Minutes of TEI - U.S. Department of Treasury liaison meeting: February 12, 2007.

• Position: Tax Executives Institute

These minutes were prepared by Tax Executives Institute, and although reviewed by the Treasury Department, they have not been formally approved by the Department.

Introductory Comments

On behalf of the U.S. Treasury Department's Office of Tax Policy, Assistant Secretary for Tax Policy Eric Solomon welcomed TEI President David L. Bernard and the other members of the delegation from Tax Executives Institute to the liaison meeting. Mr. Solomon said that he was pleased to be able to meet with TEI. Mr. Bernard congratulated Mr. Solomon on his appointment as Assistant Treasury Secretary.

The delegations for the Treasury Department and TEI at the liaison meeting are set forth above.

Pending Legislation

1. Administration's Fiscal Year 2008 Tax and Budget Proposals

   Mr. Bernard noted that the Administration's fiscal year 2008 budget included several new requirements relating to the reporting of payments made to corporations, basis reporting on stock sales, and merchant credit card reimbursements. Mr. Bernard noted that a proposal to require the reporting of payments to corporations was opposed by TEI in the early 1990s, adding that despite technological advances, TEI's concerns remain. He explained that there are issues relating to reporting payments to corporations on a fiscal- vs. calendar-year basis, and those on the accrual vs. cash method of accounting. More fundamentally, the proposals would burden taxpayers who are already complying with the law. Finally, Mr. Bernard noted that the revenue estimate for the proposal is relatively small, but the cost of compliance will be high.

   Mr. Solomon stated that the Administration is sensitive to the need to balance enforcement with the cost of compliance, adding that some have criticized the proposals as not sufficiently aggressive in attacking the tax gap. He noted that remarks by Treasury Secretary Henry M. Paulson the prior week show an appreciation for concerns about imposing the burden of compliance onto compliant taxpayers. This is an area where a dialogue is needed, he said, adding that Treasury fully appreciates TEI's concern about the additional administrative burden.

   Mr. Desmond stated that the largest component of the tax gap is unreported income. He invited comments on ways in which the government can focus on that area, perhaps through the use of de minimis rules or thresholds.

2. Economic Substance Doctrine

   Mr. McDonough observed that prior efforts to codify the economic substance doctrine have not succeeded, in significant part because of Treasury's opposition. TEI shares those concerns, he stated; codifying the doctrine would further complicate the system and raise significant issues of statutory construction. He asked whether the recent changes in Congress--including adoption of "pay-as-you-go" budget rules--have affected Treasury's position on the proposal or its view of the proposal's viability.

   Mr. Desmond said that recent comments by Treasury officials generally echo TEI's concerns. He invited comments on technical aspects of the proposal that could improve it, for example, by minimizing ambiguity or carving out routine transactions. There is huge pressure to raise revenue, he explained, and the Joint Committee on Taxation in 2006 estimated that codification of the economic substance doctrine would raise $18 billion. He mused, however, whether that estimate is still accurate in light of the changes brought to the accounting field by FIN 48, Accounting for Uncertainty in Tax Positions.

   Mr. Desmond also questioned whether the courts will enforce a 40-percent penalty, referring to the recent Klamath case where the court found the transaction lacked economic substance, but declined to impose a penalty. What would be the court's reaction, he asked (1) rhetorically, to the proposed strict liability penalty--might it sustain the underlying transaction rather than subject the taxpayer to such a penalty? In spite of these concerns, Mr. Desmond expressed the view that the proposal will be reintroduced during the upcoming congressional term.

3. Tax Gap

   Mr. Traubenberg referred to The Treasury's Comprehensive Strategy for Reducing the Tax Gap (Tax Gap Strategy), issued in September 2006, which paints the tax gap picture as a predominantly individual tax problem stemming from income underreporting or deduction/credit overstatement. Noting (again) the proposals in the Administration's budget, he asked what the next step will be in the process.

   Mr. Desmond explained that hearings will likely be held within the next few months both on the Administration's information reporting proposals and on...