    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

    FAILURE TO COMPLY WITH THE REGULATORY FLEXIBILITY ACT: IRS ENDANGERING
                          SMALL BUSINESSES YET AGAIN

    =======================================================================

                                    HEARING

                                   before the

                          COMMITTEE ON SMALL BUSINESS
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                         WASHINGTON, DC, JULY 25, 2006

                                   __________

                               Serial No. 109-62

                                   __________

             Printed for the use of the Committee on Small Business

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     house

                                     _____

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                          COMMITTEE ON SMALL BUSINESS

                     DONALD A. MANZULLO, Illinois, Chairman

    ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
    Chairman                             JUANITA MILLENDER-McDONALD,
    SUE KELLY, New York                    California
    STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
    SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
    TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
    BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
    MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
    JEB BRADLEY, New Hampshire           ED CASE, Hawaii
    STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
    THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
    RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
    TED POE, Texas                       LINDA SANCHEZ, California
    MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
    JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
    MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
    LYNN WESTMORELAND, Georgia
    LOUIE GOHMERT, Texas

                      J. Matthew Szymanski, Chief of Staff

              Phil Eskeland, Deputy Chief of Staff/Policy Director

                      Michael Day, Minority Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                                   Witnesses

                                                                       Page
    Korb, The Honorable Donald L., Chief Counsel, Internal Revenue
      Service........................................................     5
    Sullivan, The Honorable Thomas M., Chief Counsel for Advocacy,
      U.S. Small Business Administration.............................     6
    Weller, Mr. Louis S., Principal, National Director, Like-Kind
      Exchange Planning, Deloitte Tax LLP............................     8
    Halloran, Mr. Michael, President and CEO, Nationwide Exchange
      Services.......................................................     9
    Levine, Mr. Howard J., Partner, Roberts & Holland LLP............    12

                                    Appendix

    Opening statements:
        Manzullo, Hon. Donald A......................................    40
    Prepared statements:
        Korb, The Honorable Donald L., Chief Counsel, Internal
          Revenue Service............................................    49
        Sullivan, The Honorable Thomas M., Chief Counsel for
          Advocacy, U.S. Small Business Administration...............    78
        Weller, Mr. Louis S., Principal, National Director, Like-Kind
          Exchange Planning, Deloitte Tax LLP........................    83
        Halloran, Mr. Michael, President and CEO, Nationwide Exchange
          Services...................................................    85
        Levine, Mr. Howard J., Partner, Roberts & Holland LLP........    89
    Additional material:
        Dance, Mr. Richard, President, 1031 Exchange Coordinators....    92
        Litschi, Mr. James...........................................    97

                                     (iii)

    FAILURE TO COMPLY WITH THE REGULATORY FLEXIBILITY ACT: IRS ENDANGERING
                           SMALL BUSINESSES YET AGAIN

                                  ----------

                             TUESDAY, JULY 25, 2006

                       House of Representatives
                                    Committee on Small Business
                                                         Washington, DC
        The Committee met, pursuant to call, at 2:20 p.m., inRoom
    2360, Rayburn House Office Building, Hon. Donald A. Manzullo
    [Chairman of the Committee] Presiding.
        Present: Representatives Manzullo, Kelly, King, Gohmert,
    Velazquez and Bordallo.
        Chairman Manzullo. Good afternoon, and welcome to this
    important hearing. I was just working on the reauthorization of
    Ex-Im Bank, and that is why I am late.
        On February 2006, IRS and Treasury released proposed
    regulations that substantially changed the rules governing the
    taxation of funds used during deferred exchanges of like-kind
    property, both real and personal, under section 1031 of the
    Internal Revenue Code. If finalized, I believe these proposed
    regulations would have a devastating impact on the hundreds of
    small qualified intermediary businesses in this industry and
    increase costs for investors.
        Only Chicago Deferred Exchanges, a wholly-owned subsidiary
    of LaSalle Bank, which is owned by ABN AMRO, desires the
    completion of the proposed regulations. The rest of the
    businesses in this industry, most of which are small, are
    simply trying to stay in business. Worse, the situation has
    been created by Treasury and the IRS in the case where no
    regulations are needed. There simply is no homeless income
    here. Thus, one must ask why these proposed regulations are
    being pursued when they are so devastating to small businesses.
        In addition to these problems, Mr. Don Korb, the chief
    counsel of IRS, has admitted in a letter to me--and that letter
    is back there on the table--that the Internal Revenue Service
    and Treasury did a sloppy job of complying with the Regulatory
    Flexibility Act by failing to complete a full Initial
    Regulatory Flexibility Analysis. Because of the impact on small
    businesses and the failure to comply with the RFA, I have
    requested that the proposed regulations be withdrawn. I have
    been joined in this effort by no less than six Senators. Still,
    the IRS and Treasury have not responded.
        This hearing is about the survival of small businesses and
    the refusal of an agency to follow the law, and the refusal of
    Eric Solomon, Acting Assistant Secretary for Tax Policy and
    Deputy Assistant Secretary for Regulatory Affairs, to come to
    this hearing at my request.
        I am astonished that the IRS and Treasury will move forward
    in this matter, especially in the face of the 2005 U.S. Court
    of Appeals for the D.C. Circuit opinion in U.S. Telecom
    Association v. FCC, which empowers the courts to set
    regulations aside for failure to comply with the Regulatory
    Flexibility Act. We have asked on several occasions that Mr.
    Solomon appear. He refuses to do so. So here is the letter I am
    sending to 100 Senators.
        Dear Senator, I am writing to inform you of an issue of
    vital concern to my Committee and the small business community.
    Proposed regulations were issued by the Internal Revenue
    Service that, if promulgated, will substantially harm all small
    businesses in this industry.
        Because of the impact on small businesses and their
    customers, I have, with six of your colleagues, already
    requested that these proposed regulations be withdrawn. I
    invited Mr. Eric Solomon, Acting Assistant Secretary for Tax
    Policy, Deputy Secretary for Regulatory Affairs at the U.S.
    Department of Treasury, to appear before my Committee to
    explain the purpose of these proposed regulations and what
    impact he believes the regulations will have on the small
    business community. Unfortunately, Mr. Solomon willfully
    refused to appear before my Committee.
        I cannot tell you how disturbed I am over the failure of
    Mr. Solomon to appear, especially in light of the fact that I
    specifically requested his presence; in addition, he has not
    even contacted me about the matter personally.
        Although Mr. Solomon is still awaiting confirmation to
    become the Assistant Secretary for Tax Policy, his actions
    today have demonstrated to me that he should not even be Acting
    Assistant Secretary for Tax Policy. For this reason, I strongly
    recommend that he not be confirmed, I am also requesting that
    Treasury Secretary Paulsen seek Mr. Solomon's resignation.
        If you have any questions, I am happy to provide you with
    additional clarification.
        So this is a war between the IRS and the little people, and
    the chief general who is in charge of regulations thinks he is
    too good to show up at this hearing. Perhaps he thinks that
    things might be discovered about what goes on at IRS that the
    press doesn't want to know about. Well, I can assure you this:
    His hiding behind the fact that he has a confirmation pending
    before the United States Senate is not sufficient reason for a
    person in this position to blow off a hearing and to ignore the
    desires of a Committee chairman. I could have subpoenaed him if
    I wanted to. I wish I had; then I would have moved to have him
    held in contempt of Congress. Instead of being confirmed by the
    Senate, he could have gone to jail for the rest of the time
    this body is in session.
        I guess on that thought I would turn to my Ranking Minority
    Member for her opening remarks.
        [Chairman Manzullo's opening statement may be found in the
    appendix.]
        Ms. Velazquez. Thank you, Mr. Chairman.
        Small businesses are the driving force in this economy, yet
    even with their significant impact in this country, oftentimes
    they are an afterthought when it comes to improving economic
    conditions. No place is this more evident than in the
    regulatory arena.
        This hearing will offer an opportunity to examine the way a
    specific regulation that has come out of Treasury will impact
    small businesses and the users of the so-called 1031 exchanges.
    Unfortunately, it seems with this regulation, as with many
    others over the past few years, Congress has been forced to
    consider whether it unfairly harms small firms rather than the
    agency. This is despite the fact that Congress intended for
    agencies to consider this impact under the Regulatory
    Flexibility Act.
        Today we will examine specifically whether the IRS properly
    complied with the Regulatory Flexibility Act with this
    regulation, but it will also offer an opportunity to hear about
    the purpose and impact of the exchanges.
        The proposed regulations will create significant changes in
    the way that 1031 exchanges are completed. This regulation will
    have an impact on both the hundreds of qualified intermediaries
    that assist with these transactions, as well as the thousands
    of small companies that are engaged in these exchanges.
        I look forward hearing from the IRS on why the change is
    necessary now, and what is actually driving the need for this
    regulation. It will change the way hundreds of small businesses
    report their income to their clients and to the IRS, and will
    create new administrative hurdles.
        I am anxious to hear testimony from both sides of this
    issue on why they believe this change is needed or is not
    needed to reflect the proper nature of the transaction.
        Income certainly must be reported accurately to the IRS,
    but we need to know that this is the actual purpose. The
    question has been raised if this regulation is about reporting
    income or some other reason.
        Another concern that needs to be addressed is the issue of
    competitive advantages this rule might create for those who do
    not do these exchanges. The qualified intermediaries are
    concerned it will put them out of business. It raises the
    question if the IRS considered all of its options when it
    pushed this regulation forward.
        Most importantly, the officials from the Treasury here
    today need to tell us why was the effect on small businesses
    not fully considered when proposing this legislation. It is
    clear that the IRS has failed to identify all of the businesses
    that will be impacted by this rule and have failed to fully
    explain all the costs of complying.
        It seems there are a lot of issues gone unanswered
    regarding this regulation. Small businesses already face a
    tremendous regulatory burden that has increased by 700 million
    hours in the last 3 years. The Office of Advocacy has
    consistently reported that the burden remains intolerable for
    small businesses. Before we finalize another regulation, we
    need to know its effect on the Nation's entrepreneurs. This
    seems to be another example of the administration acting first
    and considering consequences later. It will be only natural
    that when proposing a rule, the IRS should fully explain why,
    while there are a lot of priority projects, they feel it is
    necessary to move forward with these regulations. In short,
    they have failed to provide an answer to this question.
        If the goal of this rule is to make sure that income is
    reported properly to the IRS, there are ways to do that without
    impacting small businesses. Maybe the IRS is just trying to
    close down the tax gap on the part of small businesses. If it
    turns out that change is needed, I would strongly encourage
    them to adequately seek out and review alternative ways of
    addressing this problem.
        Small businesses are the engine of the economy and are the
    largest provider of jobs; we need to do everything we can to
    make sure they have the tools they need to be successful, and
    not to increase the unnecessary regulatory burdens they face.
        And I look forward to hearing the witnesses' testimony.
    Thank you, Mr. Chairman.
        Chairman Manzullo. Our first witness is Eric Solomon,
    Deputy Assistant Secretary for Regulatory Affairs. Mr. Solomon
    was a tax lawyer at Drinker & Biddle. Then he went to the IRS
    as Assistant Chief Counsel for Corporate. Then he returned to
    the private sector at Ernst & Young, Mergers and Acquisitions.
        In 1999, he joined IRS again as Deputy Assistant Secretary
    for Regulatory Affairs in the Office of Tax Policy, and also
    Acting Assistant Secretary for Tax Policy. But he is not here.
    I am going to answer for him and give his testimony.
        Mr. Solomon has been at the IRS since 1999. It was under
    his watch that these present regulations that we are debating
    today have been drafted. Mr. Solomon is in a position where he
    is personally responsible for these regulations coming out, and
    they came out under his signature.
        Mr. Solomon, if you are there, we can't see you. Perhaps
    you are an apparition. Perhaps you can compose yourself so that
    we can see you, so that the people here that represent small
    businesses throughout the country can look at the person who is
    personally responsible for the actions that may result in over
    350 small businesses going under. But since you are not here, I
    can't give any more testimony on your behalf, and I wish you
    the best.
        The next witness is Don Korb. We have had some very
    interesting discussions at our office, and Don has always been
    there. He shows up, we get into interesting discussions, we
    disagree, as you will see, but, at least he has always been
    there. He has the decency to show up in my office and the
    decency to appear in this Committee hearing, unlike others in
    the Treasury that don't have the decency to show up here. I
    can't make myself any more emphatic. And I look forward to the
    debate in the Senate over Mr. Solomon's confirmation.
        Mr. Korb is the IRS Chief Counsel; he was appointed to that
    position in 2004. He has been responsive on several occasions
    to the small business community for which we have sent him
    letters of gratitude, which he attached to his testimony, and I
    appreciate that. I also appreciate the fact that you are here
    to testify.
        The testimony of the witnesses is normally 5 minutes, Mr.
    Korb, I am going to give you 10 minutes on the clock. You have
    got a difficult path to wind. The rest of the witnesses are
    limited to 5 minutes. I am giving you additional time because
    you are the only witness representing the Administration.
        I look forward to your testimony. Your complete statement
    will be made part of the record, without objection, as well as
    that of the rest of the witnesses. Thank you very much.

      STATEMENT OF THE HONORABLE DONALD L. KORB, INTERNAL REVENUE
                                SERVICE

        Mr. Korb. Chairman Manzullo, Ranking Member Velazquez, and
    members of the Committee, I am here this afternoon to talk
    about our Initial Regulatory Flexibility Analysis to the
    proposed regulations that are the subject of this hearing.
    However, before I do, I would like to take this opportunity to
    publicly thank the Chairman as well as Chief Counsel for
    Advocacy Sullivan, sitting to my left, for your recent letters
    to me expressing appreciation for my leadership in finalizing
    the regulations under section 199, and for including in those
    regulations an expanded simplified deduction method that will
    allow 99.5 percent of our country's manufacturing firms, most
    of them small business, to use this less burdensome method.
        I want to note for the record that this commendation
    should, in fact, go to all of the dedicated and hard-working
    lawyers and staff at the IRS and Treasury who worked on this
    particular project. Too often in this town people are quick to
    criticize the efforts of these dedicated and hard-working
    public servants. It is rare indeed for me to be able to pass on
    to them the well-deserved compliments that you gave them in
    your letters. Thank you.
        I would also like to point out that I am not in a position
    to discuss my view of or position on the proposed regulations
    that are the subject of this hearing. You have asked me to
    testify here today after expressing concerns both in writing
    and at the public hearing on the regulations which was held in
    the IRS building on June 6, 2006, before the flood, about the
    substance of the proposed regulations and the procedures under
    which they were issued. However, the integrity of the
    regulatory process requires me to suspend judgment on
    finalizing proposed regulations until all internal and public
    comments have carefully been considered and addressed through a
    rigorous process involving both the IRS and Treasury.
        We have not yet reached the stage at which the information
    received from public comments has been sufficiently analyzed so
    that I can make a judgment about the proper course of action.
    Accordingly, I am sure you understand that it would be
    inappropriate for me to make any comments on the substance of
    the 2006 proposed regulations and how they might change at the
    hearing here today.
        Although my written comments focus on four topics, I would
    plan to limit my oral statement to only the final topic, which
    is the Initial Regulatory Flexibility Analysis performed by IRS
    and Treasury as part of the regulatory process.
        Mr. Chairman, as I have assured you privately, I take the
    IRS obligations under the Regulatory Flexibility Act very
    seriously. As my description of the regulatory process at the
    IRS and Treasury, which is in my written statement--as it
    demonstrates, the requirements of the IRFA are considered both
    during the process of drafting and viewing of proposed
    regulations, and during the review and revision of those
    regulations before they are made final.
        The contents of the IRFA, to be included in a notice of
    proposal we are making, are delineated in RFA in section 603.
        In my limited time available, I want to focus on one of
    these requirements, and that is the number of small entities to
    which the proposed rule applies. Preparing the IRFA, the
    drafting team identified questions that would help us determine
    the population of qualified intermediaries, which, as you know,
    are entities that facilitate deferred exchanges of like-kind
    properties, and to estimate the burden on those entities. These
    questions included the number of QIs and independent QIs, the
    number of small QIs, the annual number of deferred like-kind
    exchanges, the amount of principal QIs hold in exchange funds
    on average, and the average interest rate earned on the funds.
        When government and publicly available sources of
    information, including the SBA and the Department of Commerce
    Web sites, do not provide answers to these questions, the
    drafting team turned to industry resources, and specifically
    the Federation of Exchange Accommodators, all this contemplated
    by the RFA.
        FDA provided information on a number of its members, a
    number of those that constitute QIs, and its estimate of the
    percentage of the industry that belongs to the FEA. This
    information was reiterated by FEA numerous times and formed the
    basis of the IRFA estimate of 325 small businesses providing
    services as QIs. The FEA did not provide any other information
    that would help us estimate the impact of the regulations on
    small entities, nor did it suggest alternative sources for the
    information.
        The drafting team was able to learn the financial details
    necessary to estimate the impact of the regulations on small
    entities, the decision was made to specifically request
    comments on the extent of the economic burden and on
    alternatives to it in the IRFA itself. The drafting team is in
    the process of evaluating those comments to collect all of the
    information it can about the potential impact of the proposed
    regulations on small entities as contemplated by the law.
        In my written response to a letter from you, Chairman
    Manzullo, I maintain that the IRS and Treasury had met their
    legal obligations under the RFA, but I acknowledge, as you
    indicated, that we could have done a better job. I still hold
    that view, and I believe it is supported by the details I
    provided in my written statement. As you know, I have committed
    to you that we will do a better job in the future on a
    Regulatory Flexibility Act Analysis.
        Thank you for inviting me to testify this afternoon, and I
    would be happy to respond to your questions at the appropriate
    time.
        Chairman Manzullo. Thank you very much.
        [The Honorable Donald L. Korb's testimony may be found in
    the appendix.]
        Chairman Manzullo. Our next witness is Tom Sullivan, the
    Chief Counsel for Advocacy at the SBA. Mr. Sullivan, I look
    forward to your testimony.

       STATEMENT OF THE HONORABLE THOMAS M. SULLIVAN, OFFICE OF
              ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION

        Mr. Sullivan. Good afternoon, Chairman Manzullo, members of
    the Committee. I thank you for the opportunity to testify this
    afternoon.
        Congress established the Office of Advocacy to represent
    the views of small businesses before Congress and Federal
    agencies. My office is an independent one within the SBA;
    therefore, the comments expressed in my written statement and
    in this oral statement don't necessarily reflect the position
    of the administration or the SBA. My oral and written statement
    were not circulated to OMB for comment.
        I am here today to discuss how departments like Treasury
    and IRS can better comply with the letter and spirit of the
    Regulatory Flexibility Act. Much of my written statement
    applies that concept to a specific proposal published by
    Treasury and IRS in February of this year having to do with QIs
    and Like-Kind Exchanges.
        My office takes its direction from small businesses, and in
    order to understand IRS's proposal, we hosted a roundtable on
    the proposed rule. The roundtable was attended by Treasury and
    IRS staff. The roundtable provided an opportunity for small
    business QIs to directly express their comments and concerns
    about the proposed rule to Advocacy, Treasury and IRS.
        As a result of the roundtable, my office submitted a
    written comment to Treasury and IRS on May 8, 2006. That letter
    highlighted what we believe to be incomplete areas of their
    Initial Regulatory Flexibility Analysis, IRFA. With the
    Chairman's permission, I would like to enter our written
    comment in the record.
        Chairman Manzullo. Without objection.
        Mr. Sullivan. In our May letter, we recommended that
    Treasury and IRS republish their Regulatory Flexibility
    Analysis. The good news is that their original proposal did
    contain an IRFA, and I don't want to understate the importance
    of that fact; in the special analysis section there was an
    IRFA. And many times our interactions with agencies are to
    simply get to that step, but obviously the Regulatory
    Flexibility Act requires more. And the bad news is that IRFA
    may have significantly undercounted the impact on small
    entities. And the proposal asked the commenting public what
    type of impact the proposal may have.
        My office hopes that agencies use data that they possess,
    work with my office and others to conduct analysis on potential
    impacts, and subject that analysis to comment. That way, an
    IRFA better informs small entities and other commenters on
    impacts to analyze, comment on and suggest alternatives. Quite
    frankly, Mr. Chairman, the economist in my office used the
    expression "garbage in, garbage out." and IRFAs, we believe,
    deserve to have a fully vetted analysis of impacts, whether
    that is done at a preproposal, proposal, or sometimes even
    correcting insufficiencies through a subsequent publication of
    simply that IRFA so it can better inform the rule writers.
        I encourage that Treasury and IRS come to my office early
    in their regulatory development process. The useful exchange of
    information, sometimes through confidential interagency
    communication, and then subsequently through the formal notice
    and comment process, can only help assure that the spirit of
    the Regulatory Flexibility Act is met and regulatory results
    that will lessen the eventual impact of small business be
    achieved.
        Thank you for this opportunity to express my views, and I
    would be happy to answer any questions the Committee might
    have.
        Chairman Manzullo. Thank you.
        [The Honorable Thomas M. Sullivan's testimony may be found
    in the appendix.]
        Chairman Manzullo. Our next witness is Louis Weller. He is
    a principal at Deloitte Tax. He heads the firm's National Like-
    Kind Exchange Practice Group. We look forward to your
    testimony.
        Mr. Weller, we understand you are testifying privately and
    on your own behalf, and not on behalf of the company with which
    you work is that correct?
        Mr. Weller. That is correct, nor on behalf of any clients.

      STATEMENT OF LOUIS S. WELLER, LIKE-KIND EXCHANGE PLANNING,
                            DELOITTE TAX LLP

        Mr. Weller. As you say, my name is Louis Weller, and I am
    pleased to appear before you in connection with your inquiry
    into proposed regulation section 1.468B.
        I am a principal at Deloitte Tax. My professional practice
    focuses on advising clients on tax consequences of transactions
    involving acquisitions and dispositions and structuring of real
    estate and other business transactions.
        I appear before you at your request. And as you say, I
    express my own views and not those of my firm.
        I have been involved in the like-kind exchange area for
    more than 30 years. My clients have included over the years
    both taxpayers engaged in transactions under section 1031, and
    a number of qualified intermediary entities which help
    facilitate those transactions, both those affiliated with
    national institutions, banks, title companies, attorneys,
    escrow--really the entire gamut of the industry that has arisen
    to help facilitate like-kind exchanges.
        My professional background is more described in the CV that
    is included with my testimony. I have written a number of
    outlines, articles and speeches on the topic, including a
    treatise on section 1031. The reason I think that I am here
    today is that my most recent article deals with this very
    subject of section 1.468B. It was published in the June 2006
    issue of the Journal of Taxation. The article fairly
    comprehensively--at least we hope, myself and my coauthor Kelly
    Alton--expresses our views of these proposals, the technical
    background, and what we view as limitations and errors we think
    of approach that are represented by the proposals as they have
    been issued. Again, they express my personal view.
        I want to summarize fundamentally the points that were
    mentioned in the article as a basis for my testimony. First of
    all, we believe that it is an appropriate exercise of
    regulatory authority by Treasury and the IRS to attempt to
    create rules under section 468B, perfectly legitimate. And
    there were a number of rules that were issued in 1999 which are
    not the subject of this hearing, which have not been reproposed
    and which were probably just fine. 468B-6, the section that is
    the subject of this hearing, however, addresses a set of issues
    which, in our view, are not really the subject of this section
    of the Internal Revenue Code, nor was it intended to address
    them, particularly the thing that I think is at the core of
    your inquiry, which is qualified intermediary holding funds in
    what are called unsegregated accounts.
        By characterizing the core observation we make as a
    technical matter, by characterizing deferred exchange
    arrangements as loans, the proposal we believe inappropriately
    draws a distinction between the status of qualified
    intermediaries under section 1031, in which they are treated as
    parties to an exchange transaction, and under 468B, in which
    they are treated as borrowers of money loaned to them by the
    taxpayer.
        Following on that, we believe that the application of the
    rules of section 7872 to qualified intermediary arrangement, at
    least those which there is no segregated account, is
    inappropriate as a technical matter. And then even if one would
    concede that the arrangements are loans subject to section
    7872, we believe that the short-term nature of deferred
    exchange arrangements, which by their terms can only last 6
    months because of that time limit of the client under section
    108183, the short-term nature makes them really inappropriate
    for regulation under the section 7872 regime.
        Next, the testing rate that was adopted in the regs is too
    high. It is inconsistent with the economic practice of the
    industry and applies a set of rules which cannot be met by and
    large in the way that we understand that the intention was.
        And finally, the projected effect of the proposal we
    believe favors bank and financial institution-owned qualified
    intermediaries at the expense of nonbank or nonfinancial-owned
    qualified intermediaries in a way that we don't believe was as
    carefully thought through as it might be, and we have urged in
    our article and continue to urge consideration of that
    distinction in the course of the consideration of these
    regulatory proposals.
        I think the way that comments have come in on the proposals
    illustrates the differential effect that we believe would occur
    if the regulations went final in their present form.
        As I say, these points are elaborated on in my article, so
    I won't go any further, and I am happy to answer questions at
    the appropriate time.
        Chairman Manzullo. Thank you very much.
        [Mr. Weller's testimony may be found in the appendix.]
        Chairman Manzullo. Our next witness is Mike Halloran,
    President and CEO of Nationwide Exchange Services.
        Mr. Halloran, we look forward to your testimony.

      STATEMENT OF MICHAEL HALLORAN, NATIONWIDE EXCHANGE SERVICES

        Mr. Halloran. Thank you.
        Chairman Manzullo and members of the Committee, thank you
    for the opportunity to speak today. My name is Michael
    Halloran. I am the president and CEO of Nationwide Exchange
    Services. We are an independent qualified intermediary
    performing 1031 tax-deferred exchanges, independent by the fact
    that we are not owned by a banking institution. We provide
    investors and corporations with 1031 tax-deferred exchange
    services on a national basis, and we have operations in
    California, Illinois, and here in D.C.
        My comments today are not only on behalf of Nationwide
    Exchange Services, but are generally reflective of a number of
    independent qualified intermediaries in the marketplace, quite
    a number of which are here in the audience today.
        We at NES believe that the proposed changes, while the
    intention of the IRS may be noble, fail to identify and
    substantiate the specific deficiency that they are trying to
    remedy. They are unnecessary to address ambiguously stated
    concerns. They would effectively eliminate current free-market
    competitive environments and would hand the market into one
    particular segment of bank-owned qualified intermediaries. They
    run counter to the interests of individual consumers,
    commercial investors and corporations. And as a result, they
    would create the closing of hundreds of independent qualified
    intermediaries and a loss of literally thousands of job.
    Ultimately, we believe this would result in a lower tax revenue
    to the Federal Government. Our position is they are not an
    equitable solution.
        I would like to start by stating that NES is in the
    business because of the IRS and the Tax Code. The Service is
    not our adversary by any means. To the contrary, qualified
    intermediaries act on a daily basis as the first line of
    defense to the Internal Revenue Service regarding 1031
    exchanges. If it were not for the intermediary industry, the
    Service would be plagued with frequent and substantially
    incorrect executions of 1031 exchanges, inadvertent or
    fraudulent.
        The Internal Revenue Service and the qualified intermediary
    industry have a long track record of a mutually beneficial
    codependency. Our industry would like nothing better than to
    have a meaningful opportunity to address any valid and
    substantiated deficiencies that are identified by the IRS in a
    way that would be balanced and equitable. We believe the
    current proposed regulation changes do not accomplish this
    objective and would result in a decisive competitive advantage
    for a handful of bank-owned qualified intermediaries.
        To understand why we have come to that conclusion, it is
    probably important for you to have a basic understanding of
    what a 1031 exchange is and how a 1031 intermediary operates.
    Basically, as a 1031 intermediary, we process the paper where
    we do the education for the consumers. We provide them with
    levels of customer service to help them execute their 1031
    exchanges. And according to the 1031 code, we actually have to
    act as the custodian and the fiduciary for the funds. Consumers
    cannot be in constructive receipt of their own funds.
        What seems to be at issue in these proposed changes is the
    ability for the qualified intermediary to make any spread on
    the funds while we are holding those deposits. It is commonly
    accepted within banking and within financial services that they
    actually make money on the spread; it is a commonly disclosed
    practice to consumers and exchangers throughout the United
    States that we make a combination of fee and spread. Consumers
    are not stupid. They realize that we have to make money. So a
    free market environment allows qualified intermediaries to
    price their services in a combination of fee--it could be a
    high fee and a very low portion of the spread; it could be a
    low free and a very high portion of the spread. But competitive
    forces are the best ones for determining who are the winners
    and what are the appropriate business models to be utilized in
    the marketplace.
        And I am running out of time, so the proposed changes
    basically provide that all interest earned on exchange or
    assets has--
        Chairman Manzullo. We are okay on time. The next series of
    votes is in 2 hours.
        Mr. Halloran. Okay. I will try and talk slower then.
        The IRS proposed revisions provide that all interests
    earned on exchange or assets be taxed as income directly to the
    exchanger, whether received or not, regardless of the fact that
    the exchanger is not and cannot be in constructive receipt of
    their own exchange proceeds to earn interest. The question here
    would be, do you earn money on your checking account? Of course
    not, because that is how banks subsidize, how they provide all
    of the services around your checking account. They hold your
    money, they invest your money, and every consumer understands
    that. It is part of the way that they rationalize on paying for
    this checking account.
        The IRS further proposes that the only legitimate form of
    income for the QI is in the form of exchange fees, and that all
    such fees must be set up front, regardless of any variable cost
    burden of executing the exchange transaction, and fully
    ignoring any competitive drivers that exist in the marketplace.
    Basically they said you can do a fee and nothing else.
        The inequity in this is that a bank-owned qualified
    intermediary has more opportunities to monetize the deposits
    they are holding, whether they are in traditional savings
    accounts or in trust accounts, where they routinely distribute
    12b-1 fees to their subsidiaries to help them with their
    operating expenses associated with garnering those deposits.
    That opportunity would no longer exist for qualified
    intermediaries that are independent; they would only have the
    opportunity to do this in fee and nothing else. So the
    independent qualified intermediaries would have to dramatically
    raise their fees while the bank-owned intermediaries could keep
    their fees low and still earn a certain amount of interest on
    the spread.
        For a point of reference, Bank of America's return on
    deposits is 8.9 percent, far greater than any independent
    qualified intermediary could ever have done. So their ability
    to monetize those funds already puts them at a competitive
    advantage in the marketplace, and yet we are still able to
    compete and deliver high-value products as independent
    intermediaries.
        The IRS states that in the event that the QI utilizes any
    of the interest earned on the assets to cover transactional
    expenses or operating costs, exchange proceeds will be treated
    as below-market loans, and the taxpayer will recognize computed
    income at a rate equivalent to a 6-month Treasury rate,
    regardless of the fact that deposits must be held as demand
    deposits, and on average are seldom held longer than 90 days,
    with many calling for shorter time frames. In my company, our
    average hold on funds is 67 days. We have many transactions, I
    would say easily 20 percent or more, where the demand on those
    deposits is within 10 days. So we will hold funds, and we have
    the consumer turning around and needing those funds for the
    closing on their replacement property within a very short
    period of time, yet if, according to the new IRS proposal, if
    we were to do that and cover any of our operational costs, the
    consumer would be taxed as if they were paid at a 6-month
    Treasury rate for the full 6 months.
        The IRS goes on to define the only acceptable form of
    transaction costs that can be deducted from interest proceeds
    or exchanger assets are hard costs directly attributable to the
    specific exchange and paid to a third party--
        Chairman Manzullo. Now you are over.
        Mr. Halloran. I will be done.
        Chairman Manzullo. I know you will be done, but when?
        Mr. Halloran. I thought I could talk slower.
        The bottom line is that the proposed changes, though the
    intention may be honorable, and specifically to determine
    better clarity around 1031 transactions, are extremely punitive
    upon the independent qualified intermediary, and they prejudice
    against one particular business model over another. And our
    argument would be that competition in the market, in a free
    market, is the best arbiter of who delivers the ultimate value
    to the consumer and will still drive interest revenue to the
    IRS.
        Thank you.
        Chairman Manzullo. Thank you very much.
        [Mr. Halloran's testimony may be found in the appendix.]
        Chairman Manzullo. Our next witness is Howard Levine, who
    has been involved in 1031 activities for more than 25 years. He
    is an instructor and adjunct professor for tax at Georgetown
    Law School and George Washington University. We look forward to
    your testimony.

          STATEMENT OF HOWARD J. LEVINE, ROBERTS & HOLLAND LLP

        Mr. Levine. Thank you. Chairman Manzullo and other members
    of the Committee, good afternoon, and thank you for inviting me
    to present testimony.
        My name is Howard Levine. I am a partner in Roberts &
    Holland, which is a Washington and New York law firm which
    limits its practice to tax law.
        My interest in the like-kind exchange area spans more than
    30 years. I was chairman of the ABA Tax Section Sales,
    Exchanges & Basis Committee, which has primary jurisdiction in
    the ABA over 1031. I am the author of the BNA Tax Management
    Portfolio on 1031, which for more than 25 years has been the
    most widely used treatise around the country on like-kind
    exchanges. And I have been an adjunct professor at both George
    Washington University Law School and Georgetown Law School.
        In the limited time that I have, I want to make five
    points. Number one, the reproposed regulations are correct,
    both as a matter of substantive tax law and as a matter of tax
    policy. The general rule in the reproposed regulations that the
    funds will be treated as loans to the QI unless all of the
    interest is paid over to the taxpayer is absolutely consistent
    with and, in fact, required by long-established case law that a
    taxpayer must have the benefits and burdens of ownership of
    property in order to be taxed on the income derived from that
    property.
        Contrary to what some have claimed, it is also consistent
    with the intent of the original set of regulations that were
    proposed in 1999, which also set forth a burdens and benefits
    test and clearly indicated back then that section 7872 could
    apply in any situation where for some reason the taxpayer was
    treated as the owner. Had the IRS immediately finalized those
    1999 regulations, it is doubtful that there would be any real
    issue today as to who must report all the income from the
    exchange account and whether section 7872 could apply; however,
    the IRS took no action to finalize the regulations for 7 years,
    and that had the practical effect of allowing QIs to take
    inconsistent positions and aggressive positions.
        From a substantive tax law viewpoint and a tax policy
    viewpoint, the bottom line is this: The funds are simply the
    proceeds from the sale of a taxpayer's property. If the funds
    are somehow treated as owned by the QI, one must answer this
    question: How did the QI get ownership of the funds? The answer
    can only be by way of a loan.
        The question has been raised several times, is there any
    income that is not being reported? The answer unequivocally is
    yes. If I earn $1,000 of investment income from my assets, and
    I use that same $1,000 to pay my doctor bills, I am taxed on
    that $1,000 of investment income, and my doctor is taxed on
    that $1,000 of income from services he actually rendered, even
    though I am using the same $1,000 to pay for my doctor for the
    services he rendered.
        The exact same thing is happening here. There is
    substantial interest income being earned from the taxpayer's
    assets. That interest income is not business reported or paid
    by the taxpayer, it is instead being simply taxed to the QI
    instead of being taxed to the taxpayer and then being taxed to
    the QI. That is not double taxation, that is the way our tax
    law works. I get interest income from my investments. I use
    that interest income to pay for services rendered by third
    parties. We are both taxed.
        Number two, this debate is not about big versus little QIs,
    nor is it about bank and title insurance QIs versus all others.
    Contrary to the way this is being portrayed by some, this
    debate is not about the big QIs and their affiliates versus the
    little QIs. At the forefront of those opposing and lobbying
    against the regulations are the very large title insurance
    companies and their financial parent companies, which in terms
    of revenue and assets far eclipse all other QIs and their
    affiliates. Nor is the debate about banks or banks and title
    insurance companies versus all others.
        In my 30 years of experience in the like-kind exchange
    area, I have represented all kinds of QIs, and I continue to
    represent all kinds of QIs. I represent QIs who are strongly
    opposed to these regs, I represent QIs are who are strongly in
    favor of the regs.
        When the original set of regulations were proposed in 1999,
    I testified before the IRS in favor of those regulations. I did
    not at that time represent any QI affiliated with banks or
    title insurance companies, but I strongly supported those regs,
    and I continue to support these regs for the same reason;
    namely, that they are consistent with and required by
    established case law.
        Moreover, as evidenced by the submissions that have been
    made to the IRS and Treasury, and certainly as admitted by
    those opposing the regulations, there are clearly QIs who are
    not affiliated with any bank or title insurance company who
    support the regulations. Therefore, what the debate is about is
    a difference in business models.
        Number three, the reproposed regulations will benefit most
    small businesses. The purpose of this hearing is to determine
    whether the reproposed regulations will be harmful to small
    business. It is true that many, but not all, of the few hundred
    or so QIs around the country may end up deciding to change
    their business model as a result of these regulations. However,
    it is important for this Committee to understand that there are
    many, many more small business interests who will benefit from
    the finalization of these regulations; namely, the many
    thousands and thousands of taxpayers who do exchanges each year
    and are customers of the QIs. These small business investors
    are not represented here. The small business owners, the
    restaurants, the operators--
        Chairman Manzullo. How are you doing on time? You are about
    1-1/2 minutes over.
        Mr. Levine. Can I have 1 more minute?
        Chairman Manzullo. I can give you 20 seconds.
        Mr. Levine. Okay. The reproposed regulations will force the
    greater consumer protection, it will encourage a segregation of
    accounts--there have been many bankruptcies in this area. It
    should minimize that. The reproposed regulations will lead to
    greater transparency. There is a tremendous amount of interest
    being earned which the individual taxpayer has no idea about.
        Thank you for your attention. I would be happy to answer
    any questions.
        [Mr. Levine's testimony may be found in the appendix.]
        Chairman Manzullo. I have got a series of questions. Mr.
    Gohmert, did you have any questions you wanted to ask?
        Mr. Gohmert. Not at this time.
        Chairman Manzullo. Okay. Mrs. Kelly, why don't we go to
    you.
        Mrs. Kelly. Thank you very much, Mr. Chairman.
        We have been struggling with an issue on Financial Services
    for some time, and that is the issue of the banks and commerce.
    So I would like to ask this panel a couple of questions about
    that.
        If only banks are allowed to be QIs, doesn't that
    inexplicitly mix banks and commerce to an extent that is
    unwelcome?
        Mr. Levine. Are you asking all of us--
        Mrs. Kelly. I am asking the entire panel. Mr. Levine, would
    you like to respond to that?
        Mr. Levine. That is not correct. The proposed regulations
    in no way state or imply that only banks can be QIs.
        Mrs. Kelly. Well, anybody else want to talk about that?
        Mr. Halloran. Practically that would be the impact. The
    reality is the monetization of funds is inherently different
    between a bank and an independent QI. And the QIs would be
    forced to raise fees to the tune of thousands of dollars, where
    banks would not have that same structure in place. So basically
    bank-owned QIs would have an advantage in the monetization of
    funds.
        There is also another issue, and it would be a disadvantage
    actually back to the bank, and that is, with the bank acting as
    a qualified intermediary or having a qualified intermediary
    subsidiary, there is an issue where banks would go on and say
    you need to use our qualified intermediary services, and we
    will give you the best loan rate associated with it. If the QI
    ended up making a significant error in that exchanger's
    exchange, there is really an issue of potential negligent
    referral on the part of the bank. And so the bank would have an
    associated liability that could be created out of that.
        Mrs. Kelly. Mr. Halloran, you just jumped on to the second
    question I was going to ask. That is exactly what I see, and
    that is why I asked the question to begin with. I am concerned
    about that.
        So is there anybody else who wants to jump in on this? Or I
    will ask my third question.
        My third question is what is to prevent a bank from
    acquiring a geographic monopoly on the QI business if new
    nonbank competitors don't get into the QI business? Is there
    anything out there that would prevent them?
        Mr. Halloran. No.
        Mr. Levine. There is just a fundamental misunderstanding, I
    think, of the premise, because the assumption you are making is
    that these regulations will even effectively result in only
    banks being QIs. That is just not correct. What they may result
    in is they may result in the interest being paid over to the
    taxpayer. But I think what we all need to understand is that
    the range of fees that QIs charge right now is very minimal. It
    is between $500 maybe and $1,500, that is all. All QIs
    basically are within that range.
        I think what effectively might happen by these regs is not
    that nonbank QIs will be prohibited somehow, but that I think
    QIs who are keeping most of the taxpayer's interest will wind
    up giving over that interest, and the overall fees, all of the
    fees that are being received, probably will reduce. It has to
    be beneficial to the ultimate consumer. It has to be.
        Mrs. Kelly. That would depend on whether there is a
    geographic monopoly on the QI.
        Mr. Halloran, I saw you shake your head. Do you want to
    respond to that?
        Mr. Halloran. First of all, qualified intermediaries pay
    competitive rates of interest to consumers today, so this is
    not an issue of the interest not being paid to the consumer.
    There is no homeless income here. The consumer receives
    interest that is paid by the qualified intermediary, they are
    1099 on it, they have to pay their taxes accordingly. The
    qualified intermediary reports all of their income, takes away
    their traditional operating deductions that any company is
    allowed to do, so there is no homeless income there. The banks
    would have a significant competitive advantage, particularly in
    the scenario that you are painting.
        Mrs. Kelly. Thank you.
        I want to ask the IRS a question. How many comments did you
    get on this proposed rule?
        Mr. Korb. One hundred thirty-eight comments.
        Mrs. Kelly. How many were in opposition to the proposed
    rule?
        Mr. Korb. One hundred thirty-five.
        Mrs. Kelly. One hundred thirty-five were opposed out of one
    hundred thirty-eight; is that correct?
        Mr. Korb. That is exactly right.
        Mrs. Kelly. What is your view regarding the security with
    regard to the consumer on the services that are provided by
    bank-owned QIs compared to the security and customer service--
    sorry, let me do this again. What is your view regarding the
    security and consumer service provided by bank-owned QIs
    compared to the security and customer service provided by
    business-owned QIs?
        Mr. Korb. Congresswoman Kelly, I am not sure I am the right
    person to answer that.
        Mrs. Kelly. Let's throw it out to the whole panel here.
        Mr. Levine. I think the level of service by both bank QIs
    and nonbank QIs is very good. I think there may be some point
    about banks being regulated, and because the bank is regulated
    by the OCC--the bank subsidiary, including the QI, has to be
    regulated by the OCC. So from the consumer's viewpoint, there
    may be more protection, but in terms of level of service, both,
    I think, offer very good service.
        Mrs. Kelly. Thank you. My time is up.
        Thank you, Mr. Chairman.
        Chairman Manzullo. Congresswoman Bordallo.
        Ms. Bordallo. Thank you, Mr. Chairman. I have a question
    for Mr. Korb.
        Based on the testimony here today, there is a concern about
    the effect that this change would have on the qualified
    intermediary industry. Does the IRS and Treasury acknowledge
    that this regulation will create some burden or cause hardship
    for some of the small businesses represented here today?
        Mr. Korb. Congresswoman, that is exactly what the
    Regulatory Flexibility Act is designed to get at. That is why
    it is so important that we take this step that has been
    recommended by Chief Counsel Sullivan to do a better job in
    that analysis, and it will come out in the analysis.
        Ms. Bordallo. So you do feel that small businesses could go
    out of business?
        Mr. Korb. I didn't say that. I said that is what this
    process is designed to get at.
        Ms. Bordallo. I have another one for Mr. Halloran here.
    Based on what you heard so far at this hearing, do you believe
    that the IRS fully understands how your business operates and
    the impact that it will have on your business? And what bothers
    you the most about their testimony?
        Mr. Halloran. Actually, I think you kind of got to the core
    of it. I am serious when I say I trust that their intentions
    were fine, they were good. I think the reality is because they
    are not necessarily business people, they don't understand the
    context of how we have to operate on a day-to-day basis. They
    don't understand competitive markets; they don't understand
    creating value propositions for consumers. And unfortunately,
    as a result, they have come out with a ruling that--or a
    proposed regulation change that would prejudice the industry
    towards one particular group. I do not believe that was their
    intent, but it is certainly the result.
        Ms. Bordallo. Thank you.
        And one more quick question, Mr. Chairman, for Mr.
    Sullivan.
        In the testimony before the IRS, former Treasury Assistant
    Secretary Pam Olson cited complaints of small businesses as
    disingenuous, and that the assertion that the IRS has not
    complied with the Regulatory Flexibility Act is a red herring.
    I take it from your testimony and your comments that you do not
    feel the same way.
        Mr. Sullivan. Congresswoman, not only do I not feel the
    same way, but I think the chief counsel Don Korb's letter to
    the Chairman saying that they could do a better job on the
    Regulatory Flexibility Analysis refutes that point of view.
        Ms. Bordallo. What is Advocacy doing to improve the process
    in which the IRS considers the impacts its rules and
    regulations have on small businesses?
        Mr. Sullivan. Well, Congresswoman, we are working to try to
    get a better understanding with IRS on what it takes to have a
    full-blown and complete Regulatory Flexibility Analysis. Prior
    to this hearing, actually prior even to the consideration of
    this hearing, the chief counsel and I have met and have
    exchanged commitments to continue to work toward improving the
    Regulatory Flexibility Analysis they conduct. So I was
    optimistic then; I am optimistic by the chief counsel's
    comments today that we will move forward in better working
    relationships in compliance with the Regulatory Flexibility Act
    over at IRS.
        Ms. Bordallo. Thank you.
        Thank you, Mr. Chairman.
        Chairman Manzullo. Mr. King.
        Mr. King. Thank you, Mr. Chairman.
        First, I would direct my first question to Mr. Halloran,
    and that is, consumers--first of all, I would like to know from
    you, are you confident and to what degree are consumers advised
    of the rate they might receive on their nonbank QIs on bank
    deposits? And also, how many small businesses make up the
    industry percentage of exchangers or customers?
        Mr. Halloran. To your first question, the majority of QIs
    that I know of disclose the fact that this is our fee, and that
    we make some interest on the spread. Again, consumers are aware
    of it not only because it is only logical that companies make
    money--and certainly some organizations, mine included, charge
    very low fees. We created a very low-fee structure so that we
    could assist smaller consumers who could not normally afford
    $1,000-plus fee. And the larger customers that we have
    basically help cover those costs through the spread. But our
    largest customers, they are all aware that we make money in the
    spread. We fully disclose it both in our conversations with the
    consumers and actually contractually in our exchange
    agreements.
        Mr. King. Can you give us some idea of the range of that
    return rate?
        Mr. Halloran. Depending on the individual exchanger and the
    size of the deposits, for instance, our largest depositor right
    now earns 425 basis points on their funds, which is a very
    competitive rate, and they are comfortable with that. They know
    that, it is fully disclosed to them, they know what the rates
    are out in the marketplace.
        Our smallest exchanger earns 1-1/2 percent. The average
    that we pay out corporately is somewhere around 2-3/4 percent.
        Mr. King. That helps.
        Then about what percentage do you think are handled then by
    nonbank?
        Mr. Halloran. Of the total transactions in the marketplace?
    I couldn't tell you the total market share numbers. There are
    two large bank-owned QIs--
        Mr. Halloran. There are two large bank-owned QIs of
    substance, maybe four, that as you start to aggregate them all
    and their meaningful volume, the majority are small businesses.
        Mr. King. I sit and listen to the exchange between the
    witnesses and the panel. I am thinking in terms of, there is a
    pot of money that comes from the sale of some real property,
    most likely. That goes into the hands of maybe yourself or Mr.
    Levine. And then there is a disagreement then between the two
    of you on whether this is actually two incomes or one out of
    that.
        I would direct this to Mr. Levine kind of in this way, say,
    for example, I had a horse, and I needed that horse boarded for
    a while. And I would go to my neighbor and say, will you feed
    that horse and take care of that horse and then when I am ready
    to transfer him over into another property or sell him, will
    you keep that horse for me, feed him and do what you want to
    with him while I am gone, take him to the horse show or
    whatever you want to do?
        Now, is there income off of that horse? Then should that be
    taxable? And the next question is, if you take him to the horse
    show and then make a little money on the side, why do I care
    about that, and why is that not taxable as the income that you
    would receive as managing that 1031?
        Mr. Levine. In the examples you gave, effectively, you are
    renting that horse to the individual, whoever it is, that is
    boarding it. If you are allowing that person not only to board
    it but do whatever it wants with that horse, then, from a
    Federal income tax viewpoint, that person is like a lessee in
    the sense that you are renting that horse to that person.
    Whatever income that is earned from that horse--it is like real
    estate. If I let you use my real estate, you can do whatever
    you want with it, keep the income from that real estate, I am
    renting, I am leasing that real estate.
        Mr. King. Whether or not you take him to the horse show or
    not? That depends on the original transaction or--
        Mr. Levine. Right. If I give you the ability to do whatever
    you want with the real estate or with the horse, I am in effect
    leasing or renting that horse or real estate to you.
        Mr. King. And if I own that horse for business purposes, I
    can write off the expense of that lease.
        Mr. Halloran, how would you respond to that.
        Mr. Halloran. I would think you are doing him a favor by
    taking care of the horse.
        Mr. King. At this point of levity in this particular
    discussion, I would point out these things: We are in, the
    Federal Government is in this business of taxing all
    productivity in America. And that is what we are asking here:
    Is there productivity here, or is there not productivity there?
    Because if it is interest income, dividend income, wage income,
    we tax it all. Uncle Sam is standing there with his hand out
    every Monday morning when people punch the time clock at
    whatever time it is in the morning, and the Federal Government
    has the first lien on all productivity in America. And what we
    are sitting here doing is determining whether we think that is
    really productivity.
        My point to this is, more than any other, so we get down to
    the weeds, into the minutia of all of this because we have such
    a convoluted Tax Code that nobody can understand, no two people
    will come to the same conclusion on any kind of complicated tax
    policy, and that is my point for tax reform.
        I thank all of why you gentlemen for your testimony and
    your responses and I yield back to the gentleman.
        Chairman Manzullo. A horse? You ever try to feed a horse,
    Mr. Levine?
        Mr. Levine. Not recently, no.
        Chairman Manzullo. If you had to feed a horse, I don't
    think that you would consider that to be a great business
    transaction.
        Mr. Levine. Well, if the horse was a Kentucky Derby winner,
    and you allowed me to do whatever I could do with that horse, I
    may be very grateful to you.
        Chairman Manzullo. Mr. Gohmert, you have questions?
        Mr. Gohmert. Thank you, Mr. Chairman. And with regard to
    the horse, being a freshman here, having been a judge for a
    number of years, I have become more familiar with dealing with
    part of a horse since I have been here in Washington.
        But, anyway, Doctor, there seems to be significant feeling
    that the new regulations will drive QI business into the bank.
    So I just had a question for Mr. Korb and Mr. Sullivan. If that
    were to happen, QI business is driven to banks, would you
    consider that a good thing or a bad thing?
        Mr. Korb. I really don't know in my role that I am sitting
    here that I can form a judgment on that.
        Mr. Gohmert. Do you need to change seats and sit somewhere
    else?
        Mr. Korb. I think so. I am the tax administrator right
    here, remember what the rule is. The rule is, what Congress has
    enacted here with the Federal Regulatory Flexibility Act is
    sunshine. It is transparency. The idea is to present before the
    public certain ramifications. Okay? And then those
    ramifications are taken into account as we finalize the
    regulations.
        I would really prefer, in fact I think I would be doing a
    disservice to everybody if I formed a judgment at this point in
    time in the middle of the process. It would be like asking a
    judge how he is going to decide a case before the case is
    through.
        Chairman Manzullo. Would the gentleman yield?
        Mr. Gohmert. Let me follow up on that metaphor. Actually it
    is more like questioning a juror to see if they would be fair
    before they make the final decision is what it is really more
    akin to. I yield to the Chairman.
        Chairman Manzullo. I think that is a valid question, Mr.
    Korb, because the question is--restate the question again.
        Mr. Gohmert. Well, if this business is driven into banks
    would you consider that to be a good thing, good for the
    economy?
        Chairman Manzullo. But the small businesses closing up?
    QIs?
        Mr. Gohmert. Merging into the banks.
        Chairman Manzullo. I think that is a valid question. That
    goes not only to the heart of the RFA but goes to the heart of
    the issue if there are just a few people that are left in the
    industry.
        Mr. Korb. I am not so sure my judgment matters on that
    point.
        Chairman Manzullo. But you are the one who makes the
    decision. Your judgment is important.
        Mr. Korb. My decision will be based on what the law is.
        Chairman Manzullo. Well, it will be based upon the impact
    of the law. That is the RFA, and that is why I have this
    hearing going on. Mr. Gohmert I took your time.
        Mr. Korb. I am not trying to be cute about it. I am trying
    to give you my honest answer.
        Mr. Gohmert. Well, if you were trying to be cute, it did
    not work. Because you suffer from my problem, you are not going
    to be cute no matter what you do.
        Mr. Korb. You are right about that.
        Mr. Gohmert. You and I are in the same boat.
        Mr. Sullivan, you had a comment?
        Mr. Sullivan. I would like to expand on the juror analogy
    that you mentioned. I think a key point for this committee and
    the Regulatory Flexibility Act is, how would a juror respond to
    the question, I don't have enough information in front of me to
    make a decision? And I think that, from the Regulatory
    Flexibility Act perspective, that seems to be my office's
    stance on whether or not it is a good idea or a bad idea. We
    prefer not to say that, but we do prefer--the Reg Flex Act
    demands that there be enough information so that the commenting
    public can actually help IRS decide whether or not it is a good
    idea or a bad idea.
        Mr. Gohmert. But as I understood, these could go into
    effect tomorrow. That possibility exists; is that right?
        Mr. Sullivan. The Regulatory Flexibility Act, the spirit of
    it, would be that a thorough regulatory flexibility analysis
    precede the finalization of a rule. Because, again, you want
    the public to comment on a thorough analysis. You want the jury
    to deliberate on the facts--as many of the facts and
    circumstances of the case before making a decision. It would be
    unfortunate if IRS finalized the rule without having the
    opportunity of a more thorough regulatory flexibility analysis
    out for comment.
        Mr. Gohmert. Mr. Halloran, that would help your feelings,
    would it not? If they went ahead and made this in effect
    tomorrow and could pass on to you it really is unfortunate that
    it just killed your business, you would feel better; right?
        Mr. Halloran. Yeah, I would see if I could come work for
    you.
        Mr. Gohmert. I don't think you would for the wages you get
    paid up here. But still, I am troubled, on the one hand, I am
    hearing that we want to make sure there is a thorough review
    and we gather all the evidence. But then, on the other hand, I
    was under the impression that we were near the end of the
    evidence gathering and we were about to have a verdict, whether
    there had been sufficient evidence or not.
        Mr. Korb. That is not true at all. That is not true at all.
    We are not near the end. I told Chairman Manzullo's tax counsel
    that the other way. I made it very clear to him. There is no
    way this reg is going to be finalized tomorrow.
        Mr. Gohmert. I didn't say it was going to be.
        Mr. Korb. I committed to--I committed to Mr. Manzullo's tax
    counsel, as I did here publicly, that we are going to perform a
    revised IRFA. So you don't have to worry about--I mean, this is
    not going to happen immediately. Take a look, I lay out in the
    testimony--I wasn't able to cover everything, but I go through
    the entire process. And we are really at the beginning of that
    stage of the process.
        Mr. Gohmert. Well, regardless of the credibility, you might
    assess or attach to the comments information that has been
    gleaned so far.
        If I could ask this one further question, Mr. Chairman, I
    know I have a red light there. Okay. Thank you. How would you
    summarize the evidence and information that has been gleaned so
    far? You don't have to--credibility, I understood we had 138
    comments, and 135 were negative. But how would you assess the
    information gleaned so far?
        Mr. Korb. Well, with respect to the 135, quite a few of
    them were identical comments. I think the best answer to your
    question is sitting on the panel here. Mr. Weller has 30 years
    of experience in this business. Okay? He was chairman of the
    ABA committee, wrote books. He has one view.
        Mr. Levine has got 30 years of experience, chairman of some
    other ABA committee, wrote other books. He has got a different
    view. That shows you how tough this decision is.
        Mr. Gohmert. And that is your summary of what you have
    heard so far is, it is just tough?
        Mr. Korb. I think it just points out, there are two sides
    to this. I think these gentlemen did an excellent job of
    summarizing both sides this afternoon.
        Mr. Gohmert. So thank you. So there are two ends to every
    horse; I appreciate that.
        Mr. Korb. That is right.
        Mr. Gohmert. Thank you.
        I yield back.
        Chairman Manzullo. Thank you.
        Mr. Korb, we gave you a document on July 14th asking for
    documents relating to Treasury's research on the Regulatory
    Flexibility Act; do you recall that?
        Mr. Korb. Yes, sir, I received a fax from your tax counsel.
        Chairman Manzullo. Right. You talked to our tax counsel,
    Mr. Westmoreland and Mr. Pineles.
        Mr. Korb. I actually talked to both of them.
        Chairman Manzullo. Right. And did you not advise them that
    you were going to seek out these documents?
        Mr. Korb. Absolutely.
        Chairman Manzullo. And I just received documents, but these
    are documents that were up on the Internet. They are simply the
    letters that are in favor or against the regulation; is that
    correct?
        Mr. Korb. That is exactly right.
        Chairman Manzullo. Now, I call this a subpoena duces tecum.
    I gave you this thing instead of serving a subpoena thinking
    that you had given me documents, which you did not.
        Mr. Korb. Were those indicated to be all that we were going
    to give you or just the first group of documents?
        Chairman Manzullo. Maybe you could tell me. Usually you
    have documents before you go to trial. You are an attorney. I
    would anticipate that when a committee chairman requests
    documents, that you would bring those documents before the
    hearing. Would you not anticipate that?
        Mr. Korb. We have been working expeditiously to respond
    fully. This effort--
        Chairman Manzullo. Come on. I have been waiting for you to
    go get the documents.
        Mr. Korb. There are several different lawyers who have been
    responsible for this.
        Chairman Manzullo. Could you give me the names of the
    lawyers?
        Mr. Korb. Our efforts--
        Chairman Manzullo. Mr. Korb, I am asking the questions.
        Mr. Korb. Okay.
        Chairman Manzullo. What are the names of the lawyers who
    did the work on this?
        Mr. Korb. The names?
        Chairman Manzullo. Yeah, who actually did the work on it.
    Because I guess I will have to subpoena them at a future
    hearing date.
        And, Phil, could you give me a hearing date in September? I
    don't think we are done with this, and we will have to serve a
    subpoena to Mr. Solomon at that time.
        Mr. Korb. The names of the lawyers listed here in the
    regulation, page 584 and 585, are--your tax counsel has access
    to this--A. Katharine Jacob Kiss and Rebecca Asta. They are the
    lawyers who are listed who worked on the--
        Chairman Manzullo. Are any of those people here? Are any of
    those people mentioned in the room today from the IRS? They are
    not here? Did you ask them for documents?
        Mr. Korb. Well, here is the problem we have right now.
        Chairman Manzullo. No, the problem is, I am the one that
    asks the questions. All right?
        Mr. Korb. I put in--
        Chairman Manzullo. You are the one that answers them.
        Mr. Korb. Okay. Let me answer it.
        Chairman Manzullo. Go ahead and answer it.
        Mr. Korb. We put in process as soon as that document
    arrived from Mr. Westmoreland and Mr. Pineles, whenever it
    arrived. Okay? Our efforts have been made extremely difficult
    by the--
        Chairman Manzullo. Get your wading boots.
        Mr. Korb. By the flood. I have been frank with your staff
    from the very beginning. The moment that arrived, I told them
    it was highly unlikely that we would have those documents by
    today.
        Chairman Manzullo. What documents are there? Do you know?
        Mr. Korb. I don't know.
        Chairman Manzullo. I don't think there are any.
        Mr. Korb. We will find out.
        Chairman Manzullo. I really don't think there are any, Mr.
    Korb, and I will tell you why.
        Mr. Sullivan, would you take a look at the attempt to
    comply with the RFA that appears on the page of the regulation
    which says, Initial Regulatory Flexibility Analysis. Do you see
    that?
        Mr. Sullivan. Yes, sir, Mr. Chairman.
        Chairman Manzullo. Here it is on page 6, 234, and there is
    one paragraph at the bottom there. Then it goes to, I think the
    total is about three paragraphs. Is that correct?
        Mr. Sullivan. The entire section entitled, Initial
    Regulatory Flexibility Analysis, appears to be about seven or
    eight paragraphs.
        Chairman Manzullo. All right. And it is pretty small. Is
    that correct?
        Mr. Sullivan. It is about seven or eight paragraphs.
        Chairman Manzullo. Okay. And you said in your testimony it
    is up to the agency to come up with the data and to show what
    the impact would be and then for the entities to comment on the
    impact as opposed to the entities coming up and saying what the
    impact will be; isn't that correct?
        Mr. Sullivan. Ideally, that is the way the process would
    work under the Reg Flex Act.
        Chairman Manzullo. Mr. Korb, did you have staff trying to
    find that? Trying to find that data? Or was this done under
    your control and supervision?
        Mr. Korb. No.
        Chairman Manzullo. So you really can't answer that.
        Mr. Korb. I really cannot.
        Chairman Manzullo. Mr. Solomon could.
        Mr. Korb. I really can't speak for Mr. Solomon.
        Chairman Manzullo. That is why we needed Mr. Solomon here,
    and we are going to prepare a subpoena to have him here. I may
    have to bring in the new Secretary of Treasury to sit next to
    him also. Does that indicate to you, Mr. Korb, about the
    attitude of the Treasury, the fact that Mr. Solomon is not
    here?
        Mr. Korb. No, not at all.
        Chairman Manzullo. Do you want to comment on that? You
    don't have to. If I could walk you through the written
    testimony, I appreciate that it is very thorough, Mr. Korb, on
    page 9.
        Mr. Korb. Of my written testimony?
        Chairman Manzullo. Yes, sir. On page 4, where it says, the
    drafting process--this is your testimony.
        Mr. Korb. Right, I am getting it.
        Chairman Manzullo. Page 4, where it says, the drafting
    process.
        Mr. Korb. This is in general. This is how the process
    works. Remember, I wasn't at the Service during most of this.
        Chairman Manzullo. I understand, I understand.
        Mr. Korb. So all I can do is tell you how it would normally
    work.
        Chairman Manzullo. I appreciate that. It says: ``Chief
    Counsel staff identifies the issue in each regulations project
    and makes recommendations for possible solutions.'' Then it
    says, last sentence of the paragraph, ``If an IRFA must be
    prepared''--and your testimony goes back and forth as to
    whether or not there was in fact any obligation on behalf of
    the IRS to prepare anything.
        Mr. Korb. No, no, that is not true. That is not true at
    all. As Chief Counsel Sullivan said, in this particular case,
    the Service recognized the need to prepare, and they did. In
    fact, you said that in your letter to me as well.
        Chairman Manzullo. This may be the first time at least that
    I know of that the IRS even attempted to comply with the
    Regulatory Flexibility Act.
        Mr. Korb. In your office, Congressman, I told you things
    are going to be different with me.
        Chairman Manzullo. This is not a training ground. This is
    not a school. This is a hearing before the United States House
    of Representatives Small Business Committee as to whether or
    not at least 350 companies are going to be wiped out. And that
    is why we asked you to withdraw this regulation and start all
    over again, because you admit that it is far from perfect. In
    fact, your testimony says: ``If an IRFA must be prepared, the
    drafting team researches the population of small businesses
    that would be affected, the cost the regulations would impose
    and whether less burdensome alternatives exist.''
        Now, if I take you to page 6, 234, I don't really find any
    of those three items except the attempt to say that all you had
    was 200 or 300 of these qualified intermediaries. There is
    nothing there that talks about the cost the regulations would
    impose or whether less burdensome alternatives exist. And by
    your own statement, you say that this is what you must put in
    the IFRA.
        Mr. Korb. Let me see here. Let's go through it. The first
    thing is, we have to determine, we have to research the
    population of small businesses, and so what they did is they
    called up FEA and got a number. The FEA represented that was 80
    percent of the industry.
        Chairman Manzullo. I understand that.
        Mr. Korb. That is 325. That is in there.
        Chairman Manzullo. Can I stop you right there?
        Mr. Korb. Sure.
        Chairman Manzullo. No, go ahead and finish.
        Mr. Korb. Then the cost the regulations would impose. What
    they did, which you can ask Chief Counsel Sullivan, is an
    appropriate way to respond when you don't have the right data
    in your IRFA. It says comments are requested on the nature and
    extent of the economic burden imposed on small entities by
    these rules.
        Chairman Manzullo. But you are supposed to have that in
    your document. You don't get that from comments. What you do is
    you sit down with the different parties and figure out what
    this is going to cost. Then that goes into your IRFA. You do
    not have that in there.
        Mr. Korb. Well, Mr. Sullivan's pamphlet here that we used
    to comply with this indicates that if you can't get that
    information, one way to get at it is to--
        Chairman Manzullo. But you don't know if it was ever asked.
        Mr. Korb. Personally, you are exactly right.
        Chairman Manzullo. Mr. Solomon would know that, and he is
    not here to testify.
        Mr. Korb. I cannot speak for Mr. Solomon.
        Chairman Manzullo. Mr. Solomon can't speak for himself
    either.
        Mr. Korb. On whether less burdensome alternatives exist,
    there is a paragraph. It's the fourth paragraph in and lists
    alternatives as I indicated to you in my letter of June 10th.
    Maybe we could have done a better job of talking about other
    alternatives.
        Chairman Manzullo. I think you could have done a better job
    altogether on this thing.
        Mr. Korb. I do not disagree with you.
        Chairman Manzullo. These small businessmen who have come to
    me as a last resort because there isn't one person in this town
    that will listen to them and will touch this issue. Desperate
    to save their family businesses. Don't you think you owe it to
    them to give them your highest and best and most educated and
    most scholarly IFRA before you go any further with this?
        Mr. Korb. We are going to do it. No doubt about it. And I
    told your tax counsel absolutely--
        Chairman Manzullo. But it should be in this document. You
    should have the facts before you draw the regulations. You
    should know the impact before you draw the regulations.
        Mr. Korb. We can't change what has already happened.
        Chairman Manzullo. Yes, you can. You can withdraw this
    piece of junk. Mr. Sullivan called it garbage in and garbage
    out. You sit there and say that the IRS has failed to follow
    the law. You have failed miserably.
        Mr. Korb. I did not say that.
        Chairman Manzullo. You did, too.
        Mr. Korb. No, I did not.
        Chairman Manzullo. Let me read your letter. I disagree with
    you, Mr. Korb, but you are honest. That is good, because you
    make no qualms as to what happened--
        Mr. Korb. I have the letter right here.
        Chairman Manzullo. All right your July 10th letter states:
    "I am writing to follow up on our meeting of June 27th, 2006,
    and your letter dated May 8, 2006, regarding proposed
    regulations. At our meeting, you expressed concern about the
    Initial Regulatory Flexibility Analysis, IRFA, prepared with
    respect to these proposed regulations. At the meeting, I told
    you I would review the IRFA in order to make my own evaluation
    of whether it did in fact comply with the requirements of the
    RFA. After looking into the matter, I have concluded that the
    IRS and Treasury Department made a good-faith effort to comply
    with the Regulatory Flexibility Act and that the IRFA that was
    published with the proposed regulations was technically in
    compliance with the law. Nonetheless, I have also determined
    the IRS and Treasury Department could have done better with
    respect to certain aspects of the IRFA. For example, regarding
    industry size standards, you suggest we should have used NAICS
    523991"--that is what we suggested in my letter to you, that
    the size standards be determined by trust, fiduciary and
    custodial activities--"rather than NAICS 531390 relating to
    real estate related services, such as escrow services."
        You know that half of these 1031 exchanges involve personal
    property? Were you aware of that?
        Mr. Korb. I have been told that, yes.
        Chairman Manzullo. But what you used here was NAICS 531390,
    relating to real estate related services, such as escrow
    services. What is at stake here is you don't even know the
    players that are impacted.
        Mr. Korb. But they still came up with the 320.
        Chairman Manzullo. That is the group here. But there is
    another group that Mr. Levine came up with. And Pam Olson, who
    was at Treasury, when she testified--I believe it was on June
    6th--on page 4 of her testimony, she says: ``The true small
    business interests are the individuals and businesses who rely
    on the services of a qualified intermediary to effect their
    1031 exchanges.''
        So it is the customers. Do you know how many people are
    impacted by this besides these qualified intermediaries? Did it
    ever occur to you that it would be the people who were involved
    in the like-kind exchanges that would be in the population that
    would be impacted?
        Mr. Korb. I think Mr. Levine mentioned that this morning.
    Although, I would point you to page 20 of Chief Counsel
    Sullivan's pamphlet here which notes--and again, we are just
    following the pamphlet that was put out--that the courts have
    held that the RFA requires an agency to perform a regulatory
    flexibility analysis of small business impact only when the
    rule directly affects them.
        Chairman Manzullo. That is correct. I would think that, if
    you are an investor and you may have to go 200 or 300 miles to
    find a qualified intermediary, a qualified intermediary might
    charge you more because the market has been narrowed down to
    one or two or three qualified intermediaries throughout the
    country. That those would be impacted people.
        Mr. Korb. Congressman, you raise an interesting point here.
    In preparation for this hearing, I went through all the
    comments again before the package was brought up for you. I
    found a letter from a lawyer in Philadelphia from Ballard
    Spahr--I don't know him--Ted Hirsh. His letter is very
    interesting. What his letter says, he talks about the number of
    letters going back and forth and whole history--
        Chairman Manzullo. Does this relate to the question of the
    investor?
        Mr. Korb. Yes, absolutely. Absolutely. What he basically
    says is: A pox on both your houses; if Congress was really
    interested in small business, they would change the law so that
    you could do a rollover like-kind exchange and you would not
    need to pay any of these fees, which I thought was an
    interesting proposition, and that would clarify--
        Chairman Manzullo. You can share that with Mr. Thomas,
    because we are not the committee that determines that.
        Mr. Korb. I thought that was interesting.
        Chairman Manzullo. It is interesting, because the question
    is--
        Mr. Korb. I think it relates to this question; doesn't it?
        Chairman Manzullo. My question to you is, in your attempt
    to come up with a new RFA, are you going to be looking at
    impact on the investor?
        Mr. Korb. I can't sit here and tell you--
        Chairman Manzullo. Mr. Korb, you can do that. We are
    looking at the population. The purpose of this hearing is to
    review your fulfillment of the RFA.
        Mr. Korb. We will do whatever is required by the law.
        Chairman Manzullo. No, that is not sufficient. That really
    isn't sufficient.
        Mr. Korb. That is all I can tell you.
        Chairman Manzullo. But that is the whole point. That is the
    whole point. I am going to ask you right now, do you have a way
    of knowing who all of these investors are that made the like-
    kind exchanges?
        Mr. Korb. No, I don't.
        Chairman Manzullo. You don't? The IRS has no way of knowing
    that?
        Mr. Korb. Not that I am aware of.
        Chairman Manzullo. Do you know what a Form 8824 is?
        Mr. Korb. Actually, I have a copy of that.
        Chairman Manzullo. Yeah, why don't you tell us what that
    does? You know what it does; don't you?
        Mr. Korb. What?
        Chairman Manzullo. Form 8824.
        Mr. Korb. Yes, I know. You want me to read it.
        Chairman Manzullo. You don't have to read it. Just tell us
    what it does.
        Mr. Korb. It is a reporting form that is used to report, I
    guess, like-kind exchanges.
        Chairman Manzullo. Right. Everybody who does that, whether
    it is real estate or personal property, has to file one with
    the IRS. Isn't that correct?
        Mr. Korb. Right. Let me go through this here.
        Chairman Manzullo. You don't have to because you have
    already answered my question.
        Mr. Korb. No, I did not.
        Chairman Manzullo. Yes, you did. Let me ask the questions;
    all right? The next question is, how many--do you have a way to
    quantify how many people filed Form 8824?
        Mr. Korb. Yes, I do.
        Chairman Manzullo. That is pretty simple, isn't it?
        Mr. Korb. That is what I was going to tell you. In 2003,
    236,073 of these forms were filed. But that does not present an
    accurate picture of the number of transactions. Taxpayers must
    file the form for 2 years after the transaction is completed.
    Some portion of the forms filed in 2003 reflect transactions
    that occurred in 2000 and 2001. Taxpayers who have more than
    one exchange per year may file a summary form--
        Chairman Manzullo. I understand. Mr. Korb, what I am
    telling you is, there is a sizable population out there, isn't
    there?
        Mr. Korb. Sure sounds like it.
        Chairman Manzullo. You do not know whether it is 100,000 or
    200,000. And Pam Olson, what was her position before she left
    the IRS?
        Mr. Korb. She was at the IRS about 20 years ago. I think
    she was the assistant to the chief counsel.
        Chairman Manzullo. No, she was there recently.
        Mr. Korb. No, she wasn't.
        Chairman Manzullo. I'm sorry, Treasury.
        Mr. Korb. At Treasury, I think she was, I think, assistant
    secretary.
        Chairman Manzullo. And the fact that she says that this is
    a significant population that should be examined, don't you
    find that to be of interest?
        Mr. Korb. I suppose.
        Chairman Manzullo. Okay. And then the fact that Mr. Levine
    says that these are important people. Wouldn't you agree that
    they are impacted?
        Mr. Korb. I am not going to sit here and tell you that
    until I think about it.
        Chairman Manzullo. I tell you what, why don't you think
    about it? How much time do you need? What does it take to get
    you to say you are going to do everything you can to make a
    thorough analysis as possible?
        Mr. Korb. I told you that three times.
        Chairman Manzullo. I understand that, but I ask you these
    questions, and you say--
        Mr. Korb. We are going to do what is required by the law.
        Chairman Manzullo. Required by law. How about doing what
    the community out here requires? How many out here--raise your
    hands--would like to see as part of the population examined on
    the impact the people that do the investing? Raise your hands,
    everybody in the audience. I think that is pretty significant.
    Mr. Levine, you would like to see that also; wouldn't you?
        Mr. Levine. Do you mean in terms of the RFA?
        Chairman Manzullo. Both.
        Mr. Levine. I am not an expert in the RFA, but yes, I do
    think that investors will benefit, will absolutely benefit--
        Chairman Manzullo. That is your opinion, and I appreciate
    that. But there should be an analysis as to that; shouldn't
    there?
        Mr. Levine. I am not an expert in the RFA, Congressman. I
    can't answer that.
        Chairman Manzullo. Mr. Sullivan?
        Mr. Sullivan. We are talking about what the Regulatory
    Flexibility Act requires and the chief counsel at the IRS was
    correct. By law and the way the courts have interpreted it, it
    does require only the analysis of those most directly impacted
    by a proposed rule.
        Now, different question, would it be nice to inform
    commenters on how this may foreseeably and reasonably impact
    customers and consumers? Those are nice things to also have.
    The Reg Flex Act does not legally require it, but it is nice to
    have in an initial regulatory flexibility analysis.
        Chairman Manzullo. Don't you feel that a person who is a
    customer who may end up paying a higher rate of interest would
    be somebody who is directly impacted by this regulation because
    of lack of competition?
        Mr. Sullivan. Actually, I think the regulation specifically
    and directly impacts QIs, and their customers are secondarily
    impacted.
        Chairman Manzullo. But they are also impacted by RFA. That
    is a pretty narrow--
        Mr. Sullivan. I don't know how the court would interpret--
        Chairman Manzullo. I don't care about the court. I helped
    draw the law.
        Mr. Sullivan. I know that the law requires those that are
    directly impacted, and there are actually bills in the House
    and Senate that extend that to require analysis for those
    reasonably foreseeable--
        Chairman Manzullo. Do you see under these circumstances, as
    Mr. Weller says, you could end up with a handful of companies
    nationwide that are the only QIs left?
        Mr. Sullivan. Mr. Chairman, from a pragmatic perspective,
    it would be good to have a more full-blown analysis of those
    directly impacted. You walk before you run, I guess. And then,
    ultimately, I would love to work with Chief Counsel Korb and
    others to see if we can go even further and look at those in
    future rulemakings that impact secondary impact. For the time
    being, the law does require the analysis of those directly
    impacted by the rule.
        Chairman Manzullo. Let me continue with Mr. Korb's letter
    of July 10th. So you are going to look at whether or not you
    used the right NAICS code; is that correct?
        Mr. Korb. To be honest with you, I need to talk to Counsel
    Sullivan to understand the full impact of that. As I see it,
    the fact that they came up with the 325, that is just the way
    to get to the 325. But maybe I don't fully understand how the
    law works.
        Chairman Manzullo. As a person who has worked with that
    law, and I appreciate Mr. Sullivan's thinking, I think the
    impact on the taxpayer should be considered. It isn't just the
    qualified intermediaries; the taxpayers are the people who are
    doing the exchanges. I don't think it is a stretch of the
    imagination or the regulations to take into consideration the
    impact on everybody involved in these transactions. There are
    the only three parties, the big guys, the little guys and the
    investors.
        Mr. Korb. Is there an NAICS Tax Code for taxpayers? I don't
    know if there is or not.
        Chairman Manzullo. Excuse me? These are all taxpayers,
    somewhere along the line. Everybody in here pays taxes.
        Mr. Korb. That is why I am confused.
        Chairman Manzullo. I don't think you are confused, Mr.
    Korb. I am trying to get some straight answers. My question is,
    it may be more appropriate to use some kind of a composite--
        Mr. Korb. Uh-huh.
        Chairman Manzullo. Which means the population that is
    impacted by this.
        Mr. Korb. Could be. Again, this came out of Chief Counsel
    Sullivan's--
        Chairman Manzullo. No, this is your letter.
        Mr. Korb. But I turned to his book for the guidance. Those
    are the rules that we are trying to follow.
        Chairman Manzullo. I understand that. Now what type of
    composite would you use?
        Mr. Korb. I don't know.
        Chairman Manzullo. Continuing with your letter: "Similarly,
    you raised questions about the accuracy of our estimate of the
    number of small businesses in the qualified intermediary
    industry. In preparing the IFRA, we arrived at our estimate of
    325 businesses affected based on information provided to us by
    the Federation of Exchange Accommodators. Testimony at the
    hearing held on June 6th suggests that there may be more than
    325 small businesses in the QI industry. We are going to
    research the matter further."
        How are you going to do that?
        Mr. Korb. I don't know how we are going to do it. But the
    story changed a little bit, so we thought we better follow up
    and make sure we had the right number here.
        Chairman Manzullo. Continuing with your letter: "You also
    criticized the IRFA for failing to discuss alternatives." There
    are none in the proposed regulations.
        Mr. Korb. The IRFA alternative.
        Chairman Manzullo. One alternative is to do nothing.
    Continuing with your letter: "Although the IRFA discussed the
    alternative of retaining the facts and circumstances test under
    the 1999 proposed regs, we agree that other alternatives could
    have been explicitly addressed." What would they be? You are
    admitting here that you could have discussed--but you did not
    do it.
        Mr. Korb. And we will do that.
        Chairman Manzullo. You don't understand. It was supposed to
    be in this document. I mean, your own guideline says to put it
    in this document.
        Mr. Korb. We are going to.
        Chairman Manzullo. I have it right here. It is not here.
        Mr. Korb. I am following--
        Chairman Manzullo. Don't say that you are following the
    law, because you are not.
        Mr. Korb. I am going to follow what Chief Counsel
    Sullivan--
        Chairman Manzullo. Don't go to him on that. I understand he
    is the expert on it. But this is very simple. The alternatives
    are supposed to be in here.
        Mr. Korb. They are going to be in the IRFA.
        Chairman Manzullo. In where? Are you going to have another
    one?
        Mr. Korb. I told your tax counsel--
        Chairman Manzullo. Tell me.
        Mr. Korb. There is going to be another one.
        Chairman Manzullo. When? What, when you publish the final
    regulations? Attach it to that at the time when nobody can do
    anything?
        Mr. Korb. Ask Mr. Westmoreland what I told him. I said we
    are going to publish a revised IRFA.
        Chairman Manzullo. When?
        Mr. Korb. Not in the final regulations. Before we turn to
    the final regulations. I made that very clear to him.
        Chairman Manzullo. Say that again, because that is good.
        Mr. Korb. I will read it to you. Bear with me. This is to
    confirm that as communicated to your chief--
        Chairman Manzullo. What are you reading from? Could you
    identify what the document is?
        Mr. Korb. It is just a draft.
        Chairman Manzullo. It is a draft? Was it sent to us?
        Mr. Korb. No, it wasn't sent to you.
        Chairman Manzullo. You are a lawyer. Tell us what you are
    reading from.
        Mr. Korb. It is a draft.
        Chairman Manzullo. Of what? A draft of what?
        Mr. Korb. Of this statement.
        Chairman Manzullo. What statement?
        Mr. Korb. The statement I am going to read to you right
    this minute. This is to confirm that as I communicated to your
    chief tax counsel, John Westmoreland, last Friday, I have
    determined that we will prepare a new IRFA for this regulation
    project to ensure that we obtain as much information as
    possible about the effect of these regulations on small
    qualified intermediaries. This analysis will be published
    before any decisions are made about the substance of the final
    regulation. As I told John, I have already directed my staff to
    begin this analysis.
        Chairman Manzullo. All right. Are you open that they would
    take a look at the taxpayers, the people that are exchanging
    the property?
        Mr. Korb. I am open for them to look at whatever is
    necessary.
        Chairman Manzullo. Continuing with this letter: "We will
    expand our discussion of alternatives in the next IRFA or in
    the final Regulatory Flexibility Analysis that we will publish
    in connection with this regulation project.
        "Lastly, you chastised us for failing to provide an
    estimate of the costs of complying with the proposed
    regulation. We acknowledge the responsibility to do so either
    in the revised IRFA or in the final RFA for this regulation
    project and will provide an estimate of those compliance costs
    at that time. As you can see from the text of the Preamble to
    the proposed regulations, because we were unable to develop a
    reasonably reliable estimate of the compliance costs when we
    published the IRFA, we requested comments regarding the nature
    and extent of the economic impact on small entities, which we
    will carefully consider when working on this regulation
    project."
        You are at a disadvantage because you were not intimately
    involved in the drawing of these regulations or in the RFA; is
    that correct?
        Mr. Korb. I appreciate you for making that point.
        Chairman Manzullo. Okay. All right. That could account for
    some of your evasive answers.
        Continuing with your letter: "I would like to thank you for
    bringing to my attention your concerns regarding the adequacy
    of the IRFA relating to these proposed regulations. As I told
    you during our meeting on June 27, I commit to you that we will
    take appropriate steps to address them along with the other
    comments that we received, either in a revised IRFA or in the
    final RFA."
        Now, your letter is different from what you told me just
    now when you read from that draft of a statement.
        Mr. Korb. That is exactly right. This letter was sent on
    June 10th; I read the statement today.
        Chairman Manzullo. I appreciate that.
        Continuing with your letter: "Also, as I discussed with you
    are at our meeting, we are undertaking a training program at
    the IRS concerning the requirements of the Regulatory
    Flexibility Act to ensure that those requirements are adhered
    to."
        Why are you having a training program?
        Mr. Korb. As I told you when I met you in your office, I
    had lunch on May 25th with Chief Counsel Sullivan, and we
    talked about putting together a program to make sure that we do
    a better job with these. So that was already in the works when
    I came.
        Chairman Manzullo. You are the IRS. You have 2,433
    employees working for you; of which, 1,550 are lawyers.
        Mr. Korb. Right.
        Chairman Manzullo. Right. That is in your written
    statement. You mean to tell me that you have to bring in
    somebody from the SBA to tell you how to comply with the law
    when you have all those lawyers working with you?
        Mr. Korb. He offered.
        Chairman Manzullo. That is because you needed it.
        Mr. Sullivan. Mr. Chairman, we have trained personnel at
    IRS a few years ago on RFA, and we actually welcome the
    opportunity to train more in the regulatory process over at
    IRS. So the chief counsel is right. We did offer, and we would
    actually prefer to go and help train rather than them doing it
    themselves.
        Chairman Manzullo. Mr. Sullivan, when was RFA passed?
        Mr. Sullivan. 1980, and it was amended to be judicially
    reviewable in 1986.
        Chairman Manzullo. That is SBRFA. So since 1980, the IRS
    has had the opportunity to develop protocol, training, in order
    to follow a law that was specifically passed to help the little
    guys, and now you need training courses?
        Mr. Korb. I just took the job 2 years ago. I can't speak
    for the last 25 years.
        Chairman Manzullo. That is a good answer, Don. I appreciate
    that.
        I guess what really bothers me--first of all, I want to
    commend you for your candor. I don't really like some of your
    answers, but at least you are here. You are answering questions
    I think to the best of your ability, and I appreciate that.
    Thank you for coming.
        But the fact that Mr. Solomon isn't here, who could answer
    these questions, that bothers me to no end. Because this is a
    committee process, and we have a process here. It is called
    oversight. And every day, we have little guys that come to us
    that have been killed by the federal government. I could take
    you into medicine, little people that come in our office and
    they bang on the door and say, Mr. Chairman, would you help me
    because there is nobody here who is advocating on our behalf?
        That was the purpose, and continues to be the purpose, of
    the Regulatory Flexibility Act. There are a lot of little
    people out there that need some protection because they don't
    have lobbyists of the nature that the big guys do. Sometimes
    they get together, but it is on an ad hoc basis as opposed to a
    continuum.
        What is Executive Order 13272? You made reference to that
    in your main testimony.
        Mr. Korb. Yes, I did. I guess that would be better directed
    to Chief Counsel Sullivan, I think.
        Chairman Manzullo. Go ahead. I think you did answer. It is
    in the first--Mr. Korb, it is on the first full paragraph of
    page 6.
        But Mr. Sullivan, if you want to take a whack at that, go
    ahead.
        Mr. Sullivan. Executive Order 13272 is the proper
    consideration of small entities in agency rulemaking.
        Chairman Manzullo. Okay. And in Mr. Korb's language, it
    says it seeks to minimize, consistent with statutory
    requirements and sound regulatory policy, the compliance and
    paperwork burdens of all regulations on small businesses, small
    not-for-profit enterprises and small governmental
    jurisdictions. I mean, that is--do you know why that was given,
    Mr. Sullivan?
        Mr. Sullivan. Yes, actually, I do.
        Chairman Manzullo. You drafted it, didn't you?
        Mr. Sullivan. The President drafted it and signed it, and I
    am happy that it was intended to give new attention to the
    Regulatory Flexibility Act. The reason that the President
    signed the Executive Order was an acknowledgement that the
    Regulatory Flexibility Act maybe isn't working as well as it
    could, and so this certainly brings the RFA to the attention of
    agencies.
        It also actually tasks my office with training government
    agencies on how to comply. And this is I guess more responsive
    to your last set of questions, Mr. Chairman. Not only is it a
    good idea for the Office of Advocacy to train agency personnel
    on how to comply with the Reg Flex Act; the Executive Order in
    fact requires us to. And so we have been doing that. And we
    welcome the opportunity to train more staff at IRS.
        Chairman Manzullo. Well you have listened to the letter
    that Mr. Korb sent and to his testimony saying that the IRS
    could have done a better job. How many people are qualified
    intermediaries? Raise your hands. All right. Where did you guys
    all come from, just tell me. These people are from everywhere
    here. They did not come here by happenstance. They came here
    because their businesses are severely threatened. And their
    message to you is that you really have to go back and start all
    over again.
        You have an alternative don't you? You could withdraw this
    regulation and start all over again; couldn't you do that? Mr.
    Korb?
        Mr. Korb. It is not our practice to withdraw regulations.
        Chairman Manzullo. I don't care what your practice is. You
    could do that. You could withdraw the regulation and start all
    over again. Could you answer my question?
        Mr. Korb. I guess we have the authority, yes.
        Chairman Manzullo. Okay. And whenever you have a document
    that is based upon-- we could do better, we have to go to
    school, you could have looked at a different population, we
    promise that we will follow the law-- whenever you have a
    document that is based upon an admittedly imperfect analysis,
    would you not want to start all over again?
        Mr. Korb. We are going to start all over again with the
    IRFA.
        Chairman Manzullo. That is a good place to start. You start
    with the IRFA, then you see the impact that these regulations
    may have on small businesses.
        Mr. Korb. That is the way the system is supposed to work.
        Chairman Manzullo. Are you going to have a revised proposed
    rule?
        Mr. Korb. No.
        Chairman Manzullo. You are going to have a new IRFA before
    a revised proposed rule?
        Mr. Korb. We will have a new IRFA. That is right.
        Chairman Manzullo. Before a revised proposed rule?
        Mr. Korb. We may not have to revise the rule. The rule
    isn't final. As I explained in my testimony, this is a process
    that is going on.
        Chairman Manzullo. You have that authority.
        Mr. Korb. Authority; what?
        Chairman Manzullo. To keep the same rule and do a new
    study. But you also said that before any--
        Mr. Korb. Yes, that's right.
        Chairman Manzullo. --before any regulation would take
    effect, that you will file an IRFA; right?
        Mr. Korb. That is what I said. I think there is some real
    misinformation here.
        Mr. Manzullo. What is that?
        Mr. Korb. I think these people feel that this rule is
    effective right now, and that is not true.
        Chairman Manzullo. Do you know what the impact of that rule
    has been out there? Mike, why don't you tell us. Listen very
    closely to what the impact of this rule has been.
        Mr. Halloran. From a practical business perspective, the
    impact of the rule is to try and evaluate whether or not there
    are any alternatives, should the rule go final, to our business
    continuing on.
        Chairman Manzullo. I am talking about the big guys trying
    to buy the little guys out.
        Mr. Halloran. That has certainly happened, although I have
    not personally experienced it. A number of banks have
    approached qualified intermediaries saying, if 468B went
    through, they should be rolled up and bought by the bank. And
    that has been a relatively common occurrence from what I
    understand.
        Chairman Manzullo. Have you heard that before?
        Mr. Korb. Yes, you told me that.
        Chairman Manzullo. Would that be of significance to you in
    the IRFA, the fact that the population we agree upon is the
    center of this may have the big banks threaten them to buy
    their book?
        Mr. Korb. I am a tax lawyer. I am not a regulatory lawyer.
        Chairman Manzullo. Yes, but, I--
        Mr. Korb. I am learning. Congressman, Mr. Chairman, it is
    very difficult for me to tell you what is going to be done
    specifically in this new IRFA. All I can commit to you is it is
    going to be done correctly. I am going to be personally
    involved, and so we are going to get it right. That is all I
    can commit. I can't tell you what we are going to look at
    exactly. Can't do that right now. I just don't have the
    knowledge to be able to do that.
        But I have got some good help here with Chief Counsel
    Sullivan. We have, as I committed to you, we have a program
    being developed to make sure that something like this does not
    happen again.
        Chairman Manzullo. Well, it is extremely unfortunate,
    because with this regulation hanging out there, there are big
    banks out there that are buying up these little guys. And I
    guess the premise is, if you don't sell now, you may not have
    anything left after the regulation goes into effect. Is that
    right, Mr. Halloran?
        Mr. Halloran. I don't know of any transactions that have
    actually transpired, but certainly, there is a conversation
    regarding should this go final.
        Chairman Manzullo. Is there anybody in the audience who
    could tell us personally about that? Yes, sir, stand up and
    give us your name. Sit in Mr. Solomon's chair. Finally, we will
    have somebody there. And you remove that. You want to sit down
    and give us your name and who you are. I guess that is the same
    thing; isn't it? The name of the company you represent.
        Mr. Dance. Richard Dance from Seattle, Washington.
        Chairman Manzullo. How do you spell your last name for the
    record?
        Mr. Dance. D-A-N-C-E.
        Chairman Manzullo. And you came all the way out here for
    this hearing?
        Mr. Dance. Yes, I just received a letter 2 days ago asking
    if I wanted to be bought out. There is a concerted effort, and
    I will introduce the testimony, I brought it, not intending to
    use it, but I could find it for you. It came probably to quite
    a few of us as QIs just 2 days ago.
        Chairman Manzullo. You own a QI, Mr. Dance?
        Mr. Dance. Yes, I do.
        Chairman Manzullo. What is the name of it?
        Mr. Dance. The name is 1031 Exchange Coordinators. And I
    actually brought one 11-by-17 sheet on it in which I have tried
    to carefully explain the quantitative and numeric impact of
    everything that I see coming as a result of this particular
    rule.
        Chairman Manzullo. How many employees do you have?
        Mr. Dance. I have eight.
        Chairman Manzullo. Go ahead.
        Mr. Dance. I am looking for the particular letter. It is
    right here.
        Chairman Manzullo. And who wrote the letter to you?
        Mr. Dance. Looks like an investment group, Elan, USA, Inc.,
    investment group.
        Chairman Manzullo. How do you spell that?
        Mr. Dance. E-L-A-N, USA, Inc.
        Chairman Manzullo. Do you want that made part of the
    record?
        Mr. Dance. Certainly.
        Chairman Manzullo. Okay. Without objection.
        Mr. Dance. I am writing at the request of one of my clients
    who has embarked on a plan to consolidate qualified
    intermediaries into a vertically integrated company.
        He goes on: The acquisition is currently ongoing. He has
    very specific design criteria in evaluating the viability of
    companies that are acquired. It allows principals to continue
    operating the company for a term favorable and desired by the
    QI owner. Each acquisition will close quickly within 30 days.
        It goes on: So the idea is, let's get them now while you
    can. I have been authorized to evaluate each interested QI and
    will do so under a confidentiality nondisclosure. If you would
    consider a purchase of your company, please contact my office
    immediately.
        Chairman Manzullo. Who signed the letter?
        Mr. Dance. Mitchell--and I can't pronounce his last name--
    V-O-Y-N-O-V-I-C-H.
        Chairman Manzullo. Where is he from?
        Mr. Dance. Florida.
        Chairman Manzullo. Phil, would you issue a subpoena? I want
    him here at the next hearing. I want to know who he is
    representing.
        Mr. Levine. Congressman, may I make a comment?
        Chairman Manzullo. Yes.
        Mr. Levine. Two points. One, until you read that, I was
    under the impression you were telling us that he received a
    letter from a bank. How do you know that investment banker was
    representing a bank?
        Chairman Manzullo. Who do you think it is?
        Mr. Levine. I have been involved--I will tell you--I have
    been involved in transactions for some nonbank QI clients where
    they have been looking to acquire other banks. If you take a
    look, Congressman, at some of the prices that have been paid
    for some of the acquisitions, not by banks, just where some
    nonbank QIs have been acquiring banks over the last few years,
    irrespective of those regulations, they have been tremendous
    values. Tremendous prices that have been going in the
    marketplace. They have nothing to do with banks.
        Chairman Manzullo. I am just saying that the testimony here
    is that the only ones who will be left are the banks.
        Mr. Levine. The testimony is incorrect.
        Chairman Manzullo. Mr. Weller, in paragraph 6 of your two-
    page testimony, you said that these regulations are so written
    that, in the end, the only QIs that will be left are the banks;
    is that correct?
        Mr. Weller. I don't think I go that far, no. My view is
    that the large companies which can aggregate capital either by
    big banks or being able to make money on large aggregations of
    capital can survive. I cast it more as big versus little rather
    than banks versus nonbanks. Banks I believe are the most likely
    survivors, but not just banks.
        Chairman Manzullo. This could be a bank or a big bank.
    Maybe we should write and find out whom he is representing. I
    think this is significant.
        Mr. Dance, what is the significance of these big guys
    trying to buy out the little guys? What does that mean to you
    or anybody else here?
        Mr. Dance. You have to consider: Do I want to sell out now,
    or do I want to keep with my employees? What is going to
    happen? I would like to give this to you also. I tried to go
    through on the nuts and bolts of what it daily means to me to
    abide by these regulations. I have gone so far and tried to
    figure out, how many bank accounts do I need to open?
        Chairman Manzullo. Go ahead. I think that is significant
    for the Regulatory Flexibility Act.
        Mr. Korb. It might be significant for the underlying rule.
        Chairman Manzullo. That is correct.
        Mr. Korb. Did you testify at the hearing?
        Mr. Dance. Yes, but I have worked on it since then.
        Mr. Korb. Have we received that?
        Mr. Dance. You received the original. I would be happy to
    give you--
        Mr. Korb. You should. You should supplement that.
        Chairman Manzullo. Could you give Mr. Korb a copy of that
    today? If you want to share some highlights on that, go ahead.
        Mr. Dance. If I could please pass it out, I have a hundred,
    I have enough for everybody.
        Chairman Manzullo. Staff will pass it out. Go ahead. Mr.
    Dance, why don't you talk? Mr. Dance, they will take care of
    that. Why don't you sit down and tell us about the impact of
    this proposed regulation on your small business.
        Mr. Dance. Yes, and I don't speak for anybody but myself. I
    try to be--
        Chairman Manzullo. I understand. I will give you 5 minutes.
        Mr. Dance. Thank you. I tried to look primarily at the
    impact on banking, accounting and systems, and then tried to go
    a little bit further and even give some possible solutions for
    me and my company, not speaking for anybody else. On the upper
    righthand corner, you see I have a quick index that is indexed
    to everything that is there. And, basically, what I say as an
    overall assessment is that we have about twice the workload
    with half the revenues to get the job done.
        Now, in a lot of cases, there is a lot more to be done. But
    basically, the impact, if you are to look at banking, we
    obviously need to set up a separate bank account for all
    clients. I am not saying that is necessarily bad, except right
    now, one of our great tools to help our clients is to know that
    we have got all the funds in the bank. And the way to make most
    of the banks set up right now, if you set up all of these
    individual accounts, you have no way to know what your total
    is. Very few banks have that opportunity to tell you other than
    once a month what your total is. I don't rely on that total in
    the bank daily. I know what we have in the bank right now as we
    are speaking. I know if there is anything leaving. That is a
    great source of help.
        We need to maintain thousands of accounts and subaccounts,
    and I try to explain in here how some clients have two
    exchanges going at the same time. If you were to code that into
    separate bank accounts, they don't allow you to transfer it.
    You, basically, in the banking, end up--if you turn to page 2--
    our bank on the top line there, Frontier Bank, and says,
    basically, opening accounts. That was in color; would be in
    yellow. It is a hassle to open accounts because you have to
    follow the PATRIOT Act. You can't just open it any way you
    want.
        Chairman Manzullo. I voted against it.
        Mr. Dance. Thank you. If you look at reconciling accounts,
    there is no way we can reconcile individual accounts. We can't
    print blank checks if we set up separate accounts for all of
    these clients. Interest, they can't compute the average daily
    balance being requested by the IRS, and there is no way to
    allocate any miscellaneous charges, and so I have to change
    banks. I took a look at five or six other banks to see if it
    would be easier, if the big banks are better. And they read
    faster than you can speak.
        Mr. Dance. But, basically, I have said, I have got to
    change banks, and I don't know if this will be any easier or
    better.
        When I go to section--page three, on the accounting
    consequences, I say, well, maybe I want to stay with the bank;
    maybe I can just do this on a spreadsheet. And I figured out
    that I am being asked to do about a million transactions,
    calculations a year on a spreadsheet. That is a disaster. And
    there is no way, if I do my internal accounting on any sort of
    spreadsheet, it will ever be possible because there are such
    simple things as timing differences. I have an illustration
    here. When we get a check written on April 28th for a million
    dollars, it comes to us on May 1st. It doesn't get deposited
    until May 2nd. If I have my own internal accounting system,
    what do I do with the float? The same thing when I send a check
    out. My accounting system would not agree with the interest the
    bank had. So little things like that I tried to point out just
    so you could realistically see here is what the impact of this
    is
        The other thing I tried to point out is that in exchange--
    you say you only have an account open for a period of time, but
    we get holdbacks. We get releases. We get things sometimes
    months and months and months after an exchange has ended that,
    rightfully blind to the clients, that we have to keep their
    account open. Well, do we track interest on $2? We have got
    $20. We have got $400. We got--there are all sorts of things
    that, by reading this, I think you understand the predicament
    we are in.
        If you turn to the back page, the last page, I try to say,
    okay, let's assume that we changed banks. We realized that we
    couldn't do it internally, let's go out and buy a system. I
    actually employed a firm, a very reputable systems firm, to go
    out and make a system analysis all over the United States. I
    told them, no holes barred, I want to know what is out there
    because if I have these go into effect on the date they are
    published in the Federal Register, I have got to have a new
    system. They came back, gave me a short list, which I have
    given you here, and basically said the cheapest one would be
    $10,000, and most of them would require $75,000 to $100,000
    just for the customization. And we, as QIs, are used to
    spending about $750 to $1,000 for a system, not $10,000, not
    $50,000, not $100,000.
        And so it came down to solutions, and I said, whatever we
    do has to greatly reduce the volume of work and the interest
    loss being required. Whatever we do, if we reduce the volume of
    the work and the interest loss being required by the present
    regulations, we would be making some forward progress. And I
    tried to tender five ideas just that would help us as a
    personal firm in there for what can happen and said, you know,
    like a threshold period of time. You see in the chart below,
    the days and exchanges open for us is only 53 days. Within 53
    days, we have opened an account. We have done all the work. We
    have written all their checks. We have sent everything back. We
    sent their money back to them, and their new replacement
    property they are buying, and except for all the holdbacks and
    anything like that, it is pretty much done. So if we can have
    some--
        Chairman Manzullo. Richard, I don't have time to go through
    all five, but I will make this part of the record.
        This is very meaty. This is the type of stuff that--I can't
    speak for Mr. Korb, but I do know it is the type of stuff he
    will consider.
        Mr. Korb. Absolutely. These are good ideas. This is exactly
    what this system is, this process is supposed to produce. The
    system is working; the process is working.
        Chairman Manzullo. Well, I don't--Don, come on. I mean, I
    saw your letter. I mean, it is--
        Mr. Korb. The right process is working. This is great for
    us to consider.
        Chairman Manzullo. Do you know what saves the day for you?
    It is your honesty.
        Mr. Korb. I am what I am.
        Chairman Manzullo. You bet, you bet. And I appreciate that.
        But, Richard, I have one more question for you. Are you
    saying that you have to make these changes but the large banks
    do not? The banks are already set up for that?
        Mr. Dance. I don't know. I tried to say the impact--
        Chairman Manzullo. This is just for you.
        Mr. Dance. So, realistically, what is the real impact on
    one QI without--
        Chairman Manzullo. With how many employees?
        Mr. Dance. Eight employees.
        Chairman Manzullo. And, obviously, a larger institution
    could absorb these costs a lot easier than you can.
        Mr. Dance. I assume so, but I was just working on myself.
        Chairman Manzullo. You sound like Mr. Korb there.
        Mr. Dance. Remember, I am taking Mr. Solomon's place.
        Chairman Manzullo. Well, you have more wisdom than Mr.
    Solomon, I can tell you now.
        I am going to make this document from Elan USA, Inc., part
    of the record. I think we can send them a letter asking them
    whom they are representing, and they will probably say it is
    none of your business. That may be the case. All we can do is
    ask.
        [Mr. Dance's testimony and letter may be found in the
    appendix.]
        Chairman Manzullo. I am at the end of the questions that I
    have here. What I would like to do is leave the record open for
    5 more days just in case there are any questions that we wanted
    to ask that have not been asked here.
        I want to thank you all for your patience. Mr. Korb, I want
    to thank you particularly for making the statement to us that
    there would be a new IFRA issued before any regulations are
    even considered to take effect. That is a tremendous
    consolation to the people here. Do you guys understand what he
    meant by that? You can thank him on the way out because he
    didn't have to say that. He did that because it is the right
    thing to do, and I appreciate it.
        I want to thank all of you for coming out, especially those
    that traveled long distances for the hearing. This hearing is
    adjourned.
        [Whereupon, at 4:23 p.m., the committee was adjourned.]
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