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30–358 PDF 2006

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

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 

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) 

(1)

FAILURE TO COMPLY WITH THE REGULATORY FLEXIBILITY ACT: IRS ENDANGERING SMALL BUSINESSES YET AGAIN 

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 ExIm 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 SolVerDate 0ct 09 2002 23:54 Nov 21, 2006 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 G:\HEARINGS\30358.TXT MIKE
2

omon, 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. 

3

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 

4

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. 

5

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. 

6

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. 

7

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. 

8

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. 

9

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 shortterm 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. 

10

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. 

11

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. 

12

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 longestablished 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 

13

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. 

14

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 

15

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 bankowned QIs compared to the security and customer service—sorry, 

16

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. 

17

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? 

18

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. 

19

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. 

20

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 

21

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 

22

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. 

23

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. 

24

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 

25

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. 

26

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. 

27

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. 

28

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 SenVerDate 0ct 09 2002 23:54 Nov 21, 2006 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 G:\HEARINGS\30358.TXT MIKE
29

ate 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 busiVerDate 0ct 09 2002 23:54 Nov 21, 2006 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 G:\HEARINGS\30358.TXT MIKE
30

nesses 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. 

31

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? 

32

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. 

33

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? 

34

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? 

35

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-OY-N-O-V-I-C-H. 

36

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 twopage 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? 

37

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. 

38

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. 

39

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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