax Services, and Contingent Fees, page 185

* Comments on Mandatory Efiling Initiative, page 190

* Revised GST Memorandum 17.16--GST/HST Treatment of Insurance Claims, page 194

* Proposed Regulations Relating to Flat Rate Supplemental Wage Withholding, page 196
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Title Annotation:Tax Executives Institute, generation-skipping transfer tax
Publication:Tax Executive
Date:Mar 1, 2005
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