Retail Trade Association Requests Prospective Application of Repair Regs

Dear Commissioner Shulman and Acting Assistant Secretary McMahon:

On behalf of the members of the National Retail Federation (NRF), I am writing to express concern over the potential retroactive impact of recently issued temporary and proposed regulations under Internal Revenue Code sections 162(a) and 263(a) dealing with amounts paid to acquire, produce, or improve tangible property. These regulations are the Treasury Department's latest attempt to provide guidance with respect to whether expenditures are for capital improvements or ordinary repairs. The Treasury Department previously proposed regulations dealing with this issue in August of 2006 and again in March of 2008. The most recent regulations were issued in December of 2011.

Although we recognize that the regulations technically apply on a prospective basis, we are concerned that the IRS will apply the principles of the regulations to earlier years. We believe that the only way to resolve this issue is for the Treasury Department and IRS to issue further guidance to clarify that the new regulations will not be applied to adjustments for tax years beginning before publication of this recent guidance, unless the taxpayer elects to have the guidance apply. Taxpayers' sound positions, taken for these earlier years based on the case law and other available guidance, should not be disturbed. We recommend that the IRS direct agents not to examine taxpayers' positions for these years unless taxpayers' positions are clearly unreasonable, and instead should concentrate on future years when the new regulations are in effect.

This area of the law is highly factual in nature, and the lack of clear guidance over the last several years has led to a great deal of uncertainty and controversy. The fact that the Treasury Department has issued three different sets of proposed regulations in this area over a 5 year period, without finalizing a regulation, is indicative of the vagaries that this area of the law presents. We recognize that the most recently issued regulations attempt to bring more clarity to the law, but we think it is imperative that they not penalize taxpayers for positions taken in past years, before this guidance was issued.

In March of 2010, NRF requested that the IRS enter into an Industry Issue Resolution (IIR) with the retail industry to address the uncertainties in the application of the law to retail-specific factual situations. Although a similar request was granted for the utility and telecommunications industries, the retail industry request was not accepted, pending issuance of these regulations. The fact that the industry was denied the ability to work through an industry-IRS solution that other industries were granted (i.e. utilities and telecommunications) is another reason why retailers should be permitted to rely on sound positions taken during these years of uncertainty as a result of the issuance of multiple sets of regulations.

NRF members believe that the IIR process is still important to help develop clear and easily administered rules to deal with retail-industry factual situations, and we are hopeful that we will have the opportunity to work with the IRS and Treasury on an IIR dealing with this issue in the future.

Finally, NRF continues to have concerns with the appropriateness of certain rules set forth in the recently issued regulations, and we expect to submit comments on these regulations in the near future.

We would be pleased to meet with you or provide additional information that may be needed to evaluate our request.