TEI-IRS Midstates Liaison Meeting.

February 10, 1999

On February 10, 1999, representatives of Tax Executives Institute met with officials of the Internal Revenue Service's Midstates Region in Dallas, Texas. TEI's delegation to the meeting was led by Kendall D. Coyne of Sprint PCS, Vice President-Region V, and included the following individuals: Steven R. Evans of MidAmerica Energy Company, Frank Calfo, Cynthia A. Rooks of Harley-Davidson, Inc., W. Kurt Meier of Morton International, Inc., Thomas R. Blythe of OwnesIllinois, Inc., Kelley A. Scharosch of Sprint PCS, Madeline R. Schneider of Sprint Corporation, Bill Zornes of PartsAmerica, Jack N. Reif of Dayton Hudson Corporation, Charles B. Tebelius of IMI Group Inc., D. Jeanne Sturges of Citgo Petroleum Corp., Robin M. Fitzpatrick of Citgo Petroleum Corp., Ben J. Clayton of Phillips Petroleum Co. (TEI Vice President-Region VI), Anthony W. Rackley of The Williams Companies, Inc., Gareth S. Glaser of Alcon Laboratories, Inc., William B. Blaylock of Texas Instruments Inc., R. Randall Capps of Electronic Data Systems Corp., Nan E. Smoot of Mary Kay Inc., Janet M. Wilson of Cooper Industries, Inc., Gerard G. Meneilly of Exxon Company, USA, Malcolm E. Calkins of Union Pacific Resources Company, John C. Moore of Tesoro Petroleum Corp., and Mary L. Fahey of TEI's legal staff. In submitting the questions and answers for the meeting for publication, Mr. Coyne wrote the following:

"The meeting began with Bobby Scott, Regional Chief Compliance Officer (Southeast Region), providing a thorough and interesting discussion regarding IRS Restructuring. Mr. Scott is the team leader of the IRS Middle Market/Large Corporate Design Team. After listening to his comments, it was the consensus of TEI participants that the role of the Industry Specialist Program (ISP) will be enhanced in the restructured agency. The Chief Counsel's Office will support the ISP directly. A closer, more controlled approach is likely with ISP and taxpayers at all levels. As the regions and geography take on less importance within the IRS, attention will focus on industry issues. This will include a special focus on training agents in specialized industries. Industry issues and control will emerge from this process. There is concern that the independence of Appeals, though professed with confidence by the IRS, may be compromised in this process.

"Ladd Ellis, Regional Commissioner, prepared TEI members for positive change, including many new faces and responsibilities as the IRS restructuring unfolds. Additionally, he reported that many new system and software upgrades are necessary and underway for delivery in the near future.

"John Buchanan moderated the discussion. Perhaps the response by the IRS that generated the most questions related to capitalization issues. Notwithstanding widespread taxpayer concerns, it is the view of the IRS Regional Officers that there is no evidence of agent indiscretion concerning the utilization of INDOPCO principles outside their expected interpretation.

"Melinda Kurtz did a remarkable job of organizing the questions and answers for the Conference. The region wishes to express its appreciation to her and all those IRS employees who contributed to the overall success of the meeting."

1. How is the IRS applying the global interest netting rule on a retroactive basis? For example, if the statute of limitation has run on an assessment, but claim for refund is pending, can the taxpayer still ask the IRS to do the netting?

   There will be forthcoming guidance on the applicable statute of limitations that must be open (and the applicable date of when the statutes must be open) before the taxpayer can take advantage of the retroactive application of the statute. It is anticipated that the revenue procedure will be out by the end of the first quarter of 1999.

2. Recent amendments to section 6662 and other sections of the Internal Revenue Code give the IRS the power to impose penalties for underpayments attributable to tax planning activities simply by characterizing those activities as a tax shelter How can tax professionals engage in legitimate tax planning without the fear of tax penalties under these revised rules?

   The revised definition of tax shelter for purposes of the substantial understatement penalty under section 6662 (as well as the new confidential corporate tax shelter registration requirement under section 6111) is intended to discourage taxpayers from entering into transactions that do not comport with the tax laws. The substantial understatement penalty, as revised, is effective with respect to transactions entered into after August 5, 1997. Although currently effective, the penalty provision is not intended to preclude a taxpayer from engaging in a legitimate transaction that furthers a substantive, non-tax business purpose of such taxpayer.

   Guidance on the revised definition of tax shelter for purposes of the substantial understatement penalty is not currently planned (although it may be included on the joint IRS and Treasury 1999 business plan. The IRS and the Treasury Department do intend to issue regulations under section 6111, involving the new...