[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
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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
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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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