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 F. Olson and other representatives of the Treasury's Office of Tax Policy. The agenda for the meeting was published in the March-April 2003 issue of The Tax Executive. The minutes follow:

1. Introductory Comments

   On behalf of the U.S. Treasury Department's Office of Tax Policy, Assistant Secretary Pamela F. Olson welcomed TEI President J. A. (Drew) Glennie and the other members of the delegation from Tax Executives Institute to the liaison meeting. Ms. Olson observed that the Treasury Department derives benefit from its meetings with the Institute, and confirmed the view that the meetings are only part of an ongoing dialogue. TEI thanked the Treasury representatives for taking time to meet with the Institute, especially during this hectic period. The delegations for the Treasury Department and TEI at the liaison meeting are set forth below.

2. The Administration's Budget Proposals

   1. Dividend Exclusion

      TEI expressed support for the goal of eliminating the double taxation of corporate earnings and said that it is pleased that the Administration's 2004 Budget proposals focus on restoring economic growth. TEI noted that the dividend exclusion proposal will have far-reaching effects on many provisions of the Internal Revenue Code. Moreover, concerns have been expressed by some about the complexity of the proposal as well as the additional recordkeeping burdens imposed. In addition, company dividend payment policies are very stable, but operating earnings and reported tax liabilities can vary substantially from year to year. As a result, there may be considerable volatility in the excludable dividend account (EDA) and the retained earnings basis adjustments (REBA) reported to shareholders, especially for companies in cyclical industries.

      Ms. Olson said that, since the proposal was released in early January, practitioners, taxpayers, and taxpayer groups have identified a number of technical issues that the Treasury Department has addressed through clarifications and revisions. A draft of the proposal's statutory language, which is expected to be released later in the week, is likely to incorporate additional minor revisions, but may not address the shareholder reporting concerns expressed by TEI. Ms. Olson noted that, because of business and economic conditions in 2001 and 2002, some groups have recommended that the Treasury Department modify the base tax year (or years) for computing the 2003 EDA. Adopting those recommendations, however, would add complexity.

      TEI noted that large businesses are generally subject to examination, which may take several years for the IRS to initiate and conclude. In addition, where disputes arise about a company's reported tax liability, the taxes subsequently paid (or refunded) in order to resolve the dispute will be made well after the year to which the additional (or reduced) tax liability relates. TEI inquired whether the Treasury Department has considered the effect of tax appeals or litigation on the computation of EDA. Specifically, TEI noted, if the EDA is based on the amount of taxes paid in cash during a particular year, the proposal may affect a taxpayer's choice of forum for litigating tax matters. Ms. Hubbard said that the statutory language would likely address the specific questions posed by TEI in respect of the effects of subsequent payments and refunds. Generally, the Treasury intends that the EDA employ a straightforward arithmetic calculation based on the amount of taxes actually paid during a year in order to provide certainty to corporations and their shareholders. Ms. Olson said that TEI is the right group to raise and highlight the administrative issues posed by the proposal. After the statutory language is released, she said, the Treasury Department would be willing to discuss any issues identified by the Institute. TEI said it will work with the Treasury Department to highlight members' concerns and to ensure that the final legislation is as administrable as possible.

   2. Employer Retirement Savings Accounts

      TEI noted that the Administration's 2004 Budget proposals include several provisions designed to enhance savings, including an Employer Retirement Savings Account (ERSA). ERSAs would follow the existing rules for 401(k) plans, subject to certain modifications. TEI noted that 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, but there are likely to be a number of transition issues.

      Mr. Sweetnam said that the Treasury's current focus is on developing the economic growth package, including the dividend exclusion. The statutory language for the pension and savings provisions, he said, will be developed and released later. In the meantime, his staff is taking comments and responding to questions from various groups, especially from small business and tax exempt and government entities, about the effect of the proposals on various types of tax-deferred savings accounts. For 401(k) plans, he noted, the ERSA proposal is tantamount to a name change because the substantive differences between an ERSA and a 401(k) plan are minimal.

      TEI noted that many of the proposed changes for ERSAs, e.g., to the top-heavy, safe harbor, and nondiscrimination rules, would simplify the rules for plan administration inquired whether the revisions might cause shifts in pension coverage. Mr. Sweetnam said that the proposals focus on simplifying the...