March 11, 2010
AGENDA
I.Welcome and Introduction
II.Commissioner’s Priorities
a.Tax Risk Management – Conversation with the Boardroom
b.Transparency
Announcement 2010-9 represents the latest step in the IRS’s continuing effort to better identify transactions and areas of risk that should be the focus of its examination resources. In line with Forms 8275, M-3, and 8886, it is designed to assist the IRS to expend its resources examining – rather than searching for – transactions. TEI is in the process of preparing written comments on Announcement 2010-9, but we welcome the opportunity to discuss the Announcement and in particular, the following:
- Effective date
- Materiality threshold
- Unknowable amounts – valuations, transfer prices, etc.
- Permanent v. Temporary Differences
- Current year v. cumulative
c.Other
III.Program Priorities
a.Compliance Assurance Process
The Compliance Assurance Process (CAP) pilot was designed to reduce taxpayer burden and uncertainty while ensuring the accuracy of tax returns prior to filing, and thereby minimizing the number and scope of post-filing examinations. Since its initial roll-out, the program has grown to well over one hundred participants.
As CAP enters its sixth year, we would like to address the following:
- When will the determination be made regarding the permanent status of CAP?
- With the growing population of participants, does the IRS have sufficient resources to support the size of the program?
- How is the IRS considering leveraging CAP to general program examinations?
b.National Employment Tax Examination Initiative
Moratorium on Cell Phone Audit Pending Action on Obama Legislative Proposal. The Administration’s Fiscal 2011 Budget includes a proposal to remove cell phones from the definition of listed property under section 280(F)(d)(4) and to treat an employee’s personal use of an employer-provided cell phone as a de minimis fringe benefit. Commissioner Shulman said during a January 8, 2010, interview on C-SPAN’s Newsmakers program, “We're quite hopeful Congress is going to act on this . . . . In the meantime, we're not doing anything special or moving forward with any initiatives. Our hope is that there will be legislation to clean this up.” Pending congressional action on the proposal, will the IRS suspend enforcement activity against employers for the personal use of employer-provided cell phones?
IV.Appeals-Related Matters
a.Resources, Volume and Closure Rate
TEI welcomes a discussion on the following questions:
- How do the current volume and closure rates of CIC cases compare with the overall rate?
- What effect has the Industry Issue Focus approach to issue management had on the case closure rate for CIC cases?
- Are there any program changes being considered relative to CIC taxpayers?
b.Appeals Issue Management Task Force – The Appeals Issue Management Task Force was formed to assess, among other things, whether Appeals’ involvement in LMSB issue management teams compromised (in fact or perception) Appeals’ independence. We welcome a status report on the Task Force’s work.
V.Regulatory Issues
a.Debt/Equity classification
Rev. Proc. 2010-3, 2010-1 I.R.B. 110, updates the IRS’s annual “no ruling” revenue procedure. Section 4.02(1) states that there “may be instances where IRS will rule on whether an instrument issued by a domestic corporation is classified as stock or indebtedness.” Specifically, the IRS may “issue a letter ruling with respect to an instrument issued by a domestic corporation if (1) the taxpayer believes that the facts strongly support the classification of an instrument as stock and (2) the taxpayer can demonstrate compelling reasons to justify the issuance of a letter ruling.” (Emphasis added.)
TEI applauds Chief Counsel’s decision to issue rulings on the character of corporate instruments. We recommend that the policy be expanded to include the characterization of instruments as debt. Providing rulings to increase the certainty of characterization of instruments will minimize the frequency and scope of disputes and also permit the IRS to redirect scarce audit resources.1 We also recommend that the guidance be expanded to foreign corporate instruments and equity instruments issued by a partnership.
Finally, we note that a number of countries have adopted safe harbor guidelines prescribing the amount of permissible debt and equity in order to minimize disputes about thin capitalization. If the change in ruling policy affords the government sufficient experience to develop guidance on the indicia of equity and debt instruments, would the IRS or Treasury consider prescribing a safe harbor, debt-equity ratio, e.g., three to one, for non-financial institutions? In addition to definitional issues arising under section 385, (1) are there specific issues of concern to the IRS that TEI should consider before advancing a proposal for establishing a debt-equity safe harbor, and (2) would the IRS and Treasury be receptive to issuing safe harbor guidance?
VI.Conclusion
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1 This would be especially so when addressing deferred payment obligations with original issue discount, such as those at issue in the recently dismissed case of GlaxoSmithKline Holdings (Americas) v. Commissioner of Internal Revenue, United States Tax Court Docket No. 18940-08.