United States. Congress. House. Committee on Ways.

Administration's fiscal year 1994 budget proposals for the Bureau of Alcohol, Tobacco, and Firearms, U.S. Tax Court, and Internal Revenue Service : hearings before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, A online

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Online LibraryUnited States. Congress. House. Committee on WaysAdministration's fiscal year 1994 budget proposals for the Bureau of Alcohol, Tobacco, and Firearms, U.S. Tax Court, and Internal Revenue Service : hearings before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, A → online text (page 1 of 30)
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ADMINISTTUTION'S HSCAL YEAR 1994 BUDGET
PROPOSALS FOR THE BUREAU OF ALCOHOL,
TOBACCO, AND HREARMS; U.S. TAX COURT;
AND INTERNAL REVE NUE SERVICE

Y 4. W 36: 103-34

AdniiistratioR's Fiscal Year 1994 B...

HEARINGS

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



APRIL 22 AND 28, 1993



Serial 103-34



Printed for the use of the Committee on Waya and Means





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U.S. GOVERNMENT PRINTING OFFICE




70-792 CC


WASHINGTON : 1993






For sale by the U.S. Govemmenl Printing OITicc




Supeniilciiil


cm of Documents. Congressional Sales OtTice. Washington. DC
ISBN 0-16-041803-8


20402



/ ADMINISTRATION'S HSCAL YEAR 1994 BUDGET
PROPOSALS FOR THE BUREAU OF ALCOHOL,
TOBACCO, AND HREARMS; U.S. TAX COURT;
AND INTERNAL REVEN UE SERVICE

( 4. W 36: 103-34

idniBistratioR's Fiscal Year 1991 B. . .

HEARINGS

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



APRIL 22 AND 28, 1993



Serial 103-34



FVinted for the use of the Committee on Ways and Means




Mh 1



U.S. GOVERNMENT PRINTING OFFICE
70-792 00 WASHINGTON : 1993

lor sale h\ the I'.S. Govcmmenl Priming OITkl
Superinicndcni of Docuinenis. Congressional Sales OITice, Washington, DC 20402
ISBN 0-16-041803-8



COMMITTEE ON WAYS AND MEANS
DAN ROSTENKOWSKI, Illinois, Chairman



SAM M. GIBBONS, Florida
J.J. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS, Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM MCDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Vii^nia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. MCNULTY, New York
MIKE KOPETSKI, Or^on
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
MEL REYNOLDS, Illinois



BILL ARCHER, Texas
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
DON SUNDQUIST, Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY, Iowa
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania
DAVE CAMP, Michigan



Janice Mays, Chief Counsel and Staff Director
Charles M. Brain, Assistant Staff Director
PHILUP D. MoseLEY, Minority Chief of Staff



SUBCOMMnTEE ON OVERSIGHT
J.J. PICKLE, Texas, Chairman



HAROLD E. FORD, Tennessee
CHARLES B. RANGEL, New York
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Geoigia



AMO HOUGHTON, New York
WALLY HERGER, California
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania



(II)



CONTENTS



Press release of Friday, April 16, 1993, announcing the hearings

WITNESSES



Page
2



U.S. Tax Court, Hon. Lapsley W. Hamblen, Jr., Chief Judge, and Charles

S. Casazza, Clerk of the Court 6

U.S. Department of the Treasury:

Bureau of Alcohol, Tobacco and Firearms, Stephen E. Higgins, Director,
Daniel Black, Deputy Director and Associate Director, Office of Compli-
ance Operations; and David C. Troy, Chief of Intelligence Division,

Office of Law Enforcement 28

Internal Revenue Service, Michael P. Dolan, Acting Commissioner; David
G. Blattner, Chief Operations Officer; Philip G. Brand, Chief Financial
Officer; Henry H. Philcox, Chief Information Officer; and Lee R. Monks,
Acting Taxpayer Ombudsman 115

SUBMISSION FOR THE RECORD

U.S. General Accounting Office, Jennie S. Stathis, Director, Tax Policy and
Administration Issues, General Government Division, statement and at-
tachments 256



(in)



ADMINISTRATION'S FISCAL YEAR 1994 BUDG-
ET PROPOSALS FOR THE U.S. TAX COURT
AND THE BUREAU OF ALCOHOL, TOBACCO
AND FIREARMS



THURSDAY, APRIL 22, 1993

House of Representatives,
Committee on Ways and Means,

Subcommittee on Oversight,

Washington, D.C.
The subcommittee met, pursuant to notice, at 9:34 a.m., in room
B-318, Raybum House Office Building, Hon. J.J. Pickle (chairman
of the subcommittee) presiding.

[The press release announcing the hearings follows:]



(1)



FOR IMMEDIATE RELEASE
FRIDAY, APRIL 16, 1993






PRESS RELEASE #8
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
113 5 LONGWORTH HOUSE OFFICE BLDG.
WASHINGTON, D.C. 20515
TELEPHONE: (202) 225-5522



THE HONORABLE J. J. PICKLE (D. , TEXAS), CHAIRMAN,

SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS,

U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING TO REVIEW

THE ADMINISTRATION'S FISCAL YEAR 1994 BUDGET PROPOSALS

FOR THE BUREAU OF ALCOHOL, TOBACCO AND FIREARMS,

U.S. TAX COURT, AND INTERNAL REVENUE SERVICE



The Honorable J. J. Pickle (D. , Texas), Chairman of the
Subconunittee on Oversight, Committee on Ways and Means, U.S. House
of Representatives, announced today that the Subcommittee will hold
two hearings to review the adequacy of the Administration's fiscal
year 1994 budget proposals relating to the allocation of resources
and the staffing levels for the U.S. Tax Court, Bureau of Alcohol,
Tobacco and Firearms (ATF) , and Internal Revenue Service (IRS) . The
Subcommittee will also examine various budget-related issues
affecting programs under the jurisdiction of these agencies.

The Administration is requesting $35.3 million and 352 positions
for the U.S. Tax Court in fiscal year 1994, an increase of
$2.9 million and no additional positions from 1993 levels. The
budget proposal requests $359 million, user fee receipts of an
additional $5 million, and 4,201 positions for ATF, a total
appropriation decrease of $7.1 million and 60 positions. The
Administration is requesting $7,396 billion and 116,060 positions
for IRS, an increase of $280 million and 792 positions ^rom fiscal
year 1993 levels.

The hearing to review the budget requests for the U.S. Tax Court
and ATF is scheduled for Thursday, April 22, 1993, beginning at
9:30 a.m., in room B-318 Rayburn House Office Building . Witnesses
invited to testify include the Honorable Lapsley W. Hamblen, Jr.,
Chief Judge of the U.S. Tax Court, and Mr. Stephen E. Higgins,
Director of ATF.

The hearing to review IRS's budget request is scheduled for
Wednesday, April 28, 1993, beginning at 9:00 a.m., in the main
Committee hearing room, 1100 Longworth House Office Building .
Witnesses invited to testify at the hearing include
Mr. Michael Dolan, Acting Commissioner of IRS, and representatives
from the U.S. General Accounting Office.

In announcing the hearing. Chairman Pickle stated: "Ten years
ago, IRS employed 82,857 people, had a budget of $2.6 billion, and
collected $632 billion in taxes from the American people. Back
then, the cost of collecting $100 was approximately 42 cents. In
1991, IRS employed 115,628 people and spent $6.1 billion to collect
slightly more than $1 trillion. The cost of collecting $100 jumped
Lo 56 cents. This year, IRS's budgat request totals $7,396 billion,
an increase of about 4 percent. The cost of collecting $100 in 1994
is expected to exceed 60 cents.

"With the implementation of tax systems modernization and
improvements in the area of worker productivity, the cost of
collecting taxes should be decreasing, not increasing. I am
concerned that within the agency, there may be areas of waste and
inefficiency that is prohibiting IRS from operating more
effectively. I intend to ask IRS how it plans to improve its
performance.

"Included within IRS's budget are a series of compliance
initiatives designed to improve voluntary compliance and strengthen

(MORE)



IRS's examination and collection efforts. One initiative will focus
on foreign firms operating in the U.S. that are avoiding taxes
through transfer pricing. I want to know what progress IRS has made
in the past year to ensure that all corporations comply with our tax
laws and pay their fair share of taxes. I also want to know to what
extent transfer pricing cases are clogging-up the Tax Court's
docket.

While the Administration is proposing modest budget increases
for IRS and the Tax Court, ATF is looking at a funding decrease.
I want to know how a cut in funding for ATF will affect its
operations, particularly in light of its responsibility for over
$14 billion in the collection of alcohol and tobacco excise taxes."

DETAILS FOR SOBMISSIOM OF WRITTEN COMHENTS ;

Persons submitting written comments for the printed record of
the hearing should submit six (6) copies by the close of business,
Tuesday, May 18, 1993, to Janice Mays, Chief Counsel and Staff
Director, Committee on Ways and Means, U.S. House of Representatives,
1102 Longworth House Office Building, Washington, D.C. 20515.

FORMATTING REQUIREMENTS ;

Each statement presented for printin( to the Committee by a witness, any written statement or exhibit
submitted for the printed record or any written comments in response to a request for written comments must
conform to the (uidelines listed below Any statement or exhibit not in compliance with these |uidelines will not
be printed, but will be maintained in the Committee files for review and use by the Committee

1 All statements and any accompanyinj eihibils for printing must b« typed in sin|le space on le{al-size
paper and may not exceed a total of 10 pates

2. Copies of whole documents submitted as exhibit material will not be accepted for printing Instead,

exhibit material should be referenced and quoted or paraphrased All exhibit material not irwetinf tlwse
ipecifications will be maintained in the Committee files for review and use by tht Committee

3 Statements must contain the name and capacity in whKh the witness will appear or, for written
comments, the narT>e and capacity of the person submitting the statement, as well as any clients or
persons, or any orfanization for whom the witr>ess appears or for whom the staterT>ent is submitted.

4 A supplenwntal sheet must accompany each sutemenl lislin| the narrw, full address, a telephone
number where the witness or the desi|n<ted representative may be reached and a topical outline or
summary of the comments and recomrT>cndations in the full statement This supplemental sheet will
not be included in the printed record

The above restrictions and limitations apply only to material being submitted for printing Statements and
exhibits or supplementary material submitted solely for distribution to the Members, the press and the public
during tt>e course of a public hearing may t>e submitted in other forms



Chairman PiCKLE. The committee will come to order.

Judge Hamblen, you may take your seat at the witness table.

Judge Hamblen. Thank you, Mr. Chairman.

Chairman PiCKLE. Today the subcommittee will discuss the fiscal
year 1994 budget proposals and related program operations of the
U.S. Tax Court and the Bureau of Alcohol, Tobacco and Firearms,
the so-called ATF.

Today's hearing is part of the subcommittee's annual oversight
review of agencies under the committee's jurisdiction. The sub-
committee will hold its hearing on IRS' fiscal year 1994 budget
next Wednesday.

I want to say at the beginning that we have got two groups to
hear from this morning, the U.S. Tax Court and the Bureau of Al-
cohol, Tobacco and Firearms. By agreement, we will hear and visit
with the U.S. Tax Court and Judge Hamblen first. After that, then
we will hear from the Director of ATF, Mr. Higgins.

I want to say to the members that they will be limited to 5 min-
utes in their aiscussions, and if time permits, we will go back for
a second round. But we may be on limited time.

First let me talk about the U.S. Tax Court. I am pleased that
Chief Justice Hamblen will be appearing and is appearing before
our subcommittee today. This will be his first appearance before
this committee since his appointment as the Chief Judge of that
court, and his appointment was in June of 1992.

The U.S. Tax Court provides taxpayers with a forum for the judi-
cial resolution of tax disputes with the Internal Revenue Service.
The court is not only a forum for high-powered lawyers to argue
on behalf of wealthy clients; it has also functioned in many in-
stances as a sort of people's court where taxpayers can represent
themselves without the strictures of formal rules of evidence or
procedure and where taxpayers can go to court without first paying
the taxes in dispute.

Over the past year, the court has continued to reduce its inven-
tory of cases from 84,000 cases at the end of fiscal year 1986 to
45,000 cases at the end of fiscal year 1992. It is important that we
again review the activities of the court and take notice of its suc-
cesses, as well as any problems that arise.

With respect to the Bureau of Alcohol, Tobacco and Firearms, I
want to welcome Director Higgins, who will be here shortly, be-
cause we agreed that he would be a few minutes late.

As chairman, I and, I think, members of this committee will re-
serve any final judgment about the tragic events at Waco, Tex.,
until more information is made available, and we may conduct ad-
ditional hearings later if the facts so develop.

For the pubfic's information, I am inserting in the subcommit-
tee's hearing record and making available to the press and the pub-
lic, copies of the affidavits filed by the ATF in support of the arrest
and search warrants in Waco. Copies of these affidavits are made
available on the press table and at the members' table in the event
that you want a copy of that affidavit as so filed.

I want to also clarify that today's hearing was planned a month
ago, well in advance of this past week's events.

Of course, I want to express my sorrow to Director Higgins and
to the ATF for the loss of life that occurred when that tragic raid



took place. To the families of the ATF agents who were killed as
well as the family members of the Branch Davidian followers and
the children who perished in that compound, I do express my deep-
est sympathy. This was a tragic and a sickening event that should
cause all of us to reexamine our Nation's purpose and meaning,
and our futures as citizens of this great country.

For many of the new members of this subcommittee, today's
hearing will be the first opportunity to discuss ATF operations with
the Director. Under the administration's proposal, ATFs budget in
1994 would be $364 million, slightly less than current levels. In
1994, ATF will collect over $14 bilHon in taxes. I beUeve that ATF
must maintain a strong presence in the various industries it regu-
lates to ensure that this tax revenue is not put at risk. ATF has
substantial duties to undertake with its 4,200 employees and $364
million budget. I hope that they are not spread too thin.

ATF has jurisdiction over enforcement of alcohol, tobacco and
firearms taxes and the National Firearms Act, which are matters
under the jurisdiction of this committee. ATF has responsibility for
crime control laws, alcohol product safety, arson investigation, ex-
plosives storage, and more which are handled by other committees.

Because of recent events and the horrible tragedy that occurred,
serious questions must be answered by the ATF, by the FBI, and
by local and State authorities. I hope we could explore today's ATF
jurisdiction, what is their authority, at what point do they get in-
volved, and who makes the final decision on when to make a raid,
execute orders, or enter into negotiations.

In my opinion, the biggest error in Waco was that it went on too
long. For nearly 1 year, we have known that the group was violat-
ing firearm and tax laws. And yet, from the affidavits filed, it is
clear and unmistakable that the ATF allowed this group that had
come together to continue to violate our laws.

The leader of that compound was a nut, and his followers agreed
to live with a nut. I guess that is permissible. But when people
come together in a manner such as they did, they must obey the
law. And, if enforcement efforts are delayed too long, it is inevi-
table that death and destruction will occur. That is what happened.

It is obvious to me from the affidavit that the ATF had a plant
within the compound. At the same time, it appears that there was
a plant in the law enforcement ranks. While you can argue about
whether this is true, they knew what you were doing, and you
knew what they were doing. And, on February 28, they were fully
armed and dressed in battle fatigues when the raid occurred.

Why did you insist on going forward with the raid, knowing that
you were outgunned and probably would be possibly mowed down
and have to withdraw?

Well, I want to ask the witnesses this morning to provide this
committee with their honest evaluations of their agencies and the
answers to some of these questions. We will proceed forward in an
orderly procedure.

But I first want to recognize Mr. Houghton for any opening re-
marks he might want to make on this subject.

Mr. Houghton.

Mr. Houghton. Thank you, Mr. Chairman.



Well, I am delighted to be with you here. This is the first time
I have had an opportunity to review the operations of your court,
Judge Hamblen, I am delighted to be here with you.

Judge Hamblen. Thank vou.

Mr. Houghton. I consider this man one of the great chairmen,
so this is an honor, being associated with him.

The U.S. Tax Court and the BATF are probablv the best kept se-
crets around here. You do your work in private, behind the scenes.
You try to stay out of the public eye. But obviously with the tragic
events, human events, that took place in Waco, Texas, that is no
longer possible.

I am not going to make any comments, Mr. Chairman, about the
BATF at the moment. I think I will just wait for Mr. Higgins to
appear.

I would like to mention something about the U.S. Tax Court,
though. It seems to me that one of the things that we will be look-
ing at and inquiring about is your mission. What is your mission?
Is it the same as it was last year? Are you geared to do the things
which you think are important in the future?

As I see it, you have a staffing level which is basically un-
changed. You have a falling workload, and yet you asked for in-
creased funds. So the question is: What are you trying to do, and
what are the things you see coming around the corner that will af-
fect your operation?

So, Mr. Chairman, thank you very much. I would like to ask
some questions later on, but I would like to turn it back to you.

Chairman Pickle. Judge Hamblen, I think the best way to pro-
ceed now is for you to make your statement, and we may ask you
questions thereafter. If you will proceed, sir, we welcome you to the
hearing.

STATEMENT OF HON. LAPSLEY W. HAMBLEN, JR., CHIEF
JUDGE, U.S. TAX COURT, ACCOMPANIED BY CHARLES S.
CASAZZA, CLERK OF THE COURT

Judge Hamblen. Thank you, Mr. Chairman, and members of the
subcommittee.

My name is Lapsley W. Hamblen, Jr., and I am the Chief Judge
of the U.S. Tax Court. With me today is Mr. Charles S. Casazza,
the Clerk of the Court.

I am pleased to accept your invitation to testify here today con-
cerning the Tax Court's caseload, the Tax Court's appropriation re-
quest for the fiscal year 1994, the increase in the dollar amount in
dispute at the court, and the Section 482 cases.

I would like to make a few remarks, if that is your pleasure this
morning, and then try to answer any questions which you might
have. Also I would ask that my written statement be made part of
the record of the hearing.

Chairman Pickle. That will be granted. Judge.

Judge Hamblen. Thank you, sir.

Let me begin with a brief report of the Tax Court's caseload. In
this regard, I am happy to report, as you have noted, Mr. Chair-
man, that for the sixth straight year, the court has experienced a
yearend decrease in its caseload. I am also happy to report that
this trend is continuing in the current fiscal year.



As you know, the Tax Court's inventory reached a historical
monthend high in October of 1986, when there were 84,007 cases
pending at the court. As of the end of last month, the figure was
down to 41,123, and this represents a reduction of nearly 43,000
cases, or over 50 percent during this time.

To the extent that the short-term future can be predicted, we an-
ticipate that the Tax Court's inventory will continue to decline, but
we do not expect that any future decrease will be as large either
in terms of numbers or percentages as that of the past 6 years.

I would like to turn now to the Tax Court's budget request for
the fiscal year 1994. The court has submitted an appropriation re-
quest of $35,350,000 and 350 permanent positions. This request
represents a $2,915,000 increase over the appropriation for the last
fiscal year, but no increase in the number of permanent positions
has been requested.

We are satisfied that if the Congress endorses the full amount
of our appropriation request, the Tax Court will have the resources
necessary to fulfill its mission. While we remain fully committed to
further reductions in our caseload, our paramount goal must nec-
essarily be the disposition of cases in a fair, just, and expeditious
manner.

At this point, I would like to say a few words about a very inter-
esting phenomenon which the Tax Court has witnessed over the
course of the last 3 or 4 years, and this phenomenon involves an
inverse relationship between the inventory of our cases and the ag-
gregate dollar amount of deficiencies in dispute. In other words, as
the court's inventory has steadily fallen, the dollar amount in con-
troversy has dramatically increased.

I think a few pertinent statistics will aptly illustrate this devel-
opment. At the end of the 1986 fiscal year, as the Tax Court's case
inventory was about to crest at the 84,000 mark, the dollar defi-
ciencies in dispute amounted to about $16.3 billion. Today, how-
ever, while the court's inventory hovers at around 41,000 cases, de-
ficiencies in dispute have increased to about $34.3 billion. Now this
difference, some $18 billion, represents a 110 percent increase, and
the vast majority of this increase, some $16 billion, has come since
the end of the 1989 fiscal year.

The increase in the aggregate dollar amount in dispute is attrib-
utable to an increase in the number of large cases ana in particular
to an increase in the number of what we call jumbo cases, and
these are cases in which the deficiencies in dispute exceed $10 mil-
lion.

Currently the Tax Court's inventory includes 301 jumbo cases.
This number amounts to less than 1 percent of the court's caseload,
yet these 301 iumbo cases account for over 85 percent of the aggre-
gate dollar deficiencies in dispute at the court.

The number one challenge faced by the Tax Court during the
1980s was managing the sheer size of its docket. The number one
challenge of the 1990s very well may prove to be managing the ag-
gregate dollar amount in dispute.

The court recognizes that it must carefully balance its resources
between the large cases and the smaller ones. Although the large
cases are relatively few in number, they demand attention because
of the very substantial deficiencies in dispute.



8

In contrast, the dollar magnitude of the smaller cases is rel-
atively modest. But these cases demand attention not only because
of their very number, but more importantly in order to maintain
the confidence of the taxpajdng public in our system of taxation
and our judicial system.

Finally I would like to say a few words about the Section 482
cases. More often than not, the jumbo cases which are commenced
in the Tax Court involve Section 482 and present various foreign
income and transfer pricing issues. Like the jumbo cases in gen-
eral, Section 482 absorb significant judicial resources.

The Tax Court believes that the solution to the problems pre-
sented by the Section 482 cases, as well as by the jumbo cases in
general, lies in innovative management initiatives, and the court
has already instituted significant case management strategies to
effectively control the scope of these cases and the judicial time in-
volved in deciding them.

For example, the court has instituted a procedure permitting the
assignment of a judge almost immediately after a large case is at
issue. Another initiative involves alternative dispute resolution,
and the court has amended its rules of practice and procedure to
authorize expressly the use of voluntary binding arbitration, and



Online LibraryUnited States. Congress. House. Committee on WaysAdministration's fiscal year 1994 budget proposals for the Bureau of Alcohol, Tobacco, and Firearms, U.S. Tax Court, and Internal Revenue Service : hearings before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session, A → online text (page 1 of 30)