Tax Law Section

Minutes of Conference

The 22nd Annual Conference of the National Association of State Bar Tax Sections was held in Washington, D.C. at the Swissôtel (Watergate) Hotel, 2650 Virginia Avenue N.W., on Friday, October 26, 2001 and Saturday, October 27, 2001. John L. Coalson, Jr., Chair of the Association welcomed the attendees and provided some introductory remakes.

The Association's goals are to:

1. Provide a forum for a discussion of tax ideas for State Tax Sections around the country;

2. Provide commentary on model acts in legislation that impacted the State level;

3. Coordinate discussions on improvements to the practice of law; and

4. Provide CLE "cutting-edge" issues to members of the various Tax Sections.

The conference was well attended by the State Tax Sections of 35-40 states. ABA support staff coordinated the seminar through ABA Staffer Ms. Nancy Matthews. Ms. Lisa Alexander, a reporter from Note Tax Notes, covered the conference and provided a free copy of the October 22, 2001 issue of the magazine. Copies of the agenda, the attendance roster, and the roster of registrants are attached.

OVERVIEW

The day-and-a half Conference covered a wide variety of topics that ranged from a Federal Tax update on proposed legislation in light of September 11; sales tax simplification and prospects for federal legislation on use tax collection by mail-order sellers and/or internet sales; a luncheon address on the state and local implications of June, 2001 Federal tax law and proposed Federal legislation on stimulus and internet tax moratorium; ethics and malpractice issues relating to rendering of tax advice in states in which a lawyer is not admitted and representation of tax payers in controversies in states in which a lawyer is not admitted; discussion by attendees of membership/participation in their various State Tax Sections; reports from other tax societies and organizations; discussion on the use of alternative business forms (LLC's LLP's, Business Trust, Disregarding Entities, etc.) tax planning; a post-Quill nexus update; and lastly concluded with a discussion of "Hot Tax Topics" that included a presentation on business purpose and state tax issues on problems in dealing with telecommuting employees in one state and the nexus and withholding tax problems of the employer in the employing state.

FIRST SESSION

The first topic discussed was Federal tax legislation in light of the September 11 events. The speakers were John Barrie, a lawyer from Washington, D. C., Cary Pugh, Tax Counsel, Senate Finance Committee, Washington, D. C., and Jasper L. "Jack" Cummings, Jr., Assistant Chief Counsel (Corporate) IRS, Washington, D. C.

Cary Pugh indicated that the focus on Congressional legislation had shifted from rebate checks, concern on Social Security, and taking up small business tax proposals to an economic stimulus package in light of the bleak report on the economy and the events of September 11.

The House stimulus bill (Economic Security and Recovery Act of 2001) was a $100 billion proposal for 2002, and almost $200 billion for the period 2002 through 2005. The bill provides for accelerating all of the individual marginal income tax-rate cuts that were enacted this spring, making them effective in 2000, faster bonus depreciation tax write-off's for business, repeal of the corporate alternative minimum tax, and capital gain rate relief and supplemental rebate tax checks for low-and middle-income Americans. The bill would also extend expiring tax provisions.

The Senate version was much smaller at $70 billion, concentrating on new spending aimed at the unemployed and lower-income workers. It did provide, similarly to the House, for rebate checks to individuals and the expansion of the operating loss carry back from 2-5 years.

It was unclear as to whether passage of the stimulus bill would be possible by the Thanksgiving recess.

Other tax proposals being discussed on the "Hill" concern energy, international tax package, tax shelter proposals, and simplification proposals.

Ms. Pugh said any comments from the State Bar Associations should be directed to the staff if they are of a technical nature, e.g. the implications of the estate death tax credit modified by the June federal tax legislation.

Jack Cummings, Assistant Chief Counsel (Corporate), IRS, spoke on the Office of Chief Counsel, which is under the Treasury Department. The Chief Counsel is the lawyer to the IRS.

The Chief Counsel's office is broken down into subject matter lines such as corporate, tax-exempt identities, financial products, partnerships, etc. Chief Counsel representatives in the various states represent the IRS and appear in the United States Tax Court on its behalf.

There are 600 attorneys in the National Office in Washington. D.C. These attorneys provide field service advice to local IRS agents; work on proposed regulations and public rulings; and answer questions on private letter rulings.

A cold telephone call from practitioners to the IRS Chief Counsel in Washington may not be productive. The person handling the call may not be the individual attorney assigned to that tax section of the code so he may have no expertise in the area desired.

In order to receive speedy attention from Chief Counsel on a request for private letter rulings, the practitioner should provide a complete summary of the facts and authorities including any contrary authority.

Mr. Cummings concluded his presentation by discussing Revenue Ruling 2001-46. This ruling held that the formation of a newly formed subsidiary of an acquiring company which then merges into the target corporation, followed by a merger of the target corporation into the acquiring business will be treated as a single statutory merger of the target into the acquiring company. Rev. Rul. 2001-46, 2001-42 IRB 321 (September 25, 2001). Rev. Rul. 67-274, 1967-2 CB 141, is amplified.

The essential facts of that ruling are that the acquiring company established a first tier subsidiary which pursuant to an integrated plan acquires all the stock of the acquiring corporation and has the first tier sub merge into the target (“Acquisition Merger”). In the Acquisition Merger, the target shareholders exchange their target stock for consideration, 70% of which is acquiring company’s voting stock and 30% of which is cash. Following the Acquisition Merger and as part of the plan, target then merges into the acquiring company in a statutory merger (the “Upstream Merger”). The step transaction doctrine treats the Acquisition Merger and the Upstream Merger as a single integrated acquisition by the acquiring company of all of the assets of the target.

Under the ruling 2001-46, the first step of the transaction is the parent acquiring the assets of the target through a merger of its subsidiary into the target through exchange of stock and then the target merging into the parent as the second step. This raises the issue of whether, though an exchange of stock in this transaction, a good Section 338(h)(10) election can be made or whether there is a tax fee reorganization. This in turn raises the issue of substance and form for tax issues.

Rev. Rul. 2001-46 held that the underlying policy of Section 338 was not violated by treating the transaction as a single statutory merger of target into the acquiring company. Such treatment results in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(A) in which the acquiring company acquires the assets of target with a carry-over basis under Section 362. It does not result in a cost basis for those assets under Section 1012. Thus, the step transaction doctrine applies to treat the Acquisition Merger and the Upstream Merger as an acquisition of target's assets through a single statutory merger of target into the acquiring company that qualifies as a reorganization under Section 368(a)(1)(A). Accordingly, Rev. Rul. 2001-46 holds that a Section 338 election could not be made.

The IRS will not apply the principles of this ruling to challenge the taxpayer's position with respect to the treatment of a multi-step transaction, one step of which, viewed independently, is a qualified stock purchase for the purposes of Sections 338(h)(10) or 338(g), if all of the following conditions are meet: there is a timely election; the acquisition date for the target corporation is before September 25, 2001; and the taxpayer does not take a position for US tax purposes that is inconsistent with the treatment of the acquisition as a qualified stock purchase made with respect to which the election was made.

The IRS also stated in the ruling that it may issue regulations later this year that could provide the opportunity to elect Section 338(h)(10) or 338(g) treatment for a qualified stock purchase.

Discussion also centered on the need for issuing more rulings by a speedier process. The issue of more timely rulings to the public is clearly needed. The substantial cutback in the number of rulings is attributable to a reduction in personnel. Mr. Cummings proposed a streamline process of review of rulings as a cure. In addition, the general principles of the current private ruling system could instead be incorporated into revenue procedures.

SECOND SESSION

The next section was chaired by Arthur R. Rosen, an attorney in New York City, and Charles Collins, Department of Revenue, State of North Carolina and James Goldberg of Goldberg Ampersand Associates, representing the North American Retail Dealers Association, Washington, D. C. spoke on the Streamline Sales Tax Project.

Art Rosen provided a history of the nexus wars starting with National Bellas Hess and continuing on to the economic nexus laws which were tested in the Quill case. The focus then shifted to the National Tax Association simplification project which was unsuccessful. This was followed by the Advisory Commission on Interstate Commerce that also deadlocked over Congressional legislation.

Currently, the Multistate Tax Commission has taken the position that if there is a customer in the state, economic nexus has been arrived at.

The states in an attempt to overcome administrative difficulties of out-of-state companies in complying with use tax responsibilities, have banded together to reduce complexity, improve efficiency, and administrative ability of the tax through simplification and uniformity. The project is called the Streamlined Sales Tax Project ("SSTP"). As indicated, the SSTP attempts to combine technology and simplified definitions to ease administration and collection for remote and brick-and-mortar sellers. Model legislation has been drafted and adopted by various States. In a broad overview, the system would focus on use of technology, uniform definitions, a simplified vendor registration system, and minimal vendor audits. Among other things, the SSTP agreement would require the following:

- State administered taxes. States would administer all taxes imposed on political subdivisions and sellers would register and file returns only with the state.

- Common tax base. Beginning in 2006, all local jurisdictions must have a tax base identical to the state tax base.

- Limited rate changes. Taxing jurisdictions must give a 60-day notice of a rate or boundary change and rates could only take effect on the first day of a calendar quarter.

- Uniform sourcing rules. States must adopt uniform sourcing provisions which would provide a method to determine which of the jurisdictions involved in a sale may impose a sales and use tax on or with respect to the sale.

- Uniform definitions. States would not be restricted in which items they elected to tax or exempt but they would be required to adopt uniform definitions.

- Uniform taxes returns. States could only require a seller to file only one return per state for each taxing period. States will work toward one uniform sales and use tax return that all states could accept and states would encourage electronic filing of returns.

- Simplified registration. Participating retailers could register with all member states and local jurisdictions at the same time.

- Uniform remittance rules. States would only require one payment per return.

- Amnesty. Participating states will offer amnesty for uncollected or unpaid sales and use taxes for sellers who take part in the agreement. Amnesty applies if the seller was not registered in the state for 12 months prior to commencement of the state's participation in the agreement.

- Alternate remittance methods. A participating seller may select a third party Certified Service Provider (CSP) to perform its sales and use tax compliance functions. Alternatively, a seller could use a computer system called a Certified Automated System (CAS), which calculates taxes on a transaction. Or, the seller may use its own automated sales tax system if it has been certified as a CAS.

- Data privacy. Provisions relating to consumer privacy and the confidentiality of tax information would be consistent.

Some of the larger states are not participating such as New York, California, Massachusetts, and Pennsylvania. Three states have entered into the authorization plus adopted the SSTP substantive law. Minnesota is one of these states. The hope of the Streamline Sales Tax Proposal is to tie into federal legislation with the expiration of the internet taxation moratorium.

Complications have arisen on the federal level with a proposed business activity nexus tax statute. This proposal would clarify certain nexus rules by setting out clear federal standards of what would encompass nexus for business activities tax or other tax statutes such as income, gross earnings, franchises, excludes nexus sales and use taxes. Other congressional proposals at the national level would simply extend the expired Internet Moratorium Act. The speakers used a power-point presentation for their remarks.

LUNCHEON SPEAKER AND PRESENTATION

The luncheon speaker was Harley Duncan, Executive Director of the Federal Tax Administrators. He spoke on the topic of "State and Local Taxation Proposals" in Washington.

Because of fiscal issues regarding the budget, economic distress and down turning, the impact of proposed federal legislation is compounded.

The Internet Moratorium Law was allowed to expire on October 21, 2001. The moratorium extension is bogged down by proposals from the states to require remote sellers to collect the tax and the business activities tax nexus proposals. The later legislative bills are proposed by business groups. Most states support Federal legislation if Congress would allow the states to enforce collection on remote sellers. In that event, the states would provide simplification to the sales tax by the SSTP.

Issues that Mr. Duncan saw related to the old bugaboo of local sales tax rates rather than one uniform state rate; what will trigger the requirement on remote sellers if the legislation is adopted; and what are the criteria to use for the business activity tax nexus rules.

Mr. Duncan thought that the business activity tax nexus rules were not a codification of existing law, but rather an easing of the nexus rules. Further, the introduction of the nexus rules is extraneous to the issue of sales tax compliance. Lastly, in the 21st Century, in his opinion, electronic nexus is the proper nexus test.

Mr. Duncan predicted that the probability for an Internet Moratorium Act extension of one or two years was 60%. He predicted a 30% chance that Congress would do nothing and a 10% chance that the business activity nexus rules and the SSTP would be packaged.

The big federal tax bill in June, 2001 had a small impact on the states because sixty percent of its provisions were related to marginal rates. There were some conformity provisions like retirement plans, education deductions, etc. that did affect the states. The repeal of the estate tax death credit will affect 41 states. The Federal legislation in June, 2001, phases out the state death tax credit by 25% each year beginning in 2002 and ending in 2005. The Federal estate tax is not ended until the year 2010. This causes a big revenue loss to the states.

Because of other provisions in the Federal legislation of June, 2001, Mr. Duncan felt that Congress must revisit the enacted provisions. The legislation contains a variety of sunsets that some will want to extend, and Congress will also need to address the AMT and other business issues in a comprehensive fashion.

The battle in Washington on the stimulus bill is between spending and tax cuts. A sleeper in any of the stimulus packages could be the accelerated depreciation provisions since most states conform to the Internal Revenue Code. The state revenue impact could be substantial. Another Federal provision that will have a substantial loss impact on some (7) states is the AMT provision.

The speaker closed with the admonition to stay tuned and follow the stimulus proposals in Washington very closely. Legislation in the last year or two has been very rapid and has been without consideration of the state impact by the Congress.

BUSINESS MEETING

The conference reconvened after lunch, and approved the slate of officers and membership to the Executive Committee.

THIRD SESSION

The next session was chaired by Richard W. Tomeo, an attorney from Connecticut, who introduced Robert Creamer, Esquire, an attorney with ALAS, Chicago, Illinois. Mr. Creamer spoke on the topic of ethics and malpractice issues relating to the practice of law in which a lawyer is not admitted on behalf of a client. This issue has caused controversy in light of a California Supreme Court case called Birbrower, Montalban, Condon & Frank P.C. v Superior Court, 17 Cal. 4th 119, 949 P.2d 1, 70 Cal. Rptr. 2d 304 (1998). That decision sent shock waves through lawyers who regularly engage in multi-state law practice, particularly transaction practice.

Birbrower held that a New York law firm had violated California's misdemeanor, authorized practice of law statute by performing in California legal work for ESQ, a California-based affiliate of a long-standing New York client of the firm. The work related to claim by ESQ against a California-based computer services firm, Tandem, under a contract that specified California law is governing the contract. In handling the claim, Birbrower lawyers visited California for the purpose of advising ESQ, and initiated an arbitration in California contemplated by the ESQ-Tandem contract. The dispute was settled without arbitration. The Birbrower lawyers never associated with local counsel. ESQ later sued that Birbrower firm for malpractice and the firm counterclaimed for unpaid fees. The California court held that because the firm had violated California's unauthorized practice of law statute, it could not collect fees from ESQ under their written fee agreement for work performed in California.

The Birbrower holding has been uniformly rejected as being unduly restrictive. Section 3 of the Restatement of the Law Governing Lawyers has taken the position that lawyering within a jurisdiction in which the lawyer is not admitted to the practice is permitted to the extent "the lawyer's activities arise out of or are otherwise reasonably related to the lawyer's practice." In essence, if the lawyer is not marketing to a client in a particular state but the transaction or litigation drives his presence into a foreign state where he is not admitted, such practice is within the scope of the practice of law.

The ABA and its Ethics 2000 Commission has proposed changes in the Model Rule 5.5 "Unauthorized Practice of Law". The proposed changes to Model Rule 5.5 would create safe harbors by permitting certain activities. Permitted activities include (1) those permitted while associated with a locally admitted lawyer, (2) activities after admission by a tribunal pro hac vice, (3) services rendered by in-house counsel to their fellow employers, fellow employees and organizational affiliates, and (4) out-of-state lawyer's consultations and negotiations within the state while representing an out-of-state client by whom the lawyer had previously been engaged. The ABA Ethics proposal will be voted on by the ABA in February, 2002.

A third proposal by the Association of Corporate Counsel of America takes a broader approach to the problem. Its proposal would permit out-of-state lawyering if the lawyer does not hang out a shingle in a state where he or she is not admitted and does not go into the courts of the foreign jurisdiction.

ALAS' experience has been that charges of unauthorized practice of law are only rarely a basis for malpractice claims against its insured member firms. In a few instances, such charges have been "thrown in" when there are other, more substantive grounds for malpractice claims. Such claims are usually "window dressing," but some times may be used in an attempt to create a presumption of negligence or wrong doing against the out-of-state lawyer.

Occasionally, disciplinary authorities in a particular jurisdiction will bring charges against an out-of-state lawyer who has regularly, continuously and over an extended period of time provided legal services in that jurisdiction without being licensed there. Sometimes such charges are generated by complaints from local lawyers or bar associations.

By far the most common situation in which unauthorized practice of law charges are made against ALAS firms, is a situation like Birbrower, where a law firm asserts a claim for fees against a client located in an out-of-state jurisdiction, and the work was performed in, or related primarily to, a jurisdiction in which the firm has no lawyer licensed to practice.

Mr. Creamer then assessed the risks of multistate practice. Representation of clients in out-of-state proceedings is almost always governed by rules of the court in which the matter is pending. These rules usually provide for admission pro hac vice of lawyers admitted to practice in other jurisdictions. The consequences of failing to adhere to pro hac vice admission rules can be significant.

In transactional work, there are a number of factors that might expose a lawyer or firm to a charge of a unauthorized practice of law in an out-of-state jurisdiction. These include:

Out-of-state office. Physical presence of a lawyer in the foreign jurisdiction is the single most risky aspect of multistate practice. Obviously, opening a permanent office in a foreign jurisdiction that is staffed entirely with lawyers not admitted in that jurisdiction is risky, even if the work is from clients not based in that jurisdiction and does not involve the law of that jurisdiction.

Lawyer at Client's Out-State Location. Often lawyers travel to an out-of-state client's location and render legal services there. If this occurs only on an occasional basis and is incidental to work not related exclusively to the foreign jurisdiction, it will probably not be a problem. However, if the practice is continuous, prolonged, regular or frequently repeated, it could be a problem.

Client Location: Multistate or International Nature of Client. Location of the client in the foreign jurisdiction is second only to the lawyer's physical presence in the foreign jurisdiction as an unauthorized practice of law risk factor. If the out-of-state client is located exclusively in the foreign jurisdiction, it is more likely that an out-of-state lawyer performing legal services for that client in that jurisdiction will be a problem than if the client is a multistate or multiinternational company with business locations in many jurisdictions.

Other Out-of-State Parties. If the parties to the transaction other than the client are also located in the foreign jurisdiction, the transaction begins to look more like a "foreign" transaction, especially because some or all of the subject matter of the transaction (real estate, inventory) may be located in that jurisdiction and because the transaction, or some aspect of it, are likely to be governed by that foreign jurisdiction's law.

Governing Law. Often the transactional documents will specify the governing law, at least as to certain issues.

Location of Property Involved. If any real or personal property which is the subject of the transaction is located in a foreign jurisdiction, use of local counsel may be prudent.

Tips for forestalling an unauthorized practice of law claim for fees are: consultation with client on retaining local counsel; engagement letter provisions; agreement to confer in lawyer offices; and seeking admission to the practice in the foreign jurisdiction.

Mr. Creamer provided handouts from 2001 ALAS Loss Prevention Manual on the "Multistate Law Practice and Unauthorized Practice of Law", the proposed ethical change of the Association of Corporate Counsel of America, and materials containing fact scenarios illustrating the points discussed.

FOURTH SESSION

The Round Table discussion was participated in by all members in attendance. Traditionally, this is one of the best opportunities for bar associations to exchange information on their activities, membership, and general trends in their various states. This year's session was very productive.

Items covered were as follows:

The California Tax Section had made a real effort to get young members involved by instituting a mentorship program for younger attorneys conducted by older tax attorneys. The idea was to actively have a young attorney on a panel at a CLE with an older tax attorney guiding and counseling.

Georgia indicated that the Georgia Tax Section had set up a pro bono clinic in conjunction with United States Tax Court and Georgia State University. It had also sponsored certain seminars on "How to Try a Tax Case" which had been very successful. Lastly, liaisons had been held with the Georgia Department of Revenue as to what issues the Revenue Department was looking at and what regulations would be proposed.

The Florida Bar Association puts on many seminars. It also conducts a Tax Court Moot Court and sponsors numerous publications.

Some states had used its older members as an advisory group to its current council so that there would be a policy board able to assist younger members on the current council and provide the current leadership with guidance and consultation, in addition to advice, if requested.

A discussion was also had with respect to cooperation with state revenue departments and opportunities which might be available to the tax sections. Individuals from California indicated that California routinely sends a delegation to Washington, D.C., to present papers to the congressional committees, the Tax Court, the IRS, and the Treasury Department, on areas that need to be corrected or changed in some fashion.

North Carolina indicated that it had peer review specialization based on age and experience. They also have an estate planning designation specialization based on testing.

Most of the states have monthly meetings of their Tax Council, a web site, sponsored CLE programs, participate in liaisons with legislative tax committees of their various states in the IRS, and have various get togethers for state and U.S. Tax Court judges. There are also efforts to establish liaison groups with the local Departments of Revenue.

The issues of declining membership in the tax sections and "aging" were also discussed. Part of the problem might be economics based on the billable hours and competitive pressures which have lessened the educational, mentoring, and networking advantages of bar membership.

Arizona representatives talked about encouraging participation by on-line internet meetings, teleconferencing, and video conferencing. They also coordinate seminars with other sections.

FIFTH SESSION

The next segment was a discussion of reports from the various professional tax organizations, moderated by William Prugh, an attorney from Missouri.

The COST presenter was Douglas L. Lindholm, Esq., COST's President and Executive Director, in Washington, DC. He indicated that the Committee on State Taxation, or COST, was set up to provide education, judicial advocacy in the form of amicus briefs, and legislative advocacy through state-level member coalitions. Its members are 550 of the Fortune 1000 companies. Current Task Forces active at COST are E-Commerce Taxation; Power/Energy Deregulation; Financial Services, Paperless Transactions, Unclaimed Property, and State Taxation of Telecommunications. COST was a participant in the Federal Advisory Commission on Electronic Commerce, and is actively representing business interests in the States' development of the Streamlined Sales Tax Project. COST had legislative coalitions active this year in Louisiana, North Carolina, West Virginia, Mississippi, Alabama and Arkansas. COST has filed at least six amicus briefs before state supreme courts and the United States Supreme Court this year, and three more in the pipeline.

Billy Cook, the Executive Director of the Institute for Property Taxation, gave a presentation on IPT. The Institute was founded in 1976. It is a 501(c)(3) non-profit educational association serving over 4100 members representing approximately 1450 corporations, firms, or taxpayers throughout the United States and Canada. Members represent the spectrum of business and industry sectors of all sizes – from small firms to most Fortune 500 companies. It is the only professional organization that educates, certifies and establishes strict codes of conduct for property and sales and use tax professionals who represent taxpayers (government officials or organization do not qualify for members). The Institute provides educational opportunities for its members, professional designation programs in property and sales tax leading to the CMI designation (Certified Member of the Institute) are also available to members who satisfy the educational, experience and examination requirements. It is dedicated to uniform and equitable administration of ad valorem and sales and use taxes, to minimizing the cost of tax administration and compliance, and to a high degree of professionalism with a strict Code of Ethics and Standards of Professional Conduct for its members. Lastly, IPT has upgraded its member website – www.ipt.org - and will put most of its paper materials on the site including its directory.

Tax Executives Institute, Inc. (TEI) was represented by Gregory S. Matson, Tax Counsel, who serves as the staff liaison to their National State & Local Tax Committee. Mr. Matson thanked NASBTS for the opportunity to report and expressed TEI's appreciation for the working relationships they have with the other organizations reporting: COST, IPT, and the MTC. Mr. Matson stated that TEI was founded in June of 1944 by a group of corporate tax executives in New York City and is a professional organization of business executives who are responsible for taxation matters on an administrative or policy-making level. He said that TEI today has more than 5,300 members aligned in 53 separate chapters, including chapters in Canada and Europe.

Mr. Matson then stated that TEI Executive Director Michael J. Murphy had announced his retirement effective January 2, 2002, and that TEI had selected their General Counsel and Director of Tax Affairs, Timothy J. McCormally, to be his successor. He also highlighted some of TEI's efforts in the state & local tax arena over the past year, notably the submission of an amicus brief to the U.S. Supreme Court in Kroger Co. v. Kansas Dept. of Revenue, and, most recently, submission of an amicus brief to the Illinois Supreme Court in Milwaukee Safeguard Insurance Co. et. al. v. Selcke, et. al. In pointing out ways that TEI can work with NASBTS in the future, Mr. Matson noted that NASBTS can support TEI's educational programs at the chapter, region, and national level by providing speakers, can submit scholarly and technical articles for publication in TEI's professional journal, The Tax Executive, and can be proactive in requesting amicus support, rather than waiting until the last minute. He concluded by pointing out that TEI's website, www.tei.org, is a great source for keeping up with the activities of TEI and a means of contacting him or other members of TEI's staff.

Mr. Sheldon H. Laskin reported on the Multistate Tax Commission. Mr. Laskin is Director of the National Nexus Program, MTC, Washington, D.C. The Multistate Tax Commission is an agency of state governments established:

to help make state tax systems fair, effective and efficient as they apply to interstate and international commerce, and
to preserve state tax sovereignty.
The Commission was created in 1967 through the Multistate Tax Compact, an interstate compact statute enacted by each Compact Member State.

The Commission encourages States to adopt uniform tax laws and regulations that apply to multistate and multinational enterprises. Greater uniformity in multistate taxation helps insure that interstate commerce is neither undertaxed nor overtaxed, and it helps eliminate the danger that Congress will intervene in state taxation.

The Commission encourages compliance by businesses with state tax laws. It maintains a Joint Audit Program that audits businesses for several States at the same time for both sales/use and corporate income taxes. Besides serving the compliance and revenue purposes associated with any audit program, the MTC Joint Audit Program also contributes to uniformity in taxpayer treatment and helps States learn together about new industry conditions and circumstances.

States have also created through the Commission a National Nexus Program to help encourage voluntary disclosure and discover businesses that are failing to file returns with States.

The Commission protects state taxing powers through active participation in significant court cases and through educating Congress about state tax authority and interests. The Commission is conducting a special project, the Property Tax Fairness Project, aimed at securing amendments to the 4-R Act and preventing the extension of that law to other industries.

Current projects of the MTC are set forth below:

Sales and Use Taxes

Project
Project Goal

1. Sales/Use Tax Priority—Leasing
Avoidance of economic burden of duplicative taxation; clear identification of jurisdictions with priority to tax a leasing transaction and jurisdictions providing credits for previously paid taxes.

2. Sales/Use Tax Priority—Construction Inventory
Avoidance of economic burden of duplicative taxation; clear identification of jurisdictions with priority to tax sale and subsequent use of construction inventory and jurisdictions providing credits for previously paid taxes.

3. Sales/Use Tax Priority—Sales of Services
Avoidance of economic burden of duplicative taxation; clear identification of jurisdictions with priority to tax a sale or use of a service and jurisdictions providing credits for previously paid taxes.

4. Taxation of Fund-Raising Transactions
Development of database of state practices and procedures (Joint Project with Assn. of Fund Raisers and Direct Sellers).

Income/Franchise Taxes

Project
Project Goal

1. Definition of Business/Nonbusiness Income
Develop a uniform definition of business/nonbusiness income

2. Definition of Unitary Business
Develop a uniform definition of a unitary business.

3. Corporate Income Tax Administrative Uniformity (Joint Project with the AICPA)
Recommend a uniform system for reporting changes to a federal income tax return that impacts state tax returns; recommend uniform deadlines or limitations periods; recommend a uniform reporting form.

4. Composite Reports for Pass-Through Entities
Recommend a uniform system for composite reports for members of pass-through entities; provide first step harmonization as process for further developing other meaningful uniform approaches to state taxation of pass-through entities.

5. Proposed addition of "gross receipts" to MTC Reg. IV.2.(a).


6. Proposed Revision of MTC Guideline for Public Law 86-272


7. Uniformity Proposal Concerning Residence of Funeral Trusts


8. Uniform treatment in the property factor of outer jurisdictional property.

The Federation of Tax Administrators ("FTA") was organized in 1937. Its mission is to improve the qualify of state tax administration by providing services to state tax authorities and administrators. These services include research and information exchange, training, and intergovernmental and interstate coordination. The FTA also represents the interests of state tax administrators before federal policymakers where appropriate. The principal tax collection agencies of the 50 states, the District of Columbia, and New York City are the members of the Federation of Tax Administrators. FTA is financed primarily from annual dues assessed to member tax agencies, subject to certain minimum and maximum fees. FTA is organized as a nonprofit corporation under § 501(c)(3) of the Internal Revenue Code.

Among the current and recent activities on the FTA agenda:

• Working with several public and private sector organizations to assess the issues involved with the sale of goods and services using the Internet and other on-line services and to develop model legislation for the uniform taxation of such transactions;
• C oordinating the activities of a joint state-taxpayer task force analyzing the impact of various electronic business processes (e.g., EDI, procurement cards, evaluated receipts settlement) on state tax administration;
• W orking with states to develop electronic return filing standards;
• Coordinating state activities in the development of joint electronic filing programs and the electronic exchange of information between state and federal tax agencies;
• I mplementing a uniform exchange of information agreement for states;
• M onitoring state activity regarding the sales taxation and services; and
• D eveloping and conducting basic and advanced training seminars on motor fuel audit and investigation.

ADJOURNMENT

The Friday session ended at 5:30 p.m. and a cocktail party was held at which members of the various bar associations met one another and continued to discuss tax matters in their states.

SIXTH SESSION

The program reconvened on Saturday, October 27, covering a half-day of activities. The sessions were: alternative use of business forms in tax planning, a "Post-Quill" nexus update, and "Hot Tax Topics" on the State level.

The sixth session on tax planning with alternative business forms such as LLCs was chaired and moderated by Kathleen Parker, an attorney from Massachusetts. The principal speakers were Michael C. Durst, an attorney in Washington, D. C.; Bruce Ely, an attorney in Alabama; and Sarah Beard, an attorney in Maine. Mr. Durst covered the history of the check the box rules. Mr. Ely provided the states reaction to check the box rules along with Sarah Beard. The speakers provided an outline that coincided with their power-point presentation.

SEVENTH SESSION

John L. Coalson, an attorney from Atlanta, Georgia, moderated the next session "Post-Quill Nexus Update." Ms. Diann Smith, general counsel, COST, Washington, D. C. spoke. She explored the issue of whether nexus after Quill was qualitative or quantitative. Taxpayers have taken the position that it is a qualitative test for nexus base on physical presence. The MTC and other states revenue departments have taken the position that it's a qualitative test that focuses on the market. One state commissioner of revenue has taken the position that the standard of nexus is a bright-line quantitative standard. That is, once a physical presence is reached the number of visits thereafter is irrelevant.

Ms. Smith believes that the term "substantial physical nexus" has never been used by courts to draw the nexus line. Some level of physical presence is clearly allowed before a state will have jurisdiction to impose tax obligations. Ms. Smith notes that Quill should be read as establishing a bright-line floor rather than a bright-line ceiling. Thus, anything less than Quill physical presence would not be substantial nexus, but anything more must be separately looked at to determine whether it meets the Complete Auto Transit v. Brady (1977) "substantial nexus" test.

The case of International Harvester v. Wisconsin Department of Taxation, 322 US 435(1944) has been used by the states to support the theory that a taxpayer does not have to have a physical presence in a state to be subject to taxation in that state. Whether International Harvester, which was decided before the current Commerce Clause developments and Allied Signal, is still viable was discussed. Ms. Smith said it is important to remember that the language in this case relates exclusively to a Due Process analysis, not Commerce Clause. Quill established that the nexus requirement is higher for Commerce Clause than for Due Process. Further, International Harvester only deals with nexus over the transaction while the concept of "substantial physical presence" deals with nexus over the taxpayer. The taxing state in International Harvester was seeking to tax a discreet event of the taxpayer (dividends) rather than an apportioned share of the taxpayer's entire income. The last issue discussed was the states backlash to the royalty holding company as tax planning proposals. As part of Ms. Smith's presentation, an outline on nexus developments covering cases, legislation, and rules was provided.

EIGHTH SESSION

The concluding segment of the conference was presented by Peter Faber, an attorney in New York. Mr. Faber is the former Chair of the ABA Tax Section and is a well-known commentator, practitioner, and counselor on state and local issues. His discussion focused on "Hot Tax Topics." The first topic covered was: "Application of the Doctrines of Economic Substance and Business Purpose."

The IRS in recent years has often asserted extremely broad, blunt instrument common-law doctrines - substance over form, business purpose, step-transaction - in an effort to overturn taxpayer planning in both international and domestic tax context without having to deal without the technical details of specific statutory-based theories. Such use of the blunt-instrument approaches is akin to simply saying "we don't like it" and, surprisingly, has been routinely approved by the United States Tax Court. In recent cases involving multinational and multistate taxpayers, however, some circuit courts of appeal seem to impose a more critical standard.

Mr. Faber presented from his outlined materials and covered recent federal cases on these issues. He pointed out most cases had been losers until the recent Court of Appeals decisions in IES Industries, Inc. v. United States, 253 F.3d 350 (8th Cir. 2001); United Parcel Service of America, Inc. v. Commissioner, 254 F.3d, 1014(11 Cir. 2001); and in the recent District Court case involving American Home Products titled Boca Investerings Partnership v. U.S., Docket No. 97-0602 (D.D.C. 2001). In doing so, he pointed out the importance of preserving the attorney-client privilege in tax planning, and the thoughtful choice of tax forums for litigation of a deficiency in the United States Tax Court or refund litigation in the federal courts.

Mr. Faber felt that the UPS case upheld tax planning with a business and economic purpose as long as the transaction was integral to the existing business. That is, as long as the planning related to structuring an existing business, the business purpose would be acceptable. For example, a sale and lease back transaction by a company involving intangible assets would be permitted though the asset was currently used by the on-going business.

Mr. Faber concluded with a presentation on a developing area of state taxation. He focused on the tax problems with telecommuting employees and whether the employer is subject to nexus in the employee state and to employment withholding responsibilities because of the employees telecommuting services in the employees state. New York and several other states use a convenience and necessity test rather than where their performance of the employee services takes place. Under the convenience/necessity test, the employer could be subject to tax exposure and withholding obligations for an employee residing outside the state of the employer and performing services from his or her state by technological advancements. An outline of the topic was provided.

ADJOURNMENT

The 22nd Annual Conference concluded at noon with John L. Coalson, Jr., the Chair of the group thanking the attendees for having come to Washington and reminded them of next years conference in October, 2002.

Respectfully submitted:
Date: ______________________ ____, 2001
Jerry Geis, Secretary of National Association of State Bar Tax Sections