President Obama has nominated Bill Wilkins to be IRS Chief Counsel and Beth Garrett to be Assistant Secretary of the Treasury for Tax Policy. Both served in the 1980s on tax committee staffs in the U.S. Senate; more recently, Garrett served on President Bush’s tax reform panel in 2005, while Wilkins currently is chair of the ABA Section of Taxation.

What Do These Nominations Mean?

If they are confirmed, these nominees will bring a high degree of expertise to their positions. Wilkins is a long-time practitioner who has experience with the practicalities of how IRS positions interact with taxpayer behavior. He should be able to exercise substantial guidance and direction over IRS and Treasury published authority. Moreover, his influence on the IRS litigating positions in the tax court will be important as the agency moves out of the “tax shelter” era of the early 21st Century.

Garrett is not expected to be a hands-on technician, in contrast to many recent Assistant Secretaries. Her background on the tax reform panel suggests that the President intends real tax reform, probably next year.

The experience of both nominees with the Congress is very positive, and could help Treasury reclaim a larger role in fashioning tax legislation. Treasury has seen a long erosion of that role going back to the 1940s. When the IRS disbanded its L & R Division in the 1980s, the writing of legislation and reports on legislation blossomed in the Joint Committee. Then the hearings on the IRS in the late 1990s put it in a less than positive light on the Hill.

Now, the Obama administration will have in place a strong team to reclaim leadership in the tax area.

Bread and Butter: 9100 Relief

Exotic international restructurings and complex partnerships make interesting reading, but the bread and butter of everyday life in the tax world is reflected in a recent list of rulings by the IRS: 13 rulings allowing extensions to make elections, file forms, etc. The correction of tax mistakes is the bread and butter of tax practice.

The typical rulings involve late S elections, late QSUB elections and late check the box elections. Then there is a huge variety of more unusual elections that can be late: reverse QTIP election, IC-DISC election and single rental real estate activity treatment under section 469 are examples.

Some of these late elections are addressed by particularized provisions, but most require a letter ruling from the IRS Chief Counsel issued under Reg. 301-9100. This is known as “9100 relief.” Each Technical Division of the Chief Counsel National Office (Corporate, Passthroughs, etc.) generally has one or two attorneys who superintend the issuance of 9100 relief.

The main thing they look for in issuing the rulings is whether the taxpayer is using “hindsight.” That is, a taxpayer cannot wait to see if the facts change, making a retroactive election advantageous. Rather, the taxpayer must be asking to make an election that it intended to make initially, or would have intended to make initially, based on the then existing facts, if it had been properly advised.

The “properly advised” part is where the process can become difficult, because obtaining 9100 relief generally requires some inside or outside tax advisor admitting to making a mistake. This can be difficult and sometimes results in the tax advisor procrastinating when the taxpayer should be applying for 9100 relief. That is why it is often advisable for a taxpayer who has missed an election to use a different outside advisor to seek 9100 relief. As the negotiation experts say, that permits the new advisor to care, “but not too much.”

A VAT in Your Future?

Over 20 years ago, a congressman was defeated apparently because he had spoken favorably of a VAT. Today the word has surfaced again. This time, revenue needs may impel its adoption.

All developed nations have VATs, mostly in conjunction with an income tax. The United States started its tax history mostly taxing imports by customs duties. When the need for more revenues arose, the income tax was chosen in part because liability for it rested on the ability to pay: you did not pay unless you had income. In contrast, a VAT falls on the rich and poor alike.

The operation of the income tax, however, has largely resulted in the United States taxing our own exports, and not taxing imports due to a variety of methods by which foreign vendors can reduce U.S. tax on their products. This seems like an upside-down approach and is opposite to the period of reliance on customs duties. A VAT could impact that anomaly.

The most telling practical objection to a VAT is that it would require a whole new collection system, sort of like when GM created Saturn. Of course, many countries have both systems, so it cannot be all that hard.

But the perceived difficulties will tend to promote interest in a subtraction method VAT, rather than a credit method VAT. The subtraction method allows the tax to be collected totally at the business level, and can look like an income tax, with several big exceptions: Businesses will deduct capital expenditures and will not depreciate property.

Businesses will be very interested in a subtraction method VAT if (1) it is coupled with substantial reduction in the corporate income tax, and (2) it does not require inclusion of borrowed money. The latter is a feature of a pure consumption tax.