Comments on the Thomas Bill's codification of the economic substance doctrine: August 2, 2002.

On August 2, 2002 Tax Executives Institute sent the following comments to the House Ways and Means Committee and the Department of the Treasury regarding the Codification of Economic Substance Doctrine and Related Penalty Provisions in H.R. 5095 (The American Competitiveness Act of 2002).

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On behalf of Tax Executives Institute, I am pleased to submit the following comments on section 101 and related provisions of H.R. 5095 ("The American Competitiveness Act of 2002")(hereinafter "the Act" or "the bill"). As the preeminent association of business tax professionals, TEI has a significant interest in maintaining the integrity and vitality of America's self-assessment tax system and, hence, in the development of meaningful, effective, and properly balanced legislation relating to the abusive tax shelters. Because the codification of the judicially-developed economic substance doctrine will not further these goals, TEI urges the Committee to drop the current proposals to codify the economic substance doctrine as proposed in section 101 of H.R. 5095, and the corresponding proposal in section 104 to establish a penalty for understatements attributable to transactions lacking economic substance.

TEI applauds the Chairman's decision to release a draft of the Act for public comment on July 11, well before the Committee markup. Too frequently in the past, affected taxpayers have not had a reasonable opportunity to review legislative language on a meaningful before-the-fact basis. The approach here has made it possible to examine the specific proposals in a timely manner and therefore to identify issues in, or raise questions about, them when revisions can more easily be made, if appropriate. The comments that follow are based on the draft language released on July 11 and, where noted, on the description prepared by the staff of the Joint Committee on Taxation. (1)

From the outset, TEI has acknowledged that inappropriate tax-advantaged products have been marketed and agreed that this poses a challenge to the efficacy of the tax system. The Institute firmly believes that the key to stopping such abuses is the effective administration of the tax law. Effective administration of the law, in turn, depends upon the ability of IRS agents to identify and analyze transactions, and, where necessary, to challenge them. The IRS must do more to challenge and curtail questionable transactions, including raising practitioner standards, and where appropriate, asserting currently available penalties. For this reason, the Institute supported the creation of the IRS's Office of Tax Shelter Analysis to identify, quantify, and develop comprehensive approaches to dealing with tax shelters (including the issuance of needed substantive guidance). Moreover, TEI has consistently urged the Congress and the Treasury Department to focus on disclosure-based approaches to address tax shelters. H.R. 5095 mirrors proposals approved by the Senate Committee on Finance in many important regards. Like S. 2498, the Tax Shelter Transparency Act, the Committee's general approach to tax shelters represents a marked and we]come departure from previous proposals. It properly steps in the direction of enhancing taxpayer and--more important--promoter disclosures. (2) Indeed, we suggest that a fundamental problem with the administration of the current penalty regime is that the rate is so high that it is rarely asserted against corporate taxpayers. Where penalties are disproportionate to the conduct involved, agents may be inhibited from asserting such penalties. Witness, for example, the penalty for errors involving qualified plans before the intermediate sanction rules were enacted. Because the stated penalty--revocation of exempt status--was widely considered too harsh, agents rarely ever asserted it. Thus, while administrative steps should be taken to address the certainty of application, TEI does not believe the level of accuracy-related penalties should be increased. We do, however, have significant concerns about section 101.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of business tax professionals. Today, the Institute has 53 chapters in the United States, Canada, and Europe. Our more than 5,300 members are accountants, attorneys, and other business professionals who work for 2,800 of the leading companies in North America and Europe. As a professional organization, the Institute is firmly 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. The Institute is committed to maintaining a system that works--one that builds upon the principle of voluntary compliance and is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function without unduly burdening taxpayers. We also support efforts to ensure that companies fairly present their financial condition in financial statements and related documents filed with the SEC.

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 tax laws, and to the adoption of sound tax 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, a balance must be struck between public duty and private right.

TEI members 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 Industry Case program, pursuant to which they are audited by a team of IRS agents on a continuing basis.

As a professional association of in-house tax executives, TEI offers a different perspective on tax shelters from other organizations. The Institute does not represent tax shelter promoters and developers (including investment bankers) who either sell or facilitate the transactions. Nor do we represent the professional advisors (be they attorneys or accountants) who opine on and hence assist in the development, promotion, and implementation of the arrangements...