Comments on proposed tax simplification legislation July 23, 1991, and September 10, 1991.

• Position: Tax Executives Institute

Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America, whose approximately 4,700 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 on H.R. 2777, the Tax Simplification Act of 1991, and H.R. 2775, a bill relating to additional tax simplification.

1. Overview

   Tax Executives Institute commends the Committee on Ways and Means for recognizing that the tax laws are in desperate need of simplification. The Institute shares the Committee's commitment to developing and maintaining an administrable tax system. For far too long, a sincere but sometimes misguided desire to close "loopholes" and even "pinholes" in the Internal Revenue Code has led to the enactment of mind-numbingly complex "band-aids" on an already too complex tax law. For far too long, concerns about the substantive, transactional, and transitional complexity spawned by tax law changes have been given short shrift and cavalierly dismissed as self-serving smoke screens -- even where the concerns are voiced by taxpayers and IRS alike. For far too long, tax legislation has been drafted and enacted without adequate attention to the compliance burdens. For far too long, administrability has been little more than an afterthought.

   The Committee's focus on simplification during the past year, together with the IRS's related initiatives, is testimony to a desire to build a "new tax order." Chairman Rostenkowski and the Committee are to be commended for acknowledging Congress's role in creating complexity and in recognizing their obligation to take steps to reduce the heavy compliance burden imposed by unduly complex tax laws. These hearings clearly represent a step in the right direction in elevating administrability and compliance concerns to their rightful position in the tax legislative process.

   In announcing the hearings on H.R. 2777 and H.R. 2775, Chairman Rostenkowski articulated the following criteria (among others) for assessing the various proposals and developing the legislation: whether the proposal would significantly reduce mechanical complexity or recordkeeping requirements, whether the proposal would significantly reduce compliance and administrative costs, and whether the proposal, would preserve underlying policy objectives of current law.

   Several provisions of H.R. 2777 clearly satisfy those criteria. For example, the provisions relating to the treatment of built-in losses for purposes of the corporate alternative minimum tax (AMT), the modification to the look-back method for long-term contracts, and the treatment of gain on certain stock sales by controlled foreign corporations (CFCs) under section 1248 of the Code would all fulfill the goal of simplification. There are, however, some curious and disappointing omissions. For example, we urge reconsideration of the decision not to include a proposal for creation of a single foreign tax credit (FTC) limitation "basket" for section 902 noncontrolled companies (so-called 10-to-5 companies). Even the Treasury Department has singled out the treatment of dividends from each 10- to 50-percent owned subsidiary as an area in need of simplification. The failure to include such relief in the proposal legislation leaves large multinational corporations to grapple with hundreds of separate FTC calculations for both regular tax and AMT purposes. (1)

   In addition, certain proposals in H.R. 2777 would make substantive changes in the tax law and might actually increase taxpayer burden. For example, in the international tax area, H.R. 2777 would consolidate several anti-deferral regimes, which would at first blush provide some small measure of simplification. Upon analysis, however, the promise of simplification evaporates, for the bill would supplant the existing rules with a complex hybrid of the existing controlled foreign corporation, foregn personal holding company, and passive foreign investment company rules and would add a new "market-to-market" provision. In other words, the good intentions of the drafters notwithstanding, the proposed passive foreign corporation (PFC) scheme is anything but simple.

   On the domestic side, H.R. 2777 endeavors to mitigate the appalling complexity of the AMT and adjusted current earnings (ACE) provisions. Rather than recognizing that the mere existence of two separate and independent taxing schemes breeds inordinate complexity, however, the bill opts for a "quick fix" in calculating depreciation under the AMT/ACE rules for newly acquired assets. It completely ignores the requirement that taxpayers comply with the ACe requirements beginning in 1990 and that, even under the bill, they must continue to "track" the various depreciation regimes for assets acquired before the effective date of the proposed simplified method. Frankly, the AMT proposal is an example of "too little, too late." Indeed, the operation of the provision is such that taxpayers would be required to establish and maintain still another depreciation system.

   Moreover, in several instances H.R. 2777 eschews Congress's responsibility to effect meaningful simplification by simply delegating authority to the Department of the Treasury. For example, the bill would grant the Secretary authority to issue regulations under section 986 that would allow foreign tax payments made by a foreign corporation to be translated into U.S. dollar amounts using an average exchange rate for a specified period. Although we commend the drafters for recognizing that something must be done to ease the burdens that the Tax Reform Act of 1986 places on taxpayers with respect to such translations, the approach taken in H.R. 2777 does not make sense. U.S. taxpayers find it difficult, if not literally impossible, to comply with the statutory requirements for translating their myriad foreign tax payments. Rather than ceding the authority to correct a well-documented and agree-upon problem, Congress should forth-rightly recognize that the enactment of section 986 was misguided and amend the statute to provide a statutory rule that taxpayers can comply with and that the IRS can audit.

   A similar flaw underlies the bill's provision on establishing a "simplified method" for applying the uniform capitalization rules. The proposal acknowledges the need for a simplified method for determining the cost of each administrative, service, or support function or department that is allocable to production or resale activities. Rather than establishing such a method, the bill would delegate authority to the Treasury Department to issue regulations allowing the use of a simplified method -- the details of which would be "fleshed out" later. The simplified method, moreover, could not be used until such regulations were promulgated. Simplification deferred, however, is simplification denied: even if coupled with the injunction that the Treasury act with "all deliberate speed," the bill not only prevents taxpayers from commenting on the specifics of a proposed statutory change (because there are no specifics), but would also effectively sentence taxpayers to regulatory limbo, requiring them to wait months (or even years) to avail themselves of any such method. What's more, there is no guarantee that any regulations issued by the Treasury Department would truly promote the goal of simplification. (2)

   Finally, we wish to comment on the process used in developing H.R. 2777 and H.R. 2775 and scheduling these hearings. TEI applauded the Committee last year when...