Tax Executives Institute-U.S. Department of the Treasury Liaison Meeting Minutes.

February 9, 1999

On February 9, 1999, Tax Executives Institute held its annual liaison meeting with the Assistant Secretary of the Treasury for Tax Policy and other senior representatives of the Treasury Department's Office of Tax Policy. The minutes of the meeting are set forth below.

On behalf of the U.S. Treasury Department's Office of Tax Policy, Assistant Secretary Donald C. Lubick welcomed TEI President Lester D. Ezrati and the other members of the delegation from Tax Executives Institute to the liaison meeting. On behalf of TEI, Mr. Ezrati thanked the Treasury representatives for meeting with the Institute. The U.S. Treasury Department's and TEI's delegations at the liaison meeting are set forth below.

(The order of the items listed in TEI's agenda was changed to accommodate the schedule of the Treasury Department representatives. For convenience' sake, these minutes follow the written agenda.)

Achieving the Promise of IRS Restructuring and Reform

1. Streamlining Oversight. In the interest of time, Messrs. Ezrati and Lubick deferred the discussion of streamlining oversight of the IRS. In response to a question, Mr. Lubick reported that the White House is currently vetting a number of candidates for the IRS Oversight Board and said that the nominees should be announced soon.

2. Global Interest Netting. Mr. Talisman reported that guidance on the global interest netting provisions in the IRS Restructuring and Reform Act is among the top four items on the Treasury Department's priority list. He added that Rita Cavanaugh is replacing Christopher Rizek as the Treasury Department's lead person on the interest-netting issue.

3. Changes in Accounting Methods. Ms. Wielenga said that TEI's principal concern with Notice 98-31 is to ensure that, when finalized, the procedure for initiating involuntary changes in accounting method is even handed and do not inhibit the resolution of cases. The proposed revenue procedure in Notice 98-31, she said, is one-sided because it instructs agents to refrain from making taxpayer-favorable timing adjustments in the course of examinations and, indeed, compels agents to propose a change in accounting method for all timing adjustments. Unless the procedure is modified before its final release, she said, it will limit agent's flexibility to resolve accounting issues at the lowest level.

   Ms. Turgeon explained the government's general policy against permitting retroactive accounting method changes. The government departs from that general policy on examination, she said, and imposes unfavorable retroactive accounting method changes in order to encourage taxpayers to voluntarily seek changes for improper accounting methods. Moreover, she said, the rules for taxpayers under examination should not be more favorable than for those not under examination. She explained that if the procedure did not require examining agents to impose accounting method changes for timing adjustments, the Examination Division would likely continue to make the same adjustments from cycle to cycle without ever placing the taxpayer on the proper accounting method. She acknowledged that one outcome of the mandatory imposition of taxpayer-adverse method changes will be to shift more cases to the Appeals level for resolution; nonetheless, agents need an incentive to impose the method change. Before the final version of the procedure is released, however, additional guidance on related procedural matters (e.g., early referral of cases to Appeals and changes to the accelerated issue resolution procedure) will be announced in order to expedite issue resolution.

   Mr. Murphy stated that many revenue agents and case managers have voiced concerns that the proposed procedure will hinder issue resolution. As a result, they have recommended against issuing the procedure without substantial modifications. Ms. Turgeon acknowledged that some field agents and case managers have echoed taxpayer concerns. She said that the Examination and Appeals Divisions will be consulted before the final revenue procedure and related guidance are released. Mr. Ezrati noted that the government should weigh the decreased amount of field resources expended on resolving accounting method issues against the substantially increased amount of Appeals resources devoted to such matters. Ms. Turgeon reiterated that, while the government's policy against retroactive changes in accounting methods is firm, the procedure may be ameliorated by, for example, permitting agents (or taxpayers) to net taxpayer-favorable section 481 adjustments against unfavorable section 481 adjustments that arise from proposed timing adjustments. The net unfavorable adjustments, she said, would continue to be made in the years under examination, while net taxpayer-favorable adjustments would be implemented prospectively following a taxpayer's initiating a voluntary change in method. In response to a question, Ms. Turgeon averred that the government has the general authority under section 481 to make unilateral adjustments in respect of expenditures incurred in tax years closed under the statute of limitations. She acknowledged that taxpayers may bear a substantial compliance burden if they are required to adopt a change in accounting method in order to comply with a new court decision. For example, she said, taxpayers in the mutual fund business may not have retained the records necessary to determine the amount of the capitalizable start-up costs for mutual funds established as much as 30 years prior to the decision in FMR v. Commissioner. Hence, she said, it would be difficult for taxpayers in the industry to ascertain the section 481 adjustment necessary to implement the tax accounting method required to comply with that decision. She invited taxpayers to comment on how method changes mandated by court decisions should be implemented and how the recordkeeping burdens should be taken into account.

4. Post-INDOPCO Capitalization Issues. Mr. Shewbridge said that during the liaison meeting earlier in the day with the IRS, Chief Counsel Stuart Brown reported that the IRS is reviewing its guidance process with a view to increasing the amount of guidance issued in the form of generally applicable revenue rulings. TEI, he said, welcomed the development because taxpayer-specific private letter rulings and technical advice memoranda have not significantly advanced the resolution of recurring disputes -- especially over capitalization issues. Examples of capitalization issues that are ripe for general guidance, he said, include costs incurred for ISO 9000 certification, costs of removal, and expenditures to develop a customer base. He said that, while the joint IRS/Treasury Guidance Priority Business Plan is a good tool for managing the government's priorities, the plan can sometimes inhibit the release of guidance for items that are not on the plan. He invited the Department representatives to comment on whether guidance on capitalization issues can be expedited.

   Mr. Talisman said that the IRS and Treasury have met frequently about capitalization issues seeking to develop both general and issue-specific guidance. Moreover, the IRS and Treasury Department business plan for the last two years has included a generic item relating to capitalization issues. As a result, the IRS has a green light to address capitalization issues.

   Mr. Shewbridge noted that agents often create new theories to justify capitalizing expenditures that have been deducted for years. This frequently results in burdensome...