TEI comments on tax shelter disclosure regulations: January 28, 2003.

On January 28, 2003, TEI filed comments with the Internal Revenue Service relating to the temporary and proposed regulations under section 6011 and 6112 of the Internal Revenue Code. The temporary and proposed rules modify the rules for disclosure and reporting of certain transactions as well as the requirement to maintain and furnish lists of investors in tax shelter transactions.

The comments were prepared under the joint aegis of TEI's Federal Tax and IRS Administrative Affairs Committees, whose chairs, respectively, are Mitchell S. Trager of Georgia-Pacific Corporation and David L. Bernard of Kimberly Clark Corporation.

On October 17, 2002, the Treasury Department and Internal Revenue Service issued guidance under sections 6011 and 6112 of the Internal Revenue Code substantially modifying the rules relating to the disclosure and reporting of certain transactions under Temp. Reg. [section] 1.6011-4T and the requirement to maintain investor lists under Temp. Reg. [section] 301.6112-1T. Specifically, the government issued temporary and proposed rules (T.D. 9017) revising the temporary and proposed regulations released February 28, 2000 (and subsequently amended several times), requiring taxpayers to disclose their participation in "reportable transactions." In addition, temporary and proposed rules (T.D. 9018) were issued modifying the requirement for certain transaction promoters and their material advisers to maintain and produce lists of investors in "potentially abusive shelters." (1) The rules were published in the FEDERAL REGISTER on October 22, 2002 (67 Fed. Reg. 64799 and 64807, respectively), and in the Internal Revenue Bulletin (2002-45 I.R.B. 815 and 823, respectively). A hearing on the temporary and proposed rules was held on January 7, 2003.

Background

Tax Executives Institute is the preeminent association of business tax executives in North America. Our more than 5,300 members represent 2,800 of the leading corporations in the United States, Canada, and Europe. TEI represents a cross-section of the business community, and 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, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply.

These goals can only be achieved through our members' adherence to the highest standards of professional competence and integrity. To ensure compliance with the law, TEI's Standards of Conduct exhort the members to "present the facts required in tax returns and all the facts pertinent to the resolution of questions at issue with representatives of the government imposing the tax." As important, the members "recognize an obligation to make an affirmative contribution to the sound administration of the laws, and to the adoption of sound legislation, by cooperation and consultation with the persons charged with those functions, having due regard for the interests of society, as well as the interests of the company and its employees." In short, TEI members agree that a balance must be struck between public duty and private right.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the package of rules released by the government to address tax-motivated transactions. TEI members know all too well that the inherent complexity of the Internal Revenue Code make drawing the line between sound tax reduction strategies, on the one hand, and "tax shelters," on the other, difficult. Since TEI does not represent tax shelter promoters or their advisers, our comments relate, except for the definition of a "material adviser," primarily to the temporary regulations under section 6011(a) that require taxpayers to file statements with their returns disclosing "reportable transactions."

Overview of Temporary Disclosure Regulations

Under Temp. Reg. [section] 1.6011-4T(a), every taxpayer that participates directly or indirectly in a reportable transaction as defined in Temp. Reg. [section] 1.6011-4T(b) is required to attach a disclosure statement (on newly prescribed Form 8886) to its tax return "for each taxable year for which the taxpayer's Federal income tax liability is affected by the taxpayer's participation in the transaction." (2) In addition, a copy of the disclosure statement for the first taxable year for which disclosure is required must also be filed with the IRS's Office of Tax Shelter Analysis (OTSA). Moreover, if a transaction becomes a reportable transaction (e.g., the transaction subsequently becomes a listed transaction described in Temp. Reg. 1.6011-4T(b)(2) or there is a change in facts that causes a transaction to become reportable under paragraphs (b)(5) through (b)(7)) on or after the date the taxpayer has filed the return for the first taxable year for which the transaction affects the taxpayer's or a partner's (or S corporation shareholder's) tax liability, the disclosure statement must be filed as an attachment to the taxpayer's federal tax return next filed after the date the transaction becomes reportable regardless of whether the transaction affects the taxpayer's or any partner's or shareholder's tax liability for that year.

The temporary regulations set forth six categories of reportable transactions. The first category of reportable transactions, i.e., "listed transactions," includes those identified by the Treasury and IRS in published guidance as "tax avoidance" transactions. (3) Other reportable transactions include confidential transactions, (4) transactions affording taxpayers contractual protection, (5) loss transactions, (6) transactions with significant book-tax differences, (7) and transactions involving assets with brief holding periods. (8) In addition, Temp. Reg. [section] 1.6011-4T(c)(3)(ii) requires certain United States shareholders in controlled foreign corporations to report their "indirect" participation if the controlled foreign corporation directly participates in a reportable transaction described in Temp. Reg. [subsection] (b)(2) through (b)(5) or (b)(7) or participates in a transaction that reduces or eliminates an income inclusion under section 551, 951, or 1293. In effect, the definition implicitly creates a seventh broad category of reportable transactions for transactions undertaken by a controlled foreign corporation that reduce the shareholder's Subpart F income. The temporary regulations also enumerate specific categories of exceptions to the "book-tax difference" category and exclude from the definition of reportable transactions any transaction for which the Commissioner issues public guidance stating that a transaction is not reportable. (9) In the preamble to the temporary regulations, the IRS and Treasury invite comments on specific transactions that should not be subject to disclosure or that should be excluded from the various categories of reportable transactions (the so-called angel list). (10)

Overview of TEI Comments and Summary of Recommendations

1. Overview of Comments. Tax Executives Institute has long held that the most effective approach to addressing tax shelter transactions is to enhance tax return disclosures. By identifying and targeting indicia of transactions that are characteristic of "tax shelters" and requiring enhanced disclosure of such transactions, the IRS can properly focus its examination resources on questionable transactions. TEI's comments on the 2000 regulations noted that the definition of reportable transactions contained a number of nebulous concepts and unclear subjective tests. Thus, we commend the Treasury and IRS for revising the disclosure rules to emphasize objective criteria for the determination of reportable transactions.

   The preamble to the temporary regulations explains that the revised disclosure tests were developed in part in reaction to a perception that "taxpayers are interpreting the five reporting characteristics in the 2000 regulations in an overly narrow manner and ... interpreting the exceptions in an overly broad manner." (11) As a result, the temporary regulations adopt not only objective criteria but also more expansive reporting requirements. TEI believes the requirements cast an unnecessarily wide net, requiring disclosure of many routine transactions. Notwithstanding our support for objective rules, we believe the temporary regulations overreach and will impose substantial administrative burdens on many business taxpayers. Moreover, the exceptions to disclosure are too narrow to afford taxpayers with meaningful relief and minimize the preparation and filing of excessive and unnecessary disclosure statements. Treasury officials have publicly acknowledged that the rules are so broad that they will affect compliant taxpayers as harshly as those that engage in "potentially abusive transactions." (12) Hence, many large companies (say, those involved in the Coordinated Industry Case program) will likely be required to provide detailed reports of hundreds (or, perhaps, thousands) of routine commercial transactions that occur in the ordinary course of their business. (13) Indeed, the disclosure rules will sweep in many more transactions than IRS agents can effectively examine or OTSA can timely review, analyze, and provide beneficial guidance for.

   More specific comments and recommendations for improving the regulations, especially for narrowing the reporting requirements and categories, follow. TEI's overarching concerns with these regulations are the...