AICPA comments on administration's corporate tax shelter proposals.

• Author: Sawyers, Roby B.
• Position: Clinton Administration

On Feb. 1, 1999, the President submitted to Congress his Fiscal Year 2000 Budget proposal. The budget includes 16 proposals addressing "corporate tax shelters." A task force of the AICPA Tax Division's Tax Executive Committee was created to examine the proposals; the task force, chaired by Pam Pecarich of the Tax Executive Committee and staffed by Roby Sawyers and Gerry Padwe of the Tax Division, included Bill Blaylock, Texas Instruments Inc.; Mark Ely, KPMG Peat Marwick LLP; Al Lewis, Ernst & Young LLP; Joe Marchbein, Rubin, Brown, Gornstein & Co., LLP; Tom Ochsenschlager, Grant Thornton LLP; Jay Starkman, Jay Starkman P.C.; and Claude Wilson, Vial Hamilton Koch & Knox LLP. The comments below were developed by this task force and included in the written testimony of David Lifson (chair of the Tax Executive Committee), presented to the House Ways and Means Committee on March 10,1999.

AICPA Comments

The President's budget contains sixteen proposals addressing "corporate tax shelters." The first six of these address the topic generically by imposing new penalties and sanctions and by establishing new tax rules to govern transactions generally. This section provides our comments on the six generic proposals. We expect to comment on some of the specific transaction rules separately in subsequent submissions after our technical committees have completed their reviews of the proposals.

We begin by recognizing that tax laws are usually followed, but that they can also be abused. Where there are abuses, we hold no brief for them--whether they fall under the pejorative rubric of "tax shelters" or any other part of our tax system. Thus, we sympathize with and support efforts to restrict improper tax activities through appropriate sanctions. Specifically, we favor the Administration's recommendation regarding exploitation of the tax system by the use of tax-indifferent parties.

However, we also support and defend the right of taxpayers to arrange their affairs to minimize the taxes they must fairly pay and, with that in mind, we have some serious concerns about where the President's proposals draw the distinction between legitimate tax planning and improper tax activities. We see them as an overbroad grant of power to the Internal Revenue Service to impose extremely severe sanctions on corporate taxpayers by applying standards that are far from clear and that could give examining revenue agents a virtual hunting license to go after corporate taxpayers (which, by the way, include huge numbers of small and medium-sized businesses, not just Fortune 100 companies). This would seem to be inconsistent with the taxpayer rights thrust of last year's IRS restructuring legislation. In our view, the debate concerning the sanctions for improper corporate tax behavior must begin with a clear understanding of the standards that distinguish abusive transactions from legitimate tax planning. What standards justify the imposition of extraordinary punishment on a corporation (or tax adviser) whose tax treatment of a transaction is successfully challenged by the IRS?

Our primary concern with the Treasury proposals is the absence of a clear standard defining what is and what is not an abusive transaction, which would apply to most provisions of the tax law. The proposals modifying the substantial understatement penalty for corporate tax shelters and denying certain tax benefits to persons avoiding income tax as a result of "tax avoidance...