The Tax Fairness Act of 1997 offers major opportunities to improve the tax system: July 11, 1997.

On July 11, 1997, Tax Executives Institute submitted the following comments to the House-Senate conferees on H.R. 2014, The Tax Fairness Act of 1997, as well as key officials of the Clinton Administration. Please note: H.R. 2014 was restyled "The Taxpayer Relief Act of 1997" prior to final passage by Congress. TEI's submission, which was prepared with assistance from TEI's Federal, International, and IRS Administrative Affairs Committees, was signed by the Institute's 1996-1997 President, James R. Murray of PacifiCorp.

Tax Executives Institute is the principal association of corporate tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in the United States and Canada, and must contend daily with both the planning and compliance aspects of our Nation's business tax laws. TEI is firmly committed to maintaining and improving a tax system that works -- one that effectively implements sound tax policy, that is administrable by the Internal Revenue Service, and that does not impose undue compliance or recordkeeping burdens on taxpayers.

TEI applauds the efforts of Congress and the Clinton Administration to craft meaningful tax reduction and to do so in a manner that enhances, rather than impedes, the U.S. economy. We believe H.R. 2014, the Tax Fairness Act of 1997, holds much promise, though we are concerned that many of the bill's provisions will introduce additional complexity into the Internal Revenue Code and subject both business and individual taxpayers to heavier compliance and recordkeeping burdens.

Because of differences in the House and Senate versions of the bill -- and Treasury Secretary Rubin's recent letter concerning the Clinton Administration's position on the legislation -- the Institute offers the following comments on the legislation. We note at the outset that, because of TEI's diversity and its business tax orientation, the Institute does not take positions on several contentious, and undeniably important, provisions, such as those relating to capital gains, the HOPE scholarship tax credit, and estate and gift taxation; instead, we focus on the policy and administrative aspects of provisions affecting business. We are confident that the adoption of the Institute's recommendations will materially improve the Tax Fairness Act of 1997.

Summary of TEI Recommendations

TEI recommends that the conferees:

* Mandate the netting of interest where the taxpayer is simultaneously in both a tax overpayment and underpayment situation.

* Follow the House bill and repeal the corporate AMT depreciation adjustment.

* Reject the provision in the House bill relating to so-called Morris Trust transactions and further narrow the Senate bill to exempt non-abusive transactions.

* Follow the Senate bill and provide for a permanent extension of the exclusion for employer-provided educational assistance.

* Follow the Senate bill and extend the research tax credit until May 31, 1999.

* Reject the proposal to decrease the carryback period for net operating losses.

* Follow the Senate's Brownfields provision on the treatment of environmental remediation expenses.

* Acknowledge the need to clarify the rules relating to independent contractors.

* Reject the proposed modification of the definition of corporate tax shelter.

* Reject the provision in the House bill to restrict the de minimis rule in respect of the disallowance of an interest deduction on indebtedness allocable to tax-exempt obligations.

* Follow the proposal in the Senate bill to clarify that employers may deduct the full cost of meals provided for the convenience of the employer.

* Reject the Senate proposal to decrease the carryback period for foreign tax credits.

* Adopt the provision in both bills to eliminate the overlap between the passive foreign investment company rules and the controlled foreign corporation rules.

* Follow the House bill calling for the aggregation of dividends received from 10/50 companies for purposes of the foreign tax credit limitation.

* Reject the proposals on limiting treaty benefits for payments to hybrid entities.

Interest Netting

Although neither the House nor the Senate bill contains a provision related to the netting of interest where a taxpayer is simultaneously in both a tax overpayment and underpayment situation, Tax Executives Institute urges the conferees to address this important subject. During the last ten years, Congress has several times manifested its desire that the Internal Revenue Service implement the most comprehensive interest netting possible in order to ameliorate the punitive effect of the Code's imposing a higher interest rate on tax underpayments than the government pays on tax overpayments. The IRS and Treasury Department have failed, however, to effectuate that congressional intent. Indeed, Treasury's recent report on interest netting disavowed the statutory authority to implement netting.

It is long past the time for Congress to mandate the adoption of a global interest netting regime. Consequently, TEI supports the amendment of section 6621 of the Code to provide that where a taxpayer reasonably identifies and establishes an appropriate situation for netting, interest would be equalized (i.e., the net interest rate would be zero) to the extent and for the time the overpayment and underpayment overlap. Under the proposal, netting would be permitted where there have been previously determined deficiencies or refunds on the taxpayer's accounts existing during the same time period whether or not a liability is outstanding at the time of the transaction. Should the final bill not include an interest netting provision, TEI nevertheless recommends that the conference report reiterate Congress's intention that the IRS administratively implement global interest netting without further delay.

Repeal of AMT Depreciation

Under the corporate alternative minimum tax regime that was enacted in 1986, depreciation on property placed in service after 1986 must be computed by using the class lives prescribed by the...