NEWSLETTER. FALL 2000 Volume 20 Number 1 SECTION OF T A X A T I O N. scottsdale

Transcription

1 NEWSLETTER FALL 2000 Volume 20 Number 1 SECTION OF T A X A T I O N scottsdale Midyear Meeting January 11-14, 2001

2 S E C T I O N O F T A X A T I O N 2 NEWSLETTER ABA SECTION OF TAXATION FALL 2000 VOLUME 20 NUMBER 1 ISSN EDITORIAL BOARD COUNCIL DIRECTOR Patricia Ann Metzer SUPERVISING EDITOR Ellen P. Aprill INTERVIEW EDITORS Jasper L. Cummings, Jr. Alan J.J. Swirski PRODUCTION EDITOR Anne B. Dunn ASSOCIATE EDITORS Nancy M. Beckner Dianne Bennett David A. Brennen Alexander Drapatsky Bernice J. Koplin Annette Nellen Edward N. Polisher David L. Silverman CONTENTS IMPORTANT DATES AND SERVICES FROM THE CHAIR COUNCIL ACTIONS FROM THE EDITOR POINTS TO REMEMBER POINT & COUNTERPOINT INTERVIEW MIDYEAR MEETING SCOTTSDALE, AZ GENERAL INFORMATION HOTEL RESERVATION FORM REGISTRATION AND TICKET PURCHASE FORM CLE CALENDAR SPECIAL REPORT GOVERNMENT SUBMISSIONS ORDER FORM PREMIER PUBLICATIONS ORDER FORM EDITORIAL POLICY The ABA Section of Taxation Newsletter is published quarterly to provide information on developments pertaining to taxation, Section of Taxation news, and other information of professional interest to Section of Taxation members and other readers. The Newsletter can not be responsible for unsolicited manuscripts and reserves the right to accept or reject any manuscript and the right to condition acceptance upon revision of material to conform to its criteria. Articles and reports reflect the view of the individuals or committees that prepared them and do not necessarily represent the position of the American Bar Association, the Section of Taxation, or the editors of the Newsletter. Manuscripts and letters should be mailed to: ABA Section of Taxation, th Street, NW, 10th Floor, Washington, DC Nonmembers of the Tax Section may subscribe to the Newsletter for $15.00 per year or may obtain back issues for $4.00 per copy. To order, contact the ABA Service Center, 750 N. Lake Shore Drive, Chicago, IL 60611, tel. 800/ scottsdale Midyear Meeting January 11-14, 2001

3 IMPORTANT SECTION DATES AND SERVICES FUTURE SECTION MEETINGS 2001 MIDYEAR MEETING JANUARY 11-14, 2001, PRINCESS & PHOENICIAN, SCOTTSDALE, AZ 2001 MAY MEETING MAY 10-12, 2001, GRAND HYATT, WASHINGTON, DC 2001 ANNUAL MEETING AUGUST 2-4, 2001, SHERATON CHICAGO, CHICAGO, IL 2002 MIDYEAR MEETING JANUARY 17-19, 2002, SHERATON, NEW ORLEANS, LA 2002 MAY MEETING MAY 9-11, 2002, GRAND HYATT, WASHINGTON, DC 2002 ANNUAL MEETING AUGUST 8-14, WASHINGTON, DC* 2002 FALL MEETING OCTOBER 17-19, CENTURY PLAZA AND ST. REGIS HOTEL, LOS ANGELES, CA* ABA SERVICE CENTER 800/ The ABA Service Center is your one-stop shop for inquiries and orders related to ABA publications, ABA/CLE-sponsored programs, membership status and dues information, change of address requests, and the ABA Member Advantage Program. You can reach the Service Center by at SECTION Remember, as an efficient alternative to the telephone, the Tax Section also has to provide easy communication between members and staff regarding all sectionrelated activities. Please feel free to contact us at You also may reach us by phone at 202/ VISIT US ON THE WEB Check out the new and improved Section of Taxation website! At you can find the latest news on Section meetings and CLE opportunities, contact Section and Committee leaders, review the Section s recommendations to the government and the ABA House of Delegates, view and download The Tax Lawyer and Newsletter, order Section publications, link to more than 150 websites of interest to tax law professionals, participate in Section discussion groups/listservs, and more. Section members can enjoy free use of Comm-Online, our new searchable database of committee meeting materials developed in partnership with the Section s primary corporate sponsor, LEXIS Publishing TM. The Section of Taxation website also is your gateway to the ABA s online Section Directory, which allows ABA members to locate other members by name, location, and Committee affiliation. 3 I M P O R T A N T D A T E S A N D S E R V I C E S TAX LAWYER AND NEWSLETTER ONLINE The Section of Taxation is pleased to present its premier tax law and policy journal, The Tax Lawyer, and its Newsletter online. Beginning with the Spring 2000 issue of The Tax Lawyer and the Summer 2000 issue of the Newsletter, members of the Section will be able to view and download individual articles or an entire issue from the Section s website at To do this, you will need your eight-digit ABA member ID and password, as well as Adobe Acrobat Reader software, which is free on the internet if you don t already have it on your system. If you can t remember your ID number or password, contact the ABA Member Service Center at service@abanet.org. * Committee meetings and programs normally held at the ABAAnnual Meeting in 2002 will instead be held at the Section s Fall Meeting scheduled for that year.

4 F R O M T H E C H A I R 4 FROM THE CHAIR by Pamela F. Olson, Washington DC PAM OLSON TAXI! TAXI! No, we're not hailing a cab, but you can hail a CD-ROM version of TAX-interactive, the award-winning website the Tax Section and the IRS partnered to create. TAXi grabbed the media spotlight last summer as the Section and the IRS distributed 78,000 CD-ROM copies of TAXi to high school teachers across the country. Commissioner Rossotti and I announced the CD-ROM distribution at a press conference where we demonstrated TAXi to a high school class. The students' sophisticated questions following the demonstration proved they had learned a lot about taxes and civics to boot. They wanted to know why the tax laws were so complicated and what they could do to get them simplified. Count on that class of students being among those who register and vote! If you'd like one of the CD-ROMs whether for your own use or to teach a lesson in taxes at your local high school-let us know. We'll send you a copy. TOO MANY NOTES, MY DEAR MOZART Emperor Joseph II uttered these words about Mozart's composition, and a similar observation might be made about the tax laws with one crucial difference. Talented and trained musicians play Mozart's compositions, but talent and training is no prerequisite to the application of our tax laws. The IRS does its best to prepare simplified tax returns like the 1040EZ Mozart for the beginning musician, if you will but as more and more targeted provisions are added to the Internal Revenue Code, it becomes impossible to do so. Increasing numbers of taxpayers must use the complicated forms. Moreover, as an American Tax Policy Institute (ATPI) roundtable in July made clear, when you add untrained and sometimes dishonest return preparers to the mix, the complexity of the tax laws becomes a recipe for serious trouble. In September, the Section joined with the AICPA Tax Division and others to testify before the House Small Business Committee on the need for simplification. Our Simplification Task Force prepared the testimony, lead by Helen Hubbard and David Glickman. Despite the attention simplification has received, as of this writing, the legislative session is drawing to a close without action on a number of complex provisions in dire need of attention. The good news is the tax laws have not been made any worse! But with both of the major party presidential candidates promising more targeted tax provisions if elected, that may not be the case in the next legislative session. The Joint Committee on Taxation will release a mammoth report on simplification in January, and our Committees are identifying more provisions needing simplification. The Section will give the Joint Committee's report and simplification continued attention next year. HOT LEGISLATIVE AND REGULATORY TOPICS Although Congress did not pass any simplification bills, it did pass marriage penalty relief and repeal of the estate tax, and is likely to pass a bill to replace the FSC provisions, which the WTO declared illegal earlier this year. The President vetoed both marriage penalty relief and the estate tax repeal, but the bills are likely to re-emerge. At our January meeting, our Domestic Relations Committee will explore the marriage penalty, a provision at odds with the values of our society, and what to do about it. Our Simplification Task Force has previously recommended measures to simplify the estate tax, and pointed out the complexity inherent in the phased-in repeal provision passed by Congress. The Task Force will continue to study alternatives for simplifying the estate tax, including increases in the threshold that might, for example, be tied to the amount needed for retirement years. Although the legislation replacing the FSC has the President's approval, it may not pass muster with the WTO, which will undoubtedly scrutinize it. If that is the case, then Congress may have to re-visit this topic. The FSC provisions were enacted in 1984 to replace the domestic international sales corporation (DISC) provisions first developed by long-time Tax Section member, Edwin Cohen, in the early 1970s when he served as Undersecretary of the Treasury for Tax Policy. The DISC provisions were intended to provide an export incentive to neutralize tax disadvantages to which American exporters were subject. As the theme for our fall meeting made clear, we cannot look at our tax system without an appreciation of the global economy in which we do business. If manufacturers can lower their effective tax rates by manufacturing elsewhere, then the FSC provisions mean American jobs, and the importance of replacing the FSC with provisions that will withstand WTO scrutiny is apparent.

5 On the regulatory front, the Section submitted comments on Circular 230 and on the tax shelter registration, listing, and disclosure regulations. Our comments on the tax shelter regulations make two key points. First, the regulations need to be narrowed significantly to reduce the administrative burden on taxpayers and hone in on the transactions to which the IRS should be devoting its attention. Second, the IRS should develop a program to monitor compliance with the regulations so the rules are more than paperwork for the compliant. We have also formed a working group, lead by David Weisbach, to prepare a report on the capitalization or deduction issues triggered by the Supreme Court's decision in INDOPCO. National Taxpayer Advocate Val Oveson identified the deduction of business expenses as one of the most frequent audit issues. We are confident our working group's report will make a significant contribution to resolution of this issue. Our Committees have submitted other important comments in the past few months, ranging from tax exempt bond provisions to the check-the-box international provisions. We are pleased with and proud of their efforts. DOING GOOD As you've no doubt heard before, the Section has supported the creation and funding of low-income taxpayer clinics. We've also supported training for the clinics through the preparation of a manual and the seminar we cosponsor with the American University Law School. Congressional funding for low-income taxpayer clinics has opened the door for a number of new clinics. Nina Olson, the Chair of our Low Income Taxpayer Committee and the Director of The Community Tax Law Project, recognized the need for a national resource center for these new clinics and brought it to the attention of the Section. At our July Council meeting, we approved a $30,000 contribution to the creation of the center, contingent on a $100,000 grant from the Open Society Institute to fund the center's first year of operation. In addition to the funding for the national resource center, the Section agreed to become a supporter of the American Tax Policy Institute (ATPI). ATPI was organized in 1990 to undertake tax policy research. You may be aware of ATPI's activities, which have included the IRS modernization conference co-sponsored by the Section, studies on the EITC, penalties, differences between corporate book and tax income, tax reform's effect on the states, and state unclaimed property audits. You may be one of the many tax professionals who support the important work of this organization. The Section's support will permit ATPI to expand its tax policy research. We are delighted to be able to make the contribution. THE FUTURE The ABA House of Delegates rejected the report of the ABA Commission on Multidisciplinary Practice when it met in July. In addition to rejecting the report, the House of Delegates terminated the Commission. Consequently, the issue of MDPs is dead for the time being in the ABA. As we all know, however, MDPs are not dead outside the ABA. Canada voted to approve MDPs shortly after the ABA rejected them. In addition, many states are considering changes to their disciplinary rules that would permit multidisciplinary practice. With or without changes in the rules, the growth of multidisciplinary practice continues. Consequently, it is a topic the Tax Section will continue to explore and discuss. The ABA replaced its Commission on MDPs with Commissions formed to consider multijurisdictional practice and the future of the profession. Although the scope of the multijurisdictional practice Commission's study is limited to the U.S., the International Section has requested it be broadened to cover foreign jurisdictions, and it is likely that will occur. Multijurisdictional practice is of particular importance to all of us as tax lawyers since our expertise in federal tax law may bring us clients from across the country or even around the globe. Consequently, we expect to participate in the work of the Commission through testimony presented to the Commission and a committee formed by the Sections of the ABA to consider the topic. Stef Tucker, our former Chair and recently elected delegate to the ABA House of Delegates, will lead this effort. If you are interested in the topic or would like to participate in the Section s effort, please let Stef or me know. The future of the profession puzzles, concerns, and excites us all. Law practice has changed dramatically in the past few years. My crystal ball says it is certain to continue to do so, but that is about all it says. As lawyers, we are trained to look backwards to determine how to move forward. But looking back to predict the future may be hazardous. To paraphrase a popular comedian, if we spend too much time looking at where we ve been, we ll plow into a parked car. While we cannot ignore the lessons of history, society is not constrained by what we see in our rearview mirrors. We intend to participate in the Commission studying the future of the profession and may join the discussion with other ABA Sections. If you are interested, please let me know. MORE ON YOUNG LAWYERS Our Young Lawyers Forum is off and running with excellent programs on career development and the future of the profession at our last two meetings. We offered a complimentary breakfast at the Los Angeles meeting, urged managing partners in Los Angeles law firms to send their young lawyers to the meeting, and invited IRS lawyers in the western region to attend. We plan more of the same for January. We ve also written to large law firms across the country about the benefits for young lawyers of participating in the Section s meetings and activities. We have more planned, but want your feedback. Please give us your thoughts. See you in Scottsdale! 5 F R O M T H E C H A I R

6 C O U N C I L A C T I O N S 6 COUNCIL ACTIONS by Joel D. Zychick, New York, NY The Council of the ABA Section of Taxation met on July 8, 2000, at the 2000 Annual Meeting of the ABA in New York City. The Council heard reports and took actions on the following topics. NATIONAL RESOURCE CENTER FOR LOW- INCOME TAXPAYER CLINICS Pamela F. Olson, Section Chair, reviewed [the] proposal of the Long Range Funding Task Force inviting the Section to cosponsor with The Community Tax Law Project a threeyear initiative establishing the National Resource Center for Low Income Taxpayer Clinics and to approve a grant to support the firstyear funding of the effort. Ms. Olson reviewed the Section s activities in the field of low-income taxpayer representation and policy, including the Section s sponsorship of two annual workshops for Low Income Taxpayer Clinics in cooperation with American University Washington College of Law. After discussion, Council adopted the proposal. COMMISSION ON MDP REPORT TO THE HOUSE OF DELEGATES Ms. Olson and Stefan F. Tucker, incoming Section Delegate to the House of Delegates and former Section Chair, reviewed with Council the report of the Commission on Multidisciplinary Practice that was to be submitted to the House of Delegates at the 2000 Annual Meeting of the ABA. Council discussed a recommendation in the Report that the ABA amend the Model Rules of Professional Conduct to...permit lawyers to share fees and join with nonlawyers in a practice that delivers both legal and nonlegal professional services...provided that lawyers have the control and authority necessary to assure lawyer independence in the rendering of legal services. Mr. Tucker reported that the Section cosponsored the Commission s August 1999 Report and proposed that the Section agree also to cosponsor the current Report. After discussion, the proposal to cosponsor the Report was adopted by Council. RETROSPECTIVE ON MDP AND THE FUTURE OF THE PROFESSION Paul J. Sax, Last-Retiring Chair, Sherwin P. Simmons and Stefan F. Tucker, provided a retrospective of the Section s activities in the multidisciplinary practice area and discussed with Council their respective views of the future of the tax profession. F R O M T H E E D I T O R FROM THE EDITOR by Ellen P. Aprill, Los Angeles, CA The Chair s column in this issue gives a wonderful overview of key issues facing the tax system and thus the Tax Section. The various pieces in the Newsletter go on to illustrate or expand upon many of the points raised the estate tax, international issues and the impact of multidisciplinary practice, particularly its effect on young lawyers. All of these areas bear upon another issue raised by Chair Olson, the need for simplification. The Chair s column notes that our Simplification Task Force has recommended measures to simplify the estate tax. In Points to Remember, Alexander Drapatsky and David Silverman each describe important albeit complicated techniques that have developed in response to the estate tax namely, family limited partnerships and installment sales to defective trusts. Each technique displays how the ingenuity of tax lawyers make use of the rules that confront them. Such techniques in turn prompt legislation and regulation, such as the Chapter 14 rules, and these new rules further fuel the call for simplification. Discussing family limited partnerships in his interview, Frederic G. Corneel, recipient of the ABA s Distinguished Service Award, reminds us that simplification can take many forms. He observes that the high top marginal rates of the estate tax drive family limited partnerships and that a rate reduction might decrease substantially conflict in this area. In the Chair s Column, Pam Olson also writes of the legislation replacing the FSC and the possibility of Congress needing to revisit this area once again after review by the WTO. Our fall meeting, of course, had as its theme the tax implications of the global economy. In this issue, Nancy Beckner s Point to Remember considers the final regulations under 367(b), which address exchanges involving foreign corporations. The need for these detailed regulations, with special terms such as the All E&P Amount, remind us that the global economy makes the goal of

7 simplification both more important and more difficult. The Chair s column notes the Section s continuing efforts to address multidisciplinary practice and to involve young lawyers in the Section. Fred Corneel addresses these topics in his interview as well. He reflects on how multidisciplinary practice and the continuing increase in the size of law firms heighten the need for careful consideration of ethical issues. For young lawyers, he offers one piece of advice with universal application getting together regularly with other tax lawyers. Such contact, he explains, is not only useful, but also fun. (As a personal aside and endorsement, I can attest that such participation can produce even some quite unexpected and wonderful benefits while neither of us qualified any longer as young lawyers, my husband and I met through the tax section of our local bar association!) Simplification advocates often place reform of the alternative minimum tax high on their list of desired changes. This issue s Point and Counterpoint debates an issue, now being decided in a number of courts, that highlights an unintended consequence of our current alternative minimum tax. Under the AMT, plaintiffs who win litigation and settlement awards can deduct none of the attorneys fees and costs. As a result, the tax in some cases exceeds the amount of the net recovery. Deborah Geier and Maxine Aaronson debate whether only Congressional action can correct this problem, or whether judges have the ability to do so. Even in our global economy and even in a simplified tax system, we as tax lawyers will continue to deal with human beings who sometimes change their minds and wish to undo or modify a transaction. Most of us have worried at some time about the proper way to structure and treat a rescission for tax purposes, especially in light of annual accounting and reporting. Stephen Tolles and Dora Arash have done all of us a great service by considering these issues in their special report, Unwinding a Transaction. I first heard Steve give a talk on this subject at a conference last January and a longer version of the piece will appear shortly, as noted in the article. The issues seemed to me so important and of such wide interest to the members of the Section that I asked for a short version of the piece to be published here. My thanks to them for being willing to do so. I am sure that many of us will find ourselves referring often to this special report, which you will be able to find online at All of these issues rescission, simplification, or the global economy are affected by e-commerce, which will be the theme of the Midyear Meeting in Scottsdale. I hope you will be able to join us there. 7 F R O M T H E E D I T O R MARK YOUR CALENDAR ADR CONFERENCE IN FEBRUARY Mark your calendar for a special, one-day conference on IRS s New Toolbox to Resolve Tax Disputes. Cosponsored by the ABA Sections of Taxation, Administrative Law and Practice, and Dispute Resolution, and the American Institute of Certified Public Accountants, in cooperation with the Court of Federal Claims Bar Association and the Internal Revenue Service, this program will be held on February 1, 2001 at the Marriott Wardman Park Hotel (formerly the Sheraton Washington), Washington, DC. Designed for private practitioners, business and corporate representatives, IRS representatives, and academics, the purpose of this program is to inform lawyers and taxpayers about new opportunities to resolve tax disputes with the Internal Revenue Service (IRS) through mediation, arbitration and other ADR measures, as the IRS re-tools for the new millennium. Program includes a luncheon presentation by Larry Langdon, Commissioner, Large and Mid-Size Business Division, Internal Revenue Service. CLE credit will be awarded and sessions will be audiotaped. Tuition is $200 for members of the sponsoring organizations, $250 for nonmembers, and $100 for government representatives. Please visit the ABA Tax Section s website for additional information.

8 P O I N T S T O R E M E M B E R 8 POINTS TO REMEMBER Editor s Note: POINTS TO REMEMBER are individual submissions to the Newsletter from Section of Taxation members with insights to share. Although these items are subject to selection and editing, the Section conducts no systematic review of these items. Accordingly, each item states the view of the individual contributor and does not necessarily represent the views of the ABA or of the Section of Taxation. We welcome new submissions as well as responses to previously published material found in this section. TREASURY ISSUES FINAL SECTION 367(b) REGULATIONS by Nancy Beckner, Washington, DC Section 367 limits use of the reorganization and certain other nonrecognition provisions of the Internal Revenue Code ( IRC ) in various international transactions so as to preserve U.S. taxation of income or gains having a U.S. nexus or derived through foreign corporations owned by U.S. persons. Section 367(a) addresses transfers of property by a U.S. person to a foreign corporation in section 332, 351, 354, 356 or 361 exchanges and provides that, unless certain exceptions apply, a foreign corporation is not a corporation for purposes of determining the extent to which gain is recognized on the transfer. Section 367(b) addresses cross-border and foreign-to-foreign exchanges under these IRC sections or section 355 if there is no section 367(a)(1) transfer of property by a U.S. person. For such exchanges, a foreign corporation ( FC ) is considered a corporation (i.e., non-recognition treatment is available) except to the extent provided in regulations. 1 A section 367(b) exchange would include, for example, an FC s acquisition of the assets of another FC in a section 351 exchange or a section 332 liquidation of an FC into its domestic parent. Section 367(b) regulations were originally proposed on August 26, 1991 (the Proposed Regulations ). On January 21, 2000, Treasury issued final regulations (the Final Regulations ) [T.D. 8862] effective for transactions on or after February 23, While the Final Regulations generally do not depart significantly from the relatively workable approach of the Proposed Regulations, there are several important differences; as stated in the Preamble to the Final Regulations, these differences are based on considerations of fairness, simplicity and administrability. In addition, the Final Regulations incorporate, with modification, previously published final regulations, T.D (June 19, 1998) ( June 19 regulations ), addressing the over-lap of section 367(a) with section 367(b). Section 367(b) has been viewed as complementing section 1248, which, in general, treats gain recognized by a U.S. person from the sale or exchange of stock in a controlled foreign corporation ( CFC ) 2 as a dividend to the extent of the CFC s earnings and profits (determined under section 1248 regulations). Without section 367(b), the IRC non-recognition provisions might otherwise result in the avoidance of U.S. tax with respect to a CFC s E&P; i.e., the section 332 liquidation of a CFC (with E&P) into its U.S. domestic parent or an acquisitive reorganization of a CFC with another FC if the acquiring/surviving FC is not a CFC. However, the Final Regulations do more than complement section 1248; for example, a section 367(b) exchange of stock can result in an income inclusion exceeding the dividend which would have arisen on a taxable sale of CFC stock under section The Final Regulations require current income inclusion and/or gain recognition upon inbound transactions under section 332 or section 368(a)(1). They also require income inclusion on certain outbound and foreign-to-foreign exchanges resulting in the loss of section 1248 shareholder status or the excessive potential shifting of E&P, which would produce an inappropriate section 902 foreign tax credit benefit. 3 If the potential application of section 1248 is preserved (for example, if the U.S. shareholder of CFC stock continues to own CFC stock after a reorganization), the Final Regulations permit deferral of amounts for later income inclusion, with appropriate tracking of E&P of the acquired CFC. The discussion below highlights several important differences between the Proposed and Final Regulations and from prior Temp. Reg. Sec (b)-9. INBOUND SECTION 332 LIQUIDATIONS & SECTION 368(a)(1) REORGANIZATIONS INVOLVING ACQUISITIONS OF FC S ASSETS BY A DOMESTIC CORPO- RATION (DC) A DC s acquisition of the assets of an FC in a subsidiary liquidation 1 Section 367 also addresses transfers of intangible property to foreign corporations in 351 or 361 exchanges ( 367(d)) and 355 distributions by domestic corporations to non-u.s. persons and 332 liquidating distributions to foreign parent corporations ( 367(e)). 2 A CFC is an FC of which U.S. Shareholders (U.S. persons owning at least 10% of the voting power) own more than 50% of the stock, by vote or value. Attribution and other rules apply to determine ownership. 3 Section 902 (the deemed paid credit) is a provision that permits a domestic corporation which receives a dividend from an FC of which it owns at least 10% of the voting stock to claim a foreign tax credit for foreign taxes paid by that FC (and certain lower tier FCs), based upon the ratio of the dividend to the FC s post-1986 undistributed earnings.

9 under section 332 or in reorganization will result in the inclusion of income or gain recognition for U.S. persons, thereby preventing avoidance of U.S. tax with respect to deferrals achieved during the period of FC ownership. Under the Final Regulations, any 10% U.S. Shareholder (a U.S. persons owning 10% or more of the FC stock, as determined under section 951(b) 4 ) and any 10% U.S.-owned Foreign Corporate Shareholder (a foreign corporate shareholder as to which a U.S. person is a 10% U.S. Shareholder) must include in income, as a deemed dividend, the all earnings and profits amount (the All E&P Amount ) 5 attributable to such person s stock in the FC whose assets are being acquired. Treasury rejected arguments that income inclusions should be limited to amounts includable as dividends under section 1248, since such a limitation fails to consider the section 367(b) policy need to address the proper carryover of corporate level attributes in in-bound transactions. Treasury is seeking comments on whether future regulations should limit attribute carryovers and, thus, limit the class of persons subject to income inclusions; such an approach could also deal with attribute carryovers from periods when stock was not held by U.S. persons. The Final Regulations retain the Proposed Regulations taxation of all exchanging U.S. shareholders, including U.S. persons who are not 10% U.S. Shareholders and who generally recognize gain (but not loss); alternatively, such persons may elect to include the All E&P Amount (in lieu of recognizing gain). The Final Regulations add a de minimis exception eliminating gain recognition if the value of the exchanging U.S. person s stock is less than $50,000. The Proposed Regulations permitted a gain recognition election in lieu of the All E&P Amount inclusion; the Final Regulations eliminate this election as inconsistent with the policy of section 367(b) and raising other concerns. 6 FC ACQUISITIONS OF FC STOCK OR ASSETS The Final Regulations generally follow the provisions of the June 19 regulations in requiring income inclusion where, following foreign-to-foreign reorganizations and certain other transactions, the status of a U.S. shareholder changes such that the shareholder would no longer be subject to dividend income treatment under section 1248 if gain were recognized on a subsequent sale of FC stock. In contrast to prior temporary regulations, income inclusion is also required if there is excessive potential shifting of E&P in order to prevent inappropriate tax credit benefits under section 902. This provision was unnecessary under Temp. Reg. Sec (b)-9, which addressed the section 902 problem through a complex E&P attribution system; as anticipated following the June 19 regulations, this system has been completely eliminated in the Final Regulations, which use an E&P tracking system. Treasury intends to propose regulations addressing carryover of E&P and tax accounts as well as the application of certain foreign tax credit provisions to distributions by an acquiring FC. DISTRIBUTIONS BY A DOMESTIC CORPORATION For distributions by domestic corporations, the Final Regulations adopt the approach of the section 367(e) regulations, which presumes all distributees are individuals and treats the controlled corporation as not being a corporation, thus triggering gain recognition by the distributing corporation. This presumption is rebuttable using certain shareholder identification principles; gain is not recognized on distributions to a corporation (after application of such identification principles), unless the distributee is an FC and gain is recognized under section 367(e)(1) and its regulations. DISTRIBUTIONS BY A CFC For pro-rata CFC distributions, the Final Regulations respond to taxpayer concerns about potential phantom gain and provide that basis reductions (and deemed dividends) result in certain collateral increases in the distributee s stock basis. Special basis adjustments do not apply to non-pro-rata distributions; instead, the excess of the pre-distribution amount over the post-distribution amount is a deemed dividend, and basis increases that normally apply to deemed dividends generally continue to apply. Under the Final Regulations, deemed dividends of an FC are not included in foreign personal holding company income (a classification which would result in income for U.S. shareholders of an exchanging FC). Also, rules relating to E&P allocations of a foreign transferor corporation have been dropped but will be addressed in future section 355 regulations. NOTICE FILING CHANGES The Final Regulations modify both the Proposed Regulations and the June 19 regulations by reducing the list of persons subject to notice filing requirements. The Final Regulations require filing only with respect to persons and transactions that may be subject to an inclusion under the operative provisions of the Final 9 P O I N T S T O R E M E M B E R 4 10% U.S. Shareholder status is determined without regard to an FC s status as a CFC. 5 The starting point of the All E&P Amount is essentially E&P as determined for a DC, but with certain exceptions and adjustments. However, the All E&P Amount subject to inclusion is determined without regard to an FC s status as a CFC, the shareholder s ownership of 10% of the stock during a given period or the period during which such E&P was accumulated. Accordingly, the amount includable under the Final Regulations may be greater than the 1248 dividend which would occur on a sale of the FC s stock. 6 However, Temp. Reg (b)-3T(b) [T.D. 8863, 1/21/2000] allows the election for exchanges occurring between February 23, 2000 and February 24, 2001, but requires attribute reductions if the All E&P Amount exceeds the gain recognized and one U.S. person owns, directly or indirectly, 100% of the acquired FC.

10 P O I N T S T O R E M E M B E R 10 Regulations. CURRENCY ISSUES The Final Regulations adopt, with modification, the Proposed Regulations treatment of certain currency exchange matters under sections For example, under the Final Regulations, a qualified business unit is deemed to have automatically changed its functional currency when its functional currency is different after a section 367(b) exchange. They also address exchange gain or loss with respect to section 367(b) income inclusions and distributions. Eliminated in the Final Regulations are the provisions of the Proposed Regulations addressing recognition of exchange gain or loss with respect to appreciation/depreciation in an exchanging shareholder s capital account in a foreign acquired corporation; however, this issue has been reserved for further consideration. IRS BATTLES AGAINST FAMILY LIMITED PARTNER- SHIPS CONTINUE by Alexander Drapatsky, Chicago, IL Family limited partnerships and family limited liability companies (hereinafter FLPs ) have become popular estate planning devices. By using FLPs to transfer assets to future generations, donors can institute a lifetime gifting program, reduce the eventual estate tax liability of the donor by removing assets (and the future appreciation of the asset) from the donor s estate, and maintain control over the assets in the FLP through the general partner. One of the great benefits of using a FLP to transfer wealth to younger generations is the potential reduction in the value, for transfer tax purposes, of the assets being transferred as a result of valuation discounts for lack of control and lack of marketability. A lack of control discount (also referred to as a minority interest discount) is appropriate when the holder of an interest in a FLP lacks the right to decide the timing of distributions of earnings or other issues that affect the financial benefits of FLP interest ownership. A lack of marketability discount takes into account the fact that an owner of an interest in a privately held entity will have greater difficulty than an owner of a publicly traded entity in finding a buyer for his or her interest. IRS CHALLENGES TO FLPs To counter the popularity of FLPs as an estate planning device and particularly the large discounts some taxpayers were using in determining the value of gifted FLP interests, the IRS in 1994 issued anti-abuse regulations that stated that for the IRS to respect a FLP as a partnership for tax purposes, the taxpayers must have created the FLP for a substantial business purpose. Prop. Treas. Reg. Sec , 60 Fed. Reg (1994). The IRS subsequently withdrew these anti-abuse regulations with respect to FLPs. However, the IRS s hostility towards FLPs remains. The IRS has used several arguments to challenge the discounts that taxpayers have applied upon gifting interests in FLPs. The first is an argument that if a FLP agreement is more restrictive than state law with respect to liquidation of the FLP, the IRS under section 2704(b) will disregard the FLP agreement s restrictions for purposes of determining the applicable discount on a FLP interest. In several 1997 letter rulings, including Private Letter Rulings and , the Service reiterated its position regarding applying section 2704(b) to discounts in FLP interests. However, in Kerr v. Commissioner, 113 T.C. No. 30 (1999), the Tax Court may have granted taxpayers a means to achieve a discount on a FLP interest despite section 2704(b). In Kerr, the governing state law of the FLP agreement stated that one of the ways a partnership can liquidate is upon the occurrence of specified events, as stated in a FLP agreement. Since the Tax Court ruled that such a clause is not more restrictive than the governing state law, the IRS was not able to change the discount on FLP interests by using the section 2704(b) argument. The Kerr holding was recently upheld in Estate of Harper v. Commissioner, T.C. Memo (filed June 30, 2000). Another IRS line of attack on discounts in gifted FLP interests is that, upon the formation of the FLP, the partners actually make gifts to each other, triggering gift tax consequences. Consider a FLP formed by three people, wherein a corporate general partner owns a 1% interest and each of the three limited partners owns a 33% interest. If the partners argue that each of the limited partners interest is worth less than 33% of the asset value contributed to the FLP, because of applicable discounts, the IRS would argue in reply that the amount of this discount could not have disappeared and in reality constitutes gifts among the partners. In Church v. United States, 85 A.F.T.R. 2d (2000), the District Court disposed of the IRS s gift-upon-formation argument, holding that a pro rata partnership, where each partner s interest is proportional to his or her contributed capital, does not constitute a gift to any one partner. Taxpayers and their advisors are waiting to see whether the IRS will acquiesce in the Church holding and agree that the formation of a pro rata FLP does not constitute a gift to other partners. While taxpayers have had some success in battling the IRS on issues related to discounts and gifts, a recent case demonstrates that a FLP still must have a valid business purpose. In Estate of Reinhardt v. Commissioner, 114 T.C. No. 9 (2000), the taxpayer created a FLP, transferred property

11 into the FLP where a revocable trust was the general partner, and gifted FLP interests to his children. The taxpayer maintained the same control and managed the assets he contributed to the FLP in the same way as when he was the outright owner of the assets. The court held that subsequent to the creation of the FLP, nothing changed except for legal title, and the taxpayer was solely responsible for the partnership s business activities. Since the taxpayer retained complete control over the FLP s assets, transferred FLP interests to his children without consideration, and none of the other partners were involved in the operations of the FLP, Reinhardt agreed with the IRS in holding that under section 2036(a), the assets that the taxpayer contributed to the FLP should be included in the taxpayer s estate for estate tax purposes. CONCLUSION In the ongoing battle with the IRS over FLPs, taxpayers appear to be sustaining their victories on discounts that are based on solid valuations for FLPs that have valid business purposes. However, as demonstrated in Reinhardt, if a taxpayer transfers assets into a FLP without a valid business purpose, the taxpayer may not even be able to keep such assets from his or her estate for estate tax purposes. The taxpayers battles with the IRS over FLPs continue. INSTALLMENT SALES TO DEFECTIVE GRANTOR TRUSTS by David L. Silverman, Great Neck, NY Installment sales of assets to grantor trusts exploit provisions in the Internal Revenue Code enacted to prevent income shifting at a time when trust income tax rates were much lower than individual income tax rates. The technique also attempts to capitalize on the different definitions of transfers for gift and income tax purposes. After the asset sale has occurred, the grantor trust holds property on which the grantor is taxed for income tax purposes, but is not considered as owning for gift tax purposes. As a result, the grantor is taxed on trust income, but the trust assets as well as the appreciation thereon will be outside of the grantor s estate. These trusts are known as intentionally defective grantor trusts (IDT). Although sales of assets to defective grantor trusts are likely to attract IRS scrutiny, it is unclear whether the Service could successfully mount a frontal challenge to this estate planning device. Under the tax law, the grantor of a grantor trust is taxed on the income of the trust property as if the property were owned by the grantor free of the trust. A corollary of this rule is that, if the grantor sells property to the trust, no taxable event has taken place for income tax purposes. Presumably, the income tax law would regard this transaction as a sale from the grantor to himself. The result of this application of the tax law is that the grantor can sell appreciated assets to the grantor trust, effect a complete transfer and freeze for estate tax purposes, and yet trigger no capital gains tax on the transfer of the appreciated business to the grantor trust. When a business is sold to a defective grantor trust, the income tax liability relating to the profits generated by the business remains with the grantor, while at the same time the grantor has parted with ownership of the business for transfer tax purposes. A freeze of the estate tax value has been achieved, since future appreciation in the business will be outside of the grantor s estate. Nonetheless, the grantor will remain liable for the income tax liabilities of the business, and no distributions will be required from the trust to pay income taxes on the business. This will result in accelerated growth of trust assets. The grantor may receive either cash or a note in exchange for the assets sold to the grantor trust. If a business is sold to the grantor trust, it is not likely that the trust would have assets sufficient to satisfy the sales price. Moreover, paying cash for the business or assets sold to the grantor trust would tend to defeat the purpose of the trust, which is to reduce the size of the grantor s estate. For this reason, the consideration most often supplied by the grantor trust in exchange for the business or assets is a promissory note. The grantor will likely require the trust to secure the promissory note by pledging the assets sold to the grantor trust. If properly structured, there should be no gift tax consequences upon the sale of assets to an IDT, since the transaction should constitute a bona fide sale. Although cash or assets received by the grantor as consideration for the asset sale to the IDT would subsequently be included in the grantor s estate (if not disposed of earlier), they would be entitled to a stepped-up basis at the grantor s death. Upon the death of the grantor of a grantor trust, the IDT would lose its grantor trust status. Presumably, assets in the IDT would be treated as passing from the grantor to the trust without a sale, in much the same fashion that assets pass from a revocable living trust to beneficiaries. However, for income tax purposes, the trust would receive no step-up in basis under section 1014(a) of the Code, because there will have been no inclusion in the grantor s estate. Since the sale is ignored for income tax purposes, the balance due on the note would not constitute income in respect of a decedent (IRD). The note would presumably acquire a basis equal to the value that is included in the grantor s estate. For estate tax purposes, no part of the trust should be included in the grantor s estate. However, the 11 P O I N T S T O R E M E M B E R

12 P O I N T S T O R E M E M B E R 12 promissory note would be included in the grantor s estate. This is to be contrasted with the estate tax consequences which obtain with a GRAT, where the death of the grantor prior to the expiration of the trust term would result in estate tax inclusion of the entire amount of the trust. If section 2702 were to apply to the sale of assets to a grantor trust, then the entire value of the property so transferred could constitute a taxable gift. However, it appears that section 2702 generally does not apply to the sale of assets to an IDT, primarily because of the nature of the promissory note issued by the trust. The promissory note issued is governed by its own terms, not by the terms of the trust. The holder in due course of the promissory note is free to assign or alienate the note, regardless of the terms of the trust, which may contain spendthrift provisions. The Service has held in Private Letter Rulings and that neither section 2701 nor section 2702 applies to the IDT promissory note sale, provided (1) there are no facts present which would tend to indicate that the promissory notes will not be paid according to their terms; (2) the trust s ability to pay the loans is not in doubt; and (3) the notes are not subsequently determined to constitute equity rather than debt. Even if the IRS does not view sections 2701 and 2702 as applying, the IRS could make the argument that, because the grantor is receiving a promissory note in exchange for assets, the grantor has retained an interest in the assets which require inclusion of those assets in the grantor s estate under section In order to minimize the chance of the IRS successfully invoking the argument that the promissory note related to the trust assets, the trust should be funded with assets worth at least ten percent as much as the value of the assets which will later be sold to the grantor trust in exchange for the promissory note. The reason for this ten percent recommendation is that in an analogous situation, section 2701 requires that the value of common stock, or a junior equity interest, comprise at least ten percent of the total value of all equity interests. In meeting the ten percent threshold, the grantor himself or herself should make a gift of these assets so that after the sale of assets in exchange for the promissory note, the grantor will be treated as the owner of all trust assets. In order to further support the bona fides of the promissory note, all of the trust assets should be pledged toward the payment of the note. To accentuate the arm s length nature of the sale of assets to the trust, it is preferable if the grantor is not the trustee of the trust. The IRS has also expressed the view in Private Letter Ruling that section 2036(a) could be avoided if beneficiaries were to act as guarantors of payment of the promissory note. The IDT technique permits the grantor to effect a true estate freeze by transferring assets at present value from his estate, without being subject Now Available to the limitations imposed by sections 2701 and In addition, the GST exemption could be allocated to the assets passing to the trust at the outset, thus removing from GST tax any appreciation in the assets as well. In these respects, the IDT is superior to the GRAT. The principal disadvantage of the IDT is that no step up in basis is received at the death of the grantor for assets held by the trust. Another disadvantage to the IDT technique is that although the general principles governing its use seem firmly grounded in tax law, no clear rules seem to apply. The IRS could challenge various parts of the transaction, which if successful, could negate some (or all) of the tax benefits sought. In particular, the IRS could attempt to assert that (1) the sale by the grantor to the trust does not constitute a bona fide sale; (2) section 2036 applies, with the result that the entire value of the trust is includable in the grantor s estate; or (3) section 2702 applies, and the interest payments are not qualified payments, with the THE ABA property tax deskbook, 2000 edition Size: 8 1 /2 x 11 Softcover, 900 pages Cost: $195 Tax Section Members, $240 Non-member product code: Another key resource from the ABA Tax Section for tax managers, attorneys and accountants who specialize in state and local tax matters. Updated each year, the ABA Property Tax Deskbook contains a thorough discussion of state property tax issues in all jurisdictions. Each chapter sets out the most important principles in that state, with citations to pertinent statutes, rules, regulations, case law, bulletins, and local practices information often impossible for practitioners from other states to find. To place an order, call the ABA Service Center at 800/ For more information and a list of other Section publications, visit our website

13 POINT & COUNTERPOINT: PLAINTIFF S ATTORNEYS FEES AND COSTS INTRODUCTION: A series of recent and controversial cases has raised the issue of how plaintiffs must treat attorneys fees and costs that are paid out of otherwise includable settlement or litigation awards. Plaintiffs facing this problem include civil rights litigants, employees in employment-related litigation, defrauded consumers, and those who recover punitive damages and interest as well as excludable awards under section 104(a)(2). For all of these and others, attorneys fees and costs are deductible only as itemized deductions that are reduced under the regular tax (under both sections 67 and 68) and completely disallowed under the alternative minimum tax. As Judge Beghe s dissent in Kenseth v. Commissioner, 114 T.C. No. 26 (May 24, 2000), demonstrated, if a contingent fee exceeds 50% of the recovery, the effective overall tax rate on the net recovery actually received exceeds 50% and if the aggregate fees exceed 72-73% of the recovery, the tax can exceed the amount of the net recovery. Everyone seems to agree that under tax policy and theory plaintiffs should not be saddled with this burden. Many have expressed the desire that Congress amend the Code to correct the problem. As Deborah Geier and Maxine Aaronson debate below, the more difficult question is whether courts can act to protect these plaintiffs in the absence of Congressional action. POINT: ONLY CONGRESS CAN CREATE DEDUCTIONS By Deborah A. Geier, Cleveland, OH* In the series of recent cases involving attorney s fees, plaintiffs have resorted to creative arguments to get their desired result via the backdoor by arguing that the portion of the award paid to the attorneys for their fees and litigation costs is excludable by them in the first place. 1 The impetus driving these cases on the part of both plaintiffs and judges is understandable. As described above, plaintiffs have a legitimate beef. But judges cannot alter the Code sections under which certain categories of deductions for individuals have been increasingly and severely devalued. Judges have, however, long exercised a robust power to create common law in the area of what constitutes gross income under the ambiguous catch-all provision in section 61: gross income from whatever source derived. Since an exclusion from income is the economic equivalent of an inclusion coupled with a full deduction, plaintiffs permitted by judges to exclude the portion of the award equal to their attorneys fees and costs would avoid the onerous deduction restrictions that currently apply to them under the Code but (under tax theory and policy, at least) should not apply to them. The plaintiffs in these cases make three arguments, the first two of which can be raised only if the contract under which the attorneys fees and costs are paid is of a contingentfee nature, rather than a pay-by-the hour contract or a flat-fee contract, win or lose. First, the plaintiffs argue that they have successfully assigned, under the assignment-of-income doctrine, their property rights to a portion of the recovery equal to their attorneys fees and costs because they gave up all control over that portion of their recovery under the contingent-fee contract. 2 The notion is that the contingent-fee contract transmutes the nature of their relationship to that of joint venturers, with each pursuing a return on their 13 P O I N T & C O U N T E R P O I N T * Deborah A. Geier Professor of Law, Cleveland-Marshall College of Law, Cleveland State University. 1 See, e.g., Srivastava v. Commissioner, No (5 th Cir., July 21, 2000); Coady v. Commissioner, No (9 th Cir., June 14, 2000); Kenseth v. Commissioner, 114 T.C. No. 26 (May 24, 2000); Estate of Arthur Clarks v. Commissioner, 202 F.3d 854 (6 th Cir. 2000); Foster v. U.S., U.S.T.C. (CCH) 50,353 (N.D. Al); Baylin v. U.S., 43 F.3d 1451 (Fed. Cir. 1995); Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959). 2 Under the assignment-of-income doctrine, developed in such hoary cases as Lucas v. Earl, 281 U.S. 111 (1930), Poe v. Seaborn, 282 U.S. 101 (1930), Helvering v. Horst, 311 U.S. 112 (1940), Blair v. Commissioner, 300 U.S. 5 (1937), Harrison v. Schaffner, 313 U.S. 579 (1941), Helvering v. Clifford, 309 U.S. 331 (1940), Helvering v. Eubank, 311 U.S. 122 (1940), and others, the Supreme Court developed a common-law doctrine that prevents the shifting of income for tax purposes from one taxpayer to another in many circumstances. Taken together, the cases might be summarized (if somewhat simplified) to mean that an assignor cannot shift the tax burden with respect to income produced by a mechanism over which she retains control. Because services income is created by one s body, it is just about impossible to shift services income to another, since one cannot effectively give up control over one s own body; the assignor can turn the income spigot on and off at will by performing services or not. Thus, services income is essentially always taxed to the person who provided the services that earned the income, whether the services income attempted to be assigned is already earned or to be earned in the future (Lucas v. Earl, Helvering v. Eubanks). Just as services income is typically taxed to the person who owns the body that created it, income earned with respect to property is generally taxed to the person who owns (for tax purposes rather than for state law purposes) the property that created it (Poe v. Seaborn). Unlike one s own body, the property owner can give up control over property producing income. Thus, assignments of income from property can be successful for tax purposes if the assignor gives up sufficient control over the property producing the income to the assignee (Blair, Horst, Harrison v. Schaffner, Clifford). The disputes in this area typically center around the issue of whether sufficient control over the property producing the income was surrendered to the assignee.

14 P O I N T & C O U N T E R P O I N T 14 portion of the joint venture. Second, they argue that the Old Colony Trust doctrine does not apply 3 because, under the contingent-fee nature of the contract, the plaintiffs had no obligation to pay the attorneys for their services. Third, they argue that, because state attorney lien statutes can give the attorneys a prior right to the portion of any recovery equal to fees and costs owed to them, the attorneys own this portion of the award from the beginning, not the plaintiffs. I have written about the arguments themselves at greater length elsewhere. 4 My chief interest is not in the rejoinders themselves but in the larger points illustrated by them: that the gross-income doctrine does not fit the problem at hand very well (but is used only because it s the only game available to achieve the desired end result) and, more important, can allow inappropriate deduction of nondeductible capital expenditures. One rejoinder deals with the only argument that would apply equally to contingent-fee contracts and other hourly contracts: the one based on the existence of state attorney lien statutes. What about payments to attorneys in states in which there is no similar attorney lien statute or in which the statute is worded in such a way as to create for the attorneys only a security interest in the recovery? Should taxpayers really be treated differently based on such a tenuous distinction? Most defendants pay contingent-fee awards directly to the trust account of the plaintiff s attorneys, so the attorney lien statute has little real-world effect other than-if this distinction is accepted-make some plaintiffs in the country pay tax on gross awards while others pay tax on only the net awards actually received. With respect to the arguments applicable only in the cases involving contingent-fee contracts, what about fees paid under the occasional hourly or flat-rate contract? On the theoretical and policy merits described above, it should make no difference how the fee payment is structured; the fees should be fully deductible in any event. It is a distinction without a difference on the ultimate merits. With respect to contingent-fee contracts themselves, it is not at all clear that they operate to assign a portion of assignable property income. Nor is it clear that plaintiffs have no obligation to pay the attorneys under a contingent-fee contract. It is just as reasonable to argue that the relationship between the parties is that of service recipient to service provider, and that the plaintiffs simply agreed to measure the worth of their attorneys services by reference to the gross recovery under the lawsuit. The fact that the attorneys control how the suit is prosecuted is neither here nor there; they are independent contractors to their clients, and all independent contractors retain control over the means by which they attain the end result for which they have been hired. That is the very nature of an independent contractor. Moreover, no actual tax partnership is, in fact, created here, which would (if one were deemed created with every contingent-free contract) raise a host of other issues (such as attorneys claiming a distributive share of excludable section 104(a)(2) damages). That a relationship might be conceptualized as a partnership does not mean that it should be so treated for tax purposes, and it particularly does not mean that it should be so treated for one purpose only but not for any other tax purposes. The relationship between the attorneys and the plaintiffs is respected as one of service provider to service recipient for literally every other tax characterization of the relationship, and a for-this-purpose-only departure from that model is a baldly manipulative one engineered to reach a specific result on one tax issue of the plaintiffs, which is the type of selective legal argumentation that breeds cynicism in the law. Moreover, the fact that the assignment-of-income cases arose in the family context, and that only the donor or donee but not both were taxed under those cases, does not mean that attempted assignments of income should be respected outside those contexts. Sometimes both should be taxed, and taxation of the assignor should not be allowed to be evaded through distinguishing away the assignment-of-income doctrine. This point can be most clearly illustrated with Baylin v. United States, 5 which is a great case to demonstrate that it might not be a such a good idea to jump on the bandwagon and allow all litigants to exclude the portion of an award equal to the amount paid to the attorneys under any of these theories. The Baylin litigation was brought by a partnership challenging what it considered to be a low valuation of property seized by the state of Maryland under its condemnation power. When the partnership hired an attorney to appeal the amount of the condemnation award, it entered into a contingent-fee contract under which the attorney would receive a percentage of any increase obtained over the previous valuation. The parties eventually settled at a valuation of more than $16 million, which was significantly higher than the original valuation of the property by the state of Maryland of nearly $4 million. The fee, if not excludable by the partnership, would not be considered a deductible expense but rather a nondeductible capital expenditure pertaining to the condemned property, reducing the amount of capital 3 In Old Colony Trust v. Commissioner, 279 U.S. 716 (1929), an employee s employment contract required his employer to pay the employee s federal income tax liability directly to the IRS. The Supreme Court held that the employee was deemed to have received the amount of taxes paid on his behalf (includable) and then paid them himself (nondeductible), even though under his employment contract he had no right to demand payment of those amounts directly to himself. 4 See Deborah A. Geier, Some Meandering Thoughts on Plaintiffs and Their Attorneys Fees and Costs, 88 TAX NOTES 531 (2000) F.3d 1451 (Fed. Cir. 1995).

15 gain realized by the partnership on the property transfer. The partners would be better off, taxwise, if they could exclude the portion of the award paid as attorneys fees, since that would be equivalent to garnering an ordinary deduction. The Federal Circuit rejected an exclusion, however, concluding both that the assignment-of-income doctrine prevents it and that the presence of an attorney lien statute does not change the result. Its language also evoked the Old Colony Trust paradigm, though it did not cite the case. It seems to me that the facts of this case demonstrate why this issue really is properly a deduction issue, and relief for the appropriate cases should therefore by legislated on the deduction side of the ledger. Though we might sympathize with the plight of the litigants unfairly denied full deduction of what properly is characterized as an expense in other litigation-and thus we might be tempted to rule in their favor under any one, or a combination of, the arguments posited for exclusion - this case demonstrates how trying to resolve the problem favorably for the sympathetic class in this manner can wreak havoc in a case such as Baylin, where the taxpayer would effectively be allowed to deduct a nondeductible capital expenditure. Collapsing the income and deduction into a single-step exclusion can lead to results that would be wrong if we gave each step tax significance. If, for example, a civil rights litigant succeeds in excluding the portion of the attorneys fees paid to his attorneys under the arguments discussed here, I can see no grounds on which to differentiate the plaintiff in Baylin, who should be denied deduction of the attorney s fees (in favor of capitalization) and should not be able to avoid that result through the back door. One would be hard pressed to make a distinction under the assignment-of-income doctrine itself between attorneys fees that constitute expenses (successfully assigned) and attorneys fees that constitute capital expenditures (unsuccessfully assigned). The doctrine turns on the income right itself, which would not seem to be different in the two scenarios. I do not think that one could reasonably say that the reason why Baylin should lose even though an employee suing for back wages or a civil rights plaintiff should win is that Mr. Baylin was trying to avoid taxation on attorney fees that would not be deductible under the Code if paid directly. The bald fact is that the same is true of these other plaintiffs. The only difference between the two is that these other plaintiffs should be able to deduct their fees under income tax theory (because they were 15 P O I N T & C O U N T E R P O I N T NEW TITLE THIS FALL! EFFECTIVELY REPRESENTING YOUR CLIENT BEFORE THE NEW IRS: A Practical Manual for the Tax Practitioner with Sample Correspondence and Forms A comprehensive, easy-to-use handbook for the general tax practitioner. This two-volume/cd-rom set, including sample correspondence and forms and hundreds of practice tips, is an excellent resource for attorneys, accountants and enrolled agents in all stages of representation before the IRS in controversy matters, including exam, appeals, Tax Court, refund actions and collection matters. Written by some of the most experienced tax controversy lawyers in the U.S. and edited by Professor Jerome Borison, it is the product of a four-year project of the ABA Section of Taxation Low Income Taxpayer Committee. Size: 8 1/2 x 11, Softcover, 1780 pages, includes CD-ROM Price: $240 Section Members, $290 Nonmembers, $145 Nonprofit/Academic Institutions ABA Product Code: For more information, call the Tax Section Publications Office at 202/ TO PLACE AN ORDER, CALL THE ABA SERVICE CENTER AT 800/

16 P O I N T & C O U N T E R P O I N T 16 expenses directly connected to includable income), even though they are not under the current alternative minimum tax, while Mr. Baylin should not under income tax theory (because they were capital expenditures that had to be capitalized into the cost basis of the asset in litigation). Curing the problem on the deduction side of the ledger would ensure that only those attorneys fees that are properly deductible (because they are expenses rather than capital expenditures ) would escape taxation. Moreover, these doctrines are not particularly well suited to the problem at hand; the cases have been shoehorned into them only because there is no other plausible arguments that would relieve these plaintiffs of the deduction restrictions that would otherwise apply. The doctrines provide many dark corners in which to make distinctions that might, on first reading, sound superficially plausible under a strict construction of the doctrine itself (such as the distinction between services income and property income under the assignment-ofincome doctrine and the difference between contingent-fee and pay-bythe-hour contracts) but which make no sense in the larger context of the problem at hand. The results should not be affected by whether the recovery consists of compensation income or recovery on a claim that is tantamount to a property right; by whether the attorneys are paid on a contingency basis, by the hour, or under a flat fee; by whether the attorneys fees are paid for trial work or appellate work; 6 and, finally, by the happenstance of the language in any state attorney lien statute that exists in the plaintiff s jurisdiction. Yet, under the three-pronged analysis in these cases, these immaterial differences have affected outcomes. Congress, not the courts, should act now to fix the problem and do so retroactively for all open tax years. COUNTERPOINT: LET S NOT FORGET THE FOREST WHILE EXAMINING THE TREES by Maxine Aaronson, Dallas, TX* First, it is important to point up areas of agreement with Professor Geier. Virtually no one (except perhaps 535 elected officials in Congress) actually believes that it is appropriate or good tax policy to fail to allow some sort of credit for attorneys fees against the AMT. A close reading of the Kenseth opinion and dissent leads me to believe that the Tax Court was split, not on whether attorneys fees should be somehow removed from the gross income calculation, but on whether or not they had the power to do anything about it. My favorite illustrative case is Faraghar v. City of Boca Raton, 524 U.S. 775 (1998). Fortunately for her, Ms. Faraghar lives in the Eleventh Circuit, which has followed the Cotnam rule. Assume though, that she lived elsewhere: what would her tax consequences be in, say, the Ninth Circuit? Faraghar was a sexual harassment case clarifying that employers can be vicariously liable for the actions of their employees. She was awarded one dollar in actual damages and recovered her attorneys fees, which reportedly ran some $325,000. Does anyone really think that Ms. Faraghar should be privileged to pay more than $80,000 in taxes out of her own pocket for having the courage to pursue what was clearly unpleasant, but important, litigation? The alternative minimum tax was originally passed to deal with a small number of very wealthy individuals who were paying little or no tax. Disallowing any offset or allowance for attorneys fees simply does not hit the target market of the AMT. Instead, it penalizes middle class taxpayers who collect taxable damages for once-in-a-lifetime events as recompense for an occurrence that most taxpayers would just as soon not repeat, regardless of the net economic gain. If the purpose of the AMT is to influence the behavior of taxpayers who use certain deductions on a recurring basis, then the position of the Service penalizes the innocent while missing the real target. About this, most tax professionals agree. The debate is about what to do about it, and who can do it. Professor Geier believes that the solution must come from Congress, and nowhere else, because she views the issue as a deduction issue. Clearly, her solution is one way to solve the problem. But is it the only way? Cotnam and Estate of Clarks take the view that the attorneys fee portion is never the income of the litigant to begin with. Therefore, it is not includable under section 61 and a corresponding offsetting deduction is not necessary. The fact that this theory neatly sidesteps the mismatch of income and expense under the AMT is not a reason to discard it, if it is otherwise justifiable. Stepping back from the specific problem and analyzing the economic deal between the parties is often useful in tax matters, where substance triumphs over form. What then is the economic deal between lawyer and client in a traditional contingent fee arrangement? At its most basic, a traditional contingency fee arrangement is a transfer of an economic interest in the end product in exchange for services necessary to produce the end result. On what theory should one party have to report as gross income 100% of the product, and the second party report a portion 6 See Foster v. U.S., U.S.T.C. (CCH) 50,353 (N.D. Ala.) (contingent fees for trial-level work successfully assigned because right to the income was not sufficiently ripened but contingent fees for appellate-level work after a jury held in favor of plaintiff not successfully assigned since claim was then too ripe to assign). * Maxine Aaronson is a solo practitioner in Dallas, Texas. She currently chairs the Tax Section s Individual Income Tax subcommittee on personal injury damages.

17 as well? Section 61 defines income broadly, but not so broadly as to include picking up the income of another. In the Kenseth dissent, Judge Behge discussed the gross income of sharecroppers. The gross income of sharecroppers (sometimes also called tenant farmers ) clearly does not include the one third (or whatever proportion is used) portion that belongs to the party who owns the dirt. See, IRS Publication 225, Tax Information for Farmers. Likewise, when a sharecropper owes back taxes, the tax lien does not extend to the economic ownership interest of the landlord, a very different result than when deductible rent is paid in dollars. See, Berdoll v. Barker, 63-1 USTC 9436 (No. 124,323 Dist. Ct., Travis County Dec. 31, 1962). The joint venture/economic interest analysis has not been limited to sharecroppers or attorneys fees, although those are two of the most common examples. The Service has ruled that a similar shared economic interest exists with certain mineral leases. See Rev. Rul , C.B. 310 modified by Rev. Rul , C.B. 99. It also applies to deep sea fishing boats. Linquata v. Comm r, 11 TC 501 (1952). In all of these situations, the gross income is reported proportionately in accordance with the parties economic interestsregardless of whether a formal partnership exists. See In re ACME Music Company, Inc., 96-2 USTC (Bankr W.D. Pa 1996), (joint economic venture, but not partnership) for a good discussion of this issue in the context of the coin operated vending machine industry. A typical contingent attorneys fee contract in my home state uses the words: CLIENTS hereby sell, convey, and assign to [Attorney s Name] as consideration for said services a forty percent (40%) interest in and to any and all causes of action, claims, demands, judgment or recoveries which CLIENTS may hold or receive because of damages and injuries received and sustained. This was the language in the Srivastava fee agreement as well as the language in the Cotnam agreement. Absent this debate, does anyone really believe that those words do anything but transfer an interest in property if consideration is present? If I sell, assign, and convey a 40% interest in the building that houses my law office to my secretary in consideration of her promise to faithfully discharge her duties and stay with me for a period of time, has she not acquired a real economic interest? The attorney s lien issue is a red herring, as is the argument that the attorney cannot proceed without the client s consent. The rules in this area exist to avoid the common law crime of barratry not to determine and guide the tax consequences of the transaction. The reality is no different from the sharecropper, commercial fisherman, vending machine owner, or mineral lease. Neither party can proceed without something from the other and that is the essence of a joint venture, which may or may not be a partnership for tax purposes. Finally, the issue of being able to somehow deduct a non-deductible capital expense raised by Professor Geier should be addressed. Damages for destruction of capital assets are capital in nature. Under the origin of the claim theory of Gilmore, a deemed sale or exchange occurs and the capitalized expense is taken into account at the time of payment. See Flower v. Commissioner, 61 T.C. 140 (1974). Capitalized expenses are, in effect, netted out at the time of disposition of the capital asset. The underlying litigation in Baylin was a condemnation case. Settlement of the matter, whether at the courthouse or before trial, effected either a partial or complete disposition of the asset, since the settlement fixed the amount realized in exchange for the property taken. It is possible (some would say likely) for tax practitioners to become hyper-technical when examining issues. It is the occupational hazard of our profession, and it is not always bad. It is sometimes necessary however to remind ourselves to balance that view with a practical look at the economics of the transactions. 17 P O I N T & C O U N T E R P O I N T

18 I N T E R V I E W W I T H F R E D E R I C K G. C O R N E E L 18 INTERVIEW WITH FREDERIC G. CORNEEL by Jasper L. Cummings, Jr., Washington, DC, and Alan J.J. Swirski, Washington, DC INTRODUCTION: At its 2000 May Meeting, the Section of Taxation presented its Distinguished Service Award to Frederic G. Corneel in recognition of his many years of service and his exemplary leadership on behalf of the tax bar and the profession. Mr. Corneel emigrated from Berlin, Germany in His education at Little Rock Junior College followed by the University of Arkansas was interrupted in 1941 by service in the U.S. Army, after which he served on the Columbia Law Review and graduated from Columbia Law School in After some years with the Allied High Commission for Germany and Willkie, Farr & Gallagher, New York, he found his way to the firm of Sullivan and Worcester, Boston, in 1960, where he has since practiced in estate planning and family business generally, and in the handling of IRS disputes. Mr. Corneel has authored more than forty articles and chapters of books on taxation. For many years he has lectured on ethics and estate and tax planning in the Graduate Tax Program of Boston University Law School, and at Harvard Law School. Dedicated to the pursuit of law improvement, his was a seminal role in the development of the legislation that became Chapter 14 of the Code and the provisions for electing small business trusts to own S corporation stock. Most notably, Fred Corneel is the author and inspiration behind Guidelines to Tax Practice, 31 Tax Lawyer 551 (1978), Guidelines to Tax Practice Second, 43 Tax Lawyer 297 (1990), adopted by numerous law firms, and is commencing work on Guidelines to Tax Practice Third. On August 30, 2000, Jasper L. Cummings and Alan J.J. Swirski interviewed Frederic G. Corneel. QEarlier this year you received the ABA s 2000 Distinguished Service Award for your decades of exemplary leadership in professionalism at the tax bar. What advice can you offer to young tax professionals who are only in their first decade of tax practice? AOne answer is in a story so old that younger practitioners may not have heard it: Young man to head of firm: How did you become so successful? Head of firm: I jumped at every opportunity that came along. Young man: How did you recognize the opportunities when they came along? Head of firm, I didn t. I just kept jumping. It is very helpful for young lawyers early in their career to be better than any other lawyer in their firm in some particular narrow question of law that arises from time to time or in the details of the business of a particular client. With that expertise the young lawyer will most quickly get into the situation which all of us most enjoy: Being the person able to give the advice that the client needs. And although the other lawyers in the firm are not clients in name, they are clients in fact. Of course, most of us would find it boring to confine our work to a narrow specialty. And indeed I have been told that the true test of specialists is how much they know outside their specialty. But the opportunity to become more knowledgeable and eventually an expert comes with every question that is presented to us, and from time to time we should jump on it. It has been said that in the end our concern should not be so much with making a living as making a life. And so, in my case, since I found that I enjoyed teaching and writing, I taught and I wrote. But since I felt that it would suit me better to go from the individual and practical to the general and theoretical, rather than the other way around, I decided that writing and teaching should be a sideline. Since I had particular satisfaction in working with owners of family businesses, I did a good deal of my teaching and writing in areas relevant to that particular group of clients indeed, everyone who has done so will say that the best way to quickly learn a subject is to teach it. Others will have other interests, other personalities. So rather than giving more general purpose advice, I would ask the young lawyer: What turns you on? What do you think you are or might be particularly good at? Then decide what steps, large or small, would help build the practice that would best suit your personality. The one piece of advice that I do believe has universal application is to get together regularly with other tax lawyers: In your firm, in tax luncheon groups, in local, state and national bar associations, or just informally. In the first place, it is usually fun. But it is also true that none of us has a monopoly on good ideas. And even if we ourselves turn out to be the one that has the good idea, it may come out of us only in conversations with others. Finally, if we have what seems to be a really great idea, we are so likely to be bewitched with it ourselves that we really need another to point out why it may be too good to be true. QIn 1994 you wrote a paper for the American Journal of Tax Policy to stimulate thinking about pos-

19 sible improvements in tax practice involving direct dealings between the Service and private practice professional. What response did you receive to that piece, and what improvements, if any, have you seen in this area? AYou really know how to hurt a fellow; I may not be able to answer without breaking down. The American College of Tax Counsel had asked me to take the lead in organizing a joint IRS-Practitioner conference to promote a better understanding by each group of the problems and responsibilities of the other and to exchange ideas how each might contribute to improvements in the tax practice in which both are involved. Some of those who participated in the conference thought it was a useful beginning, others were less sure. But there was enough of an interest to organize a second conference. And then on the day before the second conference a monster snowstorm came and covered Washington in a deep blanket of universal silence, which put a quietus to the conference. And with so clear a sign of heaven s disapproval, all efforts at re-scheduling were permanently abandoned. Not only that, but the American Journal of Tax Policy, in which my article was published, has folded. The article, which was circulated as a background to the first conference, raised a large number of questions that I thought might usefully be considered either by the Service or by practitioner groups in order to improve the quality of tax practice. And the same issue of the Journal contained Michael Mulroney s excellent report on what in fact transpired. Since the Journal s actual readership appeared to be largely confined to its contributors and close members of their family, and since I thought these matters deserved wider attention, I requested that our articles be published in the Tax Lawyer. The response was that the Tax Lawyer is too proud to publish reprints, no matter how limited the readership of the original publication. But to show that there is still a little spark in the embers, if anyone is interested in reading Michael s paper and mine, I will be glad to send them a copy and my blessing. QIn the American Journal of Tax Policy piece, you posed the question whether the Service, Tax Court judges, and private practitioners should jointly work on a Tax Court Code of Civility. What came of that suggestion, and do you still see a need for such a Code today? ASome time ago I was told informally that the Tax Court judges considered the idea and were divided as to the desirability of a code of civility, but I do not know the reasons for the opposition. Clearly there are differences between the Tax Court and the scores of other courts and bar associations that have adopted such codes. And it may be that the only way to curb Rambo practices is by using the equivalent of a 2x4 on those who engage in them. But these codes also serve a useful teaching function in telling young lawyers what is expected of a decent lawyer and in that regard should be helpful no matter what the forum. QYou have an active practice in the area of estate planning for owners of family businesses. What about family partnerships? Many, including the Clinton administration, view these as an abusive technique. What are your thoughts on whether an ethical tax practitioner should recommend them and what changes if any should be made in the applicable law to cure the abuses to which they give rise? AI have a large three ring binder in my office filled with copies of family partnerships that I organized twenty or thirty years ago for reasons having nothing to do with taxes. The family wants Aunt Betty to have the financial benefit of some participation in the real estate developments the family is undertaking, but none of the rights or responsibilities of a tenant in common or general partner. A large trust is about to terminate and distribute its assets to persons unlikely to manage their share of the distribution competently. A family consisting of 12 interested members would like to make venture capital investments, but for securities law reasons this is a larger number than the portfolio companies are willing to accept. In each of these situations a family limited partnership may provide the answer. And while these arrangements may reduce what the tax law considers as fair market value, they serve other values of importance to our clients. But, strange to say, until the Estate of Harrison case (T.C. Memo, ), about a dozen years ago, it did not occur to me or other tax lawyers of my acquaintance, to value the partnership interests differently than as proportionate part of the value of the partnership property. But now when there is case law and settlement experience backing tremendous discounts, I do the same. Indeed, a friend of mine was asked to testify in a malpractice case against a lawyer for failing to recommend use of a family partnership. Critics may rightly complain that the ability of a family to pay taxes is not reduced just because their marketable securities are now in a partnership. The difficulty is that the Service and the courts have long taken the position that the value of anything should be determined on the basis of the price that would be established in arm s length dealings between strangers. And what sensible buyer would not insist on a huge discount when paying for a minority interest in a family enterprise if he was not a member of the family? It is kind of silly to say that the [hypothetical] fair market value of an interest not actually traded in any market should be based upon a fair weighing of all the relevant facts and circumstances and at the same time to insist that no weight be given to the most important factor namely, whether the holder of the minority interest is my daughter who is the apple of my eye whom I will do everything to help or a former employee I had to fire, now a bitter 19 I N T E R V I E W W I T H F R E D E R I C K G. C O R N E E L

20 I N T E R V I E W W I T H F R E D E R I C K G. C O R N E E L 20 enemy. But given the present state of the law it would require a change at least in the regulations and possibly in the law itself, to bring about that result. What drives these partnerships is that the top estate tax rates, at 55-60%, are higher than any other tax rates. If they were reduced to, say, a top rate of 35%, Congress might go along with the idea that in family controlled enterprises each family member should be deemed to own a proportionate share of the business. This could be easily accomplished by an amendment to Chapter 14. The result would be unfair in some cases, but probably a substantially smaller number than is true right now. QThere is much debate today about whether corporate tax shelters are a widespread problem in need of a legislative fix. What are your views on this subject? AThese tax reduction plans, to use a neutral term, seem largely to be based on the assumption that the tax law is dumber than it is in fact, and when these plans are litigated, they tend to fail. Therefore, probably no legislation is required to make clear that these plans are contrary to law. Those that promote or adopt these plans almost certainly are aware of that fact and so what they are doing is playing the audit lottery, hoping that their schemes will not be discovered. By its opposition to these shelters, the Tax Section has made clear its view, that we all benefit from having a tax law that is respected as law and generally obeyed. The Internal Revenue Service should determine the audit strategies that are most likely to bring these schemes to light and request any legislation needed to support such strategies. Obviously increased penalties may also have a role to play. QAt its 2000 Annual Meeting, the ABA House of Delegates effectively rejected the concept of multidis ciplinary practice. What is your think ing on this issue? AThere are those whom I respect, like Bernie Wolfman, who feel that it is not good for the tax system to have so much of the tax practice handled by lawyers working for accounting firms. My own view is based in part on the practice of Boston probate lawyers who also serve as trustees for their clients. In my experience this heightens the need for ethics on the part of the lawyer in advising the client pointing out the availability of competing trustees and the charges they would make assuring that on an ongoing basis there will be a competent person to advise the client on the relationship with the attorney-trustee and the charges the attorney trustee will make giving the beneficiaries the right in the future to change trustees, etc. Since I have seen this kind of multidisciplinary practice work, I would not seek to bar it; but I would make every effort to see that all ethical issues are duly addressed. Take, just as an example, a lawyer in an accounting firm that is engaged in marketing a particular plan for a value based fee payable if the client adopts the plan the firm recommends. Clearly that lawyer should be concerned about whether his participation in his firm s potential profit may not unduly color his view that the plan is desirable for the client and that the risks are adequately described. Accordingly they should urge and perhaps insist that the client have the benefit of competent legal advice that is not potentially affected by self-interest. QYou are working now on the Third Edition of your widelyacclaimed Guidelines to Tax Practice Second, 43 Tax Lawyer 297 (1990). What areas of change can we expect to see in the next Edition? What aspects of tax practice today differ from the landscape that existed in the field in 1990? A The prior versions focused on the responsibilities of the individual lawyer. But it is clear that particularly for younger lawyers what matters most is the setting in which they practice. And so I expect that something will be said about what a firm can do in order to promote adherence to proper standards by those who work in the firm. I feel that too much of legal ethics suffers from being expressed in a manner akin to rules of law and a result generates a lawyerly response: Where is the line drawn? How close can I come without going over the line? To get away from that, I think the Guidelines might benefit from a greater use of examples to make clear the variety of considerations bearing on a particular question. Prior guidelines focused almost entirely on the conflict between the lawyer s obligation to work zealously for the client and at the same time give appropriate regard to the tax law and the Internal Revenue Service. But obviously tax lawyers like other lawyers write engagement letters, and should seek to provide prompt, competent service to their clients, resolve conflict of interest problems, etc. I would love to deal with some of those matters, if it can be done without making the new Guidelines too long. As for the last part of your question, I suppose that the major change in practice in recent years has been the continuing increase in the size of law firms and the conduct of an increasing portion of tax practice that was formerly handled by law firms, by accounting firms, financial planners, pension consultants and investment bankers and others who employ lawyers but do not hold themselves out as practicing law. As a result, and as a result also of the continuing increase in the complexity of the law, there has been a tremendous growth of specialization in segments of the tax practice. Ethics has much to do with the wider impact of what we and our clients are engaged in. The increase in specialization requires increased effort

21 2001 MIDYEAR MEETING: E-COMMERCE JANUARY 11-14, 2001, SCOTTSDALE, AZ GENERAL INFORMATION Scottsdale, Arizona welcomes the Section of Taxation to the 2001 Midyear Meeting, January 11-14th. Please note that the Section Programs are extended to Sunday, January 14. Join us and take advantage of the opportunity to meet with the country s leading tax attorneys and government officials to discuss the latest federal tax policy initiatives, regulations, legislative forecasts, and planning ideas. We invite you to stay at the Scottsdale Fairmont Princess, which will serve as the Section of Taxation s Headquarters. In addition to the Fairmont, we are also offering rooms at the Phoenician and the Resort Suites of Scottsdale. DRESS CASUAL The dress for the 2001 Midyear Meeting is casual, so relax and leave your bulky suits at home! REGISTER AND QUALIFY FOR FREE AIRLINE TICKETS At the Midyear Meeting, the Section will raffle two airline tickets for travel within the continental United States. All registrations postmarked or faxed by December 10th will be eligible. The drawing will take place at the Midyear Meeting Section Luncheon. MEETING REGISTRATION FEE WAIVED The Tax Section is pleased to be able to waive the 2001 Midyear Meeting registration fee for Tax Section members who have never attended a Tax Section meeting and for law students and LL.M. candidates. Meeting benefits include continuing legal education programs, legal publications, professional development, networking and access to upto-date information. To register, use the Meeting Registration form available in this Newsletter. ADVANCE REGISTRATION DISCOUNT To register for the 2001 Midyear Meeting, please use the Meeting Registration Form in this Newsletter. The final deadline for advance registration is December 10, The Section is pleased to offer a 15% discount to advance registrants. The registration fee includes one set of meeting materials, and permits registrants to attend all meetings, sessions and programs; however, it does not include meal functions and social events listed as Ticketed Events. All tickets are sold on a first-come, first-served basis. Payment may be by check or credit card. The Section accepts American Express, MasterCard and VISA. Your Meeting Registration Form and full payment must be postmarked or faxed by December 10, 2000 in order for your name to appear on the Attendee List and to be eligible for the 15% discount and airline tickets raffle. Registrations received after this date will be processed as on-site registrations and will be subject to the full registration fee. REFUND POLICY All cancellations and refund requests must be made in writing and postmarked or faxed by December 10th to receive a refund. All refund requests will incur a $50 cancellation fee. Absolutely no refunds will be granted at the Meeting. Direct all refund requests to the Meeting Registrar at the Section office. HOTEL RESERVATIONS The Fairmont Scottsdale Princess will serve at the Headquarters Hotel for the Midyear Meeting. In addition, a block of rooms has been secured at both the Resort Suites of Scottsdale Hotel and the Phoenician. The Resort Suites of Scottsdale is within walking distance of the Princess. Complimentary round trip transportation will be provided to the Princess from the Phoenician. (Travel distance between the Phoenician and the Princess is approximately 25 minutes one-way. Transportation schedules will be posted in the main lobby of each hotel.) To make reservations at the Fairmont Scottsdale Princess, the Phoenician or the Resort Suites of Scottsdale, please use the Hotel Reservation Form available in this Newsletter. The deadline for making reservations is December 10th. Attendees are strongly encouraged to make reservations early, as the hotels frequently sell out prior to the deadline and sleeping rooms are limited. Please note that the Hotel Reservation Form should be sent directly to the hotels, not to the Section Office. AIR TRAVEL INFORMATION American, Delta and USAirways are the preferred airlines for the 2001 Midyear Meeting. To make airline reservations or to compare rate information, attendees should contact the airlines directly. The 2001 ABA airline reference numbers were unavailable at press time. They will be posted on the Taxation website as soon as they become available, and they also will be printed in the Midyear Preliminary Schedule M I D Y E A R M E E T I N G

22 M I D Y E A R M E E T I N G 22 American 800/ Delta 800/ US Airways 877/ (toll free) Attendees are encouraged to compare all options available, including rates and restrictions between an airline s own zone fares and ABA rates. Assistance is available through your travel agent, directly from the airline, or from the ABA travel agency, Tower Travel Management at 800/ CAR RENTALS ABA Members can receive special rates through Hertz. Call 800/ and mention the ABA/Hertz CDP #13000; TDD users dial 800/ You will be asked for your ABA membership identification at the time of rental. SHUTTLE BUSES Complimentary round-trip transportation will be provided between the Fairmont Scottsdale Princess and the Phoenician Hotel. The travel time between the Phoenician and the Princess is approximately twenty-five minutes one-way. Transportation schedules will be posted in the main lobby of each hotel. The Resort Suites of Scottsdale is within walking distance of the Princess. CHILD CARE SERVICES Childcare services can be arranged by calling the concierge at the Scottsdale Princess at 480/ Rates are $8.00 per hour for one child and $1.50 per hour for each additional child. There is a 4-hour minimum plus a $5.00 transportation fee, as well as a minimum 4-hour cancellation notice. ACTIVITIES - A TASTE OF THE RUGGED WEST Tickets for the following activities may be ordered by using the Registration and Ticket Purchase Form found in this Newsletter. Tickets are sold on a first-come, first-served basis. Thursday, January 11 GOLF OUTING - TOURNAMENT PLAYERS CLUB Shotgun Start Tee Time: 1:00p.m. (Ticketed Event - $ per person) Hit the links before diving into the midyear Meeting. Plan to join fellow colleagues on the Stadium Course at the Tournament Players Club, home of the PGA Phoenix Open. You may drive to the course or take the complimentary Scottsdale Princess Hotel shuttle bus, which departs from the front of the resort every fifteen minutes (approx. 5-minute ride). Tickets are limited and offered on a firstcome, first-served basis. Friday, January 12 ARABIAN HORSE RANCH TOUR 9:30a.m. - 2:30p.m. (Ticketed Event - $80.00 per person) This fascinating tour will cover the history, background and breeding of these elegant creatures and a behind the scenes look at one of Scottsdale s most exclusive industries. You will take a narrated tour throughout one of the Valley s famous Arabian ranches and see first hand how these animals are cared for and costumed and pampered for performances. Following the tour, you will be treated to an authentic Southwestern lunch at an historic local restaurant. Saturday, January 13 SONORAN DESERT EXCURSION 8:30a.m. - 12:30p.m. (Ticketed Event - $85.00 per person) This Four-Wheelin Desert Adventure is a relaxing way to get away from the urban environment and see how the real West looks, sounds and smells. This tour includes several hours of off-road driving in an open-air vehicle through the rugged desert terrain. An experienced driver/guide will lead a nature walk and highlight various species of cacti and wildlife. Suggested attire: casual comfortable clothing, hiking boots, closed toe shoes or sneakers. For safety reasons, open toed shoes or sandals are NOT permitted. Sunglasses, hats or visors, sunscreen and lip balm are also recommended. MEETING MATERIALS The Section Program Meeting Materials will be available at the Midyear Meeting in print form, on CD-ROM, and on 3.5 floppy diskettes in both PDF and MS Word formats. Be sure to indicate your format preference on the Registration and Ticket Purchase Form. The materials from selected Committee Programs will be compiled and made available following the meeting. Both the Meeting Materials and Selected Committee Handouts print publications are available by subscription and for purchase separately. For more information, look for the Meeting Materials order form in the next Newsletter. In addition, through a partnership with LEXIS Publishing TM, the Section of Taxation is able to present Comm- Online-a searchable database housing thousands of pages of substantive Section Program and Committee Meeting Materials, which can be viewed and downloaded from our website Look

23 23 for papers from the Fall Meeting on Comm-Online within 20 days of the program. This service is free to members. AUDIO TAPES Audio cassette tapes of committee programs and the Section programs will be available for purchase on-site as well as following the meeting. Produced by Teach em, each program typically consists of two cassettes and costs only $20. To order, contact Teach em at teach (tel. 800/ ). CLE AND CPE CREDIT Accreditation will be requested for this meeting from every state with mandatory continuing legal education (MCLE) requirements for lawyers. Please be aware that each state has its own rules and regulations, including its definition of CLE. Certificates of attendance will be available at the meeting for both attendees and speakers. Call 312/ for questions pertaining to the number of credit hours granted by each state. The American Bar Association is registered with the National Association of State Boards of Accountancy as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses. Complaints regarding sponsors may be addressed to NASBA, 150 Fourth Avenue North, Ste. 700, Nashville, TN The ABA s sponsorship I.D. number is: SECTION LUNCHEON AND RECEPTION The Section Reception is scheduled for Saturday, January 13, at the Phoenician Hotel. Transportation will be provided between the Princess and the Phoenician for the Reception. The Section Luncheon will take place on Saturday at the Princess. SECTION EXHIBIT The Section of Taxation Exhibit will take place on Friday and Saturday. Representatives from a variety of tax publishers and service providers will demonstrate the latest tax law research methods and exciting new products to aid you in your daily practice. PROGRAM HIGHLIGHTS Whether you want an overview, refresher, or more advanced training in a specific practice area, there s something for you at the 2001 Midyear Meeting! Well over 60 meetings and programs are scheduled over 2 1/2 days. For a complete 2001 Midyear Meeting Program Schedule, including dates and times, visit the Tax Section website after November 1, 2000, at This meeting s theme is e-commerce, and a variety of programs from basic to advanced are being planned to address its impacts on tax practice. The Section Plenary and Mini-Programs taking place on Saturday afternoon and Sunday morning include: Plenary: Life Cycle of an E- Commerce Company - Idea to IPO, Issues and Opportunities (See box on p.25 for preliminary details.) E-Commerce Businesses: New and Old a practical analysis of tax issues that abound in this new segment of our economy, this tax primer will discuss a number of issues likely to be encountered by tax practitioners representing dot-coms as they mature from inception to operation to IPO. Employee Benefits and Executive Compensation Considerations from Start-up to Sale of an E-Commerce Company will examine the development and expansion of an employee benefits program for a dot-com start-up from inception, through IPO, to eventual acquisition by a larger organization. Electronic Communications in Employee Compensation and Benefit Plan Administration will identify ways in which employers, administrators and fiduciaries use electronic communications in plan administration, and will describe those practices and procedures for which government agencies have or have not provided guidance. Tax Planning for Mergers and Acquisitions and Joint Ventures in Latin America will discuss current structures for investments and business ventures in Argentina, Brazil and Mexico. Current Developments in Individual, Corporate, Partnership and Estate and Gift Taxes will review the most significant judicial and administrative developments of the preceding year. In addition, over two dozen committees will hold their own business meetings, discuss hot issues and recent developments, talk with representatives from IRS, Treasury, Justice, and other experts, and sponsor additional educational sessions including: Affiliated and Related Corporations: Evolving Single and Separate Entity Trends in Consolidated Returns. Banking and Savings Institutions: IRS Audit of Financial Institutions; and Corporate Tax Shelter Issues Facing Financial Institutions. Civil and Criminal Tax Penalties: Investment Research Associates et al. v. Commissioner will discuss this recent controversial case involving whether a taxpayer has a right to know the contents of a Special Trial Judge s proposed findings regarding the credibility of trial witnesses in a fraud penalty case M I D Y E A R M E E T I N G

24 M I D Y E A R M E E T I N G 24

25 Closely Held Businesses; Personal Service Organizations; and Small Law Firms: Passing the Torch will offer a practical analysis of selected planning strategies used in business succession planning. Court Procedure and Practice: Amendments to the Federal Rules of Civil Procedure; Using Videotaped Depositions; The Joint Committee s Tax Law Simplification Project; and Introducing Evidence that a Spouse Acted Under Duress will examine the use of psychological expert testimony to prove elements of relief from joint and several liability under section Domestic Relations: Marriage Penalty Marathon will examine historical and policy perspectives as well as recent legislation. Employee Benefits: GUST Determination Letters: How Do I Get One and What is it Worth?; Roundtable with J. Mark Iwry, Benefits Tax Counsel, U.S. Department of Treasury; and Paying Plan Expenses: Employer Practices and DOL Investigations. Estate and Gift Taxes: The Gift Tax: Mechanics and Calculations; Comparison of Gift Techniques; and Forgotten Transfer Tax Issues will focus on transfer tax issues that you never knew or have forgotten. Foreign Activities of U.S. Taxpayers: Setting Up an Electronic Commerce Company Offshore. Insurance Companies: Caught in the Web: Premium Taxes and the Internet will discuss the status and viability of premium taxes and other retail sales taxes in the new economy; Split Dollar Life Insurance will cover the basic structure and uses of split dollar life insurance, its variations, and the tax rules and issues to consider. Low Income Taxpayers: Availability and Publication of S Case Decisions of the United States Tax Court will review the legislative basis for publication of Tax Court opinions and decisions, as well as which materials relating to small tax cases under I.R.C. section 7463 are currently available to the general public. Partnerships: Creating Basis in Partnership Interests; Community Property Issues in Partnerships; and Investments by Law Firms (and Their Partners) in Client Deals- Equity in Lieu of Fees, Part I. Real Estate: Leasing Space to Dot-Coms and Other Start-up Companies; Tax Due Diligence in Acquisition of Real Estate Partnership Interests; and Vacation Home and Interval Ownership. S Corporations: Estate Planning with S Corporations; Special Problems of S Corporations Engaged in E-Commerce; and A Primer on the Built-in Gains Tax and Planning Techniques M I D Y E A R M E E T I N G A new century, a new decade, and a new way to view ABA Section of Taxation Committee Meeting Materials... It s here...comm-online. Section of Taxation Committee Meeting Materials and more, powered by the LEXIS -NEXIS online services. All rights reserved. LM