Tuesday, November 25, 2008
Posted by Victor Fleischer
Important changes in the tax law don't always make their way through the usual legislative process. Some significant changes come in the form of a Notice, Revenue Procedure, or Revenue Ruling. Notices and Revenue Procedures are sometimes used to give taxpayers a safe harbor -- some certainty for planning purposes -- in areas which are otherwise subject to unpredictable facts and circumstances analysis. But sometimes they go too far. For example, as I noted earlier this week, Notice 2008-83 substantially changed the tax law relating to loss carryovers in bank mergers. Revenue Procedures 93-27 and 2001-43 gave taxpayers confidence that the "Two and Twenty" carried interest structure would not give rise to taxable income on the date of grant -- an element that is critical to the tax benefits of the structure. Revenue Ruling 2003-97 moved the dividing line between debt and equity, allowing issuers to deduct payments on note+forward "units" that are treated as equity securities by rating agencies and bank regulators.
What happens if the Treasury or IRS, in an effort to implement the tax code fairly, goes too far and "gives away the store"? Ordinary citizens do not have standing, merely by our status as taxpayers, to challenge taxpayer-favorable rulings. Nor is a lawsuit necessarily the best approach. Under current law, the most important check on giving away the store is the media -- folks like Lee Sheppard at Tax Notes, Jesse Drucker at the Journal, and Ryan Donmoyer at Bloomberg. But I worry about developments that may slip by under the radar.
Congress might consider establishing a staff position designed to help the tax writing committees keep an eye on taxpayer-favorable lawmaking activity at Treasury and the IRS. One place to house this job could be at the office of the Treasury Inspector General, although for institutional reasons it might make more sense to house this position within the Joint Committee on Taxation, or independently. This person could serve as a watchdog, reviewing new developments and reporting back to the committee staffs.
Who could serve in this role? There are certainly many tax lawyers in New York that I know from my days in practice who would be great at the job, and some might be willing to take a break from practice for a year or two to serve. Many tax law professors have substantial practice experience and would also be terrific.
Does such a position already exist? Does anyone know? If so, what has that person been up to?