[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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