Transcript Is Available of IRS Hearing on Bonus Depreciation Regs

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

PUBLIC HEARING ON PROPOSED REGULATIONS
"ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION"
[REG-106808-19]

Washington, D.C.
Friday, November 22, 2019

PARTICIPANTS:

For IRS:

JOHN J. MERRICK
Senior Level Counsel
Associate Chief Counsel
(International)

LOGAN M. KINCHELOE
Attorney
Associate Chief Counsel
(International)

For U.S. Department of Treasury:

ELLEN MARTIN
Attorney-Advisor
Office of Tax Policy
Office of the International Tax Counsel

Speaker:

STEWART R. LIPELES
ALEXANDRA MINKOVICH
Baker & McKenzie LLP

JEFFREY E. MOELLER
Ivins Phillips & Baker Chtd.

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PROCEEDINGS

(10:01 a.m.)

MR. KINCHELOE: Shall we start? Good morning. We are now going to begin the public hearing on proposed regulations 1.245A-5, limitation on deduction for dividends received from certain foreign corporations, an amount eligible for Section 954 look-through exception.

We have two speakers today. Each speaker is allotted 10 minutes to speak. There are lights that will tell you as your time is running down. There will be the opportunity for questions from the panel at the end of your 10 minutes which will not be included in your 10 minutes of time. With that, we can probably —

MR. MERRICK: Introduce us.

MR. KINCHELOE: I am Logan Kincheloe, attorney ACCI International Branch 4.

MR. MERRICK: I'm John Merrick with ACCI.

MR. WANG: I'm Jim Wang with Office of Tax Policy and Department of Treasury.

MR. KINCHELOE: Okay. This first speaker is Stewart Lipeles. And whenever you're ready.

MR. LIPELES: Let me get myself situated a second here.

Mr. KINCHELOE: Take your time.

MR. LIPELES: All right, I'm ready.

MR. KINCHELOE: Okay.

MR. LIPELES: Thank you for the opportunity to speak with you today about the proposed — the Temporary 246 Cap A Regulations. I look forward to our dialogue.

The key point I want to make today is that the regulations are invalid and unreasonable for three reasons. They're contrary to the plain language of the statute, they're contrary to Congressional intent, and they retroactively punish taxpayers for following the plain language of the statute at a time when no other guidance was available.

Moreover, the process Treasury followed when they issued the regs violated the APA because it didn't give taxpayers the opportunity for notice and comment. And as a result, Treasury was unable to get the rules right.

Let's start with the plain language of the statute. Under Chevron Step 1, if the regulation is contrary to the statute, the plain language of the statute is invalid. Section 245 Cap A has three requirements. Maybe four if you count 245 Cap A Subsection E as separate.

Those requirements are one, distribution has to be after December 31, 2017. Two, it has to be out of foreign service earnings. Three, taxpayer has to satisfy the holding period and, of course it can't be a hyper-dividend. That's it. You can scour the code all you want. You won't find anything else. There are no other requirements and Treasury doesn't have authority to go making up other new requirements.

Moreover, Treasury knows that the regulations are contrary to the statute. The preamble reads — and I'm quoting now — the literal effect of Section 245 Cap A end quote would lead to a different result. Treasury goes on to say in the preamble quote a literal application of Section 245 Cap A again would lead to a different result. If the plain language would lead to a different result the regulation isn't valid.

Even if you got past Chevron Step 1, the regulation would be invalid under Chevron Step 2, which requires the regulation which says the regulation is invalid if it is arbitrary and capricious. Put another way, the reg has to be reasonable.

One of the main purposes of the TCJA was to quote make American workers and companies competitive again, end quote. By removing quote tax driven incentives to keep funds offshore. The proposed regs don't do that. They do the opposite. Instead of removing incentives to keep funds offshore, they create incentives to keep off — funds offshore.

Moreover, Treasury made a different policy choice than Congress. Congress chose to coordinate 245 Cap A and the transition tax under 965. It coordinated those two, December 31, 2017, all the earnings are picked up under 965. January 1, 2018, 245 Cap A applies.

Why did Congress do that? I mean, they could have chosen to coordinate 245 Cap A with Quilty. It did not choose to do that. Why? Because its priority was to give companies an incentive to bring cash back home. Treasury seems to have a different priority which is to tax every possible dollar of income even if that results in taxing income more than once. That's not Congress's priority. Congress's priority was to get the cash home.

And it's a little worse than that because Treasury's priority wasn't Congress's priority. Treasury went back to Congress and said please change your mind, please coordinate it with Quilty and Brady put it into his bill and it went nowhere. It was not passed by Congress. That's not Congressional intent. Congress confirmed that that wasn't its priority.

The temporary regulations are also unreasonable and invalid under Chevron Step 2 because they retroactively punish taxpayers for following the plain language of the code. In fact, Treasury knows and has publicly admitted that the temporary regulations are unfairly punitive.

At a PLI conference on September 4, a Treasury official confirmed that Treasury is working on the double gain recognition issue. We all know double gain is wrong, all right. It is one of the most fundamental principles in the code. In fact, it's so fundamental, right now Treasury officials are making that argument to the OECD that pillar 1 and pillar 2 are inappropriate because they result in double gain.

Now how can Treasury possibly tell the OECD double gain is wrong? You can't possibly do that and at the same time, at the very same time, tell U.S. companies "Oh, it's okay for us to impose double gain." I don't think that would fly. For the same reasons or similar reasons that it's unreasonable and it punishes taxpayers, it also ends up violating the Administrative Procedure Act which requires agencies to give the public notice and non-opportunity to comment. So they can get the rules right the first time. Right. And here, if the rules result in double gain, I don't think we got them right the first time. But it's beyond that.

At a recent ABA conference, ABA Tax Section Conference October 4, another Treasury official admitted the Treasury is considering allowing taxpayers to unwind transactions subject to the temporary regulations. And yet the period for rescission has long, long passed. And frankly, taxpayers have done a zillion things since then. Unwinding would be ungodly completed.

If the Treasury, the regulations are so far off that you're going to allow people to unwind and go through that complicated process, if you'd even consider it, and they result in double gain, the regs aren't reasonable and you didn't follow the right process to get them right.

Now, Treasury claims that it has good cause for dispensing with notice and comment and it argues taxpayers were engaged in aggressive tax planning. Put aside the lack of evidence, tax planning is not good cause. We know what good cause is. It's helicopters falling out of the sky. It's life limb and injury. It's protecting the public.

Like just it — just assume for a moment that the regulations result in a financial harm. I don't believe that. I think there is no financial harm from following the plain language. But if you did believe that, there is still numerous cases holding that financial harms are not good cause under the APA.

Treasury also claims that it has good cause because it didn't want taxpayers to amend returns. But there is just no requirement to file an amended return for a return that was filed in good faith. We have already admitted here that taxpayers were following the plain language of the code. The returns were filed in good faith. No return — amended returns are required.

Moreover, if that's what you wanted to do, you kind of had to get the regs out before the returns were filed and at least a bunch of these were filed first.

Lastly, I know I'm coming up against my limit but I'll be done in two minutes, I promise. Lastly, Treasury claims that it's got good cause because it was running up a deadline in 7805B2, okay, the 18 months. And that's not good cause. Good cause is harm to the public. It is life, limb and injury. It's just not something you can concoct in your own office because you're late or because you're — now I'm late. Because you're running up against a deadline.

In conclusion, the temporary regulations are invalid because they violate the plain language of the code, they're contrary to the code, they're contrary to Congressional intent, and they unfairly penalize taxpayers for following the plain language of the code.

We would respectfully request that you withdraw these regulations before a court finds them invalid. Thank you very much.

MR. KINCHELOE: Thank you. Are there questions?

MR. WANG: Yeah, so I have a quick question for you. We — of course — we read your comment letter in detail and you cite, you know, quite a few very interesting authorities. We were wondering, you know, how many of these authorities if any deal with a reg grant of the type that we have in 245 Cap AG, you know, a reg grant to carry out regulations as are necessary, appropriate to carry out the statute.

MR. LIPELES: All right. So I'm going to answer that a question a different way because the plain language of the statute has limited requirements. Taxpayers were following the plain language of the statute. So I would just disagree that the regulations are appropriate in the first place.

And if you look at the grant of authority, the grant of authority in 245 Cap A Subsection G, is not to stamp out abuses, right. That grant of authority is to implement the code which is the same thing as you have in 7805B. Right. There, I just don't see that these regs are appropriate in the first place.

MR. MERRICK: I'll ask a quick follow up on that. So you don't view paragraph G as conferring any additional authority that's not already conferred under 7805 such that three is no real meaning to paragraph G?

MR. LIPELES: Whether it has additional authority or not, if there is any difference and there may be some, it's very, very limited. It does not refer to stamping out abuse, does not refer to creating new exceptions, or implementing it as they see fit. It says to implement what Congress wrote.

And what Congress wrote in 245 Cap A — it's pretty clear. It says that there are certain requirements and if those requirements are satisfied — I'm hoping I get this quote right. The DRD shall be allowed.

MR. MERRICK: Okay, thank you.

MR. KINCHELOE: As a follow up so does that, does your interpretation of paragraph G — does it permit regulations that would disallow the DRD in any case? Or can it only be used to grant the DRD where it might otherwise be permitted? Or is that too, an overreach?

MR. LIPELES: I'm not sure I understood. Can you rephrase the question?

MR. KINCHELOE: Sure.

MR. LIPELES: I'm —

MR. KINCHELOE: So in your view, does paragraph G permit regulations that would disallow the DRD in any case or can it only be used to grant the DRD where it might not otherwise be permitted? Such as through partnerships as an example.

MR. LIPELES: What G allows you to do, I think, is to implement the code and clarify the rules. Right. It doesn't allow, I don't believe, Treasury to deny the DRD where it would be allowed under the code.

Now where there are ambiguities about the language in the code as in the case of partnerships, then Treasury has authority to interpret where there is ambiguity, but there is really no ambiguity in an effective date. An effective date of January 1, 2018, is about as clear as it could be.

MR. MERRICK: Actually, I had just one more question, thank you. I thank you for your remarks, by the way. You mentioned earlier in your remarks that the Congress intended this result to encourage repatriating earnings. Is your view that they did intend that result but only for fiscal year CFCs that it was targeting and trying to benefit just those taxpayers who were the only ones I think who could benefit from these sorts of transactions?

MR. LIPELES: Um, so I'm going to read from the House report. I read one quote, I'm going to read another one. The committee believes that the current tax system puts American workers and companies at a severe disadvantage to foreign workers and companies. This is primarily because the United States — and then it goes on to saying basically we have a worldwide system and companies have an incentive to keep cash offshore.

I think Congress's highest priority was to promote the U.S. economy and to get the cash home so companies could reinvest that cash. That was their priority. Right. They could have done a lot of other things but they were pretty clear in the House report what they wanted to do.

Could they have done other things? Yes. It's not a perfect world. Could they coordinate — could they have coordinated everything? I don't even know if they could have. I really don't. But what I do know is that they chose to coordinate these things to implement their highest priority and it wasn't to make sure — it wasn't your priority. I think your priories and theirs are different, are just fundamentally different.

MR. MERRICK: Thank you.

MR. LIPELES: Thank you.

MR. KINCHELOE: Thank you, Stewart. I believe up next is Jeffrey Moeller.

MR. MOELLER: Thank you. Good morning. I'm Jeff Moeller, a partner at Ivins, Phillips, and Barker, in Washington, D.C. Thank you for allowing me the opportunity to testify at this hearing. My remarks will be very short because the situation that I'd like to describe is fairly simple. First of all, let me say that we agree with Stewart's comments and with the various other commenters who have said that the temporary regulations are not valid, but I'm not going to go into that this morning. What we want — what I would like to talk about is, in the case that the regulations are finalized by Treasury, we would request an exception for legitimate integration transactions, that take place after an acquisition. For instance, assume a U.S. taxpayer acquires, from a third-party seller, a company with foreign operations, complementary to its own. It promptly integrates those operations to achieve synergies previously promised to its shareholders, who approved that deal. The integration transactions combine the foreign operations of the two companies by moving assets, merging subsidiaries, transferring employees, combining IT system, aligning financial ledgers. The economic substance of these transactions is unassailable. The integration was carried out shortly after the closing of the acquisition, during the so-called disqualified period — if ever I'd heard one, and, so, subject to the new tax, created by the temporary regulations, but the integration would also have been carried out by the acquirer under pre TCJA law, if the transaction had closed earlier in time, and it would have been carried what — as well, after the TCJA became fully effective, if the transaction had closed later. In fact, the integration would have been carried out in a world without tax. It is not tax motivated. In a September 11, 2019, the ABA tax section recommends that the definition of extraordinary disposition exclude in SFC's transfer of specified property, that occurs within 12 months after an acquisition of the SFC, from an unrelated party. We agree with that recommendation, and we believe that such legitimate integration transactions should not be subject to the new rule. Thank you.

MR. KINCHELOE: Thanks. Questions?

MR. MERRICK: Thank you. Thank you for that comment and those remarks. I did have one question. So —

MR. MOELLER: Oh, sorry.

MR. MERRICK: Oh, no problem. We understand that many taxpayers assert that the reg holds extraordinary dispositions were — occurred in connection with non-tax motivated restructuring to, you know, align IP, to integrate, to create synergies, et cetera. Are we understanding correctly that — what you're suggesting, that these types of cases may be less suspect or more meriting of an exception, or deserve kind of special treatment, such that only these taxpayers deserve this benefit?

MR. MOELLER: I think that, if there's any case in which the Treasury lacks authority to essentially set up a new tax system, it's for this kind of transaction that would have been carried out in any case, and that everybody agrees has a pristine business purpose, and nobody expects a company not to carry out this kind of transaction, after an acquisition. There's certainly other cases that you could say are grayer, but, in this case, it's hard to think of where Treasury authority would come from, to attack such legitimate transactions.

MR. MERRICK: Gotcha.

MR. MOELLER: Great.

MR. MERRICK: Thanks, Jeff, appreciate it.

MR. MOELLER: Thank you.

MR. MERRICK: Thank you.

MR. KINCHELOE: Anything else?

MR. WANG: No, I think that's it.

MR. KINCHELOE: I think that's it. With that, I think there are no other speakers, and that will conclude today's hearing.

MR. WANG: Thank you.

MR. MERRICK: Thank you very much.

(Whereupon, at 10:25 a.m., the HEARING was adjourned.)

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DISTRICT OF COLUMBIA

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