IRS WITHDRAWAL OF PROPOSED TIONS CONCERNING THE TREATMENT OF CONSOLIDATED SAVINGS UNDER THE NORMALIZATION REQUIREMENTS OF THE INTERNAL REVENUE CODE WEDNESDAY, SEPTEMBER 11, 1991 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON SELECT REVENUE MEASURES, Washington, DC. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 1100, Longworth House Office Building, Hon. Charles B. Rangel (chairman of the subcommittee) presiding. [The press release announcing the hearing follows:] FOR IMMEDIATE RELEASE PRESS RELEASE #7 SUBCOMMITTEE ON SELECT REVENUE MEASURES COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES 1102 LONGWORTH HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 TELEPHONE: (202) 225-1721 THE HONORABLE CHARLES B. RANGEL (D., H.Y.), CHAIRMAN, COMMITTEE ON WAYS AND MEANS, U.S. HOUSE OF REPRESENTATIVES, ANNOUNCES A PUBLIC HEARING ON THE INTERNAL REVENUE SERVICE'S WITHDRAWAL OF PROPOSED REGULATIONS CONCERNING THE TREATMENT OF CONSOLIDATED TAX SAVINGS UNDER THE NORMALIZATION REQUIREMENTS OF THE INTERNAL REVENUE CODE The Honorable Charles B. Rangel (D., N.Y.), Chairman, Subcommittee on Select Revenue Measures, Committee on Ways and Means, U.S. House of Representatives, announces a public hearing on the withdrawal by the Internal Revenue Service (IRS) of its proposed regulations concerning the treatment of consolidated tax savings under the normalization requirements of the Internal Revenue Code. The hearing will be held on Wednesday, September 11, 1991, beginning at 10:00 a.m., in the Committee': main hearing room, 1100 Longworth House Office Building. "Not In announcing the hearing, Chairman Rangel stated: surprisingly, the IRS's withdrawal of its proposed regulations on the normalization of consolidated tax savings has generated considerable confusion among utilities, ratemaking commissions, consumer advocates and other taxpayers. The Subcommittee is interested in receiving testimony regarding why the IRS withdrew its proposed regulations and what the state of the law is given that withdrawal." Public testimony is invited. However, because of time constraints, the Subcommittee would like to encourage individuals and organizations to submit written statements for the Subcommittee's consideration and for inclusion in the printed record of the hearing in lieu of testifying. BACKGROUND Historically, there has been a great deal of controversy regarding whether a normalization violation occurs when a ratemaking commission requires a utility to reduce rates to reflect the tax savings that result when the utility files a consolidated return with unregulated affiliates. Tax savings may result, for example, when the unregulated affiliate has net operating losses or qualifies for certain investment-based incentives, such as accelerated depreciation, that reduce the consolidated tax liability of the affiliated group. In the early 1980's, the IRS issued several private letter rulings in which it ruled that ratemaking commissions generally cannot require utilities to reduce cost-of-service or rate base to reflect consolidated tax savings without violating the Internal Revenue Code's normalization requirements. In 1988, however, the Commonwealth Court of Pennsylvania held that ratemaking commissions could require cost-of-service adjustments as long as the adjustments did not exceed the utility's current tax expense. Continental Telephone Co., of Pennsylvania v. Pennsylvania Public Utilities Commission, 548 A. 2d. 344 (Pa. Commw. 1988). The IRS subsequently withdrew letter rulings it had issued and opened a regulations project on the normalization of consolidated tax savings. The IRS issued its proposed regulations on the issue in November 1990. If these regulations had become final, a ratemaking commission generally would not have been able to reduce a utility's tax expense for ratemaking purposes to reflect the tax savings attributable to filing a consolidated return without violating the normalization requirements. However, the ratemaking commission generally could have reduced the utility's rate base to reflect those tax savings. -2 The IRS withdrew its proposed regulations on April 25, 1991, and closed the regulations project "pending Congressional guidance." The Subcommittee will review why the IRS withdrew its proposed regulations and what the current state of the law is given that withdrawal. DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD: Individuals and organizations interested in presenting oral testimony before the Subcommittee must submit their requests to be heard by telephone to Harriett Lawler, Diane Kirkland, or Laura Cook [(202) 225-1721] no later than close of business Wednesday, August 28, 1991, to be followed by a formal written request to Robert J. Leonard, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. The Subcommittee staff will notify by telephone those scheduled to appear as soon as possible after the filing deadline. Any questions concerning a scheduled appearance should be directed to the Subcommittee [(202) 225-9710]. Persons and organizations having a common position are urged to make every effort to designate one spokesperson to represent them in order for the Subcommittee to hear as many points of view as possible. Time for oral presentations will be strictly limited with the understanding that a more detailed statement may be included in the printed record of the hearing (see formatting requirements below). This process will afford more time for Members to question witnesses. In addition, witnesses may be grouped as panelists with strict time limitations for each panelist. In order to assure the most productive use of the limited amount of time available to question hearing witnesses, all witnesses scheduled to appear before the Subcommittee are required to submit 150 copies of their prepared statements to the Subcommittee office, room 1105 Longworth House Office Building, at least 24 hours in advance of their scheduled appearance. Failure to comply with this requirement may result in the witness being denied the opportunity to testify in person. WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE: Persons submitting written statements for the printed record of the hearing should submit at least six (6) copies by the close of business, Wednesday, September 25, 1991, to Robert J. Leonard, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements for the record of the printed hearing wish to have their statements distributed to the press and the interested public, they may provide 100 additional copies for this purpose to the Subcommittee office, room 1105 Longworth House Office Building, before the hearing begins. SEE FORMATTING REQUIREMENTS BELOW: Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee. 1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages. 2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee. 3. Statements must contain the name and capacity in which the witness will appear or, for written comments, the name and capacity of the person submitting the statement, as well as any clients or persons, or any organization for whom the witness appears or for whom the statement is submitted. 4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record. The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms. Chairman RANGEL. Would the guests please take their seats so we can get started? Today, the subcommittee will hold hearings on a request by Chairman Rostenkowski that we look into the question of the withdrawal of the proposed regulation that had been issued regarding the treatment of consolidated tax savings under normalization requirements of the Internal Revenue Code. The Internal Revenue Service withdrew these proposed regulations on April 25, 1991, and closed its regulations project on this issue, pending congressional guidance. The withdrawal of these proposed regulations produced a great deal of confusion among regulated companies, ratemaking commissions, consumer advocate and other taxpayers. Therefore, the subcommittee is anxious to hear testimony as to why the proposed regulations were withdrawn, whether or what type of congressional guidance is needed, and what is the current state of the law, given the withdrawal. Our first witness is the distinguished Deputy Assistant Secretary for Tax Policy, Michael Graetz, and I'm looking forward to hearing the testimony and learning exactly why the proposed regulations were withdrawn, as well as what your legal opinion is as to the status of existing law. The normal time limit that is given to witnesses will be waived as it relates to you, because of the complexity of the subject matter. The chair yields to Mr. Andrews. Mr. ANDREWS. Thank you, Mr. Chairman. Just very briefly I want to add to the chairman's remarks. I think this is an issue of vital importance. It's become apparent to me, over the last week or so, in studying and learning about the issue that proper normalization of treatment of utility costs not recovered through ratemaking is a vital issue; an issue with serious implications to my constituents, to our country's public utilities, and consumers across this land. The Internal Revenue Service has withdrawn proposed regulations addressing the issue of treatment of consolidated tax adjustments under the normalization requirements of the Internal Revenue Code. This withdrawal, coupled with the revocation of several private letter rulings addressing this issue has, frankly, left utilities and regulators without guidance on the consistency requirements. The resulting uncertainty has led to considerable confusion of how Federal tax expenses are treated for ratemaking purposes. The question before us today is whether the Department of Treasury should reopen the regulation project addressing the treatment of consolidated tax adjustments, or whether any legislative action is necessary at all. I look forward to the testimony today. Mr. Graetz, I look forward to hearing your comments, in particular, and look forward to hearing from all the witnesses on this important issue. Thank you, Mr. Chairman. Chairman RANGEL. Mr. Sundquist. Mr. SUNDQUIST. Thank you, Mr. Chairman. First, I would like to seek permission to insert in the record an opening statement by our ranking Republican Guy Vander Jagt. Chairman RANGEL. Without objection. [The prepared statement follows:] детебяжь Досева INTRODUCTORY STATEMENT OF CONGRESSMAN GUY VANDER JAGT At the Hearing of the Select Revenue Measures Subcommittee of the Committee on Ways and Means, U.S. House of Representatives, Concerning the Internal Revenue Service's Withdrawal of Proposed Regulations Concerning the Treatment of Consolidated Tax Savings Under the Normalization Requirements of the Internal Revenue Code September 11, 1991 Mr. Chairman, at the outset of this important hearing, I have some observations which I would like to offer on the topic of today's hearings. As stated by Chairman Rostenkowski in his letter requesting the Subcommittee to hold these public hearings, it will be helpful for the Subcommittee to get to the heart of why the I.R.S. withdrew its proposed regulations regarding consolidated tax savings and normalization, so that we can better appreciate the current state of the law given that withdrawal. First of all, I believe the Service acted correctly in withdrawing the proposed regulations in April of this year, because they were fundamentally flawed. The proposed regulations would have permitted the reduction of a utility's rate base by the amount of the tax saving realized by the utility from filing a consolidated federal income tax return with non-regulated affiliated corporations. Implementation of that portion of the proposed regulations would have been inconsistent with the normalization method of accounting, which has been required of public utilities since 1969. Let me briefly describe the background of tax normalization. Normalization Normalization is a rate making concept designed to adjust a regulated utility's operating expenses in its test year by eliminating abnormal, non-annual events that are known and certain to change in a regularly recurring manner. Normalization as it applies to income tax expense permits a regulated utility to include in its current cost of service an income tax expense higher than that which it has been required to pay, on the assumption that taxes saved by accelerated depreciation or other tax incentives of a timing nature are merely being deferred. Tax expense computed under normalization is the sum of the utility's current tax expense and deferred tax expense. Essentially, under normalization, rates are set on the basis of the higher income taxes the utility would hypothetically have paid, had it used straight |