(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Key Senators Try to End Abusive Tax Shelters

Senators Max Baucus and Charles Grassley have introduced a bill designed to shut down abusive tax shelters of the type identified in the recent spate of corporate scandals by ensuring that transactions are done for legitimate business purposes, have economic substance, and are not merely to avoid taxes. The bill makes it explicit that achieving a particular kind of financial accounting treatment does not provide the needed business purpose to satisfy tax requirements. Also, the Tax Shelter Transparency and Enforcement Act (S.1937) broadens the Internal Revenue Service's ability to enjoin tax shelter promoters and allows the agency to impose monetary penalties, in addition to suspension or disbarment, on disreputable tax advisors or their firms. Sen. Grassley is chairman of the Senate Finance Committee, of which Sen. Baucus is the ranking member.

The bill contains a number of corporate governance reforms. For example, it requires chief executive officers to sign a declaration under penalties of perjury that the company's income tax return complies with the Internal Revenue Code. The CEOs must also declare that they were provided reasonable assurance of the accuracy of all material aspects of the return.

The bill compliments S.1767, the Auditor Independence and Tax Shelters Act, which would shut down tax shelter promotion from the audit and financial statement side of the equation. Introduced by Sen. Carl Levin, S.1767 would strengthen auditor independence by prohibiting auditors from providing tax shelter services either to the companies they audit or to the companies' officers and directors.

The legislation would also reduce potential auditor conflicts of interest by codifying four auditor independence principles to guide audit committees when they are required by the Sarbanes-Oxley Act to decide whether the auditor may provide certain non-audit services to the company. Under the bill, auditors compromise their independence when they 1) audit their own work, 2) perform management functions for clients, 3) act as advocates on behalf of clients or 4) act as promoters of client financial interests.

According to Sen. Baucus, the SEC and PCAOB should augment these legislative initiatives by devoting significant resources to considering ways to improve the clarity of the tax footnote in the company's financial statements. In addition, the SEC and PCAOB should comprehensively review the financial reporting of income taxation. He urged the agencies to employ staff tax experts to ensure proper oversight investigations and reviews of the financial statement tax disclosures.

Finally, in recent floor remarks, the Senate leader asked the PCAOB to review the record of SEC rulemaking in this area, as well as ongoing business practices, and take action if it is needed to assure the public interest in auditor independence. In this context, he noted that the Sarbanes-Oxley Act empowers the PCAOB to describe new non-audit services that public companies could not acquire from their auditors, even if they are not explicitly described in the statute as a prohibited service.