Comments relating to the treatment of transaction costs required to be capitalized under section 263.

On July 13, 2007, TEI President David L. Bernard submitted a letter to Assistant Secretary of the Treasury for Tax Policy Eric Solomon and Acting IRS Commissioner Kevin Brown relating to the treatment of transaction costs incurred in connection with the acquisition, creation, or disposition of a trade or business in a taxable or tax-free stock or asset transaction. The comments respond to a request by the IRS in Notice 2004-18. TEI's comments were prepared under the aegis of TEI's Federal Tax Committee whose chair is Susan A. Bauer of Moore Investment Group. Contributing substantially to the development of TEI's comments were Steven Solinga and Philip G. Cohen of Unilever United States. Also contributing to the comments were Henry A. Orphys of Intel and Michael J. McGoldrick of Sunoco.

On March 15, 2004, the Treasury Department and Internal Revenue Service released Notice 2004-18 (2004-11 I.R.B. 605) inviting public comment on the treatment of transaction costs that are required to be capitalized under section 263(a) of the Internal Revenue Code and Treas. Reg. [section] 1.263(a)-5. The item is currently on the Priority Guidance Business Plan for the IRS and Treasury Department. On behalf of Tax Executives Institute, I am pleased to submit the following comments.

Background on Tax Executives Institute

Tax Executives Institute is the preeminent international association of business tax executives with 7,000 members representing 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. 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 the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the rules and standards that govern the application of section 263(a) to expenditures that facilitate taxable and nontaxable transactions.

Current Rules under Treas. Reg. [section] 1.263(a)-5

Treas. Reg. [section] 1.263(a)-5, which was issued in December 2003 together with Treas. Reg. [section] 1.263(a)-4 addressing the treatment of costs paid to create or acquire intangible assets, (1) requires taxpayers to capitalize amounts paid to facilitate the acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions. The current regulations generally address the treatment of the costs of the acquirer in acquiring a controlling interest in a trade or business in a taxable asset or stock acquisition, but do not discuss costs incurred by the acquiring entity in tax-free acquisitions or the costs incurred by the target. In the preamble to Treas. Reg. [section] 1.263(a)-5, the Treasury Department and IRS said they intend to issue separate guidance addressing whether amounts required to be capitalized in acquisition transactions should be eligible for the 15-year safe-harbor amortization period prescribed by Treas. Reg. [section] 1.167(a)-3.

In Notice 2004-18, the IRS and the Treasury Department acknowledge continuing controversy with taxpayers about the proper treatment of costs facilitating tax-free and taxable transactions and restructurings that are required to be capitalized under section 263(a) and Treas. Reg. [section] 1.263(a)-5. The Notice invites comments on whether capitalized transaction costs in respect of 11 categories of transactions should (1) increase the basis of acquired assets (and the methodology for allocating such costs among multiple assets), (2) be treated as creating a new asset, (3) reduce the amount realized, or (4) be treated as...