TAX EXECUTIVES INSTITUTE LARGE BUSINESS & INTERNATIONAL DIVISION LIAISON MEETING FEBRUARY 29, 2012 MINUTES

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1 TAX EXECUTIVES INSTITUTE LARGE BUSINESS & INTERNATIONAL DIVISION LIAISON MEETING FEBRUARY 29, 2012 MINUTES On February 29, 2012, a delegation from Tax Executives Institute met with Large Business & International (LB&I) Deputy Commissioner (Operations) Paul D. DeNard and LB&I Deputy Commissioner (International) Michael Danilack, III, and other officials of the Internal Revenue Service. The following minutes were prepared by Tax Executives Institute and, although reviewed by the IRS, they have not been formally approved by the agency. The agenda for the meeting was submitted in advance and was published in the January-February 2012 issue of The Tax Executive as well as on TEI s website. LB&I Deputy Commissioner (Operations) Paul DeNard welcomed TEI President David M. Penney and the TEI delegation. He said that because of travel commitments, LB&I Commissioner Heather C. Maloy was unable to attend the meeting and sends her regrets. On behalf of TEI, Mr. Penney thanked the IRS for its ongoing commitment to an active dialogue with taxpayers. The IRS and TEI delegations to the meeting are set forth below. IRS Delegation Paul D. DeNard, LB&I Deputy Commissioner (Operations) Michael Danilack, III, LB&I Deputy Commissioner (International) Cheryl P. Claybough, Director, Pre-Filing and Technical Guidance Deborah T. Palacheck, Senior Adviser to the LB&I Commissioner Thomas Brandt, Director, Planning, Analysis, Inventory & Research Samuel M. Maruca, Director, Transfer Pricing Operations Linda M. Kroening, Division Counsel Drita Tonuzi, Deputy Division Counsel Thomas A. Vidano, Deputy Division Counsel (International) Candace Hadley, Director, LB&I Communications and Liaison Margaret von Lienen, Executive Assistant to the LB&I Deputy Commissioner (Operations) Jane K. Agule, Senior Program Analyst, IRS National Public Liaison Kathryn L. Gregg, Manager, LB&I Stakeholder Liaison TEI Delegation David M. Penney, General Motors of Canada Limited, TEI International President Carita R. Twinem, Spectrum Brands Holdings, Inc., TEI Senior Vice President Terilea J. Wielenga, Allergan Inc., TEI Secretary Mark C. Silbiger, The Lubrizol Corporation, TEI Treasurer Daniel R. Goff, Xilinx, Inc., TEI Executive Committee Charles N. (Sandy) Macfarlane, Chevron Corporation, TEI Executive Committee Brian C. Ugai, Starbucks Coffee Company, TEI Executive Committee Michael J. Bernard, Microsoft Corporation, Chair, TEI IRS Administrative Affairs Committee Robert L. Howren, BlueLinx Corporation, Chair, TEI Federal Tax Committee Jocelyn P. Krabbenschmidt, Amazon.com, Inc., Chair, TEI International Tax Committee Timothy J. McCormally, TEI Executive Director Eli J. Dicker, TEI Chief Tax Counsel Jeffery P. Rasmussen, TEI Senior Tax Counsel Daniel B. De Jong, TEI Tax Counsel Benjamin R. Shreck, TEI Tax Counsel

2 2 II. LB&I 2012 Priorities Mr. DeNard said that the LB&I Division s 2012 priorities are to focus its resources as effectively and efficiently as possible to identify areas of noncompliance, streamline case and issue selection processes, work cases and resolve issues as early as possible, issue guidance where needed, and generally increase certainty and consistency of treatment for all taxpayers. In sum, the items on the Institute s agenda are LB&I s priorities. III. Examination-Related Matters a. IRS Realignment LB&I International Function. Mr. Goff invited a discussion about the effect of the reorganization of the International function on the LB&I Division s programs and procedures. Mr. Danilack said that the reorganization is part of the Division s overall strategy of focusing on issues and bringing greater expertise and more resources to bear on the most important issues. International issues have a high priority and there is more work than the Division has resources. Thus, the reorganization is designed to sharpen compliance efforts and align resources strategically. He acknowledged that, as the Division s overall reorganization has unfolded, taxpayers may have perceived two organizations and two types of audits one for international and one for all other issues. The management structure and reporting lines are now in place on the international side, he said, to ensure that the Division operates as a single, transparent organization with the ability to resolve issues quickly. As a practical matter, as the organization changes, questions will arise about who has what authority, so taxpayers should elevate issues when they have concerns. There should be no question in a taxpayer s mind about who the decision-maker is. Mr. Goff asked who the principal decision-maker is on cases. Mr. Danilack said the case manager is the decision-maker for domestic issues; the international examiner or international case manager is for international issues. There are parallel management chains, he said, so differences between the two sides can be resolved by elevating the issues to a common manager. Mr. Penney inquired whether taxpayers have access to the decision-makers in the respective chains of command. Mr. Danilack said that taxpayers should feel free to elevate issues on either side; there are no restrictions impeding taxpayers from meeting anyone in the Division all the way to and including Commissioner Maloy. Mr. Silbiger observed that some taxpayers are uncomfortable elevating issues above the examining agents or case managers out of concern that they might jeopardize the day-to-day working relationship with the field. Mr. Danilack replied that Ms. Maloy s philosophy is that taxpayers should freely elevate issues; IRS managers should resolve those issues and manage the relationship with the taxpayer. Mr. DeNard encouraged taxpayers to use the Quality Examination Process (QEP), which emphasizes communication at all stages and levels of an examination. A management chain is in place on both the international and domestic sides, he added, that taxpayers can freely access when they wish. Mr. Danilack cautioned against the view that one side might trump the other since the Division s focus is on getting the correct answer for all issues. Ms. Wielenga asked whether a case manager has authority to decide whether to pursue or drop issues; she observed that case managers seemed to have grown increasingly deferential to agents, especially international agents. Mr. Danilack acknowledged internal LB&I discussions about the Institute s concern and said that the IRS training classes emphasize that the proper approach is for case managers, in appropriate cases, to challenge agents treatment of taxpayer issues. Mr. Macfarlane inquired whether an issue-based organizational structure for LB&I will result in more frequent use of centrally controlled, standardized information document requests (IDRs). In other words, will someone other than the examination team assigned to, and knowledgeable about, the taxpayer s business, records, and practices develop the IDRs? Mr. Danilack said that standardized IDRs represent an attempt at a program approach to examinations, but as our exam programs are changed to ensure better

3 3 issue development of the right issues, and a letting go of other issues, the standardized IDRs that are out there will need to be reevaluated. Mr. Macfarlane suggested that a boilerplate approach for IDRs can result in the issuance of multi-part questions that are, at once, confusing and time consuming since they are not tailored to the taxpayer s organization. For example, his company recently received a 47-question IDR, with many enumerated questions having multiple parts. Mr. Danilack acknowledged that taxpayers and agents should have mutually agreed expectations about the scope and purpose of IDRs and that IDRs have to make sense. Achieving that goal requires a reevaluation of the IDR process, which is underway, as well as ongoing training, since the IRS must have front-line employees who know what to ask for, when, and why. Mr. Goff inquired whether LB&I has developed measures of success for its dual structure. Mr. Danilack said that measuring success will be difficult because the benefits of the structure may be indirect rather than direct. For example, taxpayers may express fewer criticisms or experience faster, more efficient examinations and issue resolution, but it may take a while for the desired productivity increases to be fully realized. Mr. DeNard said the Division is monitoring its quality and customer satisfaction surveys, focus groups, and employee satisfaction surveys. He agreed with Mr. Danilack that the methods and tools for measuring success are evolving. b. Transfer-Pricing Practice Ms. Wielenga referred to the IRS decision to transfer administration of the advance pricing agreement (APA) program from the Office of Chief Counsel to the LB&I Division, combining it with the mutual agreement process (MAP) to form the Advance Pricing and Mutual Agreement (APMA) program. She said that TEI supports combining the two offices and practices since it promises greater efficiency in handling cases and issues. She requested an update on (i) the status of the reorganization, (ii) the effect of the withdrawal of a previously issued coordinated issue paper (CIP) on cost-sharing buy-in transactions, (iii) the effect of the reorganization on the inventory of APA and MAP cases, and (iv) whether resource constraints or shifting priorities have led to delays or backlogs in other LB&I programs (e.g., pre-filing agreements). Mr. Maruca noted that he had previously described transfer-pricing issues as a hydra-headed monster and explained that transferring the APA program from the Office of Chief Counsel to the LB&I Division consumed a significant amount of time and resources during the past year. Marrying the two processes will eliminate the hand off of APA cases from Chief Counsel to the competent authority and streamline decision-making and negotiation with treaty partners. The Division has added 35 people to the APMA program and the entire inventory of cases has been assigned. Mr. Danilack added that before the reorganization, there were about 35 people assigned to APA matters and another 35 people handling mutual agreement matters. The additional 35 people, thus, represents a 50-percent increase in resources, with new personnel hired in offices across the country, including economists assigned to New York and Chicago. Mr. Maruca said that APA and competent authority personnel will act as a single team, with no distinction between APA and CA personnel in the future. Mr. Danilack added that by combining the two groups, the perspective for each will expand and every person in the organization will be challenged to grow. Mr. Maruca said that, even though the transfer of the APA program was announced in July 2011, the APMA program did not officially standup until Monday February 27, The APMA program is currently assessing the best practices and processes for APAs and competent authority proceedings. After the internal review is completed, new guidance will be issued governing the APA and competent authority processes. Mr. Ugai inquired about the timeline and goals for addressing the current backlog of APA and competent authority cases. Mr. Maruca said it is difficult to say when an individual case will be addressed, but every case in the program has been taken off the shelf and assigned to a lead person. The people and processes of the APMA program are still being merged into a cohesive unit, but a number of cases will likely be resolved soon. Mr. Danilack described IRS personnel as energized by the reorganization. In addition, when taxpayers have been contacted and informed that their case has been assigned, the feedback has been

4 4 very favorable. Mr. Macfarlane asked whether resources or priorities have been assigned based on a backlog of cases with specific countries. Mr. Danilack acknowledged a current backlog of cases with Japan and said the Japanese competent authority has invited discussions to improve case currency. In addition to assigning more IRS personnel to resolve issues and cases, he said, there have been discussions with foreign competent authority counterparts about streamlining the MAP process generally. A model that plays off the joint audit process is also under consideration, he said. Ms. Krabbenschmidt said that affording taxpayers access to the decision-makers to clarify disputed facts would streamline the process. Mr. Penney added that a competent authority resolution worked efficiently and effectively for his company because of the inclusion of both taxpayers in bilateral meetings. Mr. Danilack encouraged Mr. Penney to share his view with Canada Revenue Agency. With respect to the withdrawal of the 2007 CIP on buy-in transactions in cost-sharing arrangements, Mr. Maruca said that the resolution of nearly every transfer-pricing case turns on the case s facts and circumstances. As a result, the issues cannot be resolved through a template. The CIP, he said, may have given the erroneous impression that a single approach should be applied to every buy-in transaction. The withdrawal of the CIP, however, should not be interpreted as a retreat from the technical positions asserted; rather, it signals to the field that the examination team need not follow the CIP to resolve every buy-in case. Mr. Danilack concurred, saying that the withdrawal of the CIP was intended as an internal signal rather than an external signal. Mr. Goff said that the CIP s withdrawal removed a significant barrier to resolution of pending cases. Ms. Wielenga inquired whether the resources for the pre-filing agreement (PFA) program have diminished or whether there is a significant backlog of submissions for resolution. She explained that her company submitted an issue for resolution, but it was not accepted. Ms. Claybough said that there is no backlog, but PFAs can consume significant amounts of time and resources depending on the issue so we would want to include our Counsel and National Office (as needed), in the discussion early in the submission process. Mr. DeNard reiterated that any time a taxpayer has trouble resolving an issue with the field and regardless of whether the issue is in a pre- or post-filing posture the taxpayer should consider elevating the matter. In this case, the matter might be discussed with someone in the National Office for Pre-filing and Technical Guidance, an Industry leader, or a Director of Field Operations, he said. c. Transparency Schedule UTP Ms. Twinem noted that taxpayers have completed their first return filing cycle with Schedule UTP. She inquired whether the schedule has aided the IRS in more efficiently identifying issues and cases for examination, especially in smaller companies. Mr. Brandt said that after the schedule and instructions were finalized, the Division undertook extensive training about the schedule as well as the IRS s policy of restraint on access to workpapers. In addition, guidance was subsequently issued relating to the use of Schedule UTP by taxpayers in the compliance assurance process (CAP) program. The Schedule UTP disclosures were not released to the field until after the training was completed and the IRS had catalogued the disclosures. About 30 percent of the schedules were filed by taxpayers in the coordinated industry case (CIC) program; the other 70 percent were filed by taxpayers in the industry case program. The audit coverage of taxpayers with more than $100 million in revenues, he noted, is already high so there were few or no surprises in their disclosures on Schedule UTP. As the schedule s filing threshold declines to $50 million (and eventually to $10 million) in taxpayer revenues, the schedule s utility in identifying issues and taxpayers is expected to increase. Mr. Brandt reported that the IRS has developed an extensive information and time-tracking system to monitor field activity relating to the schedule. For example, examination teams in CIC cases have all been asked whether they were aware of the issues disclosed on the taxpayer s schedule. If they were not aware of the issues, they will be expected to make a risk assessment and then discuss it with the taxpayer during the opening conference. In addition, teams will keep records of how the issue is developed and what the

5 5 ultimate disposition of each uncertain tax position is. Over the course of the next 6 to 12 months, the IRS will develop a substantial body of data about the form and its utility in identifying and disposing of issues. In addition, he said, the concise descriptions of the issue disclosed on the form have been summarized and provided to IRS subject matter experts. The experts will assess whether additional guidance is needed in respect of the disclosed issues. The first year s use of the schedule, he said, is primarily a learning opportunity for the IRS. Ms. Twinem inquired whether agents have been trained in respect of the use of the descriptions of the issues. Mr. Brandt replied that during division-wide CPE training classes, LB&I management cautioned that the schedule is a risk assessment tool and an uncertain tax position can be uncertain for many reasons, including a lack of guidance or because of a very conservative taxpayer position. There will also be real time training whenever a particular case involves Schedule UTP disclosures, and territory and team managers are expected to discuss the disclosures internally prior to the opening conference and then determine whether to have a conversation with the taxpayer about it. Mr. DeNard said that the top three issues disclosed on Schedule UTP were unsurprising; examination teams were generally reviewing those issues prior to the issuance of Schedule UTP. Ms. Twinem asked what taxpayers should do if agents misuse the schedule as a primary tool for proposing adjustments or ask for copies of the schedule or workpapers directly from the taxpayer. Mr. DeNard encouraged taxpayers to elevate the matter within the LB&I structure. After the initial release of the Schedule UTP data to the field, he said, there were minor hiccups, but when taxpayers elevated their questions, the matters were quickly diffused as miscommunications between the examination teams and the taxpayers. Mr. Brandt said that the IRS is closely monitoring the time that agents charge to Schedule UTP matters. There were several occasions where taxpayers provided Schedule UTP directly to the agents in advance of the data s release from central processing. With the internal reporting controls in place, LB&I management intervened to limit the team s use of the data. Ms. Twinem referred to Institute work with an IRS working group on Schedule M-3. The Institute made a number of recommendations to reduce taxpayer paperwork burdens and eliminate redundant reporting. She requested an update on the working group s deliberations, especially whether the information on the schedule is useful for the IRS in issue or taxpayer risk assessments. Mr. Brandt said that the working group received extensive feedback from stakeholders, including TEI. The written submissions were supplemented with data gathered from surveys and focus groups of taxpayers and LB&I employees. The data collection phase was completed in the fall and a report with recommendations is being prepared for discussion with Commissioner Maloy. After she completes her review, the report will likely be issued for public comment with a goal of incorporating stakeholder feedback in revisions to the form and instructions for 2012 tax years. Mr. Brandt added that the IRS does not believe that there is substantial duplication or overlap of information reported on Schedules UTP and M-3. Mr. Bernard observed that taxpayers rarely receive questions from agents about Schedule M-3 during the audit planning phase. Mr. Brandt said that IRS employees have a range of experiences concerning the usefulness of the Schedule M-3 information. The IRS may need to dig deeper in its employee surveys to determine which lines of the form are most useful and which can be eliminated. Mr. Bernard said that IRS teams should have extensive training in financial accounting in order to understand taxpayers general ledgers and the mapping of those general ledgers to Schedule M-3. Mr. Brandt concurred, saying that refresher training in financial accounting would be beneficial in understanding both Schedule UTP and Schedule M-3 data. Ms. Twinem said that the process of mapping a general ledger to tax-return preparation software in order to produce Schedule M-3 is an extremely burdensome and time-consuming project. She urged the IRS to release any revisions to the Schedule M-3 and instructions far in advance of the beginning of the year to which the changes will apply so that taxpayers can make the necessary changes to their system mapping. Mr. Dicker noted that the top three UTP disclosure items (transfer pricing, research and experimentation expenditures, and section 162 expense deductions) have been widely reported in the tax

6 6 press. He asked for a summary of the issues constituting the balance of top-10 disclosures and the frequency of those disclosures. Mr. Brandt said that the next seven issues (in descending order of frequency) were: section 263, section 197, section 274, section 461, section 168, section 198, and section After the top four issues for which hundreds of UTP disclosures were made the frequency of the disclosures diminishes rapidly. Dozens or fewer disclosures were made in respect of the last six items. Mr. Macfarlane asked whether guidance priorities have been developed from the disclosed issues. Mr. Brandt said subject matter experts are reviewing the disclosures to determine whether additional guidance would be helpful. d. Quality Examination Process (QEP) An Update Mr. Silbiger noted that, although the QEP was announced approximately two years ago, there are anecdotal reports of inconsistent implementation of the program around the country. He asked for an update on the program s roll-out as well as the metrics the agency has developed to measure the program s success. Mr. DeNard said that QEP is mandatory for examinations conducted by LB&I and has been used in eighty to ninety percent of cases since it was introduced. There may have been a limited geographic area or industry where the program was not initiated promptly, he said, but all seem to be using it now. If the program is not being employed, taxpayers should provide Mr. DeNard with specifics so that he can follow up with the relevant industry, district, or city. Mr. Brandt explained that QEP metrics are based on rolling averages and since many examinations that concluded in 2011 had commenced prior to the introduction of the QEP, the participation data that Mr. DeNard cited actually understates its use. For examinations begun in the most recent calendar quarter, he said, quality assurance surveys show that program was discussed with the taxpayer in the upper 90 percentile of cases. He reiterated that the QEP program is not optional; it is the method through which LB&I conducts all examinations. All agents received training in QEP as part of their annual CPE requirement. e. Compliance Assurance Process (CAP) Mr. Ugai reported that a territory manager approached him during a chapter meeting about the company s interest in joining the CAP program. In developing a business case for the company s participation in CAP, the tax department noted that a substantial commitment of resources would be required to make CAP a priority. Will the IRS be able to bring the necessary resources to bear to make or keep CAP a priority as the program expands, new demands are placed on the IRS, or as new programs are initiated or revamped (e.g., PFAs)? Mr. DeNard said that CAP is among the Division s highest priorities. In 2011 there was a 14 percent year-over-year increase in the number of participating taxpayers. Before taxpayers are admitted to the program, he said, LB&I consults with the team and territory manager to ensure that the IRS resources will be available. The introduction of the pre-cap phase, he added, will help the IRS better screen candidates for participation CAP. In addition, some taxpayers have transitioned to the CAP-maintenance program freeing up resources for new cases. Some taxpayers who wish to join CAP, he said, may not be admitted because there are too many open interim tax years to bridge. Ms. Claybough said that CAP is a high priority because in most instances LB&I will eventually examine the participating taxpayers anyway. It is better to examine the taxpayer while the records are fresh and the people familiar with those records are in place. During the first year or two of a taxpayer s participation in CAP, the resource commitment for the IRS and the taxpayer is intense since a real-time audit is conducted of current year(s) even as the interim years are in a post-filing examination environment. Mr. DeNard explained that CAP auditors are generally drawn from the regular audit teams assigned to the taxpayer. Ms. Wielenga asked who runs the pre-cap program and assesses the taxpayer s viability for CAP. Ms. Claybough said that the examination team assigned to the taxpayer usually makes the initial assessment. In addition, if a taxpayer is admitted to CAP, the team assigned to the CAP examination is also responsible for auditing the interim years. Mr. DeNard noted that the pre-cap program is a streamlined examination similar to a Limited Issue Focused Examination with higher materiality and risk assessment levels. The APA, PFA, and Industry Issue Resolution (IIR) programs, he said, are ancillary tools in the IRS s

7 7 compliance verification toolkit that can provide certainty for taxpayers. Consequently, resources are not diverted from those areas to CAP or other examination programs. Mr. Ugai inquired what metrics the IRS is employing to measure the success of the CAP program. Mr. DeNard said that the IRS is still working on qualitative CAP metrics, such as customer and employee satisfaction surveys; the traditional measures of audit program success, such as cycle time or dollars of revenue per audit hour, do not apply to CAP. Mr. Danilack observed that because of U.S. efforts in the OECD s Global Forum on Tax Administration the joint audit concept is now being piloted by a number of other countries. Using the joint audit process in combination with a real-time audit, he added, can eliminate years of uncertainty for taxpayers. For example, LB&I recently completed a joint audit of a large taxpayer with a major trading partner. After a six-month real-time examination, the taxpayer was able to obtain a prospective, five-year bilateral APA. Some jurisdictions, he reported, are considering whether to skip open tax years in order to implement real-time audit processes. f. Tax Information Exchange Mr. Goff inquired about the scope and number of information exchanges the IRS has with treaty partners. Mr. Danilack said that the specific nature and timing of information exchanges are confidential, but acknowledged that the number of cross-border exchanges is substantial. He said that all the processes summarized in TEI s agenda are used from time to time. In other words, there are spontaneous exchanges, automatic exchanges, and country-by-country exchanges pursuant to specific requests. He inquired what concerns taxpayers might have about such exchanges since the facts reported to each country should be the same. Mr. Goff said that different parties reviewing the same facts might interpret them differently. Mr. Danilack acknowledged that it would be useful for taxpayers to be aware when information is shared so that they can be prepared for questions from the treaty partner or comment on the information supplied. Mr. Goff inquired whether the IRS is maintaining its policy against sharing information disclosed on Schedule UTP with treaty partners. Mr. Danilack said that treaty information exchange provisions obligate the IRS to share information relevant to a foreign examination. The IRS does not believe it will be required to share Schedule UTP information with foreign jurisdictions because it is unlikely that an uncertain U.S. tax position will be relevant to the examination of a foreign-based taxpayer. Mr. Goff said that a transfer-pricing issue might lead to a request for information. Mr. Danilack suggested that uncertainty about a foreign tax would likely not be an item disclosed on Schedule UTP. In addition, an uncertainty about a foreign tax credit taken in the United States would be reflective of a risk that too much, rather too little, foreign tax was paid. Consequently, the Schedule UTP disclosures are likely irrelevant to a foreign administration. In any event, he said, the IRS has received no requests for Schedule UTP from treaty partners. g. On-Line Account Access for Corporate Taxpayers Mr. Silbiger reported that some corporate taxpayers have reported diminished levels of service from the IRS service centers in respect of account-related inquiries. He noted that IRS help center phones ring unanswered and messages occasionally are not returned. Some examination teams have also shared with affected taxpayers the challenges the teams have encountered in obtaining taxpayer account information. He queried whether the IRS would develop an on-line account access system or provide a single point of contact for large taxpayers to make account inquiries. Mr. DeNard said that he would make inquiries with the Wage & Investment Division (which administers the service centers) to determine whether there have been changes that would result in diminished service levels. He noted that the IRS had created a group dedicated to the processing of Forms 1139 Corporate Application for Tentative Refund during the financial crisis and the IRS system had been highly responsive.

8 8 VI. Regulatory Issues a. Foreign Account Tax Compliance Act Ms. Krabbenschmidt referred to the recently issued temporary and proposed regulations on the Foreign Account Tax Compliance Act (FATCA). In response to Notice , the Institute had urged the IRS to create exceptions to the FATCA regime (i) in the definition of financial institutions for certain hedging/financing centers of a non-financial group, (ii) for certain holding companies, and (iii) for payments in the ordinary course of business. Mr. Danilack said the IRS s objective is to issue FATCA guidance that imposes no unnecessary burdens, especially for nonfinancial multinational corporations. Before it can carve out the exceptions urged by the Institute, the IRS must first address the regulatory scheme for financial institutions. Mr. Danilack encouraged TEI to resubmit and expand upon its prior comments because the focus of the rules and the government has been almost entirely on foreign financial institutions. [Note the Institute filed comments on the proposed FATCA regulations on April 30, 2012.] The Institute s nonfinancial entity perspective will be helpful in rounding out the rules, he said. Ms. Krabbenschmidt said that TEI applauds the government s announcement that it will negotiate bilateral agreements with foreign jurisdictions that will facilitate government-to-government information exchanges where FATCA might otherwise impose an obligation to disclose in violation of local law confidential customer information. She requested an update on those efforts. Mr. Danilack said that the United States has not completed any agreements yet; rather it has agreed to agree with five countries about instituting an information exchange process that would circumvent local privacy law restrictions against sharing of customer data directly with the United States government. The goal is to complete as many country-specific agreements as possible before FATCA s effective date. b. Tangibles Regulations Mr. Howren said that the temporary regulations on capitalization of expenditures relating to tangible property, including repairs, will have far-reaching effects on taxpayers accounting methods as well as examinations of open tax years. He also noted that many taxpayers systems are not capable of producing or tracking the information that the temporary regulations require. He suggested that a temporary moratorium on examinations of the issues raised by the regulations may be necessary while taxpayers invest the time and resources necessary to modify their systems. Mr. DeNard said that LB&I is still digesting the temporary regulations and their effect on examination activity. [Note: LB&I subsequently issued a directive (LB&I , March 15, 2012) limiting IRS examination activity on costs to repair or improve property and dispositions for tax years before January 1, 2012, and for the first two taxable years beginning on or before January 1, 2014.] Ms. Kroening reported that two revenue procedures governing changes in accounting method to facilitate the transition to the new rules are currently pending at the Treasury Department. As recommended in TEI s agenda, the procedures accord taxpayers two taxable years to make the necessary accounting method changes to comply with the temporary regulations. In addition, taxpayers will be permitted to use statistical sampling methods to compute the section 481(a) adjustments arising from changes in accounting methods. Moreover, the scope limitations in Rev. Proc and limiting when taxpayers may make changes in accounting method will be waived since the IRS is not interested in reviewing the same issues twice. [Note: On March 7, 2012, the IRS released Rev. Procs and -20 providing transition rules to facilitate the changes in accounting method required to comply with the temporary regulations.] Ms. Palachek noted that capitalization issues are highly dependent on the facts and circumstances of each case. Several IIRs have been issued recently to resolve industry capitalization controversies and additional requests are pending. She encouraged taxpayers to use the IIR process to flesh out the guidance in the temporary rules and minimize uncertainty.

9 9 Mr. Macfarlane said that the ceiling rule on deductions of de minimis tangible property will be challenging for taxpayers to comply with and for the IRS to examine. He noted that the Preamble to the temporary regulations affirms the flexibility of examining agents to reach agreements with taxpayers on the level of de minimis tangible property that can be deducted. The ceiling rule, however, does not incorporate the Preamble s helpful language and thus may preclude examining teams from reaching workable agreements. He encouraged the IRS to abandon the ceiling rule and to rely on taxpayers following their financial statement method of accounting for de minimis property. Mr. DeNard said that IRS Issue Practice Groups will address these questions when they bubble up from the field. [Note: On April 24, 2012, the Institute filed comments on the tangibles regulations.] VII. Conclusion On behalf of the TEI delegation, Mr. Penney thanked Messrs. DeNard and Danilack and the IRS representatives for their attendance and participation in the meeting. Messrs. DeNard and Danilack thanked TEI for its comments and the constructive dialogue.