Two TEI regions meet with LMSB, appeals, counsel representatives: members from Regions 5 & 6 discuss tax shelters, issue resolution, and capitalization regs with IRS counterparts.

• Author: Fahey, Mary L.
• Position: Tax Executives Institute, IRS Large and Mid-Size Business Division

The following report on a regional liaison meeting between representatives of TEI's Region 5 and 6 and officials of the IRS's Large and Midyear Business Division was prepared by Mary L. Fahey, TEI Tax Counsel.

Led by TEI Regional Vice Presidents Robert Randleman (Region V) and Delmer Threadgill (Region VI), an Institute delegation met with representatives from the Office of IRS Chief Counsel, the Large and Mid-Size Business Division, and LMSB Appeals on March 4 at the J.C. Penney Co. headquarters in Plano, Texas. The day-long session focused on the new tax shelter disclosure regulations, the notice on tax accrual workpapers, LMSB issue resolution initiatives, fast-track settlement options, and emerging issues such as the temporary regulations on the capitalization of intangibles.

IRS Deputy Chief Counsel Emily Parker opened the meeting with an in-depth discussion of the tax shelter disclosure regulations that had been issued the previous week. She explained that the new regulations are intended to address the need for ear]y notice about transactions being marketed, focus the audit resources of the IRS, and mitigate the audit lottery.

Ms. Parker noted that there has been a progressive increase in the scope of the regulations. In 2000, there were 51 disclosures of transactions submitted by 21 taxpayers; those numbers rose to 277 disclosures from 99 taxpayers in 2001. After the IRS issued Announcement 2002-63 (relating to the change in policy in respect of requests for tax accrual workpapers), the IRS received 1,600 disclosures from 1,200 taxpayers over a six-month period. The absence of a penalty for failure to disclose may account for the lack of disclosures, she averred.

The deputy chief counsel reviewed the six categories of reportable transactions under the regulations. She stated that the focus of the filter relating to the reporting of transactions with contractual protection had changed to include transactions where the taxpayer has a right to a full or partial refund or the advisor's fee is contingent on the realization of tax benefits. In respect of the section 165 loss transaction filter, Ms. Parker noted a new approach in listing exceptions in revenue procedures, such as Rev. Proc. 2003-34, which was issued at the same time as the regulations. The IRS intends to review the exceptions on a periodic basis, she added.

In respect of the book-tax difference filter, Ms. Parker explained that the exceptions (or "angel list") will also be issued in a revenue procedure (Rev. Proc. 2003-35). She remarked on one change to the prior regulations: Companies that do not keep U.S. GAAP books may use other books regularly maintained in the ordinary course of their trade or business. The IRS is open to adding categories to the angel list, she stated.

In response to a question, Ms. Parker said that transactions that become listed transactions after the return is filed must be reported on the next return filed by the taxpayer.

Ms. Parker next turned to Announcement 2002-63, which announced that the IRS will seek a taxpayer's tax accrual workpapers...