Recommendations Regarding the 2000 IRS/Treasury Guidance Priority List
March 6, 2000
On March 6, 2000, Tax Executives Institute submitted to the Internal Revenue Service and Department of the Treasury the following comments outlining TEI’s recommendations for the Treasury/IRS 2000 Guidance Priority List. The submission was made under the aegis of TEI’s Federal Tax, International Tax, and IRS Administrative Affairs Committees. (Note: The Treasury Department and IRS released their guidance priority list on March 21, and it included most of the items on TEI’s list.)
As discussed during the annual liaison meetings between TEI and the Treasury Department and IRS, respectively, and as requested in Notice 2000-10, 2000-5 I.R.B. 451, TEI is pleased to forward the enclosed recommendations regarding the 2000 Treasury/IRS Guidance Priority List.
As an association of corporate tax professionals, TEI is firmly committed to working with the Treasury Department and the IRS to develop and maintain an administrable tax system. We believe that by devoting more time to providing guidance (especially on a pre-filing or assistance basis), the IRS and Treasury can reduce the resources consumed by post-filing activities while nevertheless enhancing compliance. Three areas actively discussed during the annual liaison meetings remain among the Institute’s highest priorities for the 2000 guidance priority list. Specifically, we believe that examinations of both capitalization issues and qualifying research activities for the research tax credit consume disproportionate amounts of taxpayer and government resources. Hence, both areas would benefit substantially from additional up-front guidance. In addition, the recently released package of guidance relating to the registration of tax shelter transactions addresses a void that has regrettably contributed to the heightened controversy over tax shelters. TEI welcomes the release of the tax shelter package and looks forward to commenting on its myriad details. Finally, we also enclose, by way of appendix, a list of other items for which we believe guidance is essential in the year 2000.
The 1999 guidance priority list identified a half-dozen discrete issues for which guidance was to be issued clarifying whether the expenditures are deductible or capital in nature. The government addressed three of the items on that list (i.e., the treatment of investigatory expenses, ISO 9000 costs, and the costs of removal). For the three remaining discrete issues — i.e., cyclical maintenance costs, sales commissions paid to obtain new customers, and mutual fund launch costs — we encourage the government to provide guidance in 2000.
More important, we encourage the IRS and Treasury Department to work toward issuing guidance that will lead to a more global framework for resolution of capitalization issues. Both taxpayers and the government are frustrated by a guidance approach that resolves capitalization issues on a case-by-case basis (whether in public or private rulings) without providing broader principles that can be applied to facts and circumstances outside those specifically addressed in the ruling. In TEI’s view, several areas are ripe for a broadbased approach. For example, a revenue ruling — or regulations themselves — could be issued to provide a safe harbor for de minimis expenditure amounts that will not be subject to capitalization (e.g., repair expenses where a project that constitutes less than a certain percentage, say 10 percent, of the original cost of an asset are not capitalized except in rare or unusual circumstances). As another example, a revenue ruling could provide that recurring expenditures are generally deductible because (1) capitalization of such expenses distorts the proper matching of income and expense that capitalization seeks to achieve and (2) little or no enduring future benefit can be ascribed to a recurring expenditure.
Finally, during the liaison meeting, Treasury Department representatives indicated that the government is considering other issues on which to issue broad-based capitalization guidance, including the plan-of-rehabilitation doctrine and the definition of repairs. We encourage the IRS and Treasury to continue exploring those issues and to issue broadly applicable rules that will resolve capitalization issues.
Qualifying Research for Purposes of the Research Credit
TEI and many other groups submitted comments to the IRS and Treasury Department on proposed regulations released in December 1998 relating to the definition of qualified research for purposes of the research tax credit. In order to avoid vitiating the credit by adopting rules that are more restrictive than Congress intended, the comments generally urge the IRS and Treasury to substantially modify the proposed rules. Indeed, in the Conference Agreement to the 1998 Tax and Trade Relief Extension Act and again in the Conference Agreement to the 1999 Tax Relief Extension Act, Congress urged the Treasury Department and IRS to carefully consider the comments they have received in respect of the definition of qualified research. In connection with the 2000 guidance priority list, TEI recommends that the Treasury Department and IRS take the congressional directive into account and repropose substantially revised regulations on qualified research as soon as practicable. In addition to conforming more closely with congressional intent, the revised regulations should be simpler, easier to administer, and should avoid imposing unnecessary recordkeeping burdens. To achieve those goals, the IRS should consider adopting safe harbors. Moreover, taxpayers devote considerable resources to pre-filing activities documenting the reported credit amount only to spend even more time and resources on a post-filing basis responding to an inordinate number of requests for additional, detailed information. Hence, in addition to issuing revised regulations, the IRS should consider modifying its approach to the examination of research credit activities.
Regulations on Registration of Tax Shelters and Other Guidance Curbing Shelter Transactions
On February 28, 2000, the IRS and Treasury Department released a substantial package of temporary and proposed regulations and other guidance aimed at curbing abusive tax shelter transactions. The regulations and notices will affect taxpayers, promoters, and “purchasers” of “reportable transactions.” While TEI is still studying the package and intends to provide detailed comments, the regulations clearly confirm the view that the IRS and the Treasury Department possess considerable administrative authority to curb questionable transactions. We look forward to analyzing and commenting on the package and urge the Treasury and IRS to promulgate final regulations consistent with public comments as soon as possible. We also urge the Treasury and IRS to move expeditiously to revise Circular 230, heightening the standards of conduct for advisers who issue the opinions on which the promotion of reportable transactions rely.
If you have any questions about the Institute’s recommendations for the guidance priority list, please contact Michael J. Murphy or Timothy J. McCormally of the Institute’s staff at 638-5601.
TEI’s Recommendations for 2000 IRS/Treasury Guidance Priority List
1. Section 368 Regarding Corporate Transactions Involving Disregarded Entities. The “check-the-box” regulations give rise to legal entities that are disregarded for tax purposes. Without regulatory guidance, it is unclear how such entities are to be treated for purposes of the merger, or other reorganization, rules. We recommend that rules be proposed.
2. Section 355(e) Regarding Distributions of Controlled Corporation Stock. A number of practitioners, taxpayers, and business taxpayer groups, including TEI, have submitted comments on the need for rules clarifying the definition of “plan (or series of related transactions)” under section 355(e). We urge the IRS to issue revised regulations consistent with those comments that will assist distributing or controlled corporations in rebutting the two-year statutory presumption periods. Moreover, additional guidance is needed in respect of many other issues arising under section 355(e), including, for example, the effect of share repurchase programs, public trading of shares generally, and the exercise of compensatory stock options (or the sale of stock acquired thereby).
3. Section 351(g) Regarding the Use of Nonqualified Preferred Stock (NQPS). TEI and other groups have submitted comments on the tax treatment of nonqualified preferred stock under section 351(g). We note that proposed regulations under section 356 (REG-105089-99) will clarify the use of NQPS and other preferred stock in certain reorganizations, exchanges, and distributions. While those proposed regulations constitute helpful guidance in determining whether NQPS will be treated as “other property” in connection with such transactions, we urge the government to issue additional regulations clarifying when a financial instrument satisfies the definition of NQPS.
4. Overlap of SRLY Rules and Section 384. In 1999, the IRS released final regulations providing relief where both the separate return limitation year (SRLY) rules and section 382 apply to limit the use of net operating or capital loss carryovers. We encourage the government to issue similar remedial relief where the SRLY rules overlap with section 384 thereby limiting the use of credit carry-overs.
1. Foreign Tax Credits. Regulations are needed to clarify the scope of Notice 98-5, relating to the denial of foreign tax credits in certain “abusive” situations, including examples of when the ruling may apply. In addition, the section 904(f) regulations, relating to overall foreign losses, should be revised to replace the out-dated 1987 regulations and Notice 89-3.
2. Subpart F/Deferral. TEI urges the Treasury Department to complete its study of the future of Subpart F and the deferral of earnings by CFCs. In the meantime, specific guidance is needed, as follows:
* Regulations addressing the treatment of partners and partnerships under Subpart F.
* Update the existing PFIC regulations (especially the section 1295 regulations) to take into account the PFIC/ CFC overlap rule of section 1297(e).
* Finalize the proposed regulations under section 898, relating to conforming year-ends of certain foreign corporations to the year-ends of their U.S. shareholders.
1. Use of New Technologies in the Administration of Qualified Plans. Guidance is needed to assist plan administrators and sponsors in implementing the new technologies (i.e., voice response systems, websites, etc.) employed by investment money managers. Questions that should be addressed include: the documentation that must be retained for purposes of determining compliance with applicable pension regulations (e.g., spousal consents secured) and information required by auditors when performing financial statement preparation. Plan sponsors are concerned that if a “paper trail” cannot be reviewed, the plan may be “at risk” for compliance purposes (i.e. 401(a)) or independent auditors may not be able to provide an opinion for the financial statements of a plan.
2. Section 125 Cafeteria Plans. Proposed regulations under section 125 were first released in 1984 but have never been promulgated as final regulations. Interim guidance including Notices, Announcements, rulings, and additional proposed regulations, however, have been issued. TEI recommends that proposed regulations under section 125 be reissued thereby consolidating extant cafeteria plan guidance, addressing unanswered “change of status” issues (including especially a change from employee to self-employed (or partner) status), and generally updating the rules.
3. Section 411(d) Relief. Many plans use prototype documents. When plans are amended under different prototypes, it is often difficult to provide exactly the same benefits without encumbering the plan with myriad administrative costs for forms of benefits that likely will never be used. We urge the IRS and Treasury to consider issuing regulations providing relief from the anti-cutback rules of section 411(d), especially where plans are consolidated following a merger or other acquisition.
1. Guidance under Section 6621(d) Regarding Interest Netting Computations. Rev. Proc. 99-43 clarified many questions left open upon enactment of section 6621(d). Nonetheless, much uncertainty remains in respect of the specifics of interest-netting computations. Guidance is needed to ensure that the IRS, taxpayers, and tax practitioners agree on the proper approaches to the computations and to ensure that all taxpayers are treated consistently. In particular, the IRS should issue guidance defining the term “same taxpayer” much more broadly than in Rev. Proc. 99-43, for example, by considering a foreign sales corporation and its related supplier together. Guidance should also address the discrepancy in result when applying section 6621(d) (net interest rate of zero) rather than section 6402 (offsetting of liabilities and credits).
2. Expand the Availability of Alternative Dispute Resolution Techniques. The IRS’s plan for modernization calls for the IRS to redeploy its resources from post-filing activities to pre-filing. In order to achieve that goal, the IRS must efficiently and expeditiously address its current backlog of issues and cases in the Examination Division. TEI believes that an expansion of the types of taxpayers and situations eligible for alternative dispute resolution (ADR) techniques will accelerate resolution of the backlog of cases. Hence, administrative action should be undertaken to expand the availability of ADR. For example, the Accelerated Issue Resolution (AIR) process described in Rev. Proc. 94-67 could be expanded beyond cases in the IRS’s Coordinated Examination Program. In addition, mediation procedures could be beneficially employed at the examination level to resolve factual issues. Other approaches to expanding alternative dispute resolution mechanisms should also be explored, including, for example, approaches that involve multi-disciplinary teams from counsel, appeals, and examination working in tandem with the taxpayer to address and resolve multiple years simultaneously.
1. Reporting of Gross Proceeds Paid to Attorneys. TEI and many other groups submitted comments on the proposed regulations under section 6045(f), relating to information reporting on payments of gross proceeds to attorneys. The rules were proposed to be effective for payments made after December 31, 1999, but Notice 99-53 announced that the regulations would be effective no earlier than payments made after December 31, 2000. TEI recommends that the regulations under section 6045(f) be revised to take account of the numerous public comments. Moreover, the rules should be released at least six months prior to their proposed effective date in order to afford taxpayers time to make any required information reporting system changes.
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