Tax Executives Institute-Internal Revenue Service liaison meeting agenda, April 27, 1990.

• Position: Includes appendix on administrative initiatives

Tax Executives Institute - Internal Revenue Service

On April 27, 1990, Tax Executives Institute held its annual liaison meeting with the Internal Revenue Service. The written agenda for the meeting, which is reprinted below, was filed with the IRS on April 13. The agenda was developed by the Institute's Federal, International, and IRS Administrative Affairs Committees.

1. Introduction

   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 proven ineffective.(1)(*) It has been said that truth is the first casualty of war. This is no less the case in the battle against tax law complexity. In the last decade, simplicity has been the casualty of a series of tax bills whose common theme has not been fealty to principle but rather legislative legerdemain. A seeming distrust of taxpayers (corporate taxpayers in particular), combined with an institutional reluctance to deal with the budget deficit in a straightforward manner, has produced a stream of legislative provisions that have been difficult to understand, implement, and observe.

   Apart from the complex nature of specific statutory schemes (such as the fragmentation of the foreign tax credit into myriad baskets and the superimposition of the alternative minimum tax (AMT) scheme on an already complex "regular tax" system), the magnitude and rapidity of change have contributed mightily to the complexity of the tax law. As Will Rogers said, "The difference between death and taxes is, death doesn't get worse every time Congress meets."

   By one count, more than 140 public laws have been enacted since 1976 that, one way or the other, changed the Internal Revenue Code. 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.

   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.(2) Fast, furious, and complex legislation might be understandable if significant policy goals were achieved. TEI submits, however, that a major contributor to the complexity of the tax law is the almost willy-nilly manner in which the changes have been made. There seem to be no overriding principles that mold and shape tax policy. The goal seems simply to raise revenue; while this goal is unassailable, it should not be pursued to the exclusion of sound policy and proper administration. To restore a fuller measure of order and certainty to the tax system, tax policymakers should identify and adhere to, with some degree of constancy, clear principles, rather than championing targeted provisions to address real, perceived, or perhaps chimerical abuses.

   For example, if sound U.S. tax and economic policy supports minimizing double taxation on income earned abroad and deferring U.S. tax on unrepatriated earnings (and we submit it does), then proponents of proposals to dilute the foreign tax credit or chip away at the concept of deferral should be required to openly defend the proposed deviation from those principles. The incremental nature of such proposals should not relieve their defenders of the obligation to justify their proposals on policy grounds. Otherwise, taxpayers will find themselves at the bottom of the proverbial "slippery slope." We submit that the professed desire to close "tax pinholes" does not of itself justify the substantive, transactional, and transitional complexity it spawns.(3)

   TEI appreciates that the power to legislate lies with Congress and that the IRS is often, like the taxpayer, a bystander to the enactment of unadministrable legislation. We submit, however, that the IRS can take a more active role in ensuring that adequate attention is devoted to compliance and administrability concerns. In its February 7, 1990, testimony before the Ways and Means Committee on "the impact, effectiveness, and fairness of the Tax Reform Act of 1986," TEI urged Congress to place greater emphasis on the administrability of particular proposals during the legislative process. After stating that the most effective safeguard would be sufficient time to analyze the administrability of specific proposals, we made the following recommendations:

   * Ask the IRS to testify before

   Congress specifically to address

   the administrative aspects

   of proposed tax legislation.

   * Make a greater effort to prepare

   draft legislative language

   in advance of hearings and

   mark-up sessions to allow the

   discovery and correction of administrative

   flaws before the

   legislation becomes law.

   * In appropriate cases, ask the

   IRS to develop necessary tax

   forms and schedules before a

   proposal is enacted so that administrative

   problems can be

   identified and resolved beforehand.

   Obviously, the IRS would be intimately involved in implementing all three of these recommendations. During the liaison meeting, we invite your comments on the recommendations, as well as your suggestions on how taxpayers and the IRS can work together productively to make the tax legislative process more responsive to compliance and administrative concerns.(4)

2. The Growing Constituency

   for Tax Simplification

   For years, Tax Executives Institute has been "harping" on the need to address the tax law's complexity. Our comments have been directed both at tax legislation and at the regulations and other forms of administrative guidance issued by the Treasury Department and IRS. As the organization of those tax professionals who must deal with the Internal Revenue Code's traps and opportunities on a day-to-day basis, the Institute has endeavored to focus on the true cost of complexity - not only in terms of the financial resources diverted from more productive activity, but also in terms of the frustrations caused and the distrust bred as more and more taxpayers come face to face with the fact that full compliance may just be literally impossible. To the extent there is any other participant in the tax system that shares TEI's front-line exposure to the cost of complexity, it is the IRS's field personnel - the people who (on a time-delayed basis) confront the tax law on the same practical basis.

   The concern about complexity, moreover, is spreading: the concept of simplicity is finally commanding attention from Congress, the Department of the Treasury, the IRS, the practitioner community, and others. TEI believes that a "constituency for simplification" is growing.

   As stated earlier, in February the House Ways and Means Committee held hearings on the effect of the Tax Reform Act of 1986. Coincident with the hearing, Chairman Rostenkowski announced a major tax simplification study. In addition, Commissioner Goldberg, Assistant Treasury Secretary Gideon, and Joint Committee Chief of Staff Pearlman have all voiced support for efforts to earmark discrete portions of the Internal Revenue Code (for example, the international provisions) for simplification.

   Actions have begun to match the rhetoric - not only in recent administrative announcements but in legislative proposals as well. The Omnibus Budget Reconciliation Act of 1989 not only simplified the AMT provisions of the Internal Revenue Code(5) and repealed the mind-numbingly complex rules of section 89, but also reformed and simplified the Code's civil penalty provisions. In addition, the IRS has taken significant steps to simplify some recordkeeping requirements through announcements of a uniform rate for computing business miles (Revenue Procedure 90-66) and suspension of the 90-day rule for notices of redeterminations of foreign taxes (Notice 90-26). Similarly, the IRS's recent fringe benefit regulations (T.D. 8256), though far from perfect, reflect a greater concern with administrative burdens and business reality than did their predecessor. (Another such example is Revenue Ruling 90-23 relating to the deductibility of business travel from a taxpayer's home to a "temporary job site.") As Commissioner Goldberg remarked at TEI's recent 40th Midyear Conference, none of these actions may represent a "major league revolution," but they mark a salutary start.

   TEI commends the IRS for its efforts to date.

3. Simplicity, However, Does

   Not Mean Simplistic:

   The Loss Disallowance

   Rules

   The tax community's enthusiasm for simplification has been tested by the IRS and Treasury's implementation of the "rough justice" concept in their recently released consolidated return investment adjustment regulations. Those regulations, which disallow all losses on the disposition of a subsidiary's stock, have been criticized not only as being unduly harsh but for misusing the goal of tax simplification.

   The loss disallowance regulations were issued by the IRS on March 9, 1990, in an effort to stop "son of mirrors" transactions and modify the consolidated return rules to reflect the repeal of the General Utilities doctrine. The regulations are so broad that they intentionally disallow - under the guise of simplification - deductions for true economic losses. In defending the regulations, Treasury and IRS officials have intimated that taxpayers who complain about "rough justice" regulations should not be taken seriously when they argue for tax simplification.

   TEI submits, however, there is a vast difference between "rough justice" and "frontier justice." Simplification may mean many things to...