TEC Initiatives
Editor:
Thomas
J. Purcell III
Begley Professor of Accounting
Creighton University
Omaha, NE
Editor's note:
Professor Purcell is a member of the Tax Executive
Committee. DC Currents is designed to heighten awareness
of the AICPA Tax Division's work and keep readers
apprised of Division activities involving tax policy,
technical issues and other practice support matters.
Since
this column last appeared (TTA, September 2000, p.
663), the Tax Executive Committee (TEC) has met once and
exercised its review function on several projects. (A
report of TEC actions taken after Sept. 1, 2000 will
appear in a future column.)
SSTSs
At its meeting on July 31, 2000, the
TEC exercised its standard-setting authority for the
first time and unanimously approved the proposed
Statements on Standards for Tax Services (SSTSs) and
Interpretation. The SSTSs became part of the AICPA Code
of Professional Conduct and bind AICPA members. They took
effect on Oct. 31, 2000, and are enforceable by the
Professional Ethics Division. The final version of the
SSTSs is available online at
http://www.aicpa.org/members/div/ tax/index.htm and in
the October 2000 issue of the Journal of Accountancy.
The SSTSs are a direct outgrowth of the
former Statements of Responsibilities in Tax Practice
(SRTPs). While putatively advisory, these statements,
issued over a 25-year period, have increasingly been used
by the judiciary, administrative bodies and other
professional organizations as the articulation of
professional conduct in tax practice. As such,
practitioners were being held accountable when their
professional conduct was in conflict with the SRTPs, in
spite of their stated advisory nature.
The proposed SSTSs were issued for
comment on April 18. During the comment period (which
ended July 18), the TEC received over 50 specific
comments from more than 25 commentators. The TEC
considered each comment and made appropriate changes.
Some comments need further study; as such, the TEC
retained all comments for consideration in future
standard-setting.
Currently, the TEC does not have a task
force charged with developing additional standards, nor
is there anticipation that one will form in the
foreseeable future. Instead, its intention is to analyze
and address new professional conduct standards as they
emerge. The TEC does not intend that the SSTSs will lead
to mandatory peer review, and, in fact, rejected such a
requirement several times in the past.
The TEC believes that the existence of
enforceable professional standards for tax practice
results in better service to the public and a stronger
tax profession.
Other TEC Initiatives
A task force of TEC members and other
Tax Division representatives prepared comments for
inclusion with the written comments of AICPA President
Barry Melancon on the Securities and Exchange Commission
(SEC)'s "Revision of the Commissioner's Auditor
Independence Requirement." The proposed SEC changes
would limit the types of nonaudit services that a CPA who
audits an SEC registrant could provide, significantly
restricting CPAs from providing tax services for audit
clients. Although a significant part of the proposal
prohibits CPAs who audit financial statements from being
client "advocates," the revisions do not define
the types of activities it considers as advocacy.
On July 5, 2000, David Lifson, Chair of
the TEC, sent a comment letter to the Service on its
proposed changes to regulations governing practice before
the IRS. The Circular 230 Response Task Force, chaired by
Nancy Boozer, studied the issue and made recommendations
to the TEC.
The Relations with the IRS Committee,
chaired by Deborah Pflieger, studied the issue of
taxpayer notification. As a result, in August, Mr. Lifson
sent a letter of comment to the Service, on its proposal
to send taxpayers various notices under Secs. 6212(a),
6330(a) and 6331(d) by regular instead of certified mail.
The TEC continues to monitor the
emerging issue of multidisciplinary practice. At this
time, the TEC is not undertaking any formal actions on
this issue.
The Tax Accounting Technical Resource
Panel prepared comments on the Proposed Regulations for
the Inventory Price Index Computation Method (part of the
dollar-value, LIFO inventory method). In August 2000,
designated TEC members reviewed and forwarded comments to
the Treasury and IRS.
Conclusion
The TEC and other Tax Division
committees are committed to providing the best service
possible to AICPA members. Members with suggestions for
services or products should contact a member of the AICPA
Taxation Team.
| Consolidated
Return Issues Update Sec. 1504(a)(3) has been in the Code
since 1984, when it was enacted as an anti-abuse
rule. Sec. 1504(a)(3)(A) imposes a five-year
"cooling off" period on a subsidiary
that leaves a consolidated group. The intent is
to penalize a subsidiary searching for temporary
advantage outside the consolidated group.
Generally, a "wandering" subsidiary
must wait five years before it can re-enter the
group's consolidated return. (For convenience, a
subsidiary described in Sec.1504(a)(3) is
referred to below as an "(a)(3) sub.")
Q: Is an (a)(3) sub
outside the affiliated group?
A: No. Even
though it cannot be included in the consolidated
return, the subsidiary is still part of the
affiliated group. Such ambivalent status can
cause problems elsewhere.
Q: Can you provide an
example?
A: A technical
argument can be made that an (a)(3) sub, even
though it cannot be included in the consolidated
return, is nonetheless subject to the loss
disallowance rules (LDR) of Regs. Sec. 1.1502-20
(which generally disallow a member's loss with
respect to stock in another member). The argument
is that Regs. Sec. 1.1502-20(a)(1) targets stock
of a "subsidiary," a term defined as a
member of an affiliated group; see Regs. Sec.
1.1502-1(a), (b) and (c). Regardless of its
technical merits, the policy rationale of this
argument seems pretty thin. Because an (a)(3) sub
stands outside the consolidated return, its stock
is not part of the investment adjustment system
of Regs. Sec. 1.1502-32. Accordingly, its stock
is not entitled to positive adjustments under
Regs. Sec. 1.1502-32. It is the cumulative
build-up of positive adjustments that sets the
stage for the "artificial" losses
targeted by the LDRs.
Q: Are gains/losses on
transactions between an (a)(3) sub and members
included in the consolidated return deferred?
A: Not under the
intercompany transaction rules.
"Intercompany transactions" are limited
to transactions between members included in the
consolidated return; see Regs. Sec.
1.1502-13(b)(1), which refers to members of a
consolidated group. However, losses on
these transactions are still subject to deferral
under Sec. 267(f).
Q: If, within an
affiliated group, two (a)(3) subs are in a
parent-subsidiary relationship, can the two file
a consolidated return?
A: No. An
affiliated group is permitted only one
consolidated return. Compare Sec. 1504(c), which
permits two insurance companies (with a
parent-subsidiary relationship) to file their own
consolidated return independent of the
consolidated return of the affiliated group. This
difference is explained by the definition of an
affiliated group, which excludes certain
insurance companies; see Sec. 1504(b)(2). Having
been excluded from the affiliated group, Sec.
1504(c) allows the parent-subsidiary insurance
companies to file their own consolidated return.
Q: If, within an
affiliated group, a member of the consolidated
group is transferred to an (a)(3) sub, can the
former continue to be included in the
consolidated return?
A: No. The
transferred member would presumably have to be
excluded from the consolidated return; the chain
of ownership required by Sec. 1504(a)(1)(A) is
broken by the interposition of the (a)(3) sub.
Q: What is the result if
an (a)(3) sub is merged (or liquidated) into the
common parent of the consolidated group?
A: Presumably,
this would terminate the consolidated group's
consolidated filing, as the common parent would
be treated as the "successor" to the
(a)(3) sub under Sec. 1504(a)(3)(A) (flush
language). Accordingly, it could not be included
in the consolidated return and, without a common
parent, there can be no consolidated return.
Q: Can the IRS compel the
inclusion of an (a)(3) subsidiary if the
subsidiary does not want to rejoin the
consolidated return?
A: Sec.
1504(a)(3)(B) gives the IRS the authority to
"waive" the five-year waiting period.
Although unclear, the notion of a
"waiver" generally does not encompass a
unilateral act. Thus, it appears that the Service
should not force a waiver on an (a)(3) subsidiary
that does not want to join in the group's
consolidated return. On the other hand, recently,
an IRS official publicly stated that the Service
is concerned about the one-sided nature of the
statute, because it gives the initiative to
taxpayers. He speculated that the IRS might
attempt to alter the balance by issuing a blanket
waiver to all groups with an (a)(3) subsidiary.
From William F. Huber,
Chair, James W. Banks, Bryan P. Collins, Kevin A.
Duvall, Kevin M. Hennessey, Geoffrey Horst,
Robert M. Rosen and Richard F. Yates
Author's note: This
column was prepared by members of the AICPA Tax
Division's Consolidated Tax Issues Task Force
(CTITF).
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