Tax Executives Institute--U.S. Department of Treasury Office of Tax Policy liaison meeting: February 25, 2003.

On February 25, 2003, Tax Executives Institute held its annual liaison meeting with Assistant Treasury Secretary Pamela Olson and other representatives of the Treasury's Office of Tax Policy. The agenda for the meeting is reprinted below. Minutes of the meeting will be published in a future issue of the magazine.

1. Introduction

2. The Bush Administration's Budget Proposals

   On February 3, 2003, the Bush Administration released its proposed budget for fiscal year 2004, which includes significant tax provisions. Tax Executives Institute commends the Administration's goals of stimulating the economy and easing double taxation.

   TEI is continuing its review of these proposals and may provide more detailed comments as the proposals evolve. Given the breadth of the provisions and their potential disparate effect--combined with the diversity of TEI's membership both in the United States and elsewhere--the Institute may ultimately be unable to develop a consensus position on certain aspects of the Budget proposals. Nevertheless, TEI will be pleased to work with the Treasury Department to highlight our members' concerns and to ensure that the final legislation is as effective and administrable as possible. During the liaison meeting, we invite a discussion of the following provisions.

   1. Dividend Exclusion

      * Effective for distributions on or after January 1, 2003, with respect to corporate earnings after 2000, public and private corporations would be permitted to distribute non-taxable dividends to their shareholders to the extent those dividends are paid out of income previously taxed at the corporate level. To calculate the amount that can be distributed to its shareholders without further tax, a corporation would compute an excludable dividend amount (EDA) for each year. As an alternative to distributing excludable dividends, corporations could allocate all or a portion of the EDA to provide non-taxable basis increases.

      * TEI commends the Bush Administration for undertaking to ease the double taxation of dividend income. We believe that the policy objective of integrating the corporate and individual tax system is laudable, and stand ready to assist Treasury in reducing complexity--including the level of required recordkeeping--and developing a system that is equitable and administrable for both corporations and their shareholders.

   2. ERSAs

      * The proposed budget includes several new savings vehicles, including the establishment of an Employer Retirement Savings Account (ERSA). ERSAs would follow the existing rules for 401(k) plans, subject to certain modifications. A single test would apply for satisfying the nondiscrimination requirements with respect to contributions for ERSAs. For defined contribution plans, the top-heavy rules would be repealed. Disparity and cross-testing would no longer be permitted.

      * The proposal will provide significant simplification to the extent that it leads to the elimination of the alphabet soup of current pension and retirement savings regimes. The savings provisions, however, raise myriad technical issues (especially as they interact with current rules) that potentially will make the Code more complicated.

   3. Related Party Interest Deductions

      * Section 163(j) of the Code would be revised to tighten the limitation on the deductibility of interest to related persons and to modify the applicable safe harbor. The current law 1.5 to 1 debt-to-equity safe harbor would be supplanted by a test that takes into account the types of assets owned by the corporation and the leverage typically associated with various broad classes of assets. Instead of a fixed debt-to-equity ratio, the safe harbor would be determined based on a series of debt-to-asset ratios identified for these asset classes.

      * In the event a decision is made to revise section 163(j)'s safe harbor, TEI recommends several clarifications to the Treasury proposal. For example, the revised safe harbor would permit a level of indebtedness (the "safe harbor amount") based on the value of the corporation's assets in each identified class. "Value" is undefined. We recommend that taxpayers be afforded an election to choose either fair market value or tax basis to determine value.

      * The proposal also states that "equity investments in foreign related parties (other than investments in subsidiaries) would not be taken into account" for purposes of the safe harbor. If this provision is aimed at companies that have undergone an inversion transaction, we suggest that it should be more targeted, perhaps by providing look-through treatment similar to section 1297(c) of the Code. Otherwise, it might operate to punitively restrict interest deductions.

   4. Brownfields Remediation Costs and Research Tax Credit

      * Under the Administration's proposal, the expensing of brownfield remediation expenditures would become permanent by eliminating the restriction that qualified expenditures must be paid or incurred before January 1, 2004.

      * The Administration's proposal would also make the research tax credit permanent. This proposal recognizes that the constant expiration and adoption of tax provisions adds complexity to the law and undermines their intended incentive effect. If these provisions are to achieve their intended goals, they must be made permanent. TEI supports the adoption of these provisions.

      * Does the Treasury Department...