Tax Controversies, Tax Reform And Oil & Gas

Saturday, May 19, 2012 - 11:11

The Editor interviews Emily A. Parker, Managing Partner, Thompson & Knight LLP.

Editor: I note that you were named the best Dallas lawyer of the year for litigation & controversy-tax. Tell us about your background and experience.

Parker: I joined Thompson & Knight after graduation from Southern Methodist University Law School in 1973. I was the first woman hired by the firm as a lawyer. Not too long after I joined, I gravitated towards the tax area. I practiced as a tax lawyer, initially as an advisor and planner, and after 12 to 15 years I became predominantly a tax controversy lawyer, representing clients in audits, appeals and litigation.

I also became the firm’s first female partner. In late 2001, I left the firm to accept a position with the IRS in Washington, DC, first as deputy chief counsel and then during my last ten months as the acting chief counsel. In September 2004, I came back to Thompson & Knight as a partner. I became managing partner on February 15, 2012.

Editor: The firm has achieved a number of important milestones. Please mention a few.

Parker: Thompson & Knight is celebrating its 125th anniversary this year. We had dramatic growth in the early 2000s, and then, like most firms, that growth leveled off in 2008. During the last couple of years, our growth has again picked up.

We established a New York office five years ago and recently brought into that office a group that focuses on commercial real estate capital markets, including workouts and restructuring of collateralized mortgage obligations relating to commercial real estate. The addition of this group in the New York office has been a great complement to our firm, particularly because there is a nice fit with our existing real estate capital markets practice in Dallas and Houston.

Another milestone has been the continuing success and development of our intellectual property practice. We are fortunate to be located near the Eastern District of Texas where the federal court offers an expedited docket for intellectual property litigation. We also were identified as the nation’s top oil and gas firm for 2012 by U.S. News & World Report and The Best Lawyers in America.

Editor: What advantages did you gain in your previous positions as deputy chief counsel and acting chief counsel of the IRS?

Parker: For most of my career prior to going into government, attorneys in the IRS office of chief counsel were the opposing counsel in many of my cases. Going into the office of chief counsel, at that point in my career, gave me an opportunity to observe how that organization and the IRS itself operate. It gave me new insights into the bureaucracy, the pressures that IRS personnel are under and how they approach issues and problems. I also got to know the particular IRS staffers to contact to solve problems for clients. I came away from the government with a real respect for the hardworking and talented people who work at the IRS.

Editor: I understand that there is a plaque at the entrance to the IRS headquarters in Washington that states that the IRS has a duty to be fair both to the government and the taxpayer.

Parker: That is correct, and the sentiment that the IRS should function in a manner that is fair to taxpayers and the government is incorporated in the 1997 IRS Reform Act.

Editor: To what extent is a successful outcome of an issue with the IRS dependent on industry-specific knowledge?

Parker: Clearly understanding a business and its industry is very important when you are presenting what I call “the story behind a transaction.” It enables you to convincingly explain that things were done for sound business reasons and were not motivated by a desire to reduce or avoid taxes. It’s particularly important in communicating not just with the IRS but with your client. A lawyer must understand what the client is telling you so that you can then describe a challenged business plan to the government in an understandable manner.

Editor: What are the major U.S. tax reform proposals currently under consideration?

Parker: Most of the tax reform proposals relating to both corporate and individual taxes are based on broadening the tax base by reducing deductions, credits and special incentives that may no longer be justified thereby increasing taxable income while reducing rates.

Other proposals contemplate much more substantial changes in the overall tax system. There is some support for moving away from the income tax as a primary source of federal revenue to a system where people are taxed not on income but essentially on money that they spend. Those proposals usually are framed as a flat tax.

A proposal that has been around for many years is a value-added tax where a tax is imposed at each level of transfer in the economy. Each time goods or services are transferred, a tax is imposed based on the value added by that transfer. Such a tax is the primary source of revenue for most industrialized Western countries other than the United States.

The President has significant proposals directed at the oil and gas industry that would eliminate specific targeted tax benefits or deductions or credits. I don’t consider those to be tax reform proposals because they are not broad based.

Editor: What are the critical tax considerations affecting fracking and oil and gas exploration and production generally?

Parker: Fracking is basically part of a drilling and preparing-to-produce activity that qualifies expenses to be deducted as an intangible drilling cost. That’s a huge incentive at the federal level that supports domestic exploration and production of oil and gas in the United States. It is particularly an incentive for independent oil and gas exploration and production companies. The benefit of the IDC deduction is less for major oil companies. For integrated oil companies, they’re only allowed to deduct 70 percent of the intangible costs of drilling and development whereas independent exploration and production companies can deduct 100 percent of the intangible costs for such things as labor, fuel, supplies required in drilling and preparing to produce.

It’s a huge incentive for investors since independent exploration and production companies can raise money to drill by providing them with attractive financial projections of the ultimate financial returns from development of domestic oil and gas properties.

Proposals to repeal the IDC deduction have been made by the President but are vigorously opposed by those who want to encourage domestic exploration and production of oil and gas.

Editor: Is tax reform driven by the expiration of the Bush tax cuts?

Parker: Unless Congress takes action, the tax cuts enacted under Bush in 2001 will expire at the end of this year. This will provide an incentive for the parties to get together and agree on reasonable reform. The area of greatest concern is the need to reform our current corporate tax system in order for the U.S. to remain internationally competitive. I’ve heard that both from the Obama administration as well as from various Republican politicians.

Tax policy will be affected in a major way by the outcome of the November election. If the current gridlock is not worked out, tax planners and advisors will continue to have the problem of not being able to predict what the future holds.

Editor: It has been suggested that the U.S. corporate tax rate must be reduced to the high 20s in order to stay competitive with trading partners.

Parker: Well, I’m not an economist; I’m a tax lawyer. I will say that our current 35 percent corporate tax rate is among the highest, if not the highest, nominal tax rate of any of the countries with which we compete. In any rate reduction, the devil may be in the details of what you are defining as taxable income subject to the lower rate.

I agree that the U.S. corporate tax rate is high relative to those of the countries with which we compete and should be lowered to make our tax system more competitive. However, how the present or any future U.S. tax regime affects any particular corporate taxpayer depends on its taxable income and whether there are offsetting credits available to reduce its tax liability. So, a lower nominal rate may actually increase a corporation’s tax liability depending on how taxable income is defined.

Editor: What is the current state of judicial treatment of the practitioner-client privilege under the Internal Revenue Code?

Parker: The Section 7525 privilege provides that if a communication between a federal tax practitioner and the client would be protected by the traditional attorney-client privilege then that communication would also be privileged as if it were between the taxpayer and an attorney. It is much more limited than the attorney-client privilege because it’s only available in non-criminal tax matters before the Internal Revenue Service and in a non-criminal tax proceeding in federal court brought by or against the United States.

The privilege also doesn’t apply to a written communication between a federally authorized tax practitioner in connection with the promotion of a tax shelter. Since the definition of a tax shelter is any transaction, plan or arrangement with a significant tax avoidance purpose, the scope of this exception for written communications relating to a tax shelter is extremely broad and not well defined. Most of the time, if there is a written communication between a federally authorized tax practitioner and a taxpayer, there’s probably a significant tax avoidance purpose involved. Because what constitutes promotion of a tax shelter has been interpreted very broadly, the practitioner privilege is not widely used or relied on today by clients or their advisors.

Editor: Are there aspects of the tax climate in Texas that make it particularly attractive to corporations and their employees?

Parker: The most attractive feature of Texas is that it does not have a personal income tax. Also, Texas has a franchise tax, which is a unique business gross receipts tax with a rate of less than five percent imposed on a broader base than taxable income as defined for federal income tax purposes. This results in a lower effective tax than the corporate income tax in other states for most corporate taxpayers as well as entities such as limited liability partnerships and limited partnerships. Of course Texas also has a property tax that corporations have to take into account that is somewhat higher than in many other states. Texas has a sales tax that is middle of the road as compared to other states. Texas is also characterized by a generally cooperative tax administration system.

Please email the interviewee at emily.parker@tklaw.com with questions about this interview.