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The APA, Chevron, and the BEAT

Posted on Apr. 8, 2019
[Editor's Note:

This article originally appeared in the April 8, 2019, issue of Tax Notes.

]
Jasper L. Cummings, Jr.
Jasper L. Cummings, Jr.

Jasper L. “Jack” Cummings, Jr., is of counsel with Alston & Bird LLP in Raleigh, North Carolina.

In this report, Cummings expands on an earlier report on the Administrative Procedure Act and Chevron deference as applied to tax regulations by focusing on the proposed base erosion and antiabuse tax regulations. He identifies Treasury choices that could be contested and explains the arguments to be made in court.

I. Esse Quam Videri Preambles

A. Seeming to Be

The motto on the great seal of North Carolina is esse quam videri: to be rather than to seem. It is an admirable goal, rarely pursued today. Treasury has been pushed into “seeming” by an administration that excels at seeming. As evidence, a quarter of the preamble of the proposed base erosion and antiabuse tax regulations tries to satisfy the multiple procedural roadblocks that Republican congresses have thrown in front of the regulatory process.1

But the explanations are puffery. They assert that Treasury had to adopt regulations to keep taxpayers from wasting money taking differing reporting positions on the new law: The regulations will lessen the “burdens” of flexibility in interpreting the statute, such as litigating and losing. If Republicans think hard about that explanation, they won’t like it; discouraging taxpayers’ God-given right to read the code their way isn’t usually a Republican goal.

This report will return to that curious new justification that Treasury is applying to all the proposed regulations under the 2017 tax act, which makes the justification process a joke. But this report principally addresses the more practically important Administrative Procedure Act (APA) and Chevron2 concerns that confronted the regulation writers. Practitioners should care because they may want to advise their clients how to attack these regulations.3 And attacking tax regulations is about to become far more common, moderated only by the fact that most of Treasury’s calls favor taxpayers.

B. The BEAT Regulations

One of Treasury’s Christmas presents to practitioners last year was the proposed regulations under section 59A, the infamous BEAT add-on minimum tax. They aren’t particularly exciting as far as the growing set of 2017 act proposed regulations go, but they provide insight into administrative practice at Treasury. Indeed, the whole process of writing the 2017 act regulations has been a laboratory for the renewed interest in administrative procedure, both inside and outside government. When the first comment on a regulation by a technical expert is about authority, you know there’s been a profound change in perspective.4

The preamble’s authority citations are sections 7805 and 59A(i), and for the consolidated return regulations, they are sections 1502 and 7805 but not section 59A(i). Section 7805(a) states the Treasury secretary’s general regulatory authority in words that long predate the 1954 code:

The Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Recently courts rediscovered that this sentence authorizes legislative as well as interpretive regulations.5 That rediscovery has roiled commentators and the courts and may lead to a major discovery of “new” administrative procedure law by the Republican-configured Supreme Court this term.

II. Surprising Choices

A. Applicability and Aggregation

1. Effectively connected income.

a. Lindsey Graham speaks.
i. Overview.

Section 59A(c)(2)(B)(i) excludes from the definition of base erosion tax benefit any tax benefit attributable to a base erosion payment that’s subject to full withholding on fixed or determinable annual or periodical income that is not effectively connected income of the foreign payee. So we know for sure that Congress had ECI in mind in drafting section 59A. Prop. reg. section 1.59A-3(c)(2) implements that exception. The surprise is that prop. reg. section 1.59A-3(b)(3)(iii) extends the principle to an outbound payment to a related party if the payment is ECI and the payee avoids withholding by providing a section 1441 certificate. The preamble discusses this specific regulatory decision twice, so you know Treasury is worried about it (even though the rule is pro-taxpayer).

Every taxpayer concerned that section 59A might apply will first study the definition of applicable taxpayer (to which the section applies) and the aggregation rules, which carry out section 59A(e)(3).6 The aggregation rules treat all persons that are members of specified defined groups as one person for purposes of the gross receipts test and the base erosion percentage. The BEAT will not apply unless the gross receipts of the applicable taxpayer’s group exceed $500 million and its base erosion percentage exceeds 3 percent.

The base erosion percentage is bad deductions (for payments to related foreign persons) divided by all deductions. The statute calls these “base erosion tax benefits,” resulting from “base erosion payments.” Two terms were used because payments to buy depreciable property are also base erosion payments, but the benefit is the depreciation deduction. Otherwise, payments and the benefits are the same.

The bad deductions/benefits do double duty: They not only define the base erosion percentage, they also are the deductions that the applicable taxpayer will add back to its taxable income to compute modified (larger) BEAT taxable income, subject to the (lower) BEAT minimum tax rate.7 So defining base erosion payments and benefits is important not just for the applicability of the section but also for the tax imposed.

Three parts of the proposed regulations touch on ECI. First, prop. reg. section 1.59A-2(c) states the aggregation rules, which apply to the gross receipts test and the base erosion percentage. For both purposes, transactions between aggregate group members are disregarded, but a transaction with a foreign member is disregarded only if it “relates to” ECI. That limitation is not in the statute. It has several consequences, including making it less likely that a U.S. taxpayer will exceed the gross receipts threshold by combining the receipts of a foreign affiliate.

Second, implementing section 59A(e)(2)(A), prop. reg. section 1.59A-2(d)(3) provides that for purposes of the gross receipts test, a foreign corporation that might itself be an applicable taxpayer will take account only of its ECI. Finally, as noted, prop. reg. section 1.59A-3(b)(3)(iii), part of the regulation on base erosion payments, excludes from base erosion payments those that are ECI for the foreign related payee.8 That is not in the statute.9

ii. Wow.

Section 59A(d) is very clear — a base erosion payment requires only three elements: (1) The payee is a foreign person; (2) the payee is related; and (3) the payer would otherwise be allowed a deduction. The statute excludes FDAP income on which tax is withheld, but not ECI (on which tax would not be withheld if the payee provided a withholding certificate).10

How does the preamble explain adding another exemption? In a curious way. It mentions the exemption first in Section II.C, which says it’s discussed in Section IV.A, but Section IV.A says it was discussed in Section II.C. And in between, Section III.B.3 comes closest to giving an explanation by stating that Treasury concluded the exemption was “appropriate.” Then the exemption is discussed all over again in the section titled “Regulatory Planning and Review — Economic Analysis,” which correctly refers back to Section III.B.3 as the place it was discussed.

The economic analysis explanation is that treating these deductible ECI payments to a foreign related person as base erosion payments would be “inconsistent with the statute’s intent of eliminating base erosion,” because the payments are effectively the same as payments to a domestic related person, which are not base erosion payments because they are included in the U.S. tax base.

Of course, that explanation assumes its conclusion; literally, payments to domestic and foreign related persons are different because in one case the payee is domestic and in the other the payee is foreign. Based on the words of the statute, that was the difference Congress cared about. This is the only place where the preamble claims justification for ignoring the statute by avoiding inconsistency with statutory intent (for purposes of section 59A).

Section 59A(i) provides the following regulatory authority, which doesn’t seem to cover a rule cutting back on the reach of the statute, and the preamble doesn’t rely on it:

The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the provisions of this section, including regulations — (1) providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including through — (A) the use of unrelated persons, conduit transactions, or other intermediaries, or (B) transactions or arrangements designed, in whole or in part — (i) to characterize payments otherwise subject to this section as payments not subject to this section, or (ii) to substitute payments not subject to this section for payments otherwise subject to this section and (2) for the application of subsection (g) [definition of related party], including rules to prevent the avoidance of the exceptions under subsection (g)(3) [modifications of section 318].11 [Emphasis added.]

The ECI regulation will have to be justified as carrying out the “provisions” of the section. Literally, that does not confer any power greater than section 7805(a). However, some courts have read similar words to authorize legislative regulations (writing the law).12 But even if section 59A(i) authorizes Treasury to resolve an ambiguity, it shouldn’t matter because the section is not ambiguous on this point.

The preamble effectively admits that the proposed ECI rule changes the statute. In fact, it’s adding to the core definition in the statute to say what Treasury thinks Congress would have said if it had had time to be more careful in its drafting. However, the technical corrections bill House Ways and Means Committee ranking member Kevin Brady, R-Texas, introduced did not contain the fix.13 And the blue book, which includes many suggestions for technical corrections, doesn’t mention ECI in the BEAT discussion, although its example states that the related foreign payee has no other U.S. operations.14

The legislative history provides no support for the ECI rule. The House bill’s version of the BEAT specifically excluded ECI and allowed the payer to avoid the BEAT if the payee treated the payment as ECI.15 The final version of section 59A is the Senate amendment, which created a very different base erosion regime, and neither the Senate explanation nor the conference report mentioned any exclusion of ECI other than the withholdable payments, which implies that absent withheld tax, the possibility of directly paid tax is not a bar. In sum, Congress had ECI in mind in the drafting process and drafted around one alternative (not ECI) but not the other.

iii. Count on NYSBA.

The New York State Bar Association Tax Section report on the BEAT boldly says: “Payments that are ECI are not Base Erosion Payments as contemplated by the statute. [fn. 64].”16 That footnote states:

Base erosion payments do not include amounts paid to a foreign affiliate that are subject to U.S. income tax. For example, payments to a foreign partnership by a U.S. taxpayer that the foreign partnership certifies are effectively connected income are not base erosion payments. The income has not been shifted offshore, and there has been no erosion of the tax base.

The footnote quoted the Congressional Record statement of Sen. Lindsey Graham, R-S.C., who was addressing reinsurance payments.17 The quote is the final paragraph in his discussion of insurance company problems, and it looks like it was tacked on to his unrelated original statement. That conclusion is buttressed by a later letter from Graham to the Treasury secretary addressing only the insurance company problem.18 Nevertheless, prop. reg. section 1.59A-3(b)(3)(iii) effectively incorporates that paragraph into the regulations.

If Treasury is ready to write regulations to prevent double taxation, how about outbound deductible payments to related persons that are includable by a U.S. shareholder as subpart F income or global intangible low-taxed income? Ever-helpful to taxpayers, NYSBA thought Treasury should find a way to exclude both from the BEAT. Mark Leeds says of the proposed regulation: “This is a helpful clarification for many financial institutions that are not headquartered in the United States and that finance their U.S. operations through loans from the U.S. headquarters. These institutions should now consider obtaining financing from the market through their U.S. branches (and for on-lending to any U.S. subsidiaries).”19

b. Statements and colloquies.

Of course, the preamble did not cite the statement by Graham, so perhaps it doesn’t matter. But statements inserted into the Congressional Record are cited all the time to support interpretations of tax laws, so it’s worth asking: How relevant can it be? In this case, the answer is “not very.”

Graham’s statement wasn’t even a colloquy. In contrast, former Senate Finance Committee Chair Orrin G. Hatch often planted colloquies with another inquiring senator into the Congressional Record to top up guidance on congressional intent.20 Instead, Graham just had his one-man statement inserted into the Congressional Record, not an actual record of an oral floor debate. Graham had no particular claim to expertise on this issue. He was not on the Finance Committee, although he was a member of the Budget Committee.

Treasury doesn’t rely on colloquies to justify regulations. The last time the preamble of a Treasury regulation cited a congressional colloquy may have been in 1983.21 At least one circuit has said colloquies are not high in the hierarchy of congressional intent.22 Another circuit stated in a tax case: “There is no indication, however, that this colloquy reflected the views of the Senate rather than simply the views of those two senators. We agree with the Commissioner’s assertion that ‘[v]iews of individual members of Congress neither constitute legislative history, nor represent the will of Congress.’”23 In that case the IRS cited two Supreme Court opinions that cast doubt on colloquies: Wald24 and Chrysler.25 Those and several other Supreme Court opinions show that the Court generally declines to rely on statements that are just the opinion of one member of Congress.

The IRS sometimes cites colloquies in letter rulings and other writing26 because chief counsel lawyers scour every source to avoid appearing to “make law.” The courts are compelled to refer to colloquies because parties will cite them. The one justice who you would expect to dislike colloquies — Justice Antonin Scalia — cited one in a dissent, and Justice Stephen G. Breyer, writing for the majority, pointed out how weak that reliance was.27 This proves that these statements are like any other litigation tool: Use it if nothing else is handy.

There does not seem to be any extensive analysis of the use of colloquies in scholarly writings. One hard-to-find piece was written by a member of Congress in 1959.28 He explained that colloquies often are carefully planned and occur after it is too late to change the committee report. He also explained that rules may prevent further amendment to a bill, or a colloquy may simply be a ploy to overcome the clear meaning of a bill by its opponents or proponents. The writer thought that members of Congress intended to influence court interpretation and that they generally should succeed. But he explained that the Supreme Court was resistant in the early years. The writer said that gradually some courts did give weight to colloquies, particularly to statements of bill sponsors, and that they could be expected to continue.

c. Standing?

So a U.S. subsidiary of a foreign parent makes deductible payments to the parent’s permanent establishment, receives a withholding certificate, and the subsidiary pays less BEAT. Who is to complain?

Maybe that’s the point: Treasury’s boldest move in the proposed regulations is not antiabuse but pro-taxpayer. But what if the Tax Foundation wasn’t a “lite” version of the U.S. Chamber of Commerce, and was worried about maximizing tax collections? Would the foundation have standing to sue Treasury to redress its usurpation of Congress’s power? Better yet, how about a nonexempt taxpayer suing and claiming it will pay more tax because “deadBEATs” will pay less as a result of improper Treasury rulemaking?

So far there is no good basis for such plaintiffs to prove standing (absent a First Amendment or other constitutional ground).29 In 2006 the Supreme Court held that state taxpayers have no standing under Article III to challenge state tax or spending decisions simply by virtue of their status as taxpayers.30

d. Close enough for government work.

Treasury officials probably feel comfortable that their most feared critics — members of Congress — won’t complain. Officials have candidly admitted that they have been consulting with Hill staff about how to write the regulations for the 2017 act. That is a new practice, arising from (1) the juxtaposition of a Republican-controlled Treasury and Congress, and (2) a heightened deference to all sources of political power.31 Therefore, it’s likely that Treasury officials discussed this fix with Hill staff. There is also the “close enough for government work” explanation, which has now been made official. When Tax Notes named the regulation writers as the tax persons of the year, one of them said:

The accelerated IRS regulatory development process that emerged under the pressure of [Tax Cuts and Jobs Act] deadlines “has made a lot of us much more confident in some ways, and almost fearless. . . . Not that we think that we are right any more than we ever were, but just accept[ing] that you do what you have to do, and the chips just fall. And you can’t be afraid of being wrong, or you won’t get anything done.”32

2. Treated as one person.

If Treasury hadn’t fixed the ECI problem, section 59A could still work relatively well. But as Leeds’s article also pointed out, Treasury faced a more serious problem with applicability and aggregation: Section 59A(e)(3) requires that aggregated persons be treated as one person for purposes of the applicable taxpayer definition and the base erosion percentage.33 If treating them as one person meant disregarding transactions between them, most payments to foreign related persons wouldn’t be base erosion payments, and section 59A would largely fail.

So what does it mean to treat related persons as one person? The preamble says the section is ambiguous or silent on that point, and here the preamble is correct about ambiguity. Treasury created its own “one person” problem in the check-the-box regulations, under which transactions between disregarded entities are disregarded. Here the preamble might have relied on the antiabuse regulatory authority, but it did not. Instead, as Leeds said, “The proposed regulations effectively implement their own technical correction to the statute by excluding non-U.S. taxpayers from the threshold calculations except to the extent gross receipts are taken into account in determining effectively connected income (or treated as business profits under an applicable income tax treaty).”

But again, the left hand needs to think about what the right hand might be doing when Treasury takes a position on the meaning of a term that appears elsewhere in the code. There are about nine other code sections that treat taxpayers as one person. The preamble might have acknowledged that and tried to show that there is no one accepted meaning for the phrase “as 1 person.”

B. Gross Receipts

1. Turning three rules into six.

The proposed rules for calculating gross receipts are not as interesting as the ECI issue but present a similarly profound question for the regulation writing process, which recurs many times in the proposal. Section 59A(e)(2)(B) directs that rules similar to those in section 448(c)(3)(B) (short tax year must be annualized), section 448(c)(3)(C) (receipts are reduced by returns and allowances), and section 448(c)(3)(D) (entity includes a predecessor of the entity) will apply in determining gross receipts. Section 448(c)(3)(A), addressing taxpayers not in existence for three years, was not similarly incorporated.

Prop. reg. section 1.59A-2(d) includes the following six rules:

  1. The tax year of the taxpayer determines the period during which the gross receipts of the other aggregated group must be compiled.34

  2. If a taxpayer was not in existence for the entire specified three-year period, it generally determines a gross receipts average for the period that it was in existence.35 This is the rule of section 448(c)(3)(A), even though section 59A(e)(2)(B) doesn’t incorporate that rule.

  3. If a taxpayer has a short tax year, gross receipts are annualized by multiplying the gross receipts for the short year by 365 and dividing the result by the number of days in the short period.36 This is the rule of section 448(c)(3)(B).

  4. A predecessor includes a section 381 transferor, nonexclusively.37

  5. Gross receipts are reduced by returns and allowances, as in section 448(c)(3)(C).38

  6. Gross receipts of a consolidated group are determined by aggregating the gross receipts of all the members of the consolidated group.39

So the proposed regulation adopts the three rules Congress told it to adopt, adopts the one rule Congress oddly did not authorize, creates a rule for identifying the relevant counting period of the aggregate group members, and creates a partial predecessor rule. Before we became hypervigilant about Treasury’s authority, no one would have thought twice about these reasonable administrative choices. But now a disgruntled taxpayer might object.

The less-than-three-years rule seems like the only possible solution to that problem (unless you say that the taxpayer cannot be exempt because it cannot literally satisfy the exemption). Perhaps Treasury reasoned that because the less-than-three-years rule can only help taxpayers, no one would complain if it was added.40

Forcing aggregate group members to count receipts during the months of the taxpayer’s fiscal year that they do not share is literally correct. But how will they do it? The preamble, but not the regulation, says to use “any reasonable method.” Can the group member prorate or close the books (presumably the latter)? Example 2 of the proposed regulation presents the problem scenario and implies a book closing.

2. Predecessors.

So far Treasury might have believed it had “made no law” in this little corner of the regulation. But where does the predecessor partial definition come from? Even the section 448 regulations don’t define predecessor. Section 381 can define a predecessor (corporation) only if you think that’s a reasonable interpretation of the word “predecessor” generally.

Several code sections say that some rule applies to a predecessor. For example, section 355(e)(4)(D) states that references to the distributing or controlled corporation will include a reference to any predecessor or successor of that corporation. And yet the regulation defining predecessor for that purpose is highly complex; although it relies on section 381, it doesn’t just make a section 381 transferor a predecessor.41 Reg. section 1.382-2(a)(6) does say a section 381 transferor is a predecessor, but section 381 itself doesn’t say it is identifying predecessors.

Without a codewide definition of predecessor, or a commonly accepted meaning in the tax law, this partial definition of predecessor appears to be a legislative regulation. If so, Congress knew the term “predecessor” is ambiguous and intended for Treasury to fill the gap. If Chevron is still good law and such a purpose of Congress may be inferred, it shouldn’t matter whether the definition is interpretive or legislative, except for one thing: If a reviewing court thinks the definition is legislative, it will look for an explanation of why Treasury adopted it.

But the preamble doesn’t mention predecessors, much less say the statute is ambiguous on its meaning. So Treasury had better hope the definition is interpretive — meaning Treasury need not have explained it — in which case the definition gets no Chevron deference. So there are two problems with the nonexclusive definition being interpretive: (1) Any taxpayer can contest it on general interpretive grounds, and the regulation will not receive deference; and (2) Treasury has staked itself out on the meaning of predecessor, at least for corporations, for all purposes in the code. Although Treasury can live with (1), it probably won’t like (2).

3. Legislative or interpretive?

The upshot of this minor confusion for Treasury should be a heads-up that it may have to try even harder to explain its regulatory choices. It should consider clearly identifying all the choices made about parts of the code that it considers ambiguous, entitled to Chevron deference, and subject to APA legislative regulation criteria.42 Then Treasury should admit that the rest of the regulation is interpretive. Admittedly, staking itself out in this way carries risks both from over- and underidentification of ambiguous provisions, but Treasury can properly perform its duties only if it knows which is which.

C. De Minimis Banks

Section 59A’s threshold base erosion percentage drops from 3 percent to 2 percent for banks and securities dealers. Prop. reg. section 1.59A-2(e)(2) makes the 2 percent test apply to any taxpayer in an aggregate group with a bank — consistent with the statute — and then provides a de minimis exception if the total gross receipts of the aggregate group attributable to the bank or the registered securities dealer represent less than 2 percent of the total gross receipts of the aggregate group. The preamble explains:

For the de minimis exception for banks and registered securities dealers, in the absence of an exception, affiliated groups that are not principally engaged in banking or securities dealing would be incentivized to alter their business structure to eliminate minimal banks or registered securities dealers from their aggregate groups. These changes would give rise to tax-motivated, inefficient restructuring costs. A de minimis threshold reduces this potential inefficiency again without substantially affecting the BEAT base. In both cases, the thresholds were chosen to balance these competing concerns and to adhere to generally similar standards elsewhere in the Code.

Among others, a group of lawyers, not admitting to representing anyone, wrote a letter to Treasury recommending this rule.43 The administrative grace provided is in the same category as the ECI rule: No one will complain, unless perhaps your bank contributed 3 percent to the group’s gross receipts and you want to be in the de minimis category. If so, you might argue that Treasury has generally treated 5 percent as de minimis in other contexts.44

Or if you are a taxpayer unhappy with any other Treasury regulation that has the effect of forcing you to reorganize your business purely to avoid an “unfair” tax rule, you can complain that Treasury inconsistently applies its own stated principle of not forcing “tax-motivated, inefficient restructuring costs.” How about restructuring debt to avoid section 163(j)? Does Treasury really want to go this route of identifying 2 percent as perhaps a default de minimis threshold, and of getting taxpayers’ hopes up that whenever the law affects them Treasury should offer relief?

D. Reduction of Gross Receipts or Income

As shown earlier, the definition of gross receipts in section 59A indirectly approves reducing them by returns and allowances. Separately, reductions of gross receipts are referred to in section 59A(c)(2)(A)(iv) and section 59A(d)(4)(A), which state a special rule applicable only to payments to expatriated entities: Any payment to an expatriated entity resulting in a reduction of gross receipts is a base erosion benefit. You would expect that means reduction by returns and allowances, but if so, it doesn’t state much of a special rule for payments to expatriated entities. The proposed regulations say that buying inventory from expatriated entities is a base erosion payment, even though that’s not normally true.

The confusion starts with the conference report, which incorrectly stated that reduction in gross receipts includes amounts increasing cost of goods sold.45 Prop. reg. section 1.59A-3(b)(1)(iv) (defining base erosion payment) doesn’t say that, but prop. reg. section 1.59A-3(c)(1)(iv) (defining base erosion benefit) does — sort of. It describes “any reduction in gross receipts with respect to the payment in computing gross income of the taxpayer for the taxable year.”

That is an extremely odd formulation. It appears designed to weave the incorrect statement in the conference report into the regulation in a way that will allow IRS agents to claim that the cost of inventory bought from expatriated entities is a base erosion payment (benefit).46 The blue book seems to be trying to give aid and comfort to that approach by first stating that “generally” the cost of goods sold is not a base erosion payment, and immediately thereafter stating the gross receipts rule for surrogate foreign corporations.47

There is enough confusion here to support a strong pushback from any affected taxpayer.

E. Transferred Basis Acquisitions

1. A surprising assertion.

A bigger deal that is obscured, like the expatriated entity rule is obscured, is prop. reg. section 1.59A-3(b)(2)(i), which states that “for purposes of paragraph (b)(1) of this section [base erosion payments], an amount paid or accrued includes an amount paid or accrued using any form of consideration, including cash, property, stock, or the assumption of a liability.” Example 7 illustrates an inbound sale and is the only example of a depreciable property acquisition. If you didn’t read the preamble, you might assume that the regulation refers to a corporation purchasing property in exchange for its own stock, which can be a typical taxable transaction for the seller and a section 1032 nonrecognition stock issuance for the corporation.

But the preamble makes clear that Treasury intends to cover inbound reorganizations (in which the stock of the U.S. corporation is paid for the assets of the foreign corporation), section 351 exchanges (stock of U.S. corporation paid for assets of shareholder), and section 332 exchanges (stock of liquidating foreign corporation exchanged for its assets by a U.S. corporation shareholder), as well as section 721 exchanges for partnerships. The preamble explains:

The Treasury Department and the IRS have determined that neither the nonrecognition of gain or loss to the transferor nor the absence of a step-up in basis to the transferee establishes a basis to create a separate exclusion from the definition of a base erosion payment. The statutory definition of this type of base erosion payment that results from the acquisition of depreciable or amortizable assets in exchange for a payment or accrual to a foreign related party is based on the amount of imported basis in the asset. That amount of basis is imported regardless of whether the transaction is a recognition transaction or a transaction subject to rules in subchapter C or elsewhere in the Code.

Section 59A(d)(1) actually states that the term “base erosion payment” includes:

any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer in connection with the acquisition by the taxpayer from such person of property of a character subject to the allowance for depreciation (or amortization in lieu of depreciation).

The preamble does not contain any analysis of the terms “paid or accrued” or “payment or accrual.”48 The closest it comes is to state:

In contrast, for transactions in which a taxpayer that owns stock in a foreign related party receives depreciable property from the foreign related party as an in-kind distribution subject to section 301, there is no base erosion payment because there is no consideration provided by the taxpayer to the foreign related party in exchange for the property. Thus, there is no payment or accrual.

So the preamble equates “paid or accrued” with any exchange of property. Therefore, for example, section 1001(a) might be read to say: “The gain from the payment or accrual of property shall be the excess of the amount realized therefrom over the adjusted basis.” Of course, that is ridiculous and shows that “paid or accrued” has an understood meaning in the code that is different from any transfer of property.

The preamble doesn’t treat the statute as ambiguous on this point and say that “the proposed regulations clarify. . . . ” Instead it rejects suggestions that Treasury has power to relieve the nonrecognition transactions from the application of the BEAT, relying on the statutory purpose that section 59A apply to all imported property basis, whether carryover or cost. Therefore, Treasury treats this as an interpretive regulation and thus stakes itself out for all purposes on the meaning of “paid or accrued.” Good to know (let’s hope it knows what it’s doing).

2. Attacking the regulation.

A taxpayer that attacks this part of the regulations will first explain that the provision is interpretive and thus entitled to no deference, meaning that the court is just as able to interpret section 59A as is Treasury. Then the taxpayer will make at least two interpretive arguments. First, it will assert that the words “paid or accrued” imply a cost basis acquisition. Second, it will point to the title of section 59A(d)(2): “Purchase of Depreciable Property.”

a. Titles.

Tax lawyers know that section 7806(b) warns against the use of “descriptive matter” to inform interpretation of the code. They commonly assume that includes section titles, but section 7806(b) doesn’t exactly say so: A title is not descriptive matter like the items mentioned (table of contents, table of references).49 But district court judges are much less likely to be afraid of section titles. Supreme Court opinions have said statutory titles can’t be used to vary the words of the statute, but the Court has relied on them on several occasions in tax cases.50

Consistent with the term “purchase” in the subsection title, several rules in section 59A hinge on the taxability of the seller side of the base erosion payment (plus the ECI rule created in the regulation). Nothing in the section signals its application to transferred basis exchanges. Including all of section 351, 332, and 368/361 exchanges within section 59A makes it apply to three very different sorts of exchanges involving stock. In two of them, the transferee doesn’t even continue to exist and hold the stock paid for its assets (in one case its own stock, in the other case the acquirer’s stock).

The code commonly uses the term “purchase” to describe a taxable exchange, such as in section 338 (qualified stock purchase). Chief counsel regularly contrasts acquisitions by purchase with acquisitions that are by reorganization or are otherwise tax free.51 Respected commentators do the same.52

By analogy, when Boris I. Bittker first summarized section 304(a) (“Treatment of Certain Stock Purchases”), he did not suggest that it might apply to a nonrecognition purchase.53 The 1982 Tax Equity and Fiscal Responsibility Act modified section 304 to make some section 351 exchanges subject to it to the extent of taxable liability assumption, but before that the nonrecognition rules were thought to trump section 304.54 The issue here is almost identical to the pre-1982 problem presented when a stock-for-stock exchange might be described in section 304 and also in section 351: The presence of the word “purchase” in the heading of section 304(a) (but not in the text) suggested that taxable sales were covered, but that issue was not squarely presented because the section did not apply to the extent stock of the transferee was received in the exchange (taxable or not).55

b. ‘Paid or accrued.’

“Paid or accrued” is a term of art used throughout the code. It appears to uniformly refer to payment of taxes, interest, or other deductible amounts. It sometimes refers to paying the purchase price of property. It never refers to the actual or deemed exchange of stock in subchapter C nonrecognition exchanges of stock.

Section 48 of the 1939 code appears to be the last time the code defined paid or accrued. It said the term was to be construed according to the accounting method on which the taxpayer computed its net income, presumably referring to the cash and accrual methods. The method of accounting does not determine, for example, the timing of a corporate reorganization in which stock is not paid or accrued.

The taxpayer in a 1955 case accrued an excess profits tax in 1945, paid it in 1946, and wanted to add it to its 1946 net operating loss to carry back to 1944 under a special provision applicable only to excess profits taxes.56 The taxpayer argued that the statute allowed it to deduct the tax when paid or accrued, and that because the tax was paid in 1946, it should be deductible in 1946. The unanimous opinion of the Supreme Court said the statute didn’t give the taxpayer an option, meaning that the phrase was not ambiguous. Section 43 required the taxpayer to claim deductions in the year paid or incurred, according to the taxpayer’s method of accounting. The taxpayer reported on the accrual method, so it had to take the deduction when accrued.

c. An imprudent choice.

The point of this esoteric issue is that again Treasury has managed to open a potentially huge can of worms while trying to expand the scope of what can be called an antiabuse code section. Treasury didn’t even try to justify its action under its antiabuse powers, because it is highly unlikely that related parties would use nonrecognition transactions to try to get around the BEAT. Instead, Treasury purports to interpret words in section 59A in a way that can come back to haunt the IRS in other contexts.

F. Section 163(j) Interest Carryforward

Prop. reg. section 1.59A-3(b)(4)(vi) addresses disallowed business interest expense that section 163(j), both prior and current, requires to be carried forward and treated as “paid or accrued in the succeeding taxable year.” Notice 2018-28, 2018-16 IRB 492, said the carryforward could be a base erosion payment if carried from a year to which section 59A didn’t apply to a year to which it did apply.

The proposed regulation reverses that call, after lobbying by PwC (and others) on behalf of unnamed taxpayers,57 and says the year of actual payment determines the effective date of payment for BEAT purposes. The preamble explains that the carryforward is peculiar to the carryforward mechanism of section 163(j) and does not apply “for all purposes.”

When Treasury reverses its own reading of the statute, that pretty well proves the statute is ambiguous. Similar “next year” rules appear in sections 163(d)(2), 904(c), and 907(f)(1), among others. Perhaps this isn’t such a bad administrative call for Treasury: It hurts no taxpayer but leaves Treasury flexible to make a different call in another context. However, the IRS often finds itself arguing that similar language applies for all purposes,58 and it might have Treasury’s indecision cited against it.

G. Treaties

Prop. reg. section 1.59A-3(b)(4)(v) states that any deductible amount treated as paid to the foreign home office under a treaty provision for determining business profits of the U.S. branch can be a base erosion payment. But it isn’t clear whether the “internal dealings” the regulation refers to are actual transactions (the PE pays the home office for accounting services) or allocations of enterprise expenses incurred by the home office. The preamble explains:

The proposed regulations include rules to recognize the distinction between the allocations of expenses that are addressed in Parts III.A.2 and 3 of this Explanation of Provisions section, and internal dealings. In the first instance, the allocation and apportionment of expenses of the enterprise to the branch or permanent establishment is not itself a base erosion payment because the allocation represents a division of the expenses of the enterprise, rather than a payment between the branch or permanent establishment and the rest of the enterprise. In the second instance, internal dealings are not mere divisions of enterprise expenses, but rather are priced on the basis of assets used, risks assumed, and functions performed by the permanent establishment in a manner consistent with the arm’s length principle. The approach in the proposed regulations creates parity between deductions for actual regarded payments between two separate corporations (which are subject to section 482), and internal dealings (which are generally priced in a manner consistent with the applicable treaty and, if applicable, the OECD Transfer Pricing Guidelines).

Although “internal dealings” may be an OECD term of art, the term sometimes has referred to actual intrabranch dealings.59 If the regulation is intended to refer to notional payments, it is highly suspect.

III. Ambiguities, Interpretation, and Authority

A. The State of Play

As explained in my earlier report,60 under the Chevron/APA regimes a regulation is either legislative or interpretive. A legislative regulation settles an ambiguity or fills a gap in the statute. It should be adopted under full APA procedures, including fulsome explanations of Treasury’s thought processes. If that’s done, the regulation will be entitled to Chevron deference (until the Supreme Court reverses Chevron). By contrast, an interpretive regulation might, but need not, have been adopted under full APA procedures. It merely states the government’s enforcement position on the meaning of the statute and is entitled to little deference in court.

According to the preamble, there are only two ambiguities in section 59A as addressed in the proposed regulations: (1) the meaning of the exception for the services cost method (not discussed here), and (2) some details for determining whether a taxpayer is an applicable taxpayer, including the aggregation rule described in Part II.A of the explanation of provisions section, which seems to principally involve the ECI issue.

The ambiguity of the services cost method issue has been well rehearsed.61 Although the preamble says the statute is ambiguous, it doesn’t treat it as ambiguous in the Chevron sense. Rather, the preamble concludes that the interpretation “more consistent” with the statutory text is the one that treats only the markup as the base erosion payment.

Actually there are more ambiguities, some of which were discussed earlier. For another example, section 59A(c)(3) provides a stacking rule for a section 163(j)/59A overlap. It wants section 163(j) to apply to unrelated lender interest, so that section 59A can have maximum application to related-party interest. However, the statute doesn’t explain precisely how to make the allocations; the proposed regulations do. The preamble explains that it adopts a proportionality rule and follows a convention used in parallel rules.

The preamble doesn’t acknowledge that this is precisely the sort of gap or ambiguity in the statute that Treasury has been filling since 1913. And there are other examples in the proposed regulations, such as using the addback method to compute modified taxable income (although it’s hard to see why Treasury thinks this is not the clear first candidate).

Another ambiguity is section 59A(c)(1)(B), which treats the base erosion percentage of an NOL carried over to the current year as a base erosion payment. The natural reading of the section would apply the base erosion percentage for the current year to the NOL deducted in the year. That percentage is the only percentage discussed in the section, and there is no other discussion of NOLs — specifically, no discussion of the origin year of the loss. However, the proposed regulation applies the base erosion percentage of the “vintage” year to the NOL, which it says is “zero.”

The preamble does not waste much time on explaining. This is the explanation: “because the base erosion percentage of the vintage year reflects the portion of base erosion payments that are reflected in the net operating loss carryover.” However, how can you say Congress meant to refer to a base erosion percentage of zero when the law didn’t even apply to the year before 2018 and so the percentage for that year is a void rather than zero?

Again, who will complain about this aggressive interpretation? Well, maybe the taxpayer that has an actual base erosion percentage of 4 percent in the prior year and 6 percent in the current year.

And finally, the proposed regulations address the ultimate code ambiguity: whether and how to treat partnerships as aggregates or entities. Everyone seems to assume that Treasury has total discretion every time this comes up. Yet the preamble goes to great lengths to explain this choice, based mostly on the fact that section 59A itself doesn’t apply at the entity level (unlike section 163(j)).

B. Section 7805(a)

The regulations mostly depend on section 7805(a) for authority. Its exact words have seldom been literally enforced. They say (1) the secretary doesn’t have a choice about writing regulations and must write all needful regulations; (2) “needful” seems to be interpreted as needful to the fisc — “needful . . . for the enforcement of this title”; and (3) regulations to inform newly enacted laws may be needful, but they are not the only needful regulations.

The emphasis on enforcement is frowned upon today. Since Republicans began writing taxpayer bills of rights in 1988,62 the theory has developed that taxpayers are customers, or at least stakeholders in the IRS, and should not be pushed to pay their taxes by vigorous enforcement. When was the last time you heard an IRS public service ad warning against paying contractors in cash? Regardless of whether the customer approach ever turns around, it’s clear that enforcement has nothing to do with the preamble’s emphasis on helping taxpayers avoid inefficiencies.

The words used in section 7805(a) have an impressive origin: The U.S. Constitution declares that “Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” By 1854 Congress had begun to use the same words to authorize department secretaries to make regulations.63

The Supreme Court first addressed this authorization for tax regulations in 1967, upholding the Treasury secretary’s away-from-home-overnight requirement for deducting travel meals.64 That eminently sensible opinion concluded, “We do not sit as a committee of revision to perfect the administration of the tax laws,” relying in part on the very fact that Congress had directed the secretary to write the rules. The opinion in effect treated the statute as ambiguous or having a gap, which the regulation reasonably filled, but without having the “learning” of Chevron and the APA (which were not cited). It was decades later that section 7805(a) had to be read to authorize gap-filling regulations to open the way for Chevron deference.65

C. Economic Analysis

This report began by suggesting that the preamble to the proposed section 59A regulations used a lot of dissembling to try to satisfy congressional requirements to justify the need for regulations.66 Any tax professional knows that tax regulations aren’t even in the zone of possible interference with things like polluting the planet, but they get swept up in the prohibitions along with the environmental regulations that Republicans so dislike. The preamble’s answers to Congress’s questions about the need for the regulations are mostly some version of this example:

In the absence of this enhanced specificity, similarly situated taxpayers might interpret the statutory rules of section 59A differently. For example, different taxpayers might pursue intercompany investment and payment policies based on different assumptions about whether such investments and payments are base eroding payments subject to section 59A, and some taxpayers may forego specific investments.

So Congress wants Treasury to demonstrate why the regulations will be economically beneficial to taxpayers. And the answer is that they will prevent taxpayers from interpreting the statute on their own and trying to reduce their tax liability by planning. If that works as an ever-ready explanation, Treasury can just put it on a rubber stamp and apply it in every preamble’s explanation section, which is precisely what Treasury has done in most of the other regulations under the 2017 act. Therefore, it is a meaningless explanation.

D. Being There Lobbying

Peter Sellers became an accidental political insider in Washington by keeping his mouth shut and just “being there,” in the 1979 movie of that name. In contrast, being there in main Treasury talking to Treasury folk on a first-name basis to influence these regulations was no accident for hundreds of “government relations” people and tax directors, though it is occurring largely out of sight.

The published record indicates such a large number of meetings that you wonder how Treasury officials had time to review what chief counsel lawyers drafted. For example, Chubb Insurance Cos. wrote an email to Treasury officials referencing speedy accession to its desire for a meeting on the BEAT regulations:

Thank you again for the swift engagement conversation on Monday. As promised, below should address the follow up requested. In this, am introducing our new head of Tax, Tim Boyle, who has been in discussions with the domestic insurance tax counsels, and Warren Payne, so we all are in touch in the case you or your team need them to come in for a meeting, or jump onto a call for specific clarifications. You and I can be in touch regarding the senior leadership discussions that may take place in the coming weeks, and how to ensure those are effective. With deep appreciation, Jodi [a Chubb employee in government relations].67

Eventually we will know about more formal submissions to Treasury through the regulations.gov website, which contains a docket folder for this and other regulation projects.68 As of January 21, it did not contain any comments, even though the regulations had been proposed for a month (possibly because of the shutdown).

But the informal meetings largely fly under the radar. If the meeting participants sent emails to Treasury and they were viewed as disclosable under the Freedom of Information Act, Tax Analysts may receive them and put them in categories titled “public comments on regulations,” or “Treasury tax correspondence.” The Institute of International Bankers69 and the Coalition for American Insurance also got informal meetings on the BEAT.70

Eagle-eyed readers may have first noticed the proliferation of these informal get-togethers at main Treasury in August 2018, when Tax Notes published emails between a corporate government relations officer and two ranking Treasury tax officials concerning the corporation’s views on bonus depreciation.71 The emails revealed that the corporate official had already met once with Treasury personnel and was asking for a second meeting (not unusual). The Treasury official asked for a summary of concerns and received an email summary, which presumably triggered some requirement that the emails be released, including five emails preceding the summary. In them the corporate official congratulated one of the Treasury officials on proposed regulations (“Congrats”), and all parties were on a happy first-name basis.

Tax Analysts’ “Treasury tax correspondence” collection when I first visited in September 2018, it had 60,944 items, but it just keeps growing. A few weeks later Tax Notes Today reported a “to Doug” email from the vice president and deputy head of government affairs of the American International Group Inc. (AIG) located on K Street, which sounds like they communicate regularly this way.72 We read about a few of these communications in Tax Notes Today when the editors deem them interesting. But the vast majority go unnoticed.

They largely come from these sources: (1) industry groups, including the U.S. Chamber of Commerce; (2) law firms that specialize in regulatory lobbying; (3) affected corporations; (4) other large taxpayers (including exempt organizations); and (5) members of Congress.73

A few are not attributed to any author, presumably because FOIA rules don’t require that.74 That pattern seems to apply to submissions by “individuals,” although the writings seem related to a business organization’s issue.75 Several show that the letter is a follow-up to an in-person meeting at Treasury.76 Some correspondence written by law firms does not reveal which, if any, clients they represent.77 Some name Treasury or IRS employees that they expect to review their comments, other than the formal addressees (who are usually Mr. and Mrs.).78 Some are in the form of a memorandum, requested after an in-person meeting.79 A few sound like memos thrown over the transom by “Joe” or “Tom” who decided to write to “Secretary Mnuchin.”80 Being a litigious taxpayer doesn’t keep a corporation from expecting Treasury to listen to its views.81

There seem to be a lot of people in D.C. who are accustomed to expect and demand a “swift engagement” meeting at main Treasury by calling friends they know there on a first-name basis. And they may even admit that the issue they want to discuss is unique to them, which sounds very much like a sort of prefiling conference at the Treasury building.82 And it’s not just main Treasury where meetings occur. The Trump administration inserted the Office of Management and Budget’s Office of Information and Regulatory Affairs into the regulatory review process, and word has it that that created an entirely new and additional locus for tax lobbying, even more unseen than at main Treasury.

Government relations officers would say this is wholly appropriate petitioning of the government. But it has long since ceased to be funny that the most fundamental of constitutional rights have wound up being exercised primarily by corporations.83

IV. Conclusion

The proposed BEAT regulations mostly turned out favorably for the rarified set of taxpayers to which they might apply. There is evidence that those taxpayers had the ear of Treasury officials, who must have given up sleep to accommodate all the meetings at Main Treasury. Treasury made pro-taxpayer calls that would be hotly contested if they were against taxpayers. But those choices will probably pass unexamined — do-good groups don’t have standing to sue.

But some calls went against taxpayers. And even calls that went for taxpayers (like the de minimis rule for banks in groups) may not have been sufficiently pro-taxpayer to suit some who missed the cut. So there is plenty in these proposed regulations to complain about if they go final. The primary message of this report is that taxpayers should feel emboldened to complain in court about tax regulations: The ground is shifting under their authority, and tax litigators have a bright future.

FOOTNOTES

1 REG-104259-18. For prior coverage, see Jasper L. Cummings, Jr., “Selective Analysis: The BEAT,” Tax Notes, Mar. 26, 2018, p. 1757.

2 Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984).

3 For prior coverage, see Cummings, “Chevron, the APA, and Tax Regulations,” Tax Notes, Mar. 25, 2019, p. 1463.

4 E.g., Emily L. Foster, “Reg Authority for Broad Interest Definition Questioned,” Tax Notes, Jan. 21, 2019, p. 326 (Matthew Stevens of EY discussing the section 163(j) proposed regulations).

5 See Cummings, The Supreme Court’s Federal Tax Jurisprudence, ch. VI (2d ed. 2016).

6 For prior analysis of the BEAT section, see Cummings, “The BEAT,” supra note 1.

7 The base erosion percentage also is applied to net operating losses of the applicable taxpayer in computing the minimum tax base.

8 See also prop. reg. section 1.59A-3(b)(4)(iv), which sort of restates the same rule without the withholding requirement in the context of a BEAT calculation for the U.S. branch of a foreign corporation.

9 See Lee A. Sheppard, “BEAT-Up Service Providers,” Tax Notes, Jan. 14, 2019, p. 149.

10 See reg. section 1.1441-4.

11 There are two other minor grants of authority in the section, which are not relevant to this issue.

12 King v. Burwell, 759 F.3d 358 (4th Cir. 2014), aff’d on other grounds, 135 S. Ct. 2480 (2015).

14 Joint Committee on Taxation, “General Explanation of Public Law 115-97,” JCS-1-18, at 406 (Dec. 2018).

15 H.R. Rep. No. 115-466, at 649-650 (Dec. 15, 2017) (Conf. Rep.).

16 NYSBA tax section, “Report on Base Erosion and Anti-Abuse Tax,” at n.64 (July 16, 2018).

17 163 Cong. Rec. S8073, S8151 (Dec. 19, 2017).

18 Letter from Graham to Treasury Secretary Steven Mnuchin (Oct. 31, 2018).

19 Leeds, “BEATen Up (Again): The IRS Issues Proposed BEAT Regulations,” Tax Notes, Jan. 7, 2019, p. 47.

20 See, e.g., letter from Miller & Chevalier Chtd. to Hatch and others (Dec. 31, 2018) (citing a colloquy by Hatch).

21 T.D. 7906.

22 See Rhode Island v. Narragansett Indian Tribe, 19 F.3d 685, 699 (1st Cir. 1994).

23 Friedman v. Commissioner, 869 F.2d 785 (4th Cir. 1989).

24 Regan v. Wald, 468 U.S. 222 (1984). Associate Justice William H. Rehnquist said, “To permit what we regard as clear statutory language to be materially altered by such colloquies, which often take place before the bill has achieved its final form, would open the door to the inadvertent, or perhaps even planned, undermining of the language actually voted on by Congress and signed into law by the President.”

25 Chrysler Corp. v. Brown, 441 U.S. 281 (1979) (“The remarks of a single legislator, even the sponsor, are not controlling in analyzing legislative history.”).

27 National Labor Relations Board v. Canning, 134 S. Ct. 2550 (2014). See also Hall v. United States, 566 U.S. 506 (2012) (a tax case in which the statement relied on by the dissent was even more attenuated); Federal Trade Commission v. Anheuser, 363 U.S. 536 (1960); and Mims v. Arrow Financial Services LLC, 565 U.S. 368 (2012).

28 American Bar Association Committee on Unauthorized Practice of the Law, “Opinion 1959-A: Estate Planning,” 45 A.B.A. J. 1296, 1314 (1959) (Rep. William S. Moorhead).

29 See Matthew A. Melone, “Leg to Stand On: Is There a Legal and Prudential Solution to the Problem of Taxpayer Standing in the Federal Tax Context?” 9 Pitt. Tax Rev. 97 (2012).

30 DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006).

31 See Cummings, “Why They Won’t Talk,” Tax Notes, July 30, 2018, p. 673.

32 William Hoffman, “TCJA Reg Writers Earn Tax Notes’ 2018 Person of the Year,” Tax Notes, Dec. 17, 2018, p. 1409.

33 Leeds, supra note 19.

36 Prop. reg. section 1.59A-2(d)(7).

37 Prop. reg. section 1.59A-2(d)(8).

38 Prop. reg. section 1.59A-2(d)(9).

39 Prop. reg. section 1.59A-2(d)(10).

40 The less-than-three-year rule refers to the annualization rule, perhaps suggesting that the one implies the other. All these rules refer to the taxpayer, not the aggregate group. What if a group member was not in existence for three years?

41 Reg. section 1.355-8T. See Cummings, “Spinoff Predecessors and Successors: Not What You Think,” Tax Notes, Apr. 10, 2017, p. 217.

42 For a complete discussion of these issues, see Cummings, “The BEAT,” supra note 1.

43 Letter from Robert H. Dilworth et al. to Treasury (Aug. 8, 2018).

44 See Cummings, “How Much Is Enough or Too Much?Tax Notes, Feb. 29, 2016, p. 1025.

45 Conf. Rep. at 657.

46 The preamble also states: “The base erosion percentage also takes into account the two categories of base erosion tax benefits that result from reductions in gross income rather than deductions allowed under the Code (that is, (1) certain premium or other consideration paid to a foreign related party for reinsurance, and (2) amounts paid or accrued by the taxpayer to certain surrogate foreign corporations that result in a reduction in gross receipts to the taxpayer).”

47 JCS-1-18, supra note 14, at 400.

48 It’s curious that the Alliance for Competitive Taxation, composed of roughly 50 (mostly huge) manufacturers, made an early submission to Treasury raising this and several other issues addressed by the proposed regulations but did not assert firm positions, only “considerations.”

49 See Cummings, Federal Tax Jurisprudence, at ch. VI.B.1.a.

50 E.g., Baral v. United States, 528 U.S. 431, 437 (2000).

51 “Here, the taxpayer acquired the inventory of another, unrelated corporation by purchase rather than by distribution, reorganization, or a section 351 tax-free transfer.” GCM 39470 (1986).

52 “For example, if P Corp. acquires all of the stock of S Corp., in either a tax-free reorganization or a taxable purchase. . . .” Boris I. Bittker and Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts, at para. 90.4.

53 Bittker, Federal Income Taxation of Corporations and Shareholders 234 (1959).

54 Tiger Louis Jr., “Redemptions Through Use of Related Corporations: New and Old Problems Under Section 304,” 39 Tax L. Rev. 77, 139 (1984).

55 See ABA tax section recommendations, 32 Tax Law. 1437, 1490 (1979).

56 United States v. Olympic Radio & Television Inc., 349 U.S. 232 (1955). Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977), and United States v. Mitchell, 271 U.S. 9 (1926), recognized the many uses of “paid or accrued” in connection with deductions.

57 Letter from Pamela Olson of PwC to Treasury (May 30, 2018), stating: “It should be noted that interest was treated as paid or accrued in a succeeding taxable year under section 163(j) only for purposes of applying the section 163(j) limitation in that year.”

58 E.g., Oxford Orphanage v. United States, 775 F.2d 570 (4th Cir. 1985). The statute allowed a will to be amended to permit a charitable deduction, and the court determined that it was retroactive for all purposes, including allowing the IRS to collect interest.

59 See, e.g., Treasury technical explanation of U.S. model income tax convention (Nov. 15, 2006) (2006 prior income tax treaty).

60 See Cummings, “The BEAT,” supra note 1.

61 See id.

62 P.L. 100-647, the Technical and Miscellaneous Revenue Act of 1988, subtitle J; Omnibus Taxpayer Bill of Rights, Part I, Taxpayer Rights, section 6226 et seq. See Creighton R. Meland Jr., “Omnibus Taxpayers’ Bill of Rights Act: Taxpayers’ Remedy or Political Placebo?” 86 Mich. L. Rev. 1789 (1987-1988).

63 See Morton v. Nebraska, 88 U.S. 660 (1874).

64 United States v. Correll, 389 U.S. 299 (1967).

65 Chevron was such a case, as was Mayo Foundation for Medical Education and Research v. United States, 562 U.S. 44 (2011).

66 See Cummings, “Conjuring Up the ‘Force and Effect’ of Tax Law,” Tax Notes, Jan. 2, 2017, p. 149.

67 Letter from Jodi Bond and Timothy Boyle to Treasury (Aug. 17, 2018). See Chubb Ltd., “Chubb Appoints Jodi Hanson Bond to Lead Global Government and Industry Affairs,” PR Newswire, Oct. 20, 2017 (“Senior Vice President, Global Government and Industry Affairs. In this role, Ms. Bond will oversee and coordinate Chubb’s global government relations activities, providing leadership and strategic direction on government affairs to support the company’s insurance and reinsurance operations globally.”).

68 It confusingly associates three identifying numbers with the project: REG-104259-18, RIN 1545-BO56, and Docket ID IRS-2019-0002.

69 Letter from the Institute of International Bankers to Treasury (Sept. 13, 2018).

70 E.g., letter from the Coalition for American Insurance to Treasury (Sept. 13, 2018).

71 Email from Bank of America to Treasury (Aug. 17, 2018).

72 Email from Shawn Gallagher of AIG to Douglas Poms of Treasury (Oct. 1, 2018).

73 E.g., letter from Sen. Ron Johnson, R-Wis., to Acting IRS Commissioner David Kautter (Sept. 14, 2018).

76 Letter from Saren Goldner and Kristan Rizzolo of Eversheds Sutherland (US) LLP to Treasury and IRS officials (Sept. 5, 2018).

77 Id.

78 Letter from United Airlines Inc. to the IRS (Sept. 5, 2018).

79 Memorandum from Darren Trigonoplos of AIG to various Treasury officials (Aug. 24, 2018).

80 Memorandum from Monte Silver of Silver & Co. to Mnuchin (Aug. 14, 2018).

81 Letter from Illinois Tools Works Inc. to Treasury and IRS officials (Apr. 23, 2018) (supplementing the company’s earlier request for guidance on the apportionment of specific expenses to GILTI for purposes of the foreign tax credit limitation).

82 Memorandum from Robert Guido of BP to Kevin C. Nichols of Treasury (July 5, 2018).

83 See Cummings, “ Hobby Lobby and Federal Taxes,” Tax Notes, Nov. 3, 2014, p. 519.

END FOOTNOTES

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