TAX COUNCIL POLICY INSTITUTE

- INDOPCO: Past, Present & Future -

A Federal Tax Policy Symposium

FINAL REPORT
June 20, 2000

The Tax Council Policy Institute's first federal tax policy symposium "INDOPCO: Past, Present & Future," held on February 8-9, 2000, was a resounding success by all accounts.  Over 300 top tax professionals from the private sector, government and academia gathered to hear 31 distinguished and knowledgeable speakers discuss one of the more controversial and complex tax issues of the day.  An article in the publication Tax Notes Today stated that “the list of participants . . . reads like a “Who’s Who” of the tax world: panels of practitioners, academics, and top government and legislative officials met in Washington for two days to discuss capitalization.” 

Tax Council Policy Institute

The Tax Council Policy Institute (the "Institute") is a non-profit 501(c)(3) public policy research and educational organization.  It is affiliated with The Tax Council, which has provided an ongoing forum on federal tax policy issues for over 30 years.  The primary purpose of the Institute is to bring about a better understanding of significant federal tax policies that impact our national economy through careful study, thoughtful evaluation and open discussion.   

Events Leading to the Symposium

In INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), the United States Supreme Court held that certain legal and professional fees incurred by a corporation to facilitate a friendly acquisition of the corporation were required to be capitalized because the costs created significant long-term benefits for the taxpayer.  The Treasury Department's Office of Tax Policy and the Internal Revenue Service  ("IRS") National Office have issued a series of fact-specific revenue rulings stating that the INDOPCO decision did not change the fundamental legal principles for determining whether costs must be capitalized.  Even so, many taxpayers believe that IRS revenue agents, relying on the "significant long-term benefit" language in INDOPCO, are requiring capital­ization of regular and recurring costs that have been properly and uniformly deducted by business taxpayers for many years.  In addition, the Tax Court in a number of opinions has taken the view that INDOPCO established a new "significant long-term benefit" test. 

•                     Kent Jones, Tax Assistant to the Solicitor General, Tax Division

 

Academia:

•                     Professor Michael J. Graetz, Yale School of Law

•                     Professor Lawrence Lokken, University of Florida

 

Private Sector

•                     Jody J. Brewster, Skadden, Arps, Slate, Meagher & Flom LLP

•                     Margaret Curry, General Motors Corporation

•                     Hal I. Gann, Fannie Mae

•                     Kenneth W. Gideon, Wilmer, Cutler & Pickering

•                     Fred T. Goldberg, Jr., Skadden, Arps, Slate, Meagher & Flom LLP

•                     McGee Grigsby, Latham & Watkins

•                     Harry L. Gutman, KPMG LLP

•                     Michael S. Joseph, Ernst & Young LLP

•                     Robert Leonard, Washington Counsel, P.C.

•                     C. Ellen MacNeil, Arthur Andersen LLP

•                     Timothy J. McCormally, Tax Executives Institute

•                     Michael J. Morrissey, Deloitte & Touche LLP

•                     Abraham ("Hap") Shashy, McKee, Nelson, Ernst & Young

•                     Roy Strowd, PricewaterhouseCoopers

Program Materials

                        The participants and managers of the program prepared supporting materials that were comprehensive and voluminous.  Included were the results of a survey of over three hundred companies that provided information about tax controversies involving capitaliza­tion issues.  The materials are considered to be so thorough in regard to the INDOPCO issue that the Institute is still receiving and honoring requests for copies of them. 

Attendees                    

The symposium was open to the public.  Over 300 attendees represented a broad-based audience from the private sector, government (IRS, Treasury, the Tax Court and Congressional staff), academia, and the press.  

Program Agenda

The final program was divided into six sessions, each of which related to prior sessions.

Session I.  INDOPCO B The Decision:  This first session, which set the stage for the rest of the symposium, focused on the INDOPCO decision and examined the context in which the case was decided.  In particular, the session considered (1) the Supreme Court's earlier decision in Lincoln Savings and post-Lincoln Savings reliance by taxpayers and the lower courts on the separate and distinct asset test, and (2) pre-INDOPCO cases dealing with corporate reorganiza­tions and changes in capital structure.  Kent Jones, who argued the government's case before the Supreme Court, provided valuable insight into the decision from the government's perspective.  

Session II.  The INDOPCO Fallout:  This session explored the impact of the INDOPCO decision in practice, and thus, provided a context for the remainder of the symposium.  In particular, the session provided a factual presentation describ­ing the reactions to the INDOPCO decision by (1) practitioners, associations, and academics; (2) Treasury and the IRS in published guidance and in informal pro­nouncements; (3) IRS Examination and Appeals; (4) the courts; and (5) Congress.  This session clearly demonstrated the significant fallout from INDOPCO:

•                     Government challenges to costs that taxpayers have been deducting for years.

•                     Inconsistency in tax treatment.

•                     Uncertainty regarding the proper legal standard for capitaliza­tion.

•                     Conflicting views in the government as to the proper interpre­tation of the INDOPCO decision. 

                        Session III.  What Can We Learn From Financial Accounting?:   This session examined financial accounting principles regarding capitalization and demonstrated the significant differences between financial accounting standards and tax accounting standards.

Session IV.  What Can We Learn From Congressional and Adminis­trative Actions in Related Contexts?:  This session examined statutory and adminis­trative rules in related contexts and explored the factors that lead to these rules and the ways in which they dealt with issues that arise in the context of rules governing capitalization.  This session demonstrated that Congress and the IRS have responded to protracted controversies and widespread uncertainty in the past by enacting specific rules.  While these rules generally seem to place a premium on uniformity and administrability, the rules often times are constrained by revenue considerations and revenue estimating conventions.  This session also demonstrated that the tax economics of cost recovery are instructive.

Session V.  The Ongoing Validity of the Pre-INDOPCO Rules Governing Capitalization of Costs:  This session examined the factors that courts and the IRS have looked to historically in determining whether expenditures must be capitalized and how these factors relate to the INDOPCO decision. This session demonstrated that there are differing views that range from the view that INDOPCO rendered prior authorities inoperative to the view that these authorities were unaf­fected by INDOPCO. 

                         Session VI.  Devising and Achieving Workable Standards:  This session explored the implications of continuing to address capitalization issues under the case-by-case approach of issuing fact-specific guidance and resolving many issues through litigation.  This session also set forth a general description of a workable framework for analyzing capitalization issues and considered different approaches for implementing such a framework including generic regulatory guidance and issue-specific or generic legislation.

Ancillary Events

                        As a part of the symposium, a reception and dinner were held with Larry R. Langdon, Commissioner, Large and Mid-Size Busi­ness Division, as the key speaker.  A luncheon featured Stuart L. Brown, Chief Counsel, as the key speaker.  Both speeches produced useful information about the issues covered in the symposium and also provided the attendees with the opportunity to engage in an extensive question and answer session with both.

Symposium Findings

It is generally believed that the symposium confirmed the following:

•                     Treasury and the IRS National Office continue to take the position that INDOPCO did not change the fundamental principles for determining whether costs must be capitalized.  

•                     Notwithstanding the National Office's published position, revenue agents are challenging the tax treatment of costs that have been his­torically deducted by taxpayers, and the IRS is supporting these challenges in litigation.

•                     Language in Tax Court opinions suggesting that INDOPCO established a new "sig­nificant long-term benefit" test cannot be reconciled with the position of Treasury and the IRS.

•                     While capitalization presented difficult analytical issues in some instances before INDOPCO, taxpayers are more uncertain than ever as to what positions should be taken in filing their returns.

•                     Similarly situated taxpayers are being treated inconsistently.

An important message that many believe came out of the symposium was that, while the fact-specific revenue rulings that Treasury and the IRS have issued to date have resolved very specific issues, there now is a need for a broader framework.  Preferably, this would be in the form of regulations or legislation.        

Reactions to Symposium

From the evaluations completed as part of the symposium, it is clear that attendees believed the symposium was a resounding success.  That view was confirmed by favorable comments reported in the tax services.  Tax Notes Today referred to the symposium as "a first-of-its-kind."

Comments made after the symposium by some government officials acknowledged the confusion that continues to exist relating to the INDOPCO decision and indicated a willingness to consider a broader frame­work for analyzing capitalization issues.