Round and round and round the tax world goes …: successfully keeping beyond the circle of Circular 230 covered opinions, critiquing the CEO Declaration Requirement , revisiting California's Research Tax Credit, and enhancing customs border protection

Tax Executive, The, May-June, 2005

Spring is a time of renewal and a reminder of the cyclical nature of all things. It is not surprising, then, that Tax Executives Institute's spring was filled with challenges that TEI has addressed before--the rules governing practice before the IRS, the wisdom (or, rather, folly) of requiring the Chief Executive Officer's involvement in preparation of the tax return, and the research tax credit. But the Institute also branched out into a new area as well, providing its views on a Customs issue to the Department of Homeland Security.

Circular 230 Regulations

Early May saw TEI provide comments to the Treasury Department and the IRS on Circular 230, which sets rules for lawyers, accountants, and others who "practice before the IRS." The regulations, which were issued last December, amend Circular 230's tax shelter provisions effective June 20, 2005. In comments filed on May 5, TEI argued that, while aimed at the lawyers, accountants, and other advisers whose opinions undergird tax shelters, the new rules could have the unintended effect of burdening in-house tax professionals with significant mechanical requirements for routine communications. The Institute recommended that Circular 230 be revised to recognize the unique nature of in-house tax practice, recommendation that the IRS and Treasury effectively adopted.

In TEI's written comments, the Institute explained that the written advice rendered by a company's tax department would rarely, if ever, fall within the category of opinions targeted by the amended regulations: advice regarding tax shelters. The Institute contended that applying the new rules to in-house tax professionals could disrupt the day-to-day operations of tax departments, while doing little to achieve the purpose of the new rules. TEI therefore recommended creating a rebuttable presumption that internal tax advice rendered by in-house tax professionals is beyond the scope of Circular 230.

Following TEI's suggestion, Treasury and IRS issued guidance clarifying that written advice given by in-house tax executives to their employers is generally not subject to the rules set forth in Circular 230 for covered opinions. According to the May 19th clarification, advice provided to an employer by a practitioner in the practitioner's capacity as an employee of that employer solely for purposes of determining the tax liability of the employer is excluded from of the definition of covered opinion. Subsequently, representatives of the Treasury Department elaborated on the meaning of the term "employer," informally stating that the term should be broadly construed to encompass in-house tax professional who provide advice in the context of the employer-employee relationship even if the enterprise receiving the advice is technically not the in-house professional's W-2 employer. They mentioned consolidated, controlled, and affiliated (including foreign) members for illustration.

TEI's letter to Treasury and the IRS, as well as a follow-up submission on the scope of the term "employer," are reprinted in this issue, beginning on pages 288 and 292. Commenting on the government's May 19th guidance, TEI President Judy Zelisko commended the IRS and Treasury for their responsiveness to the Institute's concerns. "While some questions of interpretation and application remain, the new rules helpfully clarify how and when Circular 230 applies to TEI members and other in-house practitioners. They thus relieve us from expensive, time-consuming, and essentially non-value-added compliance activities."

CEO Declaration Requirement

The proposal to mandate the involvement of corporate CEOs in the tax return preparation process is the tax system's bad penny: It keeps coming back. Hence, although rejected by Congress last year as part of the American Jobs Creation Act, earlier this year the Senate Finance Committee and subsequently the full Senate approved a provision to require company Chief Executive Officers to sign a declaration as part of the company's federal tax return.

Under the provision, the Chief Executive Officer would have to declare, under penalties of perjury, that the company has in place procedures to ensure that the annual federal tax return complies with the tax code, and that the CEO has received reasonable assurances as to the accuracy of all material items in the return. TEI successfully opposed similar provisions on several occasions, including most recently last year. (TEI's previous submissions were reprinted in the May-June 2003 and July-August 2004 issues of The Tax Executive.)

The CEO declaration issue reemerged as a revenue raiser in the Senate version of the Highway Bill, which is currently pending in a House-Senate conference committee. The Senate's passage of the legislation prompted TEI to send letters to the conferees opposing the provision, documenting why the CEO requirement would unnecessarily divert valuable corporate resources from other matters without meaningfully enhancing corporate accountability. Specifically, TEI explaining chat injecting CEOs into the return preparation and approval process would distract them from activities where their expertise is better used. More fundamentally, the requirement is misguided and superfluous because the Internal Revenue Code already requires a corporate officer to sign the return under penalties of perjury.