First, a corporate taxpayer would be strictly liable, under the proposals, for a 20 percent penalty on any tax underpayment associated with a tax avoidance transaction. The penalty would increase to 40 percent if the taxpayer failed to report its participation in the transaction within 30 days of entering into it.

Second, Treasury requests blanket regulatory authority to expand the scope of its power to disallow any deduction, credit, exclusion, or other allowance obtained in a TAT.

Third, Treasury could deny corporate taxpayers any deduction for fees paid in connection with the purchase or implementation of a TAT or for related tax advice. Advisors also would be subject to a 25 percent excise tax on such fees. Note that the denial of a deduction and imposition of the excise tax would apply even to advice provided by an independent advisor that the anticipated tax advantages would not be available and to after-the-fact advice on the consequences of a transaction consummated without advice. Treasury has not indicated how this rule would apply to internal costs incurred in implementing a TAT.

Fourth, the purchaser of a corporate tax shelter who also acquires a full or partial guarantee of the projected benefits would be subject to an excise tax equal to 25 percent of the benefits that were guaranteed. A guarantee would include a rescission clause for tax law changes, a guarantee against changes in the law, or simple insurance. So, for example, if a taxpayer purchased insurance against a tax adjustment in a specific transaction for $10,000 and the limit on the policy was $1,000,000, the proposal would subject the corporate client to a $250,000 tax. This would be true even though the pricing of the policy demonstrates that the insurer rated the risk of loss at less than one percent. The same excise tax would apply if instead the insurer had seen very grave risks and charged a $200,000 premium.

Fifth, the proposals would tax otherwise tax-indifferent entities when they are parties to a corporate taxpayer's tax avoidance transaction. These tax-indifferent entities are exempt organizations, Native American tribal organizations, foreign persons, and domestic corporations with expiring net operating losses. The corporate parties would be jointly and severally liable for this tax if unpaid by the exempt taxpayer. In addition, in the case of a foreign person properly claiming the benefit of a treaty, or a Native American tribal organization, the tax on the income allocable to such persons in all cases would be collected from the corporate parties.

Taxpayers would be barred from taking tax positions inconsistent with the form of their transactions if a tax-indifferent party was involved in the transaction. A taxpayer could take an inconsistent position by disclosing the inconsistency. In effect, the rule is a reporting requirement masquerading as a deduction limitation.

THE RE-LABELING OF TAX INCREASES

More than 85 percent of President Clinton's business tax increase proposals come from items Congress previously rejected or from items that are substantive changes to long-standing and non-controversial provisions of the tax code. Nevertheless, the administration attempts to characterize its entire package as one that addresses "abusive corporate tax shelters." As I noted above, though, nearly every significant business transaction could fall within the administration's sweeping definition of a tax shelter. In reality, only a small fraction of the revenue proposals in this budget are anything other than plain tax increases.

The administration claims it will raise a little more than $2 billion from procedural changes that will place substantial restrictions on corporate tax planning. These proposals go well beyond any common understandings of a tax shelter. They would restrict taxpayers' ability to engage in normal, necessary tax planning.

THE UNCERTAINTY

Many questions about how these changes actually would work are left unanswered by the administration's proposals. Since Treasury already is so far behind in issuing regulations that it would take six years to just get caught up, corporate America certainly cannot afford to wait for Treasury to issue regulations on the proposals.

If the administration's proposals are enacted, absent clear guidance, no corporate taxpayer would have any assurance the IRS would leave intact a tax benefit obtained in conjunction with a routine business transaction (e.g., a tax-free reorganization). Taxpayers would not know whether benefits emanating from transactions that follow the words printed in the Internal Revenue Code would be available until the IRS blessed such transactions during examination. Providing the IRS with this power would be an abdication of legislative authority.

Treasury's premise in proposing these new rules suggests the IRS lacks the necessary tools to prevent transactions that produce unintended tax benefits. This assumption is wrong. A review of recent court decisions leads to the opposite conclusion: courts will not countenance transactions that do not make economic sense.