IBM LABELS FOREIGN TAX REDETERMINATION NOTIFICATION AND ADJUSTMENTS UNADMINISTRABLE AND TOO BURDENSOME.

Horner requests that the Service adopt special rules under these Code sections for taxpayers who are subject to the Coordinated Examination Program (CEP). "These special rules should treat a CEP taxpayer as satisfying the section 905(c) notice requirements if notice is filed within ten days after the commencement of the audit for the taxable year at issue, following the guidelines in Rev. Proc. 85-26, 1985-1 C.B. 580," Horner says.

Transmitted herewith are the Comments of International Business Machines Corporation ("IBM") on the proposed and temporary regulations under Sections 905(c) and 6689. As the Comments state, IBM proposes to make a supplemental submission to the Internal Revenue Service by the end of the year, setting forth statistics demonstrating the size of the burden that the regulations would impose upon large multinational corporations. IBM also requests the opportunity to testify should a public hearing be scheduled.

Respectfully submitted,

The regulations, while sound in many respects, impose significant and unjustified burdens upon large multinational corporations. At best, the regulations could be characterized as administrable for only those taxpayers that experience but a few foreign tax redeterminations; indeed, it would appear that the regulations have been drafted with only these taxpayers in mind. For example, the preamble to the temporary regulations, under the caption "Paperwork Reduction Act", estimates an average annual burden per respondent of one hour. This estimate surely does not take into account the time and costs that multinational corporations with extensive foreign tax burdens would expend in attempting to comply accurately with the notice provisions.

There are a number of aspects of the regulations that would create excessive burdens for large-case multinational taxpayers. Four major issues are: (1) the separate 180-day deadline for filing a notice of redetermination of U.S. tax liability for EACH individual foreign tax redetermination; (2) the de minimis exception for currency fluctuations that is set at a dollar cap ($10,000) so low as to be meaningless to all but a small minority of affected taxpayers; (3) the directive to adjust U.S. tax liability to reflect changes in foreign tax occurring more than 90 days before the due date of the tax return; and (4) a lack of any exception to the Section 6689 penalty based on substantial compliance with the notification requirements.

IBM operates in over 130 different foreign countries. Currency fluctuation alone is likely to produce a foreign tax redetermination for each foreign operation. The regulations impose a separate 180-day reporting deadline each time that such a foreign tax redetermination precipitates a redetermination of U.S. tax liability. Large-scale taxpayers therefore will experience a multitude of staggered deadlines for compliance, and will be subject to continuous filings over the course of each tax year.

While, in theory, taxpayers might aggregate notifications voluntarily in lieu of meeting separate deadlines, in practice time constraints will overwhelm any attempt at aggregation. Large-scale taxpayers will need AT LEAST the full 180-day period to gather the data necessary to make the adjustments, and in some cases may not be able to meet this deadline. The 90-day period relating to current- year adjustments is even more restrictive and patently unacceptable -- it does not even coextend with the amount of time that the Service gives automatically for a corporation to file its ORIGINAL tax return.

There are a number of particular individual changes to the regulations that would address the problems that the referenced provisions create for large-scale taxpayers. However, the most comprehensive solution, and the one from which all others should stem, is to adopt special rules under Sections 905(c) and 6689 for taxpayers who are subject to the Coordinated Examination Program ("CEP"). These special rules should treat a CEP taxpayer as satisfying the Section 905(c) notice requirements if notice is filed within ten days after the commencement of the audit for the taxable year at issue, following the guidelines in Rev. Proc. 85-26, 1985-1 C.B. 580. Rev. Proc. 85-26 treats this type of notification as sufficiently establishing good faith and reasonable cause for a taxpayer to avoid the Section 6661 substantial understatement penalty, a penalty similar (in its "no fault" implementation) to Section 6689. The considerations here are no different.

All returns of CEP taxpayers are routinely examined. These large-scale taxpayers face a myriad of tax adjustments (both positive and negative) on an ongoing basis. Agents do not give attention to filings of a CEP taxpayer with respect to a taxable year until the time that the examination for that year begins. Thus, even if a CEP taxpayer were to meet the notice requirements as set forth in the regulations, the Service would not review the notice until the regular examination of the relevant return took place. There is little logic, then, in imposing great administrative burdens upon a CEP taxpayer by forcing compliance with the notice requirement well before the notice will be reviewed, or, alternatively, in imposing a penalty when a notice is not sent within a restricted time period.

It is apparent from a straightforward reading that the regulations were not designed with CEP taxpayers in mind. Imposing a penalty for failure to meet the notice requirement is important in decreasing the incentive for taxpayers to play the "audit lottery" by failing to make the required adjustments and redeterminations of tax liability. Large-scale taxpayers know in advance that their returns will be examined and that the examining agents will attend to issues bearing on the proper tax treatment of foreign tax redeterminations. To the extent that a foreign tax redetermination causes an under- payment of U.S. tax liability, the Treasury's revenues are protected through the collection of interest.

Special rules for CEP taxpayers would make the regulations administrable and practical for those taxpayers that most often will fall subject to them, and at no detriment to the Treasury. There is no value to or public policy reason for imposing great administrative burdens on large-scale taxpayers solely for the purpose of maintaining rules with which those taxpayers in all likelihood will be unable to comply. IBM therefore urges the adoption of special rules for CEP taxpayers along the lines suggested.

IBM intends to compile statistics that will demonstrate the size of the burden that the reporting requirements impose. One year's data will be tested as if the proposed rules were in place. It is anticipated that the data will show a very high number of required filings for IBM, and will highlight the impracticality, and, in many instances, impossibility of meeting the short deadlines for compliance. IBM will not be able to undertake this effort until it completes the preparation of its tax return in September. IBM proposes to submit this data to the Internal Revenue Service as a supplement to these comments, although such a supplemental submission would occur after the August 22 deadline for transmitting comments on this subject. IBM requests that further action on the regulations be delayed until the end of the year in order to enable IBM to gather this important information. Should a public hearing be scheduled on these regulations, IBM requests the opportunity to appear and report its findings.