Firm Seeks Flexibility to Make, Revoke Interest Deduction Election

March 28, 2020

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

The Honorable Michael J Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Ms. Holly Porter
Associate Chief Counsel
Passthrough & Special Industries
Internal Revenue Service
1111 Constitution Ave, NW
Washington, DC 20224

Dear Messrs Kautter, Desmond, Rettig and Porter:

This is a follow-up to our letter of March 26, 2020. We are aware that many real estate companies are currently re-evaluating decisions they made in filing their 2018 or 2019 tax returns relating to the ability to elect out of the application of section 163(j). As a result of changes made by the CARES Act, various components of the analysis of the benefit of making such an election have changed. For example, the ability to immediately expense “qualified improvement property”, which is now permitted, would represent a potential incentive for taxpayers to avoid the requirement to use ADS lives with respect to such property, which would otherwise be required if they elected out of 163(j). Similarly, being able to deduct business interest expense up to 50% of ATI, rather than 30% of ATI, may make the election out of 163(j) less appealing to taxpayers who may have already made the election.

Proposed Regulation Section 1.163(j)-9 provides that an election to apply the real estate exception to 163(j) cannot be revoked. Because of the substantial changes in the law resulting from the CARES Act that are relevant to the decision made to make, or not make, this election on 2018 or 2019 returns, we believe it is imperative that taxpayers be permitted to revoke this election, and perhaps, in some situations, to make a retroactive election. As a result, we urge you to use procedures similar to the automatic relief provisions of Reg. Sec. 1.9100-2 to allow taxpayers to retroactively make, or revoke, this election, for e.g. one year, or some other specified period of time, subsequent to the enactment of the CARES Act. We also want to reiterate our request that partnerships subject to the BBA be permitted to file amended returns in situations in which partnership items would be affected by the CARES Act, including situations in which a partnership seeks to file an amended return to make or revoke the election to apply the real estate exception to 163(j), and reflect appropriate adjustments to partnership items reported on previously filed returns.

Sincerely,

Glenn E. Dance, Partner
Holthouse Carlin & Van Trigt
LLP
Irvine, CA

CC:
Clifford Warren, IRS
Jennifer Black, IRS
Meghan Howard, IRS
Robert J, Crnkovich, IRS
Roger F. Pillow, IRS
Holly Paz, IRS
Elizabeth Wagner, IRS
Drita Tonuzi, IRS