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ADR and the IRS: What Would It Mean for the IRS and for Taxpayers?



Washington, D.C.

Friday, June 19, 2009



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(9:03 a.m.)

MR. BERGIN: Good morning, everybody.

PARTICIPANTS: Good morning.

MR. BERGIN: Welcome to the latest in Tax Analysts series of discussions on key issues in tax policy and tax administration. The topic for today is whether the IRS should rebuild and modernize its alternative dispute resolution or ADR processes, and if it did, what would that mean for the IRS and for taxpayers?

I'm Chris Bergin, the president of Tax Analysts, the nonprofit publisher of Tax Notes, Tax Notes Today, State Tax Notes, Tax Notes International, and many other fine print an online products on federal, state, and international taxation.

We also recently began sponsoring, a web site for the citizen taxpayer that is informative, and it's actually fun. I invite all of you to check it out. This is our seventh year of conducting discussions on tax policy and administration.

If you are new to our discussions, let me say first it's great to have you here.

Let me also just take a moment to explain our process today. I will open things up with some brief remarks to introduce our topic. I will then introduce our distinguished panel of speakers. Each of them will address aspects of our topic. After that, we will open up the discussion to all of you, and we encourage all of you to participate.

We are streaming audio of this event on our web site, and we will post both the audiocast and a transcript there.

For media purposes, we are on the record, so when I recognize you, please tell us who you are. Also please speak into a microphone. If you are away from the table, we will quickly get a hand-held mike to you. I will moderate the discussion, and we will end by 10:30.

Now on to the subject at hand. The inspiration for our discussion today is an article that appeared in Tax Notes in March titled "Jousting With the Tax Man: An Extreme Makeover, IRS Addition." That article provided the conceptual framework for overhauling the IRS's alternative dispute resolution system to bring it in line with proven ADR principles used in the commercial world and other federal agencies.

The author of that article, John Klotsche, who is one of our speakers today, argued that the current IRS system is antiquated and too confrontational, and it does not do a good job of advancing the Agency's mission of promoting a high level of tax compliance. I'm sure some would disagree, and John himself noted that the devil is in the details. Back in March he promised us a part 2 to his article that would present details of his proposed makeover of the IRS's system. In his remarks today, he will outline his initial thoughts as to what those details would include.

Let me just make two more points, and then we can hear from our speakers. The first one -- and I make this with some trepidation sitting between two former IRS commissioners -- is at a conference we held about a year ago, someone observed that the IRS is really good at what it does, but it has a little trouble accepting change. I sort of buy into that thesis myself.

We're not here today to advocate that the IRS change its ADR system but rather to discuss the possibilities of change and encourage all points of view, which is what our conferences are about.

Second, while we may often discuss ADR in the corporate controversy context today, I just want to remind everybody it can apply to every taxpayer, and that's why it is so important.

Now let me introduce our speakers in the order in which they will speak:

John Klotsche served as senior advisor to the IRS commissioner from 2003 to 2006 and as senior international adviser from 2007 to 2008. Before that, he was a partner for many years at Baker, McKenzie and is currently a partner at Caplin & Drysdale in Washington, D.C.

Armando Gomez started his career at the IRS-T Council's Office and also served as counsel to the Commission on Restructuring the IRS. He's a partner with Skadden, Arps in Washington, D.C. Among his many responsibilities there, he represents clients in federal and state tax controversy matters.

Don Rocen was deputy chief counsel for operations in the IRS from 2004 to 2007. He also served as assistant to IRS Commissioner Larry Gibbs and worked for many years as a co-leader of national tax practice at PriceWaterhouseCoopers. He is now with Miller & Chevalier in Washington, D.C.

Let me first thank our panelists for being here today. John, would you please get us started? Just let me remind everybody, you have -- everybody has a package here? Okay, and I think John is probably going to refer to it.

MR. KLOTSCHE: Thank you, Chris. This one's on, is it? Thanks very much. We certainly appreciate the opportunity to get this topic before, hopefully, a lively discussion this morning.

I got interested in this subject when I was over at the IRS about three, four years ago, and a couple of things triggered my intrigue and my interest. One was I began to see the process, the dispute resolution process, as it worked from the inside over at the IRS; and I began to see some of the data, some of the statistics that were coming out of the IRS. And one of the handouts you've got puts forth some of those statistics and some of that data, and we'll be referring to that very shortly.

Secondly, my background has been controversy, tax controversy, handling major cases in the private sector over many years. And I've reached the conclusion that that practice and that paradigm, if you will, is just not acceptable to most of the corporate world today anymore, and that they are desperately -- they've been the tax directors, to CFOs, and the senior executives of large companies -- are desperately looking for a new mechanism to bring these disputes to a quick, quiet, and cost-effective mechanism driven in large part by the changes made in 2002, Sarbanes-Oxley and more recently Fin 48.

And I do echo, I do want to echo Chris's point one more time, and that is most of the -- I think most of the people in the room here, and certainly as I look around the table, the speakers -- Don and Armando and Swenson, and a few others -- our experience is in the corporate world, but my interest in this topic and the article that was published in Tax Notes was meant to be a much broader policy, raise a much broader policy issue in terms of ADR as it applies to all taxpayers, not just the corporate world but the Small Business world with -- we've got our former Commissioner here, Kathy Petronchak, from Small Business/Self-Employed, and even the not-for-profit world, the IRS, just within the last four or five months, has put forth, brought out a fast-track program, if you will, for the Tax Exempt/Government Entities community.

So it's, this topic of ADR has a much broader application than just the corporate community.

The next point -- and I'm not going to go through the article. I had hoped that many of you had a chance to read it, but the thesis of the article was, was change. My judgment and my experience suggest that while the IRS is notionally committed to ADR in resolving disputes, -- that commitment has not been -- it's not working with the current structure in place, the programs in place. They have six or seven different ADR programs, and those are outlined in some of the materials here.

My conclusion, from drawing on my experience in discussions with a number of people who have deep experience in the commercial world of ADR, which is a very successful dispute resolution technique, is that three changes ought to be considered to the IRS programs, drawing again on the experience from the commercial world.

The first change was very simply the timing of the process. The two main programs over at the IRS, the mediation program and the arbitration program, are called post-Appeals, and they're called that because the practice doesn't take place.

The ADR process, whether it's mediation or arbitration, doesn't kick in, taxpayers can't invoke it until the Appeals process has run its course and until there's not any impasse between the government and the taxpayer.

That can be a long period of time. That can be eight, nine years after you file a tax return for big companies: five years at audit, two or three years at Appeals. It can be a long time.

My perception or my sense is that we ought to think about changing that timing of that and move it upwards, closer on, earlier on to the beginning of the -- at the end of the exam or the beginning of Appeals. That was point number one.

Point number two was that we ought to think about making -- at mediation not arbitration, but mediation mandatory. That's the way it's done in most federal courts, that's the way it's done in most state courts. And the fundamental point here is that mediation by its terms and by its practice is a nonbinding procedure, so it's a little bit of a no-harm, no-foul. Why not require the parties to sit down with a third-party mediator, go through the process. If it doesn't work, then you go back to the normal adversarial process.

That was point number two. Point number three was, and probably the most difficult I think for the IRS is the independence issue. Mediation and arbitration in the real world, commercial world, is conducted by truly independent neutrals. They have no links, no ties, no biases to the parties.

Now, when we look at the IRS program, we can't say that because in most of the programs -- certainly all the fast-track programs -- the mediator is an IRS employee, an Appeals person, Appeals employee, Appeals officer. That's true also of the post-mediation program, and we don't have to get into all the details, but the point, the major point here, is that if we're going to draw on the experience from the commercial world, the successful commercial world, we ought to be thinking about bringing some level of independence to the program.

So that's the fundamental point of the article. And, as Chris said, we're scheduled to put out point in part 2 of the article, and one of the reasons that I welcomed this forum or the roundtable today was to get some insight and get some input into what those details would be when we put it out.

One or two of the handouts that you've got today get into a structure which I am giving some serious thought to in terms of what I think part 2 of the article may look like. The handouts I'm talking about is called IRS ADR Center. It's just one-page bullet point. And the second one is the chart here, the blue chart, which is fundamentally just a depiction of what the IRS ADR Center is.

And let me just take you through that, and my hope is that this particular ADR Center, if you will, this proposition, will provide a fundamental talking, or place, to begin our discussions today.

It does, incidentally, or at least in my judgment, the ADR Center, the idea of an ADR Center, does allow us to capture the three points that I just mentioned: the timing issue, the independence issue, and the mandatory mediation issue. It does allow us to think about bringing those into context of a new entity.

So what is it? Here's what the center is all about, it's a new concept. In IRS terms it would be a new unit, if you will, of the IRS. Its fundamental mission is just to oversee all of the ADR activities that take place at the IRS. I don't envision this as being a mammoth bureaucracy, but staffed, if you will, by a relatively small number of administrative people who just oversee the cases that come into the ADR Center. I don't know what the number would be, whether it would be 10 or 20 or 50. A lot I think would depend on the volume. But it would be an administrative function from the employee standpoint, point number one.

Point number two, today taxpayers, when they finish up their exam, their audit -- whether it's companies, individuals, it doesn't matter -- have two choices: They can take their case to Appeals and go through that process and hopefully get it resolved; or they can go through, straight into court and litigate the issue or to resolve it with counsel or whoever the opposition is at that point. Two options: Appeals or courtroom.

Here with the ADR Center what I am proposing is a third option: That the taxpayer can go to Appeals, can go to the ADR Center, or can go directly into court. If the taxpayer chooses the ADR Center, there's two choices, and you'll see that on the diagram here, two choices in the ADR Center. One is to start with mediation, nonbinding mediation, and if that's not successful, then go to arbitration, binding arbitration.

So you start with mediation and go to arbitration, or you start with mediation, and if you don't want to arbitrate and the mediation is not successful, then you go straight to court. That's the boxes on the far left side -- excuse me, the far right side.

The alternative in the ADR Center -- and this is something that I've come to understand from the commercial world of ADR, is a linked mediation/arbitration process. It's called med/arb in the commercial world. And what it is, and it's by consent, by agreement of the parties, what it is is an agreement in advance, once you get to the ADR Center an agreement between the taxpayer and the IRS, that to do both mediation and arbitration, in the sense -- and link them -- in the sense that if the mediation is unsuccessful at the ADR Center, then the process automatically defaults or automatically goes to binding arbitration. It's agreed to in advance that it will be linked.

So the case will get resolved at the ADR Center either at the mediation level or at the arbitration level.

Now, what I've understood, and it's a practice that I think is used relatively commonly in the commercial world, is that -- and the reason it's caught on is very simple -- that is, the -- just the thought, the understanding and the idea that there will be binding arbitration if the mediation is not successful has, apparently, a powerful impact in terms of resolving the case at the mediation level. In other words, the facts that the parties know that if they don't resolve it, they have to go into a binding mediation tends to have a very salutary and positive impact at the mediation level. But anyway it's an option, as I say. At the ADR Center you could do either the linked mediation/arbitration or just mediation and then decide whether you want to do the arbitration.

That's the idea. That's the fundamental concept of the center.

In terms of the independence issue, what I have in mind is the, if we would -- or the organization, the independence, and the neutrals would not be a part of the center itself; they would be totally outside. It would be a pool that would be carefully selected of, I don't know whether it would be 50, whether it would be 100, 150, I don't know what the number would be, but it would consist of a pool of former judges, retired judges, practitioners -- it could be retired, it could be active -- certainly former IRS chief counsel, former Justice Department, former government people, a large pool of trained, highly trained and experienced in the field of ADR and probably also some tax experience. I don't think that's critical, in my judgment that's -- the critical point is to have the ADR mediation and arbitration experience.

I've drawn -- some of you may be familiar with an organization called JAMS, J-A-M-S. That's where I'm drawing some of my thinking on this. I've had some experience with them. They function in the -- it's profit, a for-profit organization. There's 250 members, they're all full-time, and they're all around the country. It's former judges, former practitioners who have given up the practice to be full-time mediators or arbitrators. I believe it's a very, very successful organization, and they are called upon in many cases in the commercial world to assist in resolving complex commercial cases.

So that's the idea in terms of the dealing with the independence is to develop and draw on a significant pool, if you will, of outsiders.

I think at that point I'm going to turn it over to Don. I just want to, just in terms of the handouts, or I guess --

MR. BERGIN: Hold on a second.

MR. KLOTSCHE: But the handouts -- I mentioned the two on the ADR Center -- you've also got in there a made by Manufacturers Alliance (MAPI), some questions from a survey, five questions. This is a survey that was conducted by MAPI earlier in the year. It was corporate membership, and I've selected five questions out of, I think, 29 or so. My colleague and friend Don reminded me that we have to be very careful, or certainly careful with the data here because the sample is not deep. I think -- I know that there were 51 companies that responded to this, but having said that, the responses on each of these questions varies, the number, and generally it's in the range of 20 to 25. And one of the questions is only eight respondents, so I think we need to be a little bit careful.

But it is what it is. It's a survey that was undertaken by MAPI, specifically, with respect to some of the issues that are certainly of interest to me.

The other document you've got in your packet I think is very instructive, the data sheet, if you will. It gives you some information on two levels.

Number one, it gives you some information on the volume of activity at the Appeals -- in the Appeals Office today, and it, frankly, is staggering the number of cases, about 100,000 a year coming into there, and usually about 100,000, maybe a little less going out of there. There's a backlog today of about 60,000 cases at Appeals.

For those of you who are aware, there's only about 800 people at Appeals that manage these, decide these cases, so they've got some -- they've got some serious volume, and there's some serious delays over there. Companies will spend three, four, or five years trying to get their cases through that process.

The second group of data at the bottom is what I would call the 80-yard data, and that just goes to show you what the level of activity is at the IRS ADR. And it's infinitesimal, infinitesimal, if you will, compared to the volume of cases at Appeals and in the IRS.

So that's the -- that's the information you've got, and I think at that point -- there was just one other comment, Chris, I'd make. I noticed your brochure you start out here on the very first line, "Today we'll have a discussion on whether to use alternative dispute resolution." I only question, or I'd take issue with one, the word "whether." I think that really the word is "how," because the IRS has got programs in place.

They've got four, five, or six programs in place. They say they're committed to the program or the ADR concept, so there's no question about that, we've heard that from the commissioner so to my way of thinking, it's really getting the right structure, getting the right programs in place to make it work a lot better than it is today.

MR. KAPLAN: John, isn't it true that by statute the IRS is obliged to have an ADR program?

MR. KLOTSCHE: Yeah, the '98 restructuring act was about in -- it's a general call to the IRS, a general mandate to the IRS to develop ADR programs. But it's a pretty soft mandate marked -- but, yes, the answer is yes.

MR. BERGIN: Armando, do you want to react to this idea?

MR. GOMEZ: I'd be pleased to. Thanks first, Chris, for having me here. I had to say for someone, to use John's term, who makes a living jousting with the IRS, I find myself in the unusual position of perhaps defending them a little bit today. But I'll do what I can.

I guess as a starting point I'll start with the last thing that John just said about, you know, is whether or how to pursue ADR with the IRS. When I think of Appeals, just traditional Appeals, it is alternative dispute resolutions. Their mission, the page put on their web site, is to settle tax disagreements without having to go to court. That I think is the essence of alternative dispute resolution.

And, you know, if you set aside some of the large case and coordinated cases, the vast majority of cases that go through Appeals get resolved in about a year or so, which is pretty quick if you think about the alternative. You know, certainly for larger cases, big companies, which tend to be the type of clients that I represent, it takes longer to get through Appeals. John said, three, four, five years. That's not my experience. I think the majority of cases, large cases that go through Appeals get in and out of Appeals in about two years.

Certainly, you can have more complicated cases, there can be things that slow cases down. I've had clients a few years ago with cases that got bogged down where there were issues that were in the courts, and it was slowing down Appeals ability to decide how they wanted to resolve things.

But, you know, if you think about big cases for very large companies being resolved without having to go to court and all that is involved with that in two years or even three years, that's still pretty quick. And so, you know, that's just traditional Appeals. I think, you know, beyond sort of the traditional Appeals, don't forget that, you know, over the last decade or so the IRS has rolled out a number of programs to expand the way cases get resolved, many of which happened while John and Don were in the government.

But everything from expansions of the prefiling agreement programs, the CAP program for large taxpayers, SAF track, which is started earlier, but it's certainly expanded quite a bit in the last decade. Early referral, and then more recently the post-Appeals mediation/ post-Appeals arbitration programs, there's a lot there, and in addition to the things that are there I know that when there are complicated cases, the folks at Appeals are usually, you know, willing to explore hybrids, sort of, you know, unique ways to deal with cases which can happen when you, say, have different cycles, some in Appeals, some in exam, maybe some that are docketed, and trying to get it all worked out.

So, you know, I think the organization, not just Appeals but the IRS generally, has taken to heart over the last 10, 12 years, a mission of trying to get things resolved, trying to get decisions earlier in the process. And I won't say that everything is running perfectly, but, you know, certainly I think that, you know, they have -- they have come a long way.

I was going to use Mark Twain's quote about statistics: Lies, damn lies, and statistics. John did point out that, you know, the MAPI survey had a pretty small survey base. And so I'm always very skeptical of statistics. I do think it is useful when you get surveys, not just to see the numbers but to the extent that surveys call for subjective responses, to see, you know, what is it that respondents put in. I don't know if there was much of that in the MAPI survey.

There was another survey done a couple of years ago by the American Bar Association Tax Section, and if you read to the back of that, there's a lot of subjective responses. And it's interesting sometimes to read through those to hear sort of the tone that comes across, because I think that when you just look at the raw numbers, you know, I think a lot can be lost in translation.

But regardless of where the numbers come out, if Appeals traditionally is resolving somewhere between 80 and 85 percent of the 100,000-plus cases that come through each year, that's pretty good. And so, you know, I wouldn't say that the system is broken or isn't working if you've got such a high proportion of cases that are being resolved.

You know, another thing that is worth looking at when you look at the data of 100-to-110-thousand cases on their docket is, you know, what's the makeup of those cases? I think about one-third or so of those cases are collection/due-process cases; maybe about 10 percent of those cases are offers-in-compromise cases; less than one percent are large case, big corporate taxpayers.

And so, you know, to say that Appeals has got 100,000 cases without breaking it down and understanding what are the types of cases, and I'm thinking, well, what's the best way to get those types of situations resolved.

I'm not sure that mediation programs are necessarily going to be the way to solve large segments of the cases that are in Appeals.

One more thing I guess I would say before commenting on John's proposal is about Appeals' independence. The commissioner is right. The '98 Act directed the IRS to -- I love this quote from the statute -- Section 1001 of the '98 Act, ". . . that the Commissioner's reorganization plans show, ensure an independent Appeals function within the IRS." How you have something independent within an organization is -- is one of those things that maybe DesCartes could have figured out, but I never will.

MR. CAPLIN: Wasn't there a general statute from Congress --


MR. GOMEZ: But, you know, the notion of independence, you know, I think part of what you need to think about is what is the role of Appeals. And if the Commission of Appeals, as I said, is to try to settle tax cases before going to court, what you need to have in an Appeals officer is someone who understands the system, understands the law, can assess both sides of the case and try to make some judgment on hazards of litigation and resolve the case. As I said, if 80-85 percent of the cases are going to resolve, that's pretty good numbers.

Certainly, I think, those of us in practice, we've all seen Appeals officers in situations where, certainly, the perception is the Appeals officer is on the same team as compliance. But all of this about independence, for the most part, is simply about perceptions. It is very hard to get inside the head of the Appeals officer and know what's really going on there. I suspect that if I were to poll my clients who I've taken through Appeals, the ones who were more concerned about Appeals independence are probably the ones who the least happy with the outcome in their case.

So, you know, again it's really a perception thing. That said, it's something that has to be worked on. Certainly, the ex parte rules, I keep hearing that they're going to update some guidance on that, and maybe one day when all the government positions get filled, that'll happen. But that's certainly an area where I think that the service can be better.

I was told that earlier this year within, I believe, both Large and Mid-Size Business and SB/SE, there were some significant daylong training programs for the compliance personnel on understanding what ex parte is all about, and, you know, how they should and should not be interacting with Appeals when cases they worked on have moved into Appeals' jurisdiction. And those are all good things, and perhaps the next time some surveys are done, if the data is to be believed, it might be better.

So, you know, in terms of what John as tee'd up, you know, I start with the premise of: Don't fix what isn't broken.

You know, where could things be improved? You know, certainly, there a lot of cases that are docketed both in the Tax Court as well as in the district courts and the Court of Federal Claims.

And, you know, finding a way to -- which, you know, I -- I can't say that I know what the Tax Court is doing, but I believe just about every district court in the country, you know, the initial scheduling order will direct the parties to consider mediation.

HONORABLE MILLER-PARR: I don't think that's the Tax Court --

MR. GOMEZ: The Tax Court -- okay, Judge Parr says the Tax Court doesn't. Well, they should. But district courts are doing that. It's a trend that the courts had adopted, and I think that certainly telling people that if you're, you know, at the outset of the litigation, directing them to at least consider it is something that definitely should be done.

I think that, you know, certainly improving access to fast-track and the other initiatives to try to get cases resolved faster, get them out of compliance and get them resolved are things that can be done. One of the problems that John hinted at is, you know, resource issues within Appeals. They are seriously understaffed. I think that the last chief of Appeals reported that they are on a hiring spree, so to speak, I think increasing their workforce by about 24 or 25 percent this year. It will take time for them to get those people up to speed and trained and understanding how to do their job.

But it's, certainly, getting them more resources, you know, hopefully will help.

The last -- the last point, and perhaps the one that troubles me the most with the notion of John's proposal to say that when you come out of an audit you go straight to this -- well, I guess you could choose to go either to Appeals or to this ADR Center -- is that I think one of the fundamental precepts of the way that our federal tax system operates is an expectation that similarly situated taxpayers are going to end up in about the same place. And I have confidence that when cases go through compliance and go into Appeals, while I know that you don't always get, you know, take two cases to Appeals and get slightly different outcomes, odds are they're going to be in the same ballpark.

If you take a large swatch of the 85 percent of the cases that are being resolved in traditional Appeals and let them go off to be mediated, first of all you're going to need a whole lot of mediators, but how are we going to know that the taxpayers, generally, are getting fair treatment? And are you going to get special treatment because you go into the mediation program and get the right mediator, who, you know, sees things your way rather than going through a program where Appeals decides cases on hazards of litigation?

So, I think, you know, doing more with mediation and even with arbitration in lieu of litigation is a great idea.

But, you know, taking it ahead of traditional Appeals is something that I think should be, if ever, done very carefully.

MR. BERGIN: Thanks, Armando. Don?

MR. ROCEN: Okay. Thank you, Chris. I appreciate the opportunity to be here. I have to say now, when John and I were colleagues at the IRS, I often wondered what he was doing.

Now I know. Be that as it may, I do have a lot of respect for John, and it's been a wonderful relationship that we've developed. And I think that the real advantage of John's proposal and taking on this subject is it does stimulate the discussion, and is discussion needed, I think so. I'm not quite sure that I would agree that as dramatic of a proposal as John is putting on the table, you know, should be implemented.

I side more with Armando's thinking in this regard. I mean I think that everybody -- and let's look at the goals that we're trying to achieve here. It seems to me that those are the important things. Timeliness. John mentioned one of the drivers in that regard is the financial reporting changes that have occurred over the last couple of years in particular, and a cost-effective system that allows taxpayers to participate in effective resolutions.

I think that the ADR is really the core of this discussion that underlies this analysis.

However, I think that mediation and arbitration are really just a segment of this, and what I would like to focus on in my brief time before we throw this open to discussion is fast-track. I am really a proponent of that program. Is it working as effectively as it might? Probably not. Should we drill down on that program and see if we can make it a more effective tool in the ADR arsenal? I firmly believe so.

I remember when it first came out in 2001 as a pilot program, and then it was formalized I believe in around 2003.

At that time I was in private practice, and a lot of the clients I had really embraced it. They were enthusiastic about this. It was an opportunity where issues, a handful of issues remained unresolved at the end of the examination.

And they had the opportunity to bring Appeals considerations into the process at that time as we all kind of refer to it "hazards of litigation." And you could get in a more informal setting this type of consideration brought upon your issues. You had Appeals there, the case was still in exam, you didn't have to go through the formal 30-day protest process, (off mike) didn't run, so there were a lot of pluses in this.

So I had anticipated at that time that this was really a program that was going to grow and really flourish. But I looked at the numbers and in fiscal years 2006, 2007, 2008, receipts in fast-track, and we're talking in LMSB environment here, okay? It's not available in the SB/SE and TE/GE type of cases, but right now we're talking -- those are in pilot modes.

We have receipts for, as I say, fiscal '06, '07, and '08 of cases, 79 cases, and 67 cases. It doesn't seem that there's been a real -- in fact, the trending is down, and there is not a real embracement, if you will, of this program.

At the same time, fast-track mediation had 78, 61, cases, respectively, again, not a real endorsement of the program. Be that as it may, I would suggest that a lot of discussion and thought should be given to why this isn't working, because in my opinion in concept this is a great tool.

And I suggest that, we look at some of the, issues that might surround the resistance of taxpayers to use the program.

I think we should look at the effect of the currency and cycle-time initiatives that have recently, you know, been implemented within the IRS starting with Commissioner Mark Everson. Is there a tendency by exam when they are given these goals, if you will, to say, you know, we can't involve a system into our case consideration that is going to take another four months in an 18-month or whatever cycle is used.

You know, is there a cultural bias on the part of the exam other than how it's going to affect the timeline of their processing cases for the use of fast-track? Does the waiver of ex parte, which is a condition for going into the fast-track program, does that present a barrier? And, you know, to kind of reflect what both John and Armando surfaced, you know, the independence issue.

Is there a concern on the part of taxpayers that they are not going -- maybe it's a futile effort because this is nothing more than a continuation of the exam?

And it's just going to tack more time onto the exam process. And they're better off just saying: Let's take my case once I get the 5701 to Appeals, and talk to Appeals or officers independent of examination.

So I think that those are legitimate -- and I'm sure there's others, I'm sure you all have your own thoughts on this matter -- but I mean these could be barriers, some more, some less, to the use of this program. But be that as it may, I think would do us well, do the service well, to take a look at it and say, you know, we pull up with a technique here, or we come up with a concept that could really assist in moving cases along. And we should see why it isn't being used as we would think it should be used. So that's my thoughts in that regard.

Again, I would like to say, kind of echoing with Armando said, I think we can put too much emphasis on the statistics that show the Appeals inventories. As a matter of fact, I went back and looked at some of the IRS statistical data, and for fiscal '08, as your handout indicates, 106,722 cases that were closed in Appeals, almost 60,000 of those were collection due-process, offers in compromise, innocent spouse, and penalty Appeals. And I submit nobody is going to use mediation or arbitration in that environment, okay?

Appeals is stuck with those cases, and it's a drain on their resources. And I think that the (off mike) has been a decision on the part of Congress that this is good, and in these cases you kind of move up that chain, but I think there has to be a recognition that that is really impacting the timeliness with which Appeals deals with cases, okay, that a restructuring, if you will, of the organization is not going to change.

So then, again I say it causes me at least to want to figure out how to deal with the coordination, the coordinated issue cases and the industry cases in a more effective manner.

Now, you know, maybe we want to think about things in the fast-track environment as, you know, should taxpayers have it as a matter of right? So that exam in certain cases might -- those who aren't enamored with the idea, those being revenue agents or team leaders they can't offer a veto of the program to the taxpayer. Should there be a dedicated group of Appeals officers that are -- they are trained mediators now -- but that they do not have any other involvement in any other Appeals cases?

They are just Appeals officers who are trained mediators that will be brought around to the various locations in the country to facilitate the fast-track process. Do we do away with this requirement that ex parte be waived? I don't see why that's necessary.

Anyway, and again I think that there are really factors to be analyzed as to why this tool doesn't work, and I think those should be explored before moving into an environment of changing how mediation and arbitration are currently used within the IRS. I, like Armando, am not a fan of moving into a pre-Appeals context. Appeals itself, as Armando has said, is an alternative dispute resolution process. It always has been, it has worked effectively, and I think that Appeals has the desire and has the the wherewithal to really analyze what it has now and how it can make it better.

It's working. Is it working as well as it could? I submit no, but I think that we should try to look at those processes. And I don't want to be viewed as a dinosaur, as an ex-IRSer resisting change. I'm for change, but I am for really considered thoughtful change, and not kind of a reactive change.

MR. BERGIN: Thanks, Don. I'm going to open up for questions now. Let me just remind people, this is a nice cozy room here, but to help the people who are listening on the Web, let's try to identify ourselves every time we talk, I do know that's going to get difficult, but give it a try.

HONORABLE MILLER-PARR: My name is Carolyn Miller-Parr. I'm a retired judge from the United States Tax Court. I've been doing mediations and arbitrations full-time since 2002, and I've done five post-appeal mediations representing large businesses -- well, not representing, I was a mediator, but I was hired by large businesses because the only way that you can get an outside mediator at the current time is if the taxpayer pays 100 percent of your fee. And you're required to co-mediate with a trained Appeals officer.

Let me say that I have had very good co-mediators in all of those cases. They have tried to be fair. They have not been people who worked on the particular case, but in many instances they did have friendships with the people who worked on the case -- they're going to see them at lunch tomorrow. You know, that's an issue.

I'd just like to talk a little bit about my experience about that in terms of whether the system is broken or not. First of all, the statistics are interesting because it tells you how many cases closed in post-appeal mediation, which you see is going down, down, down. But it doesn't tell you how many post-appeal mediations were actually conducted. And I would wager to say that it was many, many more.

The system has not, doesn't work very effectively in post-appeal mediations, in my view, and one of the big reasons is the independence issue. The parties are the taxpayer who is usually represented by counsel, who were not involved necessarily in the earlier tier negotiations. Usually, that person was in an accounting firm, a large accounting firm.

So they are getting some fresh eyes. The Appeals officer, on the other hand, who is representing himself, basically, is not -- there's no fresh eyes there. The Appeals mediator, supposedly, has fresh eyes, but the Appeals officers -- I've had this experience: You have your opening session, and you ask each party to state their position, and often the Appeals officers says: We've made our final offer. We think it's fair. We have nothing else to add. And you go through five or six hours of mediation, and that's where you come out, on the other end.

This is supposed to be handled by the supervisor of the Appeals officer being there, but they're trying to protect their own product. And sometimes it's fair. I mean sometimes they really have been generous, and the offer was fair, but I've seen this time after time -- the last time I got so frustrated I said to one Appeals officer, "How many of these have you been on?"

And he said, "This is my fifth." And I said, "How many have you settled?" And he said, "Well, none." And then he said, "I think we get a little dug in." So this independence issue comes up in that way in that I think if you're going to have IRS employees being involved in the mediation and post-appeal, it ought to be counsel, or it ought to be reassigned to another team of Appeals officers who do not come up with the original decision. That would be one thing I would say about that.

I'd also say that the process -- this is where ex parte rules come into being in a different way -- the mediator is not allowed to speak with the party ex parte before the mediations. That is not the way most mediations work anywhere else.

So you cannot get what their negotiating position is. You get their position, but you don't get what they really want. You can't find out, get any creativity about what they think about possible solutions. You can't ask them what do they think are their toughest points that they're going to have to work with, and what do they think are their strongest points?

What do they think about the other position's side? Those are all questions that a mediator usually asks and finds out before mediation so that it gives you a lot of tools to go in there and work with.

Everybody is just restating their position, and, similarly, they file mediation briefs with the mediator, but they exchange them. So it's not a confidential communication at all with the mediator. And that's really not how mediation works best.

Also, I want to take a little exception to the idea that Appeals officers are a great place to talk about hazards of litigation. I don't think Appeals officers generally understand what hazards of litigation is. I have -- not in the way attorneys understand it -- I had an Appeals officer tell me in a mediation not that long ago, there was a case that had come out in Tax Court that was absolutely favored the taxpayer in this particular issue, and I said, "How can you keep saying there are no hazards of litigation? Look at this case."

And he said, "Well, that's not a hazard of litigation, it was wrongly decided." You know they don't have to stand up there with egg on their face and be chewed out by a judge for, you know -- can you imagine a lawyer who would say that in front of a judge in a case?

I think John's proposals are very interesting. I want to say a couple of things about how they strike me. I hadn't really considered them in any depth, so I'd just like to mention this.

He wants to make it mandatory. I -- it's mandatory -- this is another problem from the IRS perspective, it's mandatory now for them. Their Appeals officers are not allowed to say, no, I don't think -- I'm not going to budge on this, we have it right. We don't want to go to mediation. If a taxpayer asked for it, they have to do it, but it could be a total waste of the taxpayer's money and time if they are really that dug in. And I think they ought not to have to go to mediation unless the case is transferred to another field officer.

There's no -- it's true that courts do require mediation, and maybe it should be required by the Tax Court or at that level, so, but you're going to have fresh eyes looking at the case when you have it at that level.

The expense bothers me because it's not cheap to get somebody like me or John in there mediating these cases, so when you bring in an outside mediator, you're talking about a lot of expense to the taxpayers. And I had felt bad when, you know, we've had this brawl with the IRS, and the taxpayers are paying a lot of money to bring not only me there, their counsel, their witnesses, their CEOs. In a way, it would be more helpful just to know the IRS wasn't going to move ahead of time or to at least have given them the choice.

I think med/arb is interesting concept. The only problem I see with it -- I've actually never tried one, so this is not speaking from experience -- but, and often times I know in mediations, they'll say, well, you just tell us what to do.

And people will say that once they trust you, you know, in different kinds of contexts, not in this tax context. It could work, but it also encourages parties to hold everything close to the vest if they think if they tell you what their bottom line is, and then you're going to be the arbitrator, you know, they may not want to tell you that.

So I think it may -- it may motivate people. If they're going to use the same mediator to be the arbitrator, it might motivate you to mediate just to get done with it. But on the other hand, I don't know how well it works. In a way, the concepts are opposed to each other.

And also, I think IRS is going to have some push back from this because they spent a lot of money, and they've trained a lot of Appeals officers to be mediators. So I think if you fail, the mediators have to be outside, as they probably would be for (off mike).

MR. BERGIN: Thanks for your perspective, Your Honor. This is Chris Bergin.

Generally, I want to put in two thoughts, something that Armando said and something that you said that I found interesting.

If I understood you correctly, you said that you didn't think it was necessarily important -- and I don't want to put words in your mouth -- that it was necessarily important for the mediator to know tax. Why do you think that? And would it affect -- well, Armando made the point about similar results.

MR. KLOTSCHE: This is John Klotsche. I know, Chris, from my experience in the commercial world, that I would think, just estimating, that in a majority of cases, the parties will be interested in having the mediator have some subject-matter expertise. But I also know that in almost virtually every case the experience in expertise in the mediation process and how that works is much more -- is more important than subject-matter expertise. And I know in a number of commercial mediations they will choose -- if they found the right mediator with the right background and experience in tools in the mediation area, that will trump in some cases the subject-matter expertise.

Now, what I am proposing here is to have a kind of a mixed bag, if you will, that the pool would have both tax people as well as non-tax people. So that choice can be made by the parties. But my experience in the commercial world is that the subject-matter expertise is not always essential.

MR. BERGIN: That's interesting.

MR. GOMEZ: Can I comment on that point?

MR. KEIGHTLEY: Yes, this is Jim Keightley, and I was the associate chief counsel for litigation for eight or nine years, and I actually managed the large case inventory for two or three years in the early '90s.

And the real tension between -- and I have listened to these debates now for probably 20, 25 years -- Sheldon nods, and Mr. Caplin nods, everybody, we've all been through this thing -- the real tension in this wherein why it doesn't work is that in the tax world, unlike the private community, there is this obligation for consistent treatment of taxpayers.

And I -- we managed our way through the Tax Court litigation with bigger numbers than are currently now in our Appeals in the individual tax shelter world. And regularly people, you know, you had to design a system where people got treated similarly. And I can tell you those big corporate taxpayers know their effective tax rate, and if somebody comes out with a better effective tax rate than somebody else, there's going to be a hell to pay. So that's a really, fundamentally, value-driven difference between the private world and the public world. And a lot of the delay you see in the system is that they are trying to coordinate and come up with a position that is similar to the position they have taken with other taxpayers who are similarly situated.

And then you get the ex parte context question, and, you know, how do you deal with that? But that's a really difficult tension that you have in the tax system, I think, why a lot of this doesn't work.

On a purely factual issue, you can do mediation and arbitration, or whatever you want to do, and a lot of these are legal positions that corporations are taking, and that's the serious issue and why I think you don't see these things working very effectively.

I'll tell you what, again going back to my experience as special counsel of a large case. At that time, Appeals and Counsel were all one organization. I had no authority to direct anybody to do anything, but every region had to come in and explain what they were doing, both Appeals and Counsel, with their inventory, of their top $10 million and above cases, probably 500 cases.

Just coordinating and getting the legal positions taken care of doubled the closure rate in one year just because somebody had to account to other people for what they were doing and what they weren't doing. Technical was at the table when we were, you know, after -- the technical issue that had to be resolved, you just said: We want that resolved by the next meeting.

But stronger management is a very effective way, and then you have to design a track that takes these big cases away from the individual cases, because the OIC and the due process -- there's only a limited amount of resources in the government -- and you have to decide how you're going to apply them and where you're going to apply them. And those small cases will drive out almost everything else if you don't work at it.

That's my only comment.

MR. BERGIN: We'll hear from Armando first. Let me just -- excuse me one second. I would remind people in the audience that please feel free to ask a question, make a statement.

MR. GOMEZ: Well, I have to agree with what Jim said in terms of, as the point I made in my opening remarks, for taxpayers to have faith in the system, they want to know that they're being treated the same way as other people out there.

And I certainly would worry about a large number of cases being resolved, or trying to be resolved by mediators or arbitrators who don't know a thing about tax law.

You know, my experience, I -- Judge Parr, I haven't had too many Appeals officer who didn't know the law in effect.

There's actually a lot of lawyers who are Appeals officers. They may not have tried cases, but they understand how to read a case, and I think that the better Appeals officers are the ones who will speak with the taxpayer and their representatives and say, you know, this is -- this is where you have problems.

You know, how do you deal with the fact that there's these three cases that say such and such? And when you have Appeals officers or even, if you had outside mediators and arbitrators, it would, certainly it happens in the post-appeals process as the co-mediator.

You can have people who come in who know the law and can make the points about the law to both sides. That shows them, you know, where their weaknesses are and hopefully drives them towards a resolution. I think just imagine no matter how good a judge they might be, but a judge who maybe had one or two tax cases in their career, never did tax work before they were a judge, and they're asked to help try to resolve a very complex tax case, you know, they could be a great mediator, but how are they going to be able to really convince both sides of the weaknesses of their case without doing just a massive amount of leg work to prepare? And that, I assure you, will be very expensive.

MR. BERGIN: And, John, did you --

MR. KLOTSCHE: Just a couple of quick points, Chris. On the subject-matter expertise, I would draw a distinction between mediation and arbitration. I think it probably is essential to have some subject-matter expertise in the arbitration area because a private judge, if you will, the arbitrator is going to be asked to render a decision. I think it's less so in the context of mediation because the mediator is playing a very different role in terms of facilitating. It's more of a facilitating the conversation, getting the parties together to think about creative ways to settle the case. That's point number one.

Point number two, on the consistency issue that Don and Armando have raised, I don't disagree that putting coordinated issues through this process is probably a very difficult and maybe unwise concept. But I want to keep the focus here that we're talking about a number of cases that are purely factual cases, the garden variety valuation cases, garden variety, if there's such a thing, intercompany pricing cases where the standard is arm's length.

These are economic issues, they're accounting issues. They aren't legal issues at all, and the coordinated issues at the IRS, there's big numbers, and don't get me wrong, the dollars are huge, but the cases aren't huge.

There are, on the other hand, an enormous number well below 100,000 -- Don is right, there's 30 -- a third of those are collection cases, but there are an enormous number of factually messy cases, evaluation cases that are ideal for this process, and that's what's sucking up the resources of the IRS is to deal with these enormously complicated factual issues.

And those are the ones I think are ideally suited for the process.

MS. GREENHOUSE: All I wanted is -- Robbin Greenhouse from McDermott, Will & Emery --

MR. BERGIN: Thank you.

MS. GREENHOUSE: I wanted to make several comments, one with response to, Don, when you were saying sort of your resistance factors.

MR. ROCEN: Um-hmm.

MS. GREENHOUSE: And I think another factor for your list is the Tier Issue Program. I think that that program has really created a bottleneck in exam in getting cases, you know, completed and through exam. With respect to fast-track, I think it's very difficult to settle tier issues in fast-track and may be difficult as well to settle those issues even in Appeals or post-appeals mediation. So I think as part of the process is how to fix the system.

MR. ROCEN: Right.

MS. GREENHOUSE: With respect to, John, your premise there, I think the devil's in the details. Just thinking through right now the delegation orders currently, you know, exam doesn't have authority to settle based on there's a litigation.

In fast-track, there's an Appeals officer there who blesses the settlement based on his authority. So what would happen, you know, under a program where there is no Appeals involvement?

Another thing is, would it have to be the entire case, or would it be selected issues? Maybe there is a very factual issue in a case, but, you know, under your system right now, the case if it doesn't agree, it has to go to court. So maybe you can't do all issues. Would there be another system for that?

I'm also very concerned if mediators don't have tax expertise. During the audit and taxpayers responding to IDR but not necessarily putting forth their position. Usually they're a first opportunity and maybe their first decision to do so would be in writing their protest. If they know that is a mediator that may not have any tax expertise, that's going to make writing that protest much more difficult to process and could be even more expensive for a taxpayer.

And then I guess finally no, those were my points, got them all. Thank you.

MR. BERGIN: Thank you. Steve?

MR. ROSENTHAL: Steve Rosenthal from Ropes and Gray. One observation, I listened, I liked when Don started his remarks trying to identify the goals of what we were trying to accomplish -- I always like starting there -- and Don identified a timeliness resolution and an efficiency of resolution. And I think both are important goals, but when I think there is another goal that is just as important, if not more important, and that's quality of the outcome.

We've heard in terms of a consistency on the outcome, that's one feature of quality. Another important ingredient is the need to protect the government's financial interest. We are facing huge fiscal challenges, and the menu of choices we offer taxpayers to resolve tax disputes will affect the country's fiscal collections from these matters.

I can recall in the late '90s there was an interesting coincidence of a push for a kinder, gentler IRS and a let's-make-a-deal attitude toward resolving tax controversies.

And I was at a large accounting firm and watching this unfold at the time that -- and it wasn't completely coincidental that there was an emboldenment of the tax shelter industry: Well, we can always get a pretty nice deal out of the IRS.

And so I think focusing on the quality of the outcome is critical here, and then stepping back -- and I'll just finally conclude with the big picture and the way I would evaluate circumstances in which an alternative dispute resolution would make sense and those in which it wouldn't, you remember a court of law is a dispute resolution. It just happens to be a very expensive one that offers lots of administrative burdens, time elements, things of that sort.

And, clearly, in what circumstances would we prefer an alternative dispute resolution like John suggests versus going to court? And I worry about circumstances in which the IRS will be systematically short-changed. The IRS already offers, operates under constraints of resources and expertise that the private sector does not, and in some instances I've seen the IRS simply outgunned because of lack of resources, not because of lack of case but because of lack of resources.

And you don't want to aggravate that problem by shifting yourself into a forum that makes it more problematic rather than less to address those issues.

MR. BERGIN: Okay, Sheldon, Armando, Don. I'm glad we got all this interest.

MR. COHEN: Sheldon Cohen. Back in the dim, dark, distant past there was a professor at Michigan by the name of L. Hart Wright. Hart Wright has written more on this subject than anybody else, and it's still pretty good. But Hart had the notion that the IRS ought to settle all cases with smaller taxpayers where there was a de minimus amount.

Now, the two commissioners at the table rejected that notion, not because it wasn't practical -- of course it was practical -- but it led to the lowest common denominator. And that's the kind of thing you face Steve is right in that respect.

I mean it's -- you've got to face the fact that you're going to affect the multitude, and that's actually more important than that big corporation, because the big corporation's going to get justice one way or the other, and you can't -- and the little guy can't. So you've got to deal with a system that deals more for him than the big guy.

Now, we only hear from the big guy because he is able to make his or her voice heard where as those little guys disappear into the night.


MR. ROCEN: As Steve has said, I certainly agree with the quality, the result. I guess my only reaction in thinking about it quickly, Steve, is the problem I think we face today with our tax system is exacerbated in terms of processing cases by the financial reporting requirements. I mean I know from my experience while I was the deputy, I mean there was a lot of discussion as to, by the large-case taxpayers, as to, you know: We have these burdens that we face in terms of financial report, and we cannot delay the process. We have to have certainty to the extent possible and as quickly as possible.

So while, you know, I certainly appreciate what you're saying. I think there has to be a recognition of the balancing there, that there are desires on the part of those that are subject to the reporting requirements of the Securities and Exchange Commission to get that kind of certainty. And how can the IRS deliver in that regard while, you know, upholding its fiscal responsibilities at the same time?

And one comment I'll just make in connection with Judge Parr in terms of the ability of Appeals officers to analyze litigation hazards, a lot of my experience would be that the last person that a tax person wants to see at Appeals is a Counsel.

They feel that Appeals officers are much better suited to assess litigation hazards. Once you put Counsel in there, they just, you know, kind of cause a fixated, if you will, approach, and they are more apt to draw the hard line than Appeals offices.

MR. BERGIN: Armando?

MR. GOMEZ: Yes, thanks, Chris. I guess one thing I wanted to turn to was, you know, going back to looking at the current system and where there are places where the IRS can do better. And I think, you know, Don suggested fast-track is one place where more can be done. And, you know, I think that it's probably fair to say that a large number of the cases where fast-track has attempted and fails is because Compliance is so firmly entrenched that they will not move.

And when you have, you know -- first, why do you have cases like that? You know, sometimes it's simply a personality issue; sometimes it's because it's an issue that is either coordinated or on its way to being coordinated, and Compliance just will not budge.

You know, the problem with fast-track when you have that situation, is the parties have devoted resources. It could be that the taxpayer is, you know, willing to agree to what's the fast-track person from Appeals thinks is a reasonable outcome, but because Compliance is entrenched, they don't get to resolution, but what happens, the case is still in Compliance, at some point they wrap it up, the taxpayer will then protest, they'll go to Appeals. Sometime a year later when they get their Appeals hearings, they'll make their arguments to a new Appeals official. Maybe they'll get an outcome similar to what they were, you know, willing to take in fast-track, but maybe not. But a lot of resources and time have been lost.

You know, I think that if the service would expand fast-track to say that if compliance doesn't agree and the Appeals official believes that a settlement is appropriate at the conclusion of the fast-track, they can impose it. I think, a) you'll get more success in getting fast-track cases resolved; b) I think you'll get a lot more takers for fast-track.

MR. BERGIN: Interesting point. Mr. Caplin?

MR. CAPLIN: I was pleased to see that Sheldon referred to Hart Wright. He was a secret weapon of the IRS. He taught at Michigan Law School, and I made a trip out there one day and spoke to his classes. It was one of the most stimulating days I spent.

Hart Wright wrote extensive memoranda for the IRS. One of the very good things that Coleman Andrews, a former Commissioner, Internal Revenue, ever did was to establish some sort of a school out at Michigan to train IRS agents. What he did was he used a lawyer-like approach in analyzing tax law to try to teach revenue agents not to just look at a bunch of rules in a Prentice Hall book that says, yes, you do this, this, this, this, but to hear how to analyze a case. And Hart Wright had an idea that in the perfect tax system, every taxpayer ought to have the right to have somebody review the case. In other words, above the revenue agent, and to try to decide the case, he has a 60 percent chance or 30 percent chance, and settle the case on that basis.

Of course, that wasn't very practical. They didn't have the resources to do anything like that. But Hart really had some really good thoughts, and if you ever find these books in the bowels of the IRS, they are worth reviewing.

Another point, you know, early in the before the 1960s, early in the 1960s, and we changed the rules at that time, we used to have a procedure where the tax man could have a review of his case in the district office. Now, the district office couldn't settle the case but they could determine the factual issues, which seems to be one of the big points raised here today. There are so many of the cases that would go to arbitration or mediation would be factual, but a lot of cases were cleared out that way. I mean the taxpayer had the feeling that his case could be reviewed by someone other than the revenue agent; that would be a supervisor or officer of some sort. And you had a double right of -- you could go to Appeals after that, or he could short-circuit this review.

Now, we changed that because of, really, revenue purposes, our own budget. We felt it was more efficient to eliminate that. He could go to Appeals or he could dispose of the case at the district level. But the question is, should we go back to that? I think the volume of disputed cases is going to come up. I mean our new president, President Obama has just to authorize and recommend a great increase in enforcement efforts. And we're going to see a lot more of that.

Enforcement was a dirty word for a long time within the administration. We have a new administration, I think we're going to see a new emphasis, but does it make any sense to have that second review, and new pair of eyes of the case at the district level? And many cases were disposed that way.

MR. KEIGHTLEY: In deference to the two commissioners, in some way of putting less resources on these smaller unimportant cases is extremely important, because it really jams up the whole system. Because no matter what the level of the IRS, it's a limited resource, and we, management, has to decide where to put those resources.

MR. SWENSON: Yeah, thanks, Chris. This is Dave Swenson with PriceWaterhouseCooper's. I'm the leader of PWC's Global Dispute Resolution Network, and in my prior life before PWC heavily involved in litigation of a lot of tax cases.

Just three points I wanted to make. First of all I want to -- I think we should compliment John on this proposal and concept and really thinking creatively about an approach that really the time has come to at least think about it, analyze it, and develop it. And I compliment you, John, for doing that.

Secondly, I think taxpayers, as they've always been, are interested in the big three E's in terms of resolving disputes. That's to resolve them effectively, efficiently, and equitably. And I think this process that John has put on the table for us to think about is designed to try to achieve those goals and should be seriously considered as we go forward.

The final point I wanted to make is that it's interesting, this discussion taken in the context of international taxation and what is happening globally. The United States is not entered into three treaties: one with Belgium, one with Germany, and one with Canada where the concept of mandatory binding arbitration is now in those treaties.

And a fourth treaty with France is pending ratification before the Senate. And that concept of mandatory binding arbitration is designed to move parties in a dispute much closer together. And so, if a case is not resolved within two years, it's sitting in the competent authority process, the case must go to arbitration. That's the mandatory part of it. Once it goes to arbitration, the result is then binding on the two governments.

And the third part of it is the arbitration process itself. In each of these treaties, the U.S. has decided to adopt what's referred to as "baseball arbitration." So that the arbitration panel must decide between two positions rather than giving its own view.

Now, as the various competent authorities around the world have looked at this process, they have referred to it in rather interesting terms. Diane Hay, the former competent authority of the United Kingdom, referred to this as the nuclear deterrent. Other competent authorities have said it is the alternative dispute resolution of last resort, a great deal of concern of having this alternative hanging over the heads of arbiters. And I think that we can learn from this concept and this process as we look at the system here in the States as we design it and think about it critically. It's a process that really moves two parties to a dispute to a position that allows them to resolve the dispute efficiently, effectively, and equitably.

MR. BERGIN: Yes, thank you. And. John, thank you for bringing this to a discussion.

Before I close, let me just say I hope we got a picture just for me of where I'm sitting. For those of you who are listening, I am flanked by two great former IRS commissioners, and I want that picture just for me. Let me thank the panel. This was a great discussion.

SPEAKER: Only in America that (off mike).

MR. BERGIN: That may be. I'm also the only one in American who reads Tax Notes on the beach. So --

MR. KAPLAN: I have a picture of many generations of commissioners taken together, and it has a sign on it: "Murderers Row."


MR. BERGIN: Thank you, everybody. Thank you, thank the panel. This was a great discussion.


(Whereupon, at 10:30 a.m., the

PROCEEDINGS were adjourned.)

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