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Tax Executives Institute-Internal Revenue Service Liaison Meeting Minutes.

February 23, 2000

On February 23, 2000, a delegation from Tax Executives Institute met with Commissioner of Internal Revenue Charles O. Rossotti and other representatives of the Internal Revenue Service.

On behalf of the Internal Revenue Service, Commissioner Charles O. Rossotti welcomed TEI President Charles W. Shewbridge, III, and the other members of the delegation from Tax Executives Institute to the liaison meeting. The IRS's and TEI's delegations to the liaison meeting are set forth below.

Opening Comments

On behalf of the Institute, Mr. Shewbridge thanked the Commissioner and other IRS officials for meeting with the Institute. He expressed the view that the liaison meetings are mutually beneficial since they afford the IRS and TEI an opportunity to work together to make the tax system more administrable. He pledged the Institute's continuing support for the IRS's modernization effort, including the budget the IRS needs to recruit and retain a well-trained and qualified workforce. He also thanked the Office of Public Liaison for its assistance in preparing for the meeting.

Commissioner Rossotti expressed his appreciation for the various forms of support that TEI has demonstrated for the IRS during the past year, including the Institute's support for the IRS's fiscal 2000 budget request, the active participation of TEI members in various IRS projects and initiatives relating the reorganization, and cosponsoring the Modernization Conference in January. He said that the meeting agenda reflected many of the issues and processes that the IRS wants to address, including prefiling agreements and the sensitive but important issue of tax shelters. He referred to TEI's mission statement supporting a tax system based on voluntary compliance. He said that the IRS is developing various methods to address corporate tax shelters and other compliance issues without impeding legitimate tax planning or unduly burdening compliant taxpayers. The IRS, he said, must continue to meet its traditional enforcement function and the new division structure aligned by customer types will permit the IRS to focus its efforts more efficiently. He added that this liaison meeting likely marks an important milestone in the reorganization effort since much of the meeting will be handled by Larry R. Langdon and Debbie Nolan in their new roles as Commissioner and Deputy Commissioner, respectively, of the Large and Mid-Size Business (LMSB) Division.

Mr. Wenzel noted that LMSB division is coming together very quickly with the management team of 30 executives now set. The Modernization Conference, he said, was the "end of the beginning" of the reorganization with Phase II.B. design phase completed and the Phase III implementation process well underway. He said that the IRS will attain its goal of having all four business divisions "stand up" as functional operating units by October 1. He added that the support service functions, such as information services and human resources, are also moving forward. The Appeals Division, he said, has installed its management team and the Taxpayer Advocate Service is operating on a national scale. He said that rank-and-file IRS employees are eager to participate, with many expressing enthusiasm for implementing the restructured organization as quickly as possible.

Mr. Langdon concurred with the opening remarks of the Commissioner and Mr. Wenzel, noting that TEI has been an integral participant in the reorganization process. He thanked the group for the input TEI provided to the IRS design teams and citing its work with the Customer Satisfaction Task Force on Specialists as especially important. Mr. Langdon said that, while much work remains to fully implement the reorganization, IRS personnel are "catching the fever" to effect the vision of the restructured agency.

IRS Modernization

A. Transition Issues and Liaison Activities. Mr. Langdon reported that the LMSB Division is on track to "stand up" as a separate operating division on June 4. The national office management team of 30 executives has been established, he added, and the group is recruiting the next layer of territory managers, senior technical advisers, and other personnel. He reported that Ms. Nolan and he have scheduled a series of meetings across the country in April and May to brief IRS employees on the structure, operation, and management of the new division. IRS employees, he explained, are eager to understand their roles in the restructured organization, who their bosses will be, and the effect of both on their careers. The LMSB management team, he said, faces a major challenge to ensure that its employees are in sync with the goals of the restructured organization and the tax system generally.

TEI, Mr. Langdon continued, can play a major role in facilitating the education of taxpayers about the modernization by assisting the IRS in conducting a series of town-hall meetings in various cities across the country. The purpose of the meetings is to provide TEI members and local practitioners with a fuller understanding of the structure, management, processes, and personnel in the restructured IRS. He explained that the LMSB management team is creating an entirely new environment that will support decision making at both the lowest level of the IRS and at the earliest time possible. To ensure consistent treatment of taxpayers, he said, the IRS is establishing a management structure to facilitate the early identification of significant policy issues that should be analyzed and decided at the national level. The issues will be pushed back to the field for resolution of cases. The streamlined structure should expedite the process substantially. Mr. Langdon next expressed his appreciation to TEI for accommodating his request to involve the LMSB industry directors in TEI's upcoming Midyear Conference. Mr. Langdon said that LMSB and TEI are partners in making the system work and expressed a desire to maintain an open and continuing dialogue on both a formal and informal basis. In that regard, he noted that Bob Brazzil, Industry Director for Retailers, Food & Pharmaceuticals, has been working with Mr. Murphy and members of the Institute in planning the town-hall meetings.

Mr. Murphy confirmed TEI's willingness to assist the IRS in setting up external town-hall meetings, noting that several members have already stepped forward to work with Mr. Brazzil on the scheduled meetings. He added that, following Mr. Langdon's luncheon address at TEI's Midyear Conference, TEI staff and members of the IRS Administrative Affairs Committee will escort the IRS Industry Directors to the 22 TEI industry sessions and introduce the directors to TEI members. He added that, with the IRS's new industry orientation, the Institute's leadership has been discussing various options to facilitate both informal and formal liaison activities at the national, regional, and local chapter levels.

B. Appeals. Mr. Black provided a brief overview of the reorganization of the Appeals Division. He said that the IRS is anticipating that few appeals will arise in the Tax Exempt/ Government Entities Division. Hence, he said, Appeals for that group will be combined with the Small Business/Self-Employed Division so there will be three, rather than four, Appeals divisions. He reported that the Appeals Division has selected its three top executives, including the Deputy National Chief, Linda Garrard; Deputy Chief for Small Business/Self Employed and Tax Exempt/ Government Entities, John Piper; and the Deputy Chief for LMSB, Earl Blanche, Jr. Mr. Black said the Appeals Division anticipates standing up in July of this year.

Mr. Black reported that he and other Appeals representatives met during the previous week with members of TEI's IRS Administrative Affairs Committee in Orlando, and the two groups discussed a number of issues, including Appeals staffing, mediation and arbitration, and ex parte communications. He expressed his appreciation for TEI's comments and feedback and said that Appeals is committed to settling cases and issues on a timely basis. In view of the Institute's comments, he said, the division will review its projected workload and staffing needs.

Mr. Black next noted that the Appeals Division received input from TEI, the Big 5 accounting firms, state accounting societies, and other taxpayer and practitioner groups concerning Notice 99-50, which sets forth a proposed revenue procedure governing ex parte communications between Appeals and other IRS personnel. He said that many groups had recommended that the IRS discard its first effort and start over. TEI's comments, he said, were more focused and thoughtful, providing constructive recommendations about the proper interaction among Appeals, Counsel, industry specialists, examining agents, and taxpayers. As an example of a constructive suggestion, he cited TEI's recommendation to invite the taxpayer to any post-settlement conference to address the treatment of recurring and rollover issues. He said TEI's proposal is consistent with other IRS initiatives to expedite case and issue resolution and would be considered along with other recommendations. The IRS's objective, he said, is to issue a revenue procedure that will be consistent with congressional intent that the Appeals Division maintain its independence and, as important, maintain the appearance of independence.

In response to a TEI request, Mr. Black reported that there had been 49 requests to use mediation in Appeals and that the IRS had employed 21 different arbitrators. Approximately $2.7 billion in proposed adjustments, he said, have been settled using mediation. He noted that Appeals has established a pilot project to determine how best to use binding arbitration procedures to resolve factual issues. He said that procedure governing arbitration procedures was announced in December and that a hearing will be held on April 5.

Mr. Rossi referred to a December 1999 announcement that the IRS reorganization might result in a significant reduction in Appeals Division staff. He said that the announcement engendered animated discussions at the IRS Modernization Conference. Mr. Rossi asked whether the Appeals Division will have the resources necessary to timely resolve issues and cases, especially the large cases that are currently either Coordinated Examination Program (CEP) or district-controlled cases.

Mr. Black acknowledged receiving similar questions from TEI members at the liaison meeting the previous week. He said that the Appeals Division monitors its workload on a continuing basis and shifts personnel to address that workload. Nationally, the lapse time for resolving large case appeals has been reduced by 90 days, adding that his goal is to reduce the period further. He said that the TEI liaison group requested that Appeals establish a goal of resolving cases within 12 to 15 months of submission to Appeals. Mr. Wenzel explained that, at the time of the IRS Modernization Conference, the IRS had not yet settled on the number of Appeals officers required under the reorganized agency. The numbers that were announced reflected only preliminary estimates. The IRS, he said, is continuing to evaluate the proper level of staffing for Appeals but no final decisions have been made. Mr. Wenzel said that in projecting the Appeals staffing requirements, the IRS is anticipating fewer appeals will be taken because of the IRS's commitment to achieve greater currency of examinations and quicker resolution of cases. He said that the process improvements envisioned in the restructuring will enable the IRS to reach those goals.

Mr. Shewbridge noted that reducing cycle time and increasing currency of examinations is a high priority for TEI. Businesses are stepping up the pace of their activities and decision making and are moving at Internet speed. It will be increasingly difficult, he said, for businesses to retrieve records even five years back, let alone the eight to nine years that most large-case taxpayers currently have open for examination. The Commissioner concurred, stating that the IRS wishes to get out of the "archaeology" business. He said that improving currency of examinations involves a number of issues and interdependent processes. Hence, he said, increasing Appeals staff alone will not eliminate the bottlenecks that delay case resolution. Mr. Shewbridge suggested that it may be necessary for the IRS to hire additional staff in order to implement its many new initiatives as well as clear up the backlog of cases in examination and Appeals. When the backlog is resolved, he said, the staff could be redeployed. Mr. Langdon said that many Appeals Division personnel have a background and experience in the Examination Division. Moreover, Appeals personnel are well trained in settling cases and those skills will be critical in resolving disputes and achieving currency regardless of whether they are employed in the post-filing Appeals process or in achieving pre-filing agreements with taxpayers. Hence, he said, his division will be drawing on Appeals personnel to assist in achieving currency in examinations.

The Commissioner explained that the purpose of the IRS reorganization is to focus on the entire tax process from the guidance the IRS provides for voluntary compliance, to the filing of the return, and to any necessary post-filing enforcement activities, including examination, appeals, or litigation. The structure being put in place, he said, will enable the IRS to get a better handle on the strategic planning process so that its resources are deployed where and as needed. The IRS's top priority, he said, is to make the entire process more current and each division has a role to play in achieving that goal. Hence, the IRS cannot focus on just one piece -- whether LMSB, Appeals, or Counsel. The whole organization and its processes must move forward as one. Moreover, the IRS needs cooperation from taxpayers because audits and appeals are a joint process. The Commissioner said that he is very encouraged by the successful case study model processes that are being developed and implemented. He concluded by noting that there will likely always be disputes between taxpayers and the IRS, but those disputes can be isolated and addressed and the rest of the system can move forward. Mr. Shewbridge acknowledged that there are a number of novel and promising initiatives underway that should help improve currency.

Mr. McDonough expressed his appreciation to Mr. Black for meeting with the TEI IRS Administrative Affairs Committee members during the previous week. He said that he was pleased with the candor that marked the session. He confirmed TEI's concerns about Notice 99-50 on ex parte, and commended the IRS for considering whether to establish a system for monitoring communications between Appeals officers and other personnel. Mr. McDonough added that taxpayers and Appeals likely measure the lapse time to resolve cases with different start and stop dates. Hence, TEI members likely view the lapse times as longer than reflected in the IRS's statistics. Mr. Black said that Appeals officers and taxpayers must work together to apply project and time management tools to develop mutual objectives about issue priorities, work plans, and decision time frames. The objective, he said, is to accelerate issue and case resolution.

C. Pre-Filing Agreements. Mr. Langdon referred to Notice 2000-12 describing a pilot program to establish pre-filing agreements between taxpayers and the IRS. He said that the Notice was issued relatively quickly because of the strong cooperation of the Modernization Team and the Chief Counsel. He added that LMSB, Counsel, and Appeals each have a part to play in dispute resolution and that the teamwork demonstrated in the development of the Notice is a model that the IRS can follow in the future. He said that the IRS likely surprised the corporate community with the speed and alacrity with which the Notice was issued.

John Petrella, the Program Manager of the Pre-Filing Agreement (PFA) pilot project, provided an overview of Notice 2000-12. He acknowledged that business is moving at Internet speed and the IRS is dealing in history. PFAs, he said, are a means of addressing issues as early as possible -- before the return is even filed. The later that an issue is addressed, he said, the higher the stakes, the more entrenched the taxpayer and the government become, and the more contentious the dispute will be. He explained that the PFA process will be driven, and decisions made, by the field -- case managers, agents, and the taxpayer. He reported that a number of taxpayers volunteered to participate even while the project was under development. He said that all parts of the IRS -- Counsel, Industry Directors, and the field -- are committed to reaching agreements expeditiously and that all the available procedural tools and time and project management techniques will be brought to bear. Mr. Petrella noted that, as part of its overall issue management strategy, the IRS wishes to use the PFA process to establish broad-based "industry agreements" to achieve greater consistency and quicker resolution of industry-wide issues. He said that the IRS will likely select between five and ten taxpayers from different industries as participants in the pilot project. He described the criteria the IRS will employ to select the cases to be included. Once the IRS gains both experience and confidence in its procedures and decision-making process, he said, the program will likely be opened to all taxpayers and more issues. He concluded by observing that if the pilot project is successfully implemented, the IRS will be able to "get ahead of the curve" and achieve its currency objective.

Mr. Young noted that certain issues, including international issues, were excluded from the pilot project. He inquired whether by excluding either issues or taxpayers the IRS will obtain realistic experience and feedback to assess whether the program will work as conceived. In other words, he said, the IRS should consider expanding the pilot to test it under "real world" constraints. Mr. Langdon said that IRS field agents and case managers need time and experience to learn how to resolve issues rather than simply propose adjustments. The issues and cases selected for the pilot project will afford the field that opportunity. He pointed out that the Code and IRS procedures also delineate clear lines of authority between Counsel, Appeals, and the field in respect of resolving issues. The pilot program, he said, is careful to observe those distinctions, but its genius is to create an issue resolution process that can be applied across all IRS divisions and functions. The field's expertise, he noted, is resolving factual issues. If the pilot works, the process can and will be expanded quickly to include many more issues and taxpayers. Mr. Murphy noted that initially he had reservations similar to Mr. Young's, but said upon reflection he concluded a limited pilot project makes sense. The key, he said, will be to select cases that can be resolved successfully and to build momentum for resolving issues before the return is filed. The Commissioner said that, like businesses, the IRS has no shortage of good ideas. Poor implementation or execution of those ideas, however, often dooms those ideas to failure. Consequently, the IRS needs to maintain a controlled environment initially in order to learn how to make the program successful. The IRS has established goals against which to evaluate the project and once the IRS has experience, he concluded, the project will be expanded to as many issues and taxpayers as possible.

Mr. Ashby noted both taxpayers and the IRS have limited resources available for examinations and said that one way to improve the speed and currency of examinations is to apply a resolution achieved in one year to subsequent open years. Another approach, he said, is for the IRS to modify its audit practices by expanding the scope of its materiality judgments and narrowing the focus of its information requests. Too often, he said, information requests are overbroad and result in the production of reams of unnecessary information. The Commissioner noted that the examination process can be accelerated, but cautioned that the IRS can err by being either over or insufficiently rigorous. He said that the IRS has two- to three-year time frame for implementing its reorganization plan. He acknowledged that there is tremendous enthusiasm both inside and outside the government for the IRS to implement the initiatives as quickly as possible, but a deliberate approach is necessary in order to keep the IRS "out of the ditch." Mr. Brown acknowledged that the Notice announcing the pre-filing agreement pilot program was issued quickly because all parts of the IRS, including the design teams, recognized its potential and worked together to develop it. That collaboration accelerated the guidance process, reducing the time between the idea's proposal to the announcement by several months.

D. Balanced Measures. Ms. Nolan said that balanced performance measures will be an important tool enabling the IRS to ensure that national goals are implemented. In the past, the measures emphasized enforcement and revenue collection. The new measures will include criteria to assess both the time spent on projects or cases and the quality of service. For example, she said, to encourage the use of expedited dispute resolution procedures, the time and quality of service measures will likely provide an incentive to the team to roll back an issue resolution achieved in a pre-filing agreement to the years under examination. Since pre-filing agreements will be administered by the same field personnel responsible for examining open years, there will likely be improvements in customer and employee satisfaction as well as currency of examinations. She noted that the LMSB operational measures are continuing to evolve to ensure that the division's diagnostic measures align with the strategic goals for the division and the IRS as a whole. She noted that the IRS has not yet developed a measure for customer satisfaction, but that customer feedback will be an important criterion.

Mr. Smith said that he and Richard Teed of LMSB met with TEI members in November to discuss their ideas about measures of field performance. While substantial progress has been made on the operational measures, he said, they are incomplete. Moreover, the division's strategic measures are still under development. Mr. Smith explained that the IRS is considering best practices for management personnel that will produce balanced measurements of (i) customer satisfaction, based on surveys and currency of examination (ii) business results, including measures of quantity, quality, and customer outreach; and (iii) employee satisfaction, focusing on the support (such as training) given the employee. Mr. Smith noted that the LMSB group consists of approximately 1,600 cases in the Coordinated Examination Program and approximately 208,000 non-CEP cases. Hence, the measures must address both IRS team and nonteam audit approaches. He acknowledged that some of TEI's concerns about quantity and quality measures may not have yet been fully addressed. Moreover, because of civil service restrictions, there are limitations on the manner in which the operational measures can be applied in evaluating individual performance. He closed by noting that TEI provided valuable input on the quantity and quality goals for the division.

Mr. Murphy said that previous discussions on balanced measures have focused on how to evaluate operating management. He noted that the key to ensuring that the employees embrace the goals of the new organization will be to implement individual employee performance evaluations that measure how well employees achieve personal, division, and organizational goals.

The Commissioner referred to the congressional scrutiny of IRS performance standards for its personnel. He explained that the IRS is precluded by law from adopting quantitative measures of individual or group performance based on tax dollars. He said that the IRS is attempting to develop measures that address all three levels of the organization: first, the business unit where quantitative measures, such as the number of settlements or pre-filing agreements reached, is appropriate; second, the operating management level, which has been the primary focus of the discussion; third, the individual employee level. He noted that it is difficult to establish strategic measures for the LMSB Division until it is fully functional. At the operating management level, the IRS has changed some of the measures to better align with the business division structure. The goals at the individual level will be different since the IRS cannot employ quantitative measures at the individual employee level. IRS Human Resources personnel are working with representatives of the National Treasury Employees Union to develop the critical elements for individual employee evaluations.

E. Effective Involvement of Specialists. Mr. Boocock said that TEI supports the Commissioner's goal of aligning the IRS employee and manager's measures with the goals of the organization. In the past TEI members expressed frustration with the IRS specialists because of a sense that the specialists were not part of the IRS team and, hence, beyond the control of the case manager. That feedback, he said, was provided to the IRS by TEI members who participated in the IRS Customer Satisfaction Task Force on Specialists. TEI members, he said, were pleased to see many of their recommendations incorporated in the Task Force's final report. He noted, for example, that the critical elements for engineers were changed. The Commissioner concurred, saying that the IRS is looking at the critical job elements for all employees as the starting point for aligning the IRS's measures with the organizational goals.

Ms. Nolan commended Messrs. Boocock and McCormally for their participation in the specialists task force. She noted that some of the recommendations were given to current IRS management for immediate implementation. Other recommendations, she explained, were given to Keith Jones, who will be the Director of Field Specialists in LMSB. All specialists will report to him thereby providing centralized focus and management for the group. Mr. Jones, she noted, will be rolling out a number of initiatives to create a uniform national program to manage field specialists. For example, one tool that all specialists will employ is Timeline project management software. Ms. Nolan emphasized that case managers will still be responsible for managing the case and making the decisions that directly affect the taxpayer.

Mr. Boocock inquired whether maintaining the specialists as a separate functional group reporting directly to a national director will perpetuate a perception that the specialists are not team members and, hence, beyond the control of the case manager. Ms. Nolan acknowledged the concerns, but noted that the international examiners -- are the largest single group of specialists -- will be integrated directly into the examination teams within the five industry groups. In order to better manage IRS resources, the international examiners will receive program direction from the Deputy Director of International for the LMSB. The IRS, she said, will be using matrix management to ensure that the international examiners are part of the team even though the direct management reporting line is to a non-team member. Mr. Langdon added that the goal of centralized management of specialists is to ensure that issues are managed and resolved consistently on a national basis. Consistent goal-setting and performance evaluations will permit that goal to be attained.

Policy Initiatives

A. Corporate Tax Shelters. Mr. Langdon expressed high regard for his former colleagues and members of TEI, saying that most are highly ethical and strive to follow both the letter and spirit of the law. Nonetheless, he said, there are "abusive products out there" that some large and middle-market corporations as well as individual taxpayers are purchasing. These developments, he said, cause a number of concerns for the IRS. As a result, he said, the IRS has established an Office of Tax Shelter Analysis (OTSA) in the LMSB Division. The office will focus the IRS's resources on these issues, centralize the coordination and management of IRS expertise in analyzing potential tax shelter transactions, and provide guidance to the field as quickly as possible. Because of the difficulty of defining a tax shelter, Mr. Langdon said, a cautious approach is warranted. As a result, Mr. Smith, a seasoned IRS manager, has been appointed interim head of the office.

Mr. Smith explained that the Phase II.B. design teams were initially focused on training, research, planning, coordination, and communication for the IRS. The OTSA concept was not part of the original conceptual design for the IRS. Hence, the first issue addressed was where to place the office within the new structure. The recommendation was to place the office in the technical guidance section of LMSB. That group will be staffed by technical advisers and issue specialists (rather than industry specialists), he said, and will also handle pre-filing agreements in LMSB. He explained that the group canvassed the field, asking them to identify potential or putative "tax shelter" issues. Mr. Smith briefly described the technical issues and said that, notwithstanding the scrutiny of a particular issue or transaction by OTSA, further analysis of the facts and circumstances of each taxpayer's transactions will be necessary. He said the office currently has 15 employees with expertise in financial products, COLI, international transactions, and leasing. The OTSA, he said, will provide training for the field to assist them in recognizing and developing the issues. He added that OTSA will be integrated with the group overseeing pre-filing agreements. By adopting that structure, he said, the IRS hopes to provide guidance to resolve as many issues as quickly as possible before taxpayers file their returns. While the recent IRS litigation victories in certain "tax shelter" cases are gratifying, he said, it would be better to resolve as many cases as possible Before filing rather than after the fact.

Mr. Cohen noted that most TEI member companies are subject to continuous examination as part of the IRS Coordinated Examination Program and, as a result, are less likely to play the "audit lottery" and engage in questionable transactions. He inquired whether the IRS has sufficient resources to identify and audit the individual taxpayers and middle and small market companies that are investing in tax shelters. Mr. Langdon replied that the IRS has the means to identify non-CEP taxpayers who are investing in such transactions. In Mr. Langdon's experience, the individuals and companies possessing the most highly developed networks in the tax community know what is going on. Most, including TEI members, are highly ethical. Nonetheless, he said, many people are willing to play the audit lottery, including too many CFOs and CEOs who perform a financial analysis of such transactions without an integrity analysis. He said that the IRS needs the help of tax professionals, including TEI members, to curtail abusive transactions.

Mr. Shewbridge said that TEI is on the record acknowledging that abusive products are being developed and sold. TEI, however, has no empirical data about the transactions being purchased. He said that the IRS likely has a number of tools at its disposal to increase disclosure of questionable transactions and to curb those that cross the line from legitimate tax planning to illegitimate tax evasion or avoidance. He commended the IRS for establishing the OTSA to curtail the abusive transactions, but added that one of TEI's principal concerns is that characterizing a transaction as a "tax shelter" transaction is a highly subjective determination. Hence, TEI supports an open discussion of the criteria through which OTSA will select transactions to be scrutinized as potential "tax shelters." Mr. Murphy said that TEI and the IRS should perhaps engage in a debate about whether the transactions identified by Mr. Smith are indeed tax shelters. The press, he said, will likely assume that any transaction subject to OTSA scrutiny is abusive even before the analysis of the merits of the transaction is completed and regardless of the taxpayer's legitimate business purposes for engaging in the transaction. Mr. Cohen expressed concern that the penalty provisions may also be imposed automatically.

Mr. Brown replied that the issue in every case is whether the taxpayer has correctly reported and paid its tax liabilities. Whether an issue or transaction is managed out of, or analyzed by, the OTSA is irrelevant. He added that one of the benefits of the OTSA is that the office might decide that a transaction is, indeed, not a tax shelter. He concluded that the IRS wishes to work with TEI to distinguish tax shelter abuses from legitimate transactions. The Commissioner acknowledged that the transactions currently labeled corporate tax shelters are complex and can fall into the gray areas of the Code. Whether a particular transaction is legitimate or abusive often turns on all the facts and circumstances of the taxpayer's case, and making case-by-case determination is a proper function for tax administrators. The purpose of the OTSA, he said, is to concentrate the IRS's resources in the areas where it has the greatest concerns for noncompliance; the purpose is not to make blanket judgments about particular transactions. Mr. Brown cited leasing as an example of transactions that can fall into a range of acceptability to the tax administrator: from perfectly legitimate, to perhaps questionable, to completely improper. The OTSA, he said, will provide the expertise necessary to analyze the issues and make the proper distinctions.

Mr. Brown said that TEI members are the key to making the tax system work. He inquired whether there was anything the IRS should do, especially in the way of providing guidance, to assist TEI members' in making their judgments and decisions about whether to participate in particular transactions. Mr. Shewbridge said that the complexity of the tax law provides the environment in which tax shelter transactions flourish. As a result, one step is to provide simpler, clearer rules. A second step, he said, is to provide more timely guidance. Mr. Murphy cautioned that TEI is a broad-based organization and that its members have diverse viewpoints about various transactions. Hence, it might be difficult for TEI to agree with the IRS about whether a transaction is a "tax shelter." He cautioned that the term itself is so pejorative that applying it to particular transactions can alter the perception of the transaction even before an objective analysis is completed. He said that the IRS needs to do more to determine the extent of the "tax shelter" problem. The Commissioner agreed, saying that was the purpose behind establishing the OTSA. Mr. Shewbridge cited an article in the New York Times attributing the decline in corporate tax receipts largely to abusive corporate tax shelter activity. Mr. Langdon agreed that there are several legitimate reasons for the decline in corporate tax receipts in an era of rising book profits, and he enjoined TEI to engage the press in order to counter any inaccurate information that was being disseminated.

Mr. Rossi inquired whether the IRS has empirical data to support the numbers used by the Treasury Department in its estimates of the revenue effect of the legislative proposals to curb tax shelters. He said that the revenue estimates in the fiscal 2001 budget proposals are substantially higher than the revenue estimates for similar proposals in the fiscal 2000 budget. Mr. Langdon said that the IRS's estimates of the revenue effect of tax shelter activity is not as accurate as he would prefer and that more analytical work is necessary. He acknowledged that the work performed by Mr. Smith's team to identify issues and taxpayer cases is the IRS's first stabs at producing empirical data.

Mr. Boocock noted that some of the transactions in technical areas cited by Mr. Smith involve developing areas of the law for which there is little guidance. He questioned whether the transactions should have been identified by field agents as tax shelters and queried whether, in sending the issues back to the field, the IRS is sending a signal that the issue is not shelter. Mr. Langdon said that the process provides the IRS with an opportunity to undertake an analysis and make a determination whether to manage and control cases centrally or in the field. Overall, the process should make the IRS more astute in resolving issues and cases.

B. IRS/Treasury Guidance Priority List. Mr. Brown reported that, in response to the IRS Notice requesting input from taxpayers and practitioners about the 2000 Guidance Priority List, the IRS has received more recommendations for issuing guidance than it can hope to complete. He explained that the IRS and Treasury Department have developed a more rigorous and formalized structure for putting issues on the list and, as a result, the guidance priority list will be more inclusive. He said that the Published Guidance Advisory Committee, composed of IRS and Treasury Department personnel, will meet the following week to organize the taxpayer and practitioner guidance recommendations by subject matter. He encouraged TEI to submit its guidance priority recommendations as soon as possible. He noted that the IRS successfully completed more guidance projects on the 1999 business plan than in prior years notwithstanding the resources devoted to the reorganization process. Mr. Shewbridge said that TEI would submit its comments very soon. Mr. Brown encouraged TEI to establish priorities among its recommendations and to provide a short explanation for its priorities. The IRS prefers that approach, he said, to a long list of issues with undifferentiated priorities.

C. Capitalization Issues. Mr. Shewbridge applauded the IRS for providing guidance in 1999 on a number of capitalization issues, including the treatment of ISO 9000 costs. He encouraged the IRS to continue issuing guidance on discrete capitalization issues. He next referred to a recent tax policy conference on capitalization issues sponsored by the Tax Council Policy Institute and suggested that the time may be ripe for IRS and Treasury to issue guidance resolving capitalization issues on a more global basis. Mr. Brown agreed that the conference afforded an opportunity for participants to discuss a wide range of viewpoints for resolving capitalization issues. He said that the IRS is studying ways to address capitalization issues on a global basis and the IRS is not averse to developing, for example, a formula approach. He noted that during the course of the conference there was much discussion of the need for global resolution of capitalization issues, but the discussion returned quickly to resolution of specific issues. At a minimum, he said, the IRS will continue to issue guidance on discrete issues. At the same time, the IRS will consider issuing broader-based guidance. Mr. Shewbridge acknowledged the challenge of issuing broad-based guidance but suggested that such an approach will ultimately conserve IRS and taxpayer resources by eliminating the number of discrete issues to be resolved.

D. Research Credit. Mr. Bernard referred to the proposed regulations relating to qualified research activities that the IRS issued in December 1998. He inquired about the status of those regulations and whether additional guidance might be issued in 2000. Mr. Brown indicated that regulations for the research credit are among the IRS's highest guidance priorities this year. Ms. Zelisko noted that the Conference Reports for the 1998 and 1999 tax acts state that the proposed regulations are too stringent in their approach. Notwithstanding Congress's disapproval of those proposed regulations, she said, many agents are applying the tests set forth there. She inquired whether, short of reissuing proposed regulations, interim guidance might be issued to the field agents directing them not to apply the proposed regulations. Mr. Langdon replied that proposed regulations are in process. Moreover, he said, the determination whether an activity qualifies for the research credit is the type of issue suitable for a pre-filing agreement. He added that a number of different industry groups are holding discussions with the IRS about possibly resolving research credit issues on an industry-wide basis. He noted that research activities in different industries are often very different but that within industries the activities and approaches of companies are very similar. As a result, the IRS is intrigued by the proposal and considering it carefully. Mr. Brown added that, if there are specific issues that can be addressed expeditiously before the regulations are issued, taxpayers should contact his office to set up a meeting.

E. Guidance Process. Mr. Rossi noted that novel issues often arise during the examination process and in some cases are referred by the agent to the national office for technical advice or field service advice. Where the issue is novel, the technical advice memorandum is frequently interpreted as applying across the board to all members within an industry. Moreover, there is a often a lag of two to three years between the first technical advice memorandum and a more comprehensive and authoritative revenue ruling or regulation. In the meantime, revenue agents will apply the "reasoning" of the ruling to other taxpayer's facts and circumstances. He inquired whether there is a mechanism for the IRS to send a signal to the field earlier in the process that a particular technical advice memorandum should not be applied industry wide. He noted that the reorganization along industry lines may facilitate the issuance of such guidance.

Mr. Brown said that the IRS delivers many forms of guidance to the public and acknowledged that the pieces of the guidance process system do not fit neatly together. Technical advice memorandums, of course, cannot be cited as precedent, but acknowledged that they influence the manner in which both taxpayers and agents approach the resolution of issues. He said that it would not be prudent for the IRS (or be especially appreciated by the affected taxpayers) to delay issuing guidance in particular cases in order to assess the need for, and to follow the more formal review procedures for, issuing a published revenue ruling. He said that integrating the technical advice process with the published guidance process is an issue the IRS should consider, but requires a more fundamental systemic change than is likely to occur this year.

Concluding Remarks

Mr. Shewbridge thanked the IRS for their participation in the meeting. He added that reorganization of the IRS along industry lines will cause TEI to re-examine all facets of its approach to liaison meetings with the IRS. On behalf of the IRS, the Commissioner and Mr. Brown thanked TEI for the discussion of the issues during the meeting.

IRS Delegation

Charles O. Rossotti, Commissioner Stuart L. Brown, Chief Counsel Daniel L. Black, National Chief of Appeals Larry R. Langdon, Commissioner-Large & Mid-Size Business Debbie Nolan, Deputy Commissioner-Large & Mid-Size Business W. Val Oveson, National Taxpayer Advocate John Petrella, Program Manager, Pre-filing Agreements Kathy Petronchak, Director, Corporate Examinations Thomas Smith, Director, Heavy Manufacturing Construction & Transportation Robert E. Wenzel, Deputy Commissioner Operations Lynda E. Willis, Deputy Chief for Management & Finance Suzanne M. Sottile, National Director, Office of Public Liaison Matthew S. Lyons, Office of Public Liaison

TEI Delegation

Charles W. Shewbridge, III (BellSouth Corporation), TEI President Betty M. Wilson, TEI Senior Vice President Robert L. Ashby (Nortel Networks Inc.), TEI Secretary J.A. (Drew) Glennie (Shell Canada Limited), TEI Treasurer David L. Bernard (Kimberly-Clark Corporation), TEI Executive Committee Stephen W. Boocock (Allegheny Technologies, Inc.), TEI Executive Committee Stuart D. Goldstein (Lockheed Martin Corporation), TEI Executive Committee Raymond G. Rossi (Intel Corporation), TEI Executive Committee Judith P. Zelisko (Brunswick Corporation), TEI Executive Committee Philip G. Cohen (Unilever United States Corporation), Chair, TEI Federal Tax Committee Robert J. McDonough, Jr. (Getronics NV), Chair, TEI IRS Administrative Affairs Committee Reginald G. Young, Jr. (Quaker Oats Corporation), Vice Chair, TEI International Tax Committee Michael J. Murphy, TEI Executive Director Timothy J. McCormally, TEI General Counsel and Director of Tax Affairs Mary L. Fahey, TEI Tax Counsel Jeffery P. Rasmussen, TEI Tax Counsel

Important CPE/CLE Information

Boards of Accountancy

Tax Executives Institute is registered with the National Association of State Boards of Accountancy (NASBA) (Sponsor No. 103086, Exp. 1/01/01).

TEI is also registered with the following boards of accountancy:

Illinois (#158-000651, Exp. 12/31/99)

Indiana (#CE92000119, Exp. 12/99)

New Jersey (#160, Exp. 12/31/99)

New York (000265, 9/1/99-8/31/02)

Ohio (P0087)

Pennsylvania (PX613L)

Texas (#3512)

Continuing Legal Education

The Institute is registered in the following states as a sponsor of continuing legal education programs:

California - Approved provider status from September 1, 1999 to August 31, 2002.

New York - Approved provider status based on approval from New York jurisdictions.

Kentucky

* 2000 50th Midyear Conference - 21 credit hours

* 1999 54th Annual Conference - 16.25 credit hours

Minnesota

* 2000 50th Midyear Conference - 23 credit hours

* 1999 54th Annual Conference - 23 credit hours

Ohio

* 2000 50th Midyear Conference - 21 credit hours

* 2000 Taking the Mystery out of IRS Audits and Appeals - 13.25 credit hours

* 1999 54th Annual Conference - 20 credit hours

* 1999 Transfer Pricing: Where Do We Go from Here? - 5.75 credit hours

* 1998 State & Local Tax Course - 24 credit hours

* 1998 Managing Your Company's Worldwide Effective Tax Rate - 9.25 credit hours

* 1998 A Practical Update on Consolidated Tax Return Issues - 11 credit hours

Oklahoma

* 1999 54th Annual Conference - 25 credit hours

* 1999 49th Midyear Conference - 25 credit hours

Pennsylvania

* 2000 50th Midyear Conference - 18.5 credit hours

* 1999 54th Annual Conference - 16 credit hours

Wisconsin

* 2000 50th Midyear Conference - 22 credit hours

* 1999 54th Annual Conference - 21.5 credit hours

Alabama

* 1999 49th Midyear Conference - 21 credit hours

* 1999 54th Annual Conference - 20 credit hours

* 1998 IRS Audits & Appeals: Strategies for Success - 13 credit hours

Note: TEI provides a continuing professional education form for each registrant at its conferences, courses, and seminars, which should be completed at the conclusion of the program and returned to the TEI Registration Desk for verification and signature. A copy of the form is retained and filed at TEI headquarters. Tax Executives Institute and TEI Education Fund accord to participants of any race, color, creed, sex, or national ethnic origin all the rights, privileges, programs, and activities generally accorded or made available to participants at their programs, courses, and other activities. TEI and TEI Education Fund programs are presented for the benefit of TEI members and others who work in corporate tax departments; private practitioners may not register for the programs.
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Publication:Tax Executive
Date:Mar 1, 2000
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Previous Article:Tax Executives Institute--U.S. Department of the Treasury Liaison Meeting Minutes.
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