Tax Executives Institute - U.S. Department of Treasury Office of Tax Policy liaison meeting: February 8, 2006

Tax Executive, The, March-April, 2006

On February 8, 2006, Tax Executives Institute held its annual liaison meeting with the Treasury Department's Office of Tax Policy. The agenda for the meeting is reprinted below. Minutes of the meeting will be published in a future issue of The Tax Executive.

I. Introduction

II. Pending Legislation

A. Administration's Fiscal 2007 Budget Proposals

The Administration's fiscal 2007 budget proposals are scheduled to be released two days prior to the meeting. We invite a discussion of the business tax provisions that are included in the proposals as well as the likelihood of proposals to reduce the corporate tax rate.

B. Codification of Economic Substance (S. 2020)/Tax Shelters

In connection with the federal government's 2006 budget and tax reconciliation process, the Senate has approved the Tax Relief Act of 2005 (S. 2020), which includes a proposal to codify the economic substance doctrine. There is no counterpart provision in the House-passed tax reconciliation bill. TEI recently submitted a letter to the congressional tax-writing committees urging them (again) to reject the proposal to codify the economic substance doctrine.

In TEI's view, consistent enforcement is the key to stopping abusive transactions and enforcement depends upon having information about transactions of interest. With all the refinement of the disclosure regulations under section 6011 and the penalty provisions (including the new understatement and disclosure penalties under sections 6662A and 6707A, respectively), the revision of Circular 230, and the development and implementation of Schedule M-3, much has been done to enhance disclosures and curb abuses. Indeed, there is evidence that the enforcement efforts have substantially curtailed the marketing of such transactions and raised the tax planning bar to implementing transactions.

Codifying the economic substance doctrine is, in TEI's view, unnecessary and counterproductive. It would further complicate the system, confuse taxpayers and revenue agents, raise significant issues of statutory construction, impede the courts' ability to rely on existing precedent, interfere with legitimate commercial transactions, and potentially frustrate IRS efforts to combat abusive transactions.

In the past, the Treasury has opposed codification of the flexible, judicially created economic substance doctrine. We invite a discussion of whether the Treasury continues to oppose the latest legislative proposal. We also invite a discussion of whether the Treasury believes that the current tools designed to curb tax shelters are working or should be given additional time to work before additional legislative changes are enacted. Finally, we invite a discussion of whether other regulatory initiatives are under consideration to enhance disclosures, curb tax shelter activities, or promote settlement of outstanding disputes. For example, is the IRS or Treasury considering additional tax return disclosures or other general reconciliation schedules in addition to the Schedule M-3 for corporations (1120-C, -S, -PC, or -L) or partnerships (1065)?

C. Extension of the Research and Experimentation Credit

Several temporary provisions of the Internal Revenue Code have been extended (or re-enacted retroactively following expiration) with regularity. Most notable among those provisions is the research and experimentation credit, which again expired as of December 31, 2005. The credit provides an important incentive for the conduct of research activities in the United States. TEI has long contended that this provision cannot serve its legislative purpose if taxpayers are unable to know whether it will remain in effect from year to year because taxpayers need stability in their budget process for the incentive to be fully realized. Moreover, gaps in the periods covered by the credit not only impair the provision's incentive effect but also spawn administrative burdens on taxpayers. During the meeting we invite a discussion of the Treasury's view on (1) the prospects for temporarily extending the credit with retroactive effect and (2) making the credit a permanent part of the current Code.

III. Tax Reform

On November 1, 2005, the President's Advisory Panel on Tax Reform presented its recommendations to Treasury Secretary John Snow, who called the panel's report a "starting point." As we understand it, those options are now being analyzed by Treasury with a view toward making recommendations to the White House, which, in turn, will make its recommendations to Congress.

Based on news reports, there is currently no timeline for action. With Congress focused on 2006 (and likely 2007) budget and tax reconciliation bills, incremental fixes and patches to the Internal Revenue Code, as well as ongoing debate over the permanency or extension of various tax provisions, the current year seems the time to "set the stage" with further deliberation and study of tax reform and with congressional action deferred until 2007.

TEI believes that there are four overarching principles that should guide the tax reform process. The first is simplicity and administrability of the system. The current Internal Revenue Code is much maligned for its complexity and lack of administrability. To be sure, the tax system that ultimately emerges from tax reform may not be simple, but it can be simpler than the current system. The second principle is competitiveness. In a global economy, the U.S. tax system should promote rather than hinder the competitiveness of U.S. businesses. Many industrialized and emerging nations have recently lowered their corporate tax rates without significantly expanding their tax bases. The Treasury should consider the overall competitiveness of the U.S. tax system as well as the extent to which the system discourages or promotes incremental U.S. business investment. Third, there needs to be a balance in the tax burden among sectors of the economy and, especially, between the individual and business components. Any proposal that robs Peter to pay Paul will always have the support of Paul, but that proposal may not be the right mix of reform options that will promote the growth of the economy and competitiveness of U.S. businesses. Finally, because of the linkage between the federal and state tax bases, the ripple effect of tax reform on the states must be kept in the forefront of considerations.