mass medic planning for the medical device excise tax · 2017-03-30 · first deposit of medical...
TRANSCRIPT
Mass Medic–
Planning for the
Medical Device
Excise Tax
May 16, 2012
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO
BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY
FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY
TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY
ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction described in the
associated materials we provide to you, including, but not limited to, any tax opinions,
memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are subject
to change. Applicability of the information to specific situations should be determined through
consultation with your tax adviser.
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Today’s objectives
Understand what challenges companies face
Understand tax technical issues
Understand the excise tax compliance process
Understand the assessment process needed to begin preparing for the tax
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Open discussion
What are companies’ medical device excise tax concerns?
What are the key issues and challenges?
Unique Concepts of
Federal Excise Tax
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Excise tax procedural rules
No consolidated federal excise tax return
Disregarded entities are regarded for federal excise tax purposes
Each entity with EIN is treated as a separate entity
Form 720, Quarterly Federal Excise Tax Return
– Based on a calendar quarter
Semimonthly deposits required in advance of return
– Required for each semimonthly period during calendar quarter in which liability incurred
Under IRS Small Business/Self-Employed Division
No Tax Court jurisdiction
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When does compliance start?
First deposit of medical device excise tax will be due January 29, 2013
– Relating to tax liability incurred January 1 - 15
First return of medical device excise tax will be due April 30, 2013
– Reporting tax liability incurred January 1 – March 31
Basics―
Medical Device Excise Tax
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Section 4191
Effective January 1, 2013
Tax is imposed on the sale of any taxable medical device by its manufacturer or importer at a
rate of 2.3% of the price for which sold
A device is
– Any product for use in diagnosis or treatment of human disease
– Intended to affect the structure or any function of the body
– But not drugs
Exempt medical devices are
– Eyeglasses, contact lenses, and hearing aids
– Any medical device determined by the Treasury to be of a type that is generally purchased
by the general public at retail for individual use (the “retail exemption”)
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Proposed regulations
A “taxable medical device” is a device listed with the FDA under section 510(j) of the FFDC
Act and 21 CFR Part 807, pursuant to FDA requirements
A device meets the “retail exemption” if it is regularly available for purchase and use by
individual consumers who are not medical professionals and it is not primarily intended for
use in a medical institution or office or by a medical professional
– Facts and circumstances test
– Safe harbor
Existing manufacturers excise tax regulations apply
Issued on February 3, 2012
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Retail exemption safe harbor
Identifies categories of devices that IRS determined fall within retail exemption
Specified over-the-counter devices
Specified durable medical equipment, prosthetics, orthotics, and supplies
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Retail exemption facts and circumstances test
Some of the non-exclusive factors
Regularly available for purchase and use by individual consumers
Whether consumers who are not medical professionals can:
Purchase the device through general retail business, such as drug stores and supermarkets
Safely and effectively use the device as intended without training by a medical professional
Primarily intended for use in a medical institution or office or by a medical professional
Device generally must be implanted or otherwise administered by a medical professional
Cost to acquire, maintain, and use the device requires a large initial investment and ongoing expenditure that is not affordable for the average consumer
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Examples of exempt devices
Proposed regulations provide the following examples
Safe harbor
Pregnancy test kits
Blood glucose monitors
Facts and circumstances test
Non-sterile absorbent tipped applicators
Adhesive bandages
Snake bite suction kits
Denture adhesives
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Existing manufacturers excise tax rules apply
Section 4191 is a manufacturers excise tax under IRC Chapter 32
Existing regulations provide rules relating to
– Defining “manufacturer” and “importer”
– Tax imposed on uses and leases
– Determining the “sale price” to be used as the tax base
– Tax-free sales
– Refunds of tax, including price readjustments, exports, and use in further manufacture
– Filing returns and making deposits of tax
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Who is a manufacturer?
Under existing excise tax rules, manufacturer includes any person that produces a device
From scrap, salvage, or junk material, or from new or raw material
By processing, manipulating, or changing the form of an article, or by combining or assembling
two or more articles
Fabricator is not the manufacturer if
Person for whom Fabricator produces article
Furnishes materials to Fabricator
Retains title to materials and finished device
Producer is not the manufacturer if
Person for whom Producer makes article
Owns the patents
Exercises complete control over outputs
Polaroid Corp. v. United States, 235 F.2d 276 (1st Cir. 1956); Revenue Ruling 58-134
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Who is an importer?
Under existing excise tax rules, importer means the person that sells or uses the device
in the United States after
Bringing a device into the United States from a source outside the United States, or
Withdrawing a device from a customs bonded warehouse
If the nominal importer of a device is not its beneficial owner, the beneficial owner is the
importer
Example
Customs broker engaged by the beneficial owner
How Does The Medical Device
Excise Tax Work?
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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How the tax works
Sale, use, or lease of taxable medical device by manufacturer or importer triggers the tax
The manufacturer or importer is liable for the tax
Tax base is “sale price”
– Generally, sale price is the price for which the device is sold
– Sometimes, substitute a “constructed sale price”
Tax-free sales for export and “for use in further manufacture”
– If seller and purchaser (except foreign purchaser) registered in advance by IRS
– and paperwork requirements met
Refund of tax
– In the case of certain price readjustments
– If the device was not sold tax free for export or for use in further manufacture
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What triggers tax?
Sale by manufacturer or importer
Tax applies upon sale, even if sale price not paid
Use by manufacturer or importer treated as sale
Tax applies at time use begins
Lease by manufacturer or importer treated as sale
Generally, tax applies to each lease payment
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What is use in further manufacture?
Use of a taxable medical device as a component of another taxable medical device
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What is a kit?
A kit is a set of two or more articles enclosed in a single package (such as a bag, tray, or box)
for the convenience of a medical or health care professional or the end user
A kit that is a listed device is a taxable medical device
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Generic supply chain for excise tax purposes
Wholesaler
Retailer
End User
Manufacturer/
Importer
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Sale price
Generally, the price for which the device is sold
Includes certain charges required as condition of sale
Excludes certain charges
– Excise tax
– Transportation, delivery, installation, and insurance
– Optional service contracts
– Optional warranties
Price readjustments cannot be anticipated
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Price readjustments
Devices returned by purchaser and some or all of the price is refunded
Rebates, discounts, and other allowances paid to purchaser
Refund of tax may be allowable for price readjustments
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Constructed sale price
There are constructed sale price (CSP) rules for
– Sales at retail
– Sales “not at arm’s length” and at less than a “fair market price”
Sales “not at arm’s length” is defined in excise tax regulations
– One of the parties is controlled (in law or in fact) by the other, or there is common control,
whether or not such control is actually exercised to influence the sale price, or
– The sale is made pursuant to special arrangements between a manufacturer and a
purchaser
“Fair market price” is not defined in excise tax regulations
Requires detailed understanding of the supply chain on a device-by-device basis
No IRS guidance on CSP that are specific to medical device excise tax
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What is a sale at retail?
A sale by the manufacturer or importer directly to the end user
Under section 4216(b)(1)(A), the CSP is the lower of―
The price for which the device is sold, or
The highest price for which such devices are sold to wholesale distributors, in the ordinary
course of trade, by manufacturers or importers thereof, as determined by the IRS
Under Revenue Ruling 81-73
If manufacturer or importer has an established bona fide practice of selling the articles in
substantial quantities to wholesale distributors―
CSP is the highest price for which it sells similar articles to wholesale distributors
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Sale at retail―
what if there are no sales to unrelated wholesale distributors?
Under Revenue Ruling 80-273
CSP is 75% of the price for which sold, after taking into account allowable sale price exclusions,
unless it can be shown on an industry-wide basis that a lower percentage should apply
Under Revenue Ruling 81-226
CSP for sport fishing equipment is 60% of price for which sold, after taking into account
allowable sale price exclusions
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Sales not at arm’s length and at less than fair market price
Under section 4216(b)(1)(C), CSP is the price for which such devices are
sold in the ordinary course of trade by manufacturers or importers
thereof, as determined by the IRS
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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If sales are to related wholesale distributor
Under Revenue Ruling 62-68
CSP is 95% of related wholesale distributor’s lowest established price to unrelated wholesale
distributors, or
The actual selling price at which the taxable article leaves the corporate family in the ordinary
course of trade
Under Revenue Ruling 71-240
If intercompany price is less than 95% of price to unrelated wholesalers, IRS presumes it is not a
fair market price
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For sales by related wholesale distributor to unrelated retailers
Under section 4216(b)(3), CSP is 90% of the lowest price for which
related wholesale distributor regularly sells such articles to unrelated
retailers, if related wholesale distributor does not regularly sell to
unrelated wholesaler distributors
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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What is the challenge for intercompany sales?
An intercompany sale is never an arm’s length sale under excise tax rules
Will the intercompany price be respected as a “fair market price” under the excise tax rules?
If yes, then intercompany price is the tax base
If no, the CSP rules would apply
Support for conclusion that intercompany sales are at “fair market price”
Storm Plastics, Inc. v. United States, 770 F.2d 148 (10th Cir. 1985)
– Evidence may be presented that price is fair market price to rebut IRS presumption that
CSP applies
Revenue Ruling 89-47
– IRS will follow the Storm Plastics decision and allow rebuttal of the CSP
– Manufacturer/importer has the burden of establishing that its product was sold at a
clearly applicable fair market price, using industry data, expert testimony, etc.
KPMG Approach―
Preparing for the Medical Device
Excise Tax
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Approach to medical device excise tax
Multi-step process
Assessment Phase
Analysis and Conclusions Phase
Implementation Phase
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Key questions
Which products are “taxable medical devices”?
Which devices are exempt under the “retail exemption”?
Which entities are “manufacturers” or “importers”?
What activities are taxable events?
What is the applicable tax base for those activities?
In what situations do “constructed sale price” rules apply?
Which sales can be made tax free for export and for “use in further manufacture”?
For which sales may tax refunds be allowable?
What are the excise tax procedural rules for reporting tax to the IRS?
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Assessment phase
Step 3
Step 4
Step 5
Review company
structure
Identify
manufacturers
Identify
importers
Review flow of
devices from
manufacturer/
importer to end user
Identify activities
other than sales
that may trigger tax
Identify sales and
purchases that may
qualify for tax free
treatment
Review sales and
distribution chain
Review price for
determining tax
base
Sale price
generally
Constructed sale
price
Review post-sale
events for tax refund
possibilities
Identify sales to
which price
readjustments may
apply
Identify other sales
for which a tax
refund may be
allowable
Step 1
Step 2
Review devices in
product line
Identify taxable
medical devices
Identify exempt
devices
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Analysis and conclusions phase
Provide technical analysis of issues identified during assessment phase
Make recommendations relating to identified issues
Answer key questions to determine tax liability
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Implementation phase
Understand excise tax procedural rules
Develop excise tax compliance policies and procedures
Document positions taken
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Implementation phase―develop excise tax compliance process
Determine entities that should become registered by IRS
Develop data collection system
Develop model workpapers to support excise tax return
Develop process for reporting tax quarterly
Develop process for making semimonthly deposits of tax
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Implementation phase―develop documentation
Documentation of decisions on significant issues
Manufacturer/importer entities
Taxable medical devices
Exempt devices
Constructed sale price issues
Documentation of computation of tax
Tax base
Tax-free sales
Refunds
Resumes and Contact Information
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Robert T. Noonan
Partner
Professional and Industry Experience
Rob Noonan is KPMG’s Tax Partner-in-Charge for New England and Upstate New York and is
resident in Boston. Rob joined KPMG’s Boston office in 1985 and was admitted into the partnership in
1996.
Rob is the partner in charge of our New England and Upstate New York Tax practice and is resident
in the Boston office with over 25 years of experience in delivering tax consulting and compliance
services to our clients. His experience includes advising companies on the individual and corporate
income tax consequences of equity and debt financing arrangements, employment compensation
plans, and legal entity structuring. Rob has experience in identifying federal and state direct and
indirect tax credits for start-up and mature companies. His experience also includes performing due
diligence on acquisition targets to determine income and indirect tax exposures and structuring the
form of the purchase to include the overall tax burden of the transaction, and recommending legal
structures to minimize federal and state taxes.
Representative Clients
Advent International
Nuance
Atlas Venture Partners
Thomas H. Lee Partners
Polaris Ventures
Sapient
ROBERT T. NOONAN Partner
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Tel 617-988-1129
Fax 617-507-7894
Cell 781-552-9754
Function and Specialization
Federal Tax
Education, Licenses & Certifications
• J.D. – Suffolk Law School
• B.A. – St. Michaels College
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Zara Muradali, managing director
Background
Zara Muradali has over 16 years of public accounting experience serving New England-based multinational
and middle market companies in numerous industries including manufacturing, software, and biotechnology.
She currently leads the Accounting Methods and Credits Practice for KPMG’s New England Service Area.
Professional and industry experience
Zara has provided tax compliance and consulting services for over 16 years. Her experience includes
assisting clients with design and development of tax functions, carve-out accounting, ASC 740 income tax
reserve analysis, and cash tax planning. She also has experience in performing accounting methods and
credits diagnostic studies to increase cash flow through risk mitigation and/or potential tax planning as well
as assessing the impact of IFRS conversions.
Zara has served as a technical advisor, IRS exam strategist and Tax Account Leader on a number of
multinational and inbound companies. She also served as the ASC 740 Business Tax Leader for a Big Four
accounting Firm.
Technical skills
Accounting Methods (including R&D studies and Section 199), IFRS Conversion, ASC 740, Tax Planning,
IRS Controversy (including pre-filing agreements), Intellectual Property Planning, acquisition and disposition
planning, Global Tax Compliance and Reporting.
Other activities
Co-chair of Diversity Initiatives for a Big Four accounting Firm
Founder of the Women in Tax Networking group
Travel, Food and Wine, Health and Fitness
Zara Muradali Managing Director, Tax
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02110
Tel: 617-988-5431
Fax: 617-801-8107
Cell: 617-369-9520
Function and Specialization Federal Tax
Representative Clients
Cerberus (Private Equity)
Boston Scientific Corporation
Blue Bird Corporation
Revision Eyewear
IAP Worldwide Services, Inc.
Teradyne
Professional Associations
Massachusetts Society of CPA
AICPA
Education, Licenses & Certifications
B.A. - University of Massachusetts
MST - Northeastern University, Graduate School
of Business
CPA, MA
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member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Ruth Hoffman Director
KPMG LLP
1801 K Street, NW
Washington, DC 20006
Tel 202-533-6196
Fax 202-315-3133 [email protected] Function and Specialization Ms. Hoffman is a director in the Excise Tax
group of the Washington National Tax
practice. Her services include excise tax
consulting and IRS excise tax controversies
and cover a wide range of excise taxes,
including manufacturers taxes (e.g., medical
devices; sporting goods; tires), taxable fuel
taxes, air transportation taxes, environmental
taxes (e.g., ozone-depleting chemicals; oil
spill), retail taxes (e.g., alternative fuels;
heavy vehicles), and the foreign insurance
tax, and the alcohol, biodiesel, and
alternative fuel incentives. Education, Licenses & Certifications
J.D., cum laude, at Western New England
College School of Law in 1986.
B.A. from American University
Admitted to the New York Bar in 1987.
Professional and industry experience
Prior to joining KPMG in January 2003, Ms. Hoffman spent over 15 years as an attorney at the IRS Office of
Chief Counsel. Most recently, she was the Senior Technician Reviewer of the Excise Tax Branch where,
together with the Branch Chief, she supervised a staff of eight attorneys and was responsible for IRS
published guidance on excise taxes (revenue rulings, revenue procedures, etc.), technical advice to IRS
excise tax agents, and letter rulings to taxpayers. She also worked closely with the Treasury Department in
developing regulations and legislation in the excise tax area, and with the Justice Department in developing
the government’s litigation positions. As one of the principal legal advisers to the IRS Commissioner on
excise tax matters, she developed a thorough understanding of both the substantive and procedural aspects
of federal excise taxes as well as the IRS administration of those taxes.
Ruth Hoffman, director
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partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with
KPMG International Cooperative (“KPMG
International”), a Swiss entity. All rights reserved.
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