Tax Executives Institute - U.S. Department of Treasury Office of Tax Policy and Internal Revenue Service Office of Chief Counsel joint liaison meeting: March 11, 2005

Tax Executive, The, March-April, 2005

On March 11, 2005, Tax Executives Institute met with representatives of the Office of Tax Policy of the U.S. Department of Treasury and the Internal Revenue Service Office of the Chief Counsel. The agenda for the meeting was published in the January-February 2005 issue of The Tax Executive. Note: These minutes were prepared by Tax Executives Institute, and have not been approved by the Treasury Department or the IRS Office of Chief Counsel.

I. Introductory Comments

On behalf of the U.S. Treasury Department's Office of Tax Policy, Acting Deputy Assistant Secretary for Tax Policy Eric Solomon welcomed TEI President Judith P. Zelisko and the other members of the delegation from Tax Executives Institute to the liaison meeting. On behalf of the Internal Revenue Service's Office of Chief Counsel, Nicholas J. DeNovio, Special Assistant to the Chief Counsel, also welcomed the TEI delegation. Mr. Solomon expressed regret that the previously scheduled meeting was postponed because of the congressional hearings on President Bush's fiscal 2006 budget proposals. He said that he was pleased to join the teleconference. Ms. Zelisko thanked the government representatives for taking time to meet with the Institute.

II. 2004 Act Guidance

a. Commendation. Ms. Zelisko expressed the Institute's appreciation and commendation for the prompt release of comprehensive guidance on the many provisions in the American Jobs Creation Act of 2004 (AJCA). She also expressed appreciation to the Treasury and IRS for drawing TEI into the process. Messrs. Solomon and DeNovio thanked TEI for its input provided following enactment of the legislation, saying that the ongoing dialogue initiated with TEI in November is helping to shape the government's guidance priorities.

b. Section 965 Repatriation and Notice 2005-10.

1. Section 5.02. Mr. Traubenberg referred to Notice 2005-10, which provides guidance on section 965 relating to incentives to reinvest foreign earnings in the United States. Under section 5.02 of the Notice, he said, all expenditures for worker compensation and benefits, other than expenditures for executive compensation, for new and existing employees seemingly qualify as permitted worker hiring and training reinvestments. He inquired whether the Notice was intended as broadly applicable to all non-executive compensation and benefits for existing U.S. employees.

Mr. Hicks said that the provision was written as broadly as possible and acknowledged that a number of practitioners have questioned whether the IRS "really meant" the provision should cover compensation and benefits for existing employees. Mr. DeNovio explained that, although the IRS is reluctant to say that all compensation and benefits for all non-executive U.S. employees always qualifies under section 5.02, the IRS and Treasury's view is that Congress intended to broadly promote the retention and creation of jobs in the United States. Hence, section 5.02 permits expenditures for compensation and benefits for existing workers to be considered qualified reinvestments as worker hiring and training expenses. Mr. Traubenberg commended the government for promulgating the rule and observed that, since Form 1120 requires an allocation between executive compensation and other employee compensation and benefits, companies with an existing workforce would be able to easily estimate how much of their repatriation will qualify as worker hiring and training expenditures.

2. Section 5.05. Mr. Traubenberg next referred to section 5.05(b) of the Notice and the example in the written agenda. He inquired whether a repatriation of funds by a controlled foreign corporation (CFC) to the U.S. parent followed by a contribution of the funds to a second CFC would be a qualified reinvestment where the U.S. parent is required to cure the second CFC's underfunded pension obligation.

Mr. Hicks said that equity contributions to CFCs are not a permissible use of repatriated funds. He added that there is no special "pension rule" in the statute or Notice. Ms. Evans noted that a payment may be able to be structured as a permitted reinvestment if the CFC's plan is qualified under section 401(a) of the Code. Ms. Brown observed that few CFC pension plans qualify under section 401(a). Mr. Traubenberg said that, for discussion purposes, the plan should be assumed to be a nonqualified plan. Mr. DeNovio explained that the IRS believes that the funding of pensions for non-executive U.S. workers is clearly a desirable policy goal and hence a qualified reinvestment. Consequently, references to pension funding as a permitted form of reinvestment are included in the worker hiring and training provision as well as the financial stabilization provision. But as Mr. Hicks noted, he said, there is no special rule that permits funding of pensions outside the United States. Ms. Zelisko noted that, under the assumed facts, the U.S. parent would be obliged to cure the funding deficiency and that, absent the dividend from a sister CFC, the U.S. parent might be financially impaired upon making a payment to cure the CFC's underfunded plan. She queried whether the financial stabilization provision should be expanded to address this situation. Mr. Hicks noted that it would be difficult to draw a line between funding a CFC's pension obligation and making equity contributions to repay other CFC debts. The latter is clearly not a permitted use of repatriated funds, he said. Mr. DeNovio reiterated that section 5.05(b) is not intended to cover contributions to CFCs, even if for a CFC's underfunded pension plan.