Corporate tax shelter legislation: comments on Senate Finance Committee's preliminary staff discussion draft.

• Position: Tax Executives Institute

July 21, 2000

On July 21, 2000, Tax Executives Institute submitted the following comments to the Senate Committee on Finance on draft legislation relating to corporate tax shelters. The Institute's comments focused on a "Preliminary Staff Discussion Staff" that the Finance Committee released on May 24. The comments took the form of a letter to Senators William V. Roth and Daniel Patrick Moynihan, who are respectively, the Chairman and Ranking Minority Member of the Committee. The comments supplement the Institute's March 9, 2000, testimony before the Finance Committee, which was reprinted in the March-April issue of The Tax Executive. Signed by TEI's President Charles W. Shewbridge, III of the Atlanta Chapter, the Institute's July 21 letter was prepared under the aegis of the Institute's Corporate Tax Shelter Task Force, whose chair is Philip G. Cohen of the New York Chapter.

On behalf of Tax Executives Institute, I am pleased to submit the following comments on the Preliminary Staff Discussion Draft on Corporate Tax Shelters, which was released by the Committee on Finance on May 24, 2000. As the preeminent association of business tax professionals, TEI has a vital interest in the development of meaningful, effective, and properly targeted legislation relating to corporate tax shelters.

At the outset, TEI commends the Finance Committee for the salutary process it has adopted with respect to this important issue. If Congress is to ensure that taxpayers, practitioners, and promoters have sufficient incentive to comply with the tax law without unduly interfering with legitimate business transactions, it must thoroughly assess the situation, analyze various approaches to address the situation, and not rush to judgment. TEI is pleased that the Finance Committee has subscribed to this view. In particular, the Institute is grateful for the two opportunities it has been given to testify before the Committee, first on April 27, 1999, and more recently on March 9, 2000.

More specifically, TEI applauds the Committee's decision to release the Preliminary Staff Discussion Draft for public comment. Too frequently in the past, neither members of Congress nor the affected taxpayers have had a reasonable opportunity to review legislative language on a before- the-fact basis. Rather, exigencies have forced members of the tax-writing committees to base their decisions on narrative descriptions of various proposals, with the actual bill language not being released, or perhaps even developed, until after deliberations have ended. The Committee's deliberate approach here has made it possible for members and the public to scrutinize the specific proposals in a timely manner and therefore to identify problems with, or raise questions, about the proposals when it is still possible to do something about them (other than through a post hoc "technical correction" process).

Equally important, TEI very much appreciates the willingness of the Committee's staff to meet with us and to discuss openly our concerns about possible legislative approaches to the tax shelter issue and, indeed, whether legislation is necessary in light of judicial, regulatory, administrative, and other developments. The transparency of the process has contributed to an atmosphere in which the areas of disagreement have been fully explored and constructively narrowed. Nevertheless, while many of the concerns raised by TEI and other parties in formal testimony have been satisfactorily addressed in the Preliminary Staff Discussion Draft (for example, we strongly endorse the staff's rejection of a codified business purpose test), other issues require further analysis and refinement (e.g., the definition of "corporate tax shelter" and proposals to double the substantial understatement penalty, to eliminate the reasonable cause exception, or to require a senior officer to attest to the facts underlying particular transactions). These comments address the open issues, not only supplementing TEI's formal testimony before the Committee but also our oral comments to members of the staff, both before and after the release of the Preliminary Staff Discussion Draft.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 52 chapters in the United States, Canada, and Europe. Our more than 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in the United States and Canada; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. TEI members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. Most of the companies represented by our members are part of the IRS's Coordinated Examination Program, pursuant to which they are audited by a team of IRS agents on an ongoing basis. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

As a professional association of in-house tax executives, TEI offers a different perspective on corporate tax shelters from other organizations that have presented their views to the Committee. The Institute does not represent the so-called tax shelter promoters and developers (including investment bankers) who either sell or facilitate the transactions. Nor do we represent the professional advisers (be they attorneys or accountants) who opine on the legitimacy of the arrangements. Rather, TEI's members work directly for the corporations that regularly enter into business transactions that require an analysis of their tax benefits and burdens. These companies have professional staffs dedicated to minimizing their tax liability while ensuring compliance with the law. To this end, these companies evaluate particular transactions (whether developed by their own staffs or brought to the companies by outside advisers or promoters), decide whether or not these offerings pass muster -- not only in terms of the substantive requirements of the tax law but, importantly, in terms of their own business needs and corporate culture -- and, if they proceed, report the transactions on their tax returns and defend them on audit. Ultimately, of course, these companies face potential exposure to sanctions (and public opprobrium) should their analysis of a transaction not be sustained. In other words, TEI's members are in the thick of it; they are obliged, first, to ensure their companies' compliance with...