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OIRA’s Imprint on Tax Regs Revealed in New Cache of Documents

POSTED ON Mar. 16, 2019
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A batch of documents obtained by Tax Notes reveals how the Office of Management and Budget’s regulatory team has left its mark on major tax regulations over the past year.

OMB’s Office of Information and Regulatory Affairs provided Tax Notes with drafts of five regulations that went through the new regulatory process set in place by the April 2018 memorandum of agreement (MOA) between OMB and Treasury. The batch includes drafts of proposed regs regarding:

By comparing the drafts to what Treasury ultimately proposed in the Federal Register, the documents suggest that OIRA has often taken a light touch in its reviews, with the most pronounced effect seen in the more detailed preambles of regs.

However, the documents show that in some cases, Treasury made substantial alterations to its regs before they were publicly released, including a key definition in the Opportunity Zone regs.

OIRA is the executive branch office responsible for reviewing and approving all federal agency regulations, coordinating interagency cooperation on regulations, and ensuring that presidential priorities are carried out. Although OIRA does not have authority to change a draft regulation itself, it can suggest changes to the issuing agency.

Before the 2018 MOA, virtually all tax regulations were exempt from review by OIRA under earlier agreements between Treasury and OMB. Coming on the heels of a major federal tax overhaul, Treasury and OIRA have had to develop a new review process almost from scratch.

The answer to what has been happening to Treasury’s tax regulations behind OIRA’s doors in the months after the MOA has proved elusive up to this point. While regulations are under review by OIRA, stakeholders can request meetings with OIRA and Treasury and IRS staff to discuss issues and concerns related to that particular guidance project. Materials and participants in those meetings are made public on OIRA’s website.

Earlier reporting suggested that most changes were inconsequential in terms of the rules themselves and that OIRA’s reviews of proposed regs were focused more on teeing up issues for the notice and comment period before final regs are issued.

The drafts follow a Freedom of Information Act request filed by Tax Notes six months earlier. Executive Order 12866, which provides the framework for OIRA’s regulatory review authority, stipulates that OIRA “shall make available to the public all documents exchanged between OIRA and the agency during the review by OIRA.”

Major Changes to Opportunity Zone Rules

One big change to the Opportunity Zone rules from their time at OIRA to their eventual release was the addition of the “substantially all” definition.

The Opportunity Zone program, created by the Tax Cuts and Jobs Act, allows taxpayers to defer capital gains by investing in qualified opportunity funds (QOFs). Investments held in a QOF for at least five years get a 10 percent basis step-up in the original gain, which climbs to 15 percent after seven years. Gains accrued in the fund can escape taxation if the investment is held for at least 10 years.

A business looking to qualify for the tax preference must have substantially all of the tangible property owned or leased qualify as business property under the statute. In the initial version of the proposed regulations, “substantially all” wasn’t defined.

In the version released to the public, language was included defining “substantially all” as 70 percent.

The released regulations added language that said, “If at least 70 percent of the tangible property owned or leased by a trade or business is qualified opportunity zone business property,” then the business is treated as having met the substantially all requirement.

The released version said the 70 percent requirement will give QOFs an incentive to invest in a qualified business rather than qualified business property. The government had considered setting the substantially all test at 90 percent, like the test required for QOFs to hold at least 90 percent of their assets in qualified Opportunity Zone property. Comments were requested on the topic.

SALT Regs

The draft SALT cap regs said only that regs were needed to “clarify the relationship” between the charitable contribution deduction and the new SALT cap enacted by the TCJA, but the published regs provided a more robust explanation.

The published version states that the proposed regs were needed “to make the federal tax system more neutral with respect to taxpayers’ decisions regarding donations. Compelling policy considerations reinforce the interpretation and application of section 170 in this context. Disregarding the value of all state tax benefits received or expected to be received in return for charitable contributions would precipitate revenue losses that would undermine and be inconsistent with the limitation on the deduction for state and local taxes adopted by Congress in section 164(b)(6).”

Also inserted was language describing the benefits of the proposed regs: “These proposed regulations likely reduce economically inefficient choices motivated by the potential tax benefits described above if these proposed regs were not promulgated.”

Added paragraphs also went into detail about the data analysis and how Treasury and the IRS “note that these proposed regulations will leave charitable giving incentives entirely unchanged for the vast majority of taxpayers.” A footnote was added saying Treasury and the IRS “are aware of potential concerns about educational scholarship programs in particular,” but that based on their projections, most taxpayers have never used such programs.

Explanatory language has been inserted, as well as requests for comments on the extent of the expected reduction in economic distortion, on alternative regulatory approaches that would effectively prevent circumvention of the new SALT cap, and on how the proposed regs “might alter incentives regarding contributions to state and local tax credit programs” and other potential effects on charitable contribution decisions.

199A From Initial to Released

In the original version sent to OIRA, no language was included in the preamble on the unadjusted basis of property after it’s been contributed to a partnership or S corporation.

In the version of the proposed regulations released to the public, when discussing unadjusted basis immediately after acquisition (UBIA) in the preamble, the regs read: “For qualified property contributed to a partnership in a section 721 transaction and immediately placed in service, UBIA generally will be its basis under section 723. For qualified property contributed to an S corporation in a section 351 transaction and immediately placed in service, UBIA generally will be its basis under section 362.”

The language surrounding the antiabuse provisions regarding UBIA was changed from the initial to the released version as well.

The preamble to the initial version just said “property is not qualified property if the property was transferred to or acquired by a trade or business with a principal purpose of increasing a taxpayer’s section 199A deduction. Property used in the production of [qualified business income] for at least 45 days within a taxable year will be presumed not to have been transferred with a principal purpose of increasing a taxpayer’s section 199A deduction.”

The released version said property doesn’t qualify if it’s “acquired within 60 days of the end of the taxable year and disposed of within 120 days without having been used in a trade or business for at least 45 days prior to disposition, unless the taxpayer demonstrates that the principal purpose of the acquisition and disposition was a purpose other than increasing the section 199A deduction.”

Sometime between when the rules went to OIRA and when they were released to the public, the government added language surrounding the de minimis exception. In the version released to the public, the government explained that an alternative approach to the de minimis exception would be to require businesses or their owners to trigger the specified service trades or businesses exclusion regardless of the share of gross income from each activity.

That explanation wasn’t in the initial version.  

Scant Changes to International Rules

Little changed in the text of the proposed GILTI regs, with most of the changes focusing on the explanation of provisions in the preamble.

The publicly released rules elaborate on the provision related to the determination of gross income and allowable deductions applicable to tested income and tested loss. The publicly released version of the regs also specifically sought comment on other ways to approach tested income and tested loss, which was not previously asked for in the draft version.

The newer preamble adds to the explanation of its treatment of partnerships to “harmonize the treatment of domestic partnerships and their partners across all provisions.”

Other changes during the OIRA review process of GILTI also focused on the economic analysis portion of the regs.

Besides a handful of edits to make references to prior examples or subsections more specific, the text of the proposed section 965 regulations was unchanged. The only significant changes, both made to the preamble, were a statement inviting comments on the definition of cash position of a specified foreign corporation and a new section on regulatory planning and review.

The new section of the preamble emphasizes the government’s effort to prevent “inequitable outcomes,” including those resulting from the ambiguity of the statute and potential double-counting of cash and earnings and profits. According to the section, the regulations attempt to avoid double counting in calculating aggregate foreign cash positions and prevent double-counting or non-counting of deferred earnings associated with related-party transactions.