TEI urges rejection of budget proposal to end deductibility of interest on corporate tax underpayments.

TEI Urges Rejection of Budget Proposal to End Deductibility of Interest on Corporate Tax Underpayments

Tax Executives Institute urges the rejection of any budget proposal to deny a deduction to corporations for interest paid on income tax underpayments. The proposal, which apparently is based on H.R. 5557 -

* threatens to disrupt the orderly administration of federal, state, and foreign tax audit systems;

* is punitive;

* is inappropriately retroactive with respect to interest accumulated prior to its stated effective date;

* is at odds with longstanding and legitimate tax law principles; and

* represents the type of gimmickry that both the Administration and Congress have pledged to avoid in crafting realistic and reasonable deficit reduction legislation.

Background

Tax Executives Institutes (TEI) is the principal association of corporate tax executives in the United States and Canada. The Institute's more than 4,500 members are employed by 2,000 of the leading corporations in North America and represent a cross-section of the business community. TEI is dedicated to maintaining a tax system that works - one that is fair and administrable and with which taxpayers can comply.

Discussion

From press reports, TEI understands that consideration is being given to a proposal to deny a business deduction for interest paid by corporations on income tax underpayments. According to published reports, such a proposal (which would be effective with respect to interest payments made after December 31, 1990) is estimated to raise $4.5 billion during the 1991-1995 budget period.

TEI opposes the inclusion of the proposal to deny a deduction for interest paid on income tax underpayments for the following reasons:

1. The proposal threatens to disrupt the orderly administration of federal, state, and foreign tax audit systems. Currently, the Internal Revenue Service, state, local, and foreign tax administrators are unable to conduct timely audits of many corporations and consequently regularly seek extensions of the statute of limitations from the affected taxpayers. Denying corporate taxpayers a deduction for interest paid on income tax underpayments would harden taxpayers from giving such extensions because it would postpone the ultimate determination of the amount of the taxpayer's liability that would be owing plus accrued interest. This could lead to either the expiration of the statute of limitations before an audit is complete (which would reduce...