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July 3, 2014
Major Shake-Up at LB&I?
by Jaime Arora, Amy S. Elliott, and Andrew Velarde

Full Text Published by Tax Analysts®

The resignation of two more top officials in the IRS's Large Business and International Division has prompted questions about the reasons behind what is proving to be a major shake-up of division leadership.

Samuel Maruca, transfer pricing director, and Diana Wollman, director of international strategy, are the latest to resign. Maruca will leave the agency on August 1; no date has been announced for Wollman's exit.

Last week the IRS confirmed that Michael Danilack, deputy commissioner (international) and U.S. competent authority, will leave the agency on July 2.

Richard McAlonan, advance pricing and mutual agreement program director, who announced plans earlier this year to leave the IRS, left June 27, according to sources.

"The departures represent a big loss in competency and experience and hopefully won't reverse the progress made to date or disrupt the operations of the affected programs," said Craig Sharon of EY.

Reorganization in the Works?

One practitioner told Tax Analysts that a coming reorganization may have spurred the departures. However, another said that they may just be because of normal turnover.

A former IRS official, now in private practice, said that Danilack agreed to lead the IRS's international unit on the condition that the Service would realign its Large and Midsize Business Division (LMSB) in a way that would separate international tax administration from domestic tax administration. The 2010 LMSB/LB&I realignment meant that agents working on international issues would ultimately report to Danilack, giving him greater management authority.

Under the realigned structure, the domestic and international deputy commissioners had equal authority to resolve issues. The former official said that under the LMSB structure, international issues were ultimately resolved by the domestic territory managers, directors of field operations, and industry directors. Since the realignment, "there's not been anyone with a 51 percent vote to resolve issues for a particular taxpayer" aside from going to LB&I Commissioner Heather Maloy for a tiebreaker vote, and "that's not good management," the former official said.

With industry directors and Danilack's team having similar levels of authority under the realigned LB&I, neither could overrule the other, the former official said. "No one was in charge," he said. "It was the Achilles' heel of the organization."

The former official added that Danilack's departure indicates that he probably argued for getting tiebreaker authority, making the case that the larger assessments are often those stemming from international issues, and lost. "I knew he was frustrated," the former official said.

Danilack declined to comment for this article.

The former official said that he's heard from current IRS industry directors and directors of field operations that LB&I will go back to giving domestic leaders the authority to resolve disputes in the field.

The deputy commissioner (domestic) position has gone without a permanent replacement since the departure of Paul DeNard in 2013. Laura Prendergast currently serves as acting deputy commissioner (domestic).

Kevin Brown, who served as acting IRS commissioner in 2007 and is now with PricewaterhouseCoopers LLP, disagreed with the assessment that all the departures indicated a reorganization yet to come within LB&I.

"This is an age-old debate at the IRS about who ultimately has the decision-making ability in a particular examination. It has swung back and forth over the course of my career many times," Brown said.

Brown said rumors that a reorganization is in the works could involve something much more innocuous, like collapsing a few industries into one industry. He said that he suspects the departures are just the result of "being as good a time as any" for the officials to leave. He cited the accomplishments of Danilack and Maruca as indicative of this, including the reorganization of LB&I, the creation of a transfer pricing roadmap, and the beefing up of international enforcement.

Brown added that Danilack had been saying for close to six months that he was nearing the end of his time at the IRS. He had been there four years when he intended to stay only two or three, Brown said. "He came to the realization that he had accomplished a great deal and that you never reach the finish line at the IRS," Brown said.

Brown said that the OECD's base erosion and profit-shifting program timeline, which has deliverables set for the fall, did not make the departure of the top officials any more harmful than it would otherwise be.

"Even if something happens with BEPS in the fall, it's going to likely require Congress's involvement and Treasury's involvement. That's probably months, perhaps years, down the road before that translates into something that the IRS is required to administer," Brown said. "If you are waiting for tax reform or BEPS to occur, there would never be a time to say, 'OK, the coast is clear.'"

While the IRS confirmed the resignations of Maruca and Wollman, it declined to comment on a possible reorganization. It released a statement saying, "The IRS is a large organization with many executive posts, and changes in leadership routinely occur from time to time. It's important to note the Large Business and International Division (LB&I) has had relatively few changes in leadership recently."

Praise for Outgoing Leaders

Philip R. West of Steptoe & Johnson LLP said that Danilack, Maruca, McAlonan, and Wollman have done a good job "and have done it by being fair to taxpayers while aggressively protecting the government's interest."

Timothy Tuerff of Deloitte Tax LLP said that Danilack and his team have done an excellent job identifying a strategic vision for the international part of LB&I.

Danilack "attempted to move in a direction of addressing . . . cross border dispute resolution in a manner that was more issue oriented, as opposed to only looking at a numerical standard of opening and closing of cases," Tuerff said. "There will always be a healthy tension between the government's perspective and the taxpayer's perspective on specific issues, but I do think that people will broadly recognize the importance of trying to direct the efforts in a way that responds to the needs of resolving cross-border disputes and resolving the proper allocation of income cross-border."

Maruca was named transfer pricing director in May 2011. Before joining the IRS, he was a partner at Covington & Burling LLP and at Miller & Chevalier.

During his tenure, Maruca oversaw several important changes to the transfer pricing practice. As part of its efforts to strengthen international enforcement, LB&I announced in July 2011 that it would combine the advance pricing agreement program with the U.S. competent authority program to become the APMA program under the auspices of Maruca.

In 2012 Maruca helped establish that the international practice network was meant to serve as what he called an "intellectual nerve center" for transfer pricing operations. Earlier this year, Maruca's team released its transfer pricing audit roadmap, which is intended as a guide for examiners to improve the case development process for transfer pricing audits.

Former colleagues of Maruca's praised his leadership at the IRS. "Sam is an amazing attorney and manager who has been at the heart of U.S. transfer pricing policy and administration for the last three years," said Daniel Luchsinger of Covington & Burling LLP. "Hopefully the IRS will be able to build on the remarkable legacy Sam, Mike Danilack, and others leave in terms of innovative procedures for thinking about and resolving transfer pricing issues," he said.

Wollman joined the IRS less than a year ago, in August 2013, coming into a newly created executive position. Before that, she was a partner in the New York office of Sullivan & Cromwell LLP and served as chair of the New York State Bar Association Tax Section. Wollman focused on the IRS's audit process, speaking publicly about how it should become more cooperative.

Marie Sapirie contributed to this article.

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