February 10, 1983 may go down as one of the most important days in the history of the fleet industry: on that day, 15 gentlemen representing the concerns of automotive lessors, manufacturers, and dealers spoke in Washington against the proposed IRS regulation regarding terminal rental adjustment clauses. And though each of the gentlemen represented a different argument, the brunt of their combined testimony was clear, to wit, that the proposed IRS regulation will have dire con sequences on the entire industry and should be withdrawn.
The hearing was held in the main IRS building, and facing the speakers was a panel of six representatives of the IRS and Treasury. The contingent from the IRS included: George Jelly, Director of Legislation and Regulations; John Fischer, Technical Assistant to the Director; Phoebe Mix, Attorney, Legislation and Regulations; James Ransom, Chief, Corporate Tax Branch; and John Woodhull, Tax Law Specialist, Corporate Tax Branch. Representing the Treasury was Phil McCarty, Attorney, Office of Tax. Of the six, only Phil McCarty seemed motivated toward having any verbal give-and-take, though George Fischer made occasional attempts to understand the particular conditions which the leasing industry faces.
AALA president Sam Penn was allotted the first 10-minute slate on the agenda, and he argued forcefully that the proposed regulation should be withdrawn since it is neither required nor desirable. Penn commanded immediate attention in that he represented Association members with over one million vehicles on lease, with 98 percent purchased from domestic manufacturers, and with 70 percent of those automotive leases being TRAC leases. He stressed that the TRAC lease is the simplest, most efficient type of lease, and that it has, for good reason, served everyone involved efficiently for 30 years. The proposed regulation, Penn stated, would cause a decline in domestic vehicle sales, adding to already intolerable levels of unemployment. It would also increase the operating costs for lessees. And it would likely result in a revenue loss to the government. Penn ended by saying, "There is no justifiable reason for undoing an established method that has proven over time to be the most efficient."
John Nolan of NADA spoke second and aggressively posed the question: "What useful purpose will be served by this regulation?" Citing the facts that there will be no net revenue gain from this regulation and that no tax avoidance schemes are involved, Nolan challenged the IRS as to its reasons for destroying a time-honored business practice and harming the auto industry. He termed the IRS regulation "a quest for theoretical purity which fails to recognize the issues involved."
Throughout the day-in fact, throughout the recent months since the IRS proposed the regulation-there were questions as to the IRS's reasons for proposing a TRAC ruling. During the morning session, only McCarty of the Treasury Dept. provided some insight as to the IRS's reasoning. At one point he said, "We want rules which would apply across the board to everyone, whether in the auto industry or the computer industry. We don't want to be put in the untenable position of telling some industries they can use a TRAC while telling other industries they can't."
Next, John Cartwright spoke for the Motor Vehicle Manufacturers Association; the brunt of his argument was that the proposed regulation is contrary to a number of existing laws. Specifically, Cartwright believes the proposed regulation is contrary to Congressional intent, in that the IRS is changing rather than interpreting existing law. Second, it is contrary to Executive Order 12291, in that the proposed regulation is indeed a "major rule." Third, it is contrary to Section 2B, in that the prospective benefits outweigh the prospective costs.
Following Cartwright was Bill Davis of the Western Vehicle Leasing Association. Davis posed a question which was to be voiced at different times during the day in different ways: what is the IRS trying to accomplish? In addition to criticizing the wording of the regulation, Davis accused the IRS of "focusing on form rather than on practice."
Next came a trio representing an ad hoc group of domestic vehicle lessors, manufacturers, and dealers. Speaking first for the ad hoc group was Dale Wickham, who sketched in the trio's arguments: first, the proposed regulation is of no discernible interest to the Treasury or the public at large and will net no revenue gain. Second, the proposed regulation will inflict severe economic hardship on several segments of the economy, for example, lessors whose business costs would increase. Third, that as a matter of substantive law, the regulation is not required; in fact, it is in conflict with the intent of Senator Bentsen and Congressman Matsui, the sponsors of 210. And fourth, that Executive Order 12291 requires that the Agency set forth, in its publication of notice of the proposed regulation, its reasoning as to why this is not considered a "major rule"- something which the Agency did not do.
The second speaker for the ad hoc group was Emil Sunley, an economic consultant, who sketched in the short and long term disruptions that the regulation will cause. These disruptions would be primarily to the leasing industry, to vehicle sales, and to tax revenue; paid the government. Sunley said that if the regulation is published, companies will delay taking new autos to the tune of 125,000 less cars per month. The loss to the Gross National Product caused by one month's delay in taking new autos, Sunley estimated, would be $300 million.
Those, however, are only the short-term losses. Sunley forecast three obvious long-term disruptions. Today, the leased vs. owned terms for vehicles are 28 vs. 32 months. Should the regulation be published, companies will hold cars an average of four months longer. Therefore, new car purchases will decline. Second, from a practical standpoint, a closed end lease is not as good a means of determining vehicle value as is the used marketplace. Finally, should the leasing industry move wholesale toward conditional sales contracts, the move will result in an annual revenue loss to the government of $85 million.
The third speaker for the ad hoc committee was Jerry Geckle, who touted the integrity of the present system. In addition to the system's size, strength, and ability to produce revenue for the government, it is efficient and has produced good results for all parties involved.
The panel questioned the different members of the ad hoc committee on several topics, such as whether the industry uses safe harbor leases and whether any obstacle exists to using such leases. Although questions from the panel frequently displayed a lack of awareness as to the inner workings and economic underpinnings of the leasing industry, the questions also occasionally showed a willingness, at least on the part of some panel members, to be educated as to the ramifications of the regulation.
After lunch, Glenn Mackles of Touche, Ross, and Company shifted the tone by speaking from the view point of a tax advisor. There are, Mackles contends, several problems with the regulation which are not resolved by reading the regulation. Specifically, the regulation does not address what the industry can do; instead it only stresses what it cannot do. During a question-and answer exchange at the end of Mackles' ten minutes, McCarty again came close to disclosing what was at least part of the Treasury's reasoning for proposing the regulation: "In a true lease the lessor bears some risk. Here (in an open end lease) the lessor bears no risk." McCarty's comments led to a free exchange between members of the panel and the gallery, and members of the industry pressed home the point that the lessor does indeed bear numerous risks. And by the end of the afternoon, McCarty, for one, seemed convinced on that point.
The next speaker, attorney Robert Feldgarden, offered additional comments in the same vein, namely, that a lessor cannot read the regulation and know what situations it applies to. This point was picked up later by Philip Hansen, income tax manager of United States Fleet Leasing. Hansen criticized the regulation for not defining what a lease is but only stating what a lease is not.
Hamilton Wood of Pru Lease proceeded Hansen and spoke about the undesirable effects the legislation would have on lessees, especially on utilities. The bottom line which Wood forecast is a permanent loss of business.
Two new arguments raised their heads during the testimony of William Fleming, president of Dart and Craft Financial. First, Fleming contends the regulation will result in confusion at state levels since states may still consider a TRAC to be a true lease. Second, when it comes right down to it, Fleming said, there is a lack of distinction between a TRAC and a closed end lease since the latter does contain a mileage adjustment clause which lessors might use to realize the same equanimity they now achieve with a TRAC.
The final two speakers, Elmer Pierson and John Salzer, both of Dresser Leasing, criticized the regulation for focusing on procedure rather than facts. The facts are, Salzer said, that open end leases do indeed contain numerous risks.
While the attitude of certain panel members could be judged as adversary and recalcitrant, the hearing as a whole did seem to be productive in at least one way: the gentlemen who spoke succeeded in impressing the panel of the impact that the regulation will have upon them. But when the hearing was completed, and when the panel members were questioned individually about a prognosis for the future, no one seemed to know what will happen, much less when. In fact, there seemed some question as to with whom the final decision actually lies.