House Ways and Means Committee testimony: corporate tax shelters.

November 10, 1999

On November 10, 1999, the House Committee on Ways and Means held a public hearing on proposals relating to corporate tax shelters. Tax Executives Institute was represented at the hearing by its President, Charles W. Shewbridge, III of BellSouth Corporation. Mr. Shewbridge's written statement is reprinted below. TEI's position on proposals relating to corporate tax shelters was developed by the Institute's Corporate Tax Shelters Task Force, whose chair is Philip G. Cohen of Unilever United States Inc. Earlier this year, TEI testified on the same subject before the Senate Committee on Finance. That testimony is reprinted in the May-June 1999 issue of The Tax Executive.

I am Charles W. Shewbridge, III, Chief Tax Executive for BellSouth Corporation in Atlanta, Georgia. I appear before you today as the President of Tax Executives Institute, the preeminent group of corporate tax professionals in North America. The Institute is pleased to participate in the Committee's hearing on corporate tax shelters and to provide, among other things, comments on the proposals and recommendations offered by the staff of the Joint Committee on Taxation and the Treasury Department.(1)(*)

Mr. Chairman, this subject is a very important one to TEI members, to the tax community generally, and to the tax system as a whole. In the press release announcing this hearing, Chairman Archer identified the following five issues for consideration:

* The nature and scope of the perceived corporate tax shelter problem;

* The manner in which the IRS and the courts are currently addressing corporate tax shelters;

* Additional steps that the Administration could take under current law to address such tax shelters;

* Additional legislation that might be necessary to address corporate tax shelters; and

* Procedures the Administration has in place or could adopt, or that Congress could enact, to ensure that new or existing enforcement tools brought to bear on corporate tax shelters do not interfere with legitimate business transactions or make more difficult the application of an already complex income tax.

After providing background on Tax Executives Institute and my own experience as a tax executive, I will address each of these issues.

1. Background: The Perspective of In-House Tax Professionals

   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 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. Hence, members of the Institute deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily a basis.(2) Tax Executives Institute 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. Our background and experience enable us to bring a unique and, we believe, balanced perspective to the subject of corporate tax shelters.

   Put another way, TEI's perspective differs from that of other organizations that have commented on this issue. The Institute does not represent the so-called tax shelter promoters and developers (including investment bankers) who either sell or facilitate the transactions. We do not 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. We along with the government have the most at stake in trying to craft an equitable tax system that is administrable.

   Although I am here today on TEI's behalf, I wish to provide some context for my testimony about my role as Chief Tax Executive for BellSouth Corporation. I have been a tax professional for nearly 30 years, and have been employed by BellSouth for half of that period. As the company's senior tax official, I am ultimately responsible for 40,000 federal, state, local, and foreign returns that BellSouth files each year. The company's 1998 federal income tax return, which I signed earlier this year, reflected an aggregate federal income tax liability of more than $1.6 billion.

   Given the size of that number, it should go without saying that I take my job seriously. In discharging my duties, I oversee a staff of more than 100 people. We see our job as twofold -- first, to ensure BellSouth's compliance with the state, local, federal, and international tax laws and, second, to serve the company's shareholders by ensuring that we pay only the taxes required by law. This second facet of the job is not new and it is not something that we shrink from defending. Concededly, those who seek to influence the debate by the language they use pejoratively describe today's tax department as a "profit center,"(3) but the desire to reduce -- and the legitimacy of reducing -- one's tax liability is as old as the Rosetta Stone(4) and as legitimate as seeking shelter from the cold or rain.(5) With due respect, TEI suggests that those who wish to consign corporate tax departments to the role of scriveners, filling out tax returns, fundamentally misunderstand the historical, and we submit wholly proper, role of in-house tax professionals. Similarly, those who proceed on the assumption that tax executives neither understand nor willingly embrace our professional and legal responsibility to ensure our companies' compliance with the tax laws do us, our companies, our shareholders, and -- equally important -- the tax system a disservice. To be sure, there may be taxpayers who willfully or inadvertently cross over the line, just as there may be practitioners, promoters, revenue agents, government lawyers, and others who do the same. It would be a mistake, however, without sufficient empirical evidence to suggest that the problem is pandemic.(6) Let there be no mistake: TEI supports reasonable administrative, judicial, and legislative steps to address the tax shelter issue, but the steps must be measured, targeted, and based on fact, not feeling. Thus, we take to heart Congressman Doggett's statement last week that "immodest rhetoric" has no place in this debate. We regret, however, that such rhetoric seemingly emanates more often from those seeking to enact legislation than from those who seek to clarify its scope and effect. While we agree that if the tax system does not respond to noncompliance or to sham transactions, public confidence in the fairness of the system will be diminished, we also believe that public confidence can be equally impaired by the enactment of overreaching and overbroad legislation.

   2. What Is the Nature and Scope of the Perceived Corporate Tax Shelter Problem?

      Before enacting expansive legislation dealing with corporate tax shelters, Congress is well advised both to ask and to answer the question "What is meant by the term `corporate tax shelter'?" It is not a question whose answer can be assumed. It is likewise not a question whose answer can be put off indefinitely. Whether you view the solution as lying in increased disclosure, the enactment of an economic substance doctrine or business purpose test, the imposition of new penalties, or "just" the racheting up of the IRS's enforcement activities, the definition must be both knowable and known. At this junction, TEI questions whether it is.

      Thus, the Treasury Department and the staff of the Joint Committee on Taxation have both issued substantial and serious studies that provide much food for thought on the subject of corporate tax shelters. Both have devoted considerable resources to identifying the scope of the problem from their perspectives and to crafting proposed substantive definitions of "corporate tax shelter" that attempt to measure the tax benefits of a transaction against its economic substance. Although we greatly respect the expertise and good faith of those involved -- although we very much appreciate their efforts to date to respond to taxpayer and tax practitioner concerns and to refine their approaches -- we remain concerned that the proposals rely too much on amorphous and unworkable concepts that pose challenges to tax administration and may well sweep into the "tax shelter" net many legitimate transactions for the simple reason that they produce a tax benefit to the taxpayer.

      Indeed, we are disappointed that some believe that lack of clarity is a virtue. Thus, the Treasury Department has previously framed the issue as between "rules" and "standards" (the latter being more general) and has recently suggested that what is necessary is a simple ex ante standard basically providing "Thou Shall Not Abuse the Tax Code."(7) TEI is concerned, however, that such a hortative approach to the...