TEI recommendations on simplifying the Internal Revenue Code

Tax Executive, The, May-June, 1990

TEI Recommendations on Simplifying the Internal Revenue Code

On April 20, 1990, Tax Executives submitted the following Recommendations on Simplifying the Internal Revenue Code to the House Committee on Ways and Means. The submission was made in response to the simplification study announced by Committee Chairman Rostenkowski at February 7, 1990, hearing on the effect of the Tax Reform Act of 1986. TEI's testimony (at the hearing) was reprinted in the March-April 1990 issue of The Tax Executive.

I. Introduction

Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America. Our approximately 4,300 members represent more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works - one that is consistent with sound tax policy, one that taxpayers can comply with, and one in which the Internal Revenue Service can effectively perform its audit function. TEI is pleased to submit the following comments in response to the Committee on Ways and Means study of tax law simplification, which Chairman Rostenkowski announced on February 7, 1990.

That the tax system became increasingly complex during the 1980s is incontrovertible. Although more and more attention has been paid to the complexity of the tax law in recent years, previous efforts to simplify the tax code - especially for business taxpayers - have not proven wholly effective.*

Apart from the complex nature of specific statutory schemes (such as the fragmentation of the foreign tax credit into myriad separate baskets and the superimposition of the alternative minimum tax scheme on an already complex "regular tax" system), the magnitude and rapidity of change have contributed mightily to the complexity of the tax law. By one count, more than 140 public laws have been enacted since 1976 that, one way or the other, changed the Internal Revenue Code. In many cases, the ink may not have dried - or regulations been issued - on the old law, before a new law was enacted. Change has been piled upon change, and a vast array of provisions have been enacted, revised, repealed, and (in some cases) reinstated within a few short years.

The churning of the tax laws adds to their complexity. Tax laws may always be complicated, because the transactions to which they apply are complicated, but the 1980s' juggernaut of tax legislation has raised complexity to a new, almost insurmountable peak. This ever-changing playing field affects not only corporate taxpayers, which must contend with the changes on a day-to-day basis, but also the Internal Revenue Service, which must issue the necessary guidance and, ultimately, ensure compliance through its examination process. Moreover, the continuing enactment of new legislation has a "rippling" effect on the state and local tax structures tied to the federal system.

The maelstrom of legislation also breeds another, perhaps more insidious form of complexity - transitional complexity - which encompasses the burdens and problems associated with the instability of the tax laws. Although the effects of transitional complexity might be thought to dissipate quickly, that is not the case. Not only do some provisions have long phase-in periods (e.g., the adjusted current earnings provisions of the AMT), but broad delegations of rulemaking authority to the Department of the Treasury and the IRS postpone the day when taxpayers are provided with meaningful guidance on what a new provision means. In addition, such broad delegations of authority may actually work to deny taxpayers the very relief Congress sought to give. Consider, for example, the recently promulgated consolidated return investment adjustment regulations which - in effectuating Congress's repeal of the General Utilities doctrine - disallow all losses on the disposition of a subsidiary's stock. TEI submits that such a result is contrary to congressional intent to allow the deduction of losses under section 165 of the Code. We believe that such derogation of a congressional mandate could be avoided by more carefully crafted guidance during the legislative process.

Retroactive (or essentially retroactive) legislation produces yet another form of complexity, even where the substantive provision benefits the taxpayer. For example, since its enactment in 1978, section 127 (which excludes from taxation certain employer-provided educational assistance) has expired and been extended four times - three times retroactively. Employers have been required to design and implement programs to tax and withhold upon the value of employer-provided assistance only to modify (or undo completely) those programs on an after-the-fact basis. We submit that imposing such confusion and hardship on employers (and their employees) is simply unnecessary. The timely passage of extension legislation or, better yet, the enactment of "permanent" legislation would further the goal of tax simplification.