Firm Requests Change to Proposed GILTI Regs

November 26, 2018

Internal Revenue Service
CC:PA:LPD:PR (REG-104390-18)
Courier's Desk
1111 Constitution Avenue NW
Washington, DC 20224

RE: Anti-Abuse Provisions of Proposed Treasury Regulations under Section 951A

Dear Sir/Madam:

Mayer Brown LLP respectfully submits this letter in response to the request for comments included in the Notice of Proposed Rulemaking, “Guidance Related to Section 951A (Global Intangible Low-Taxed Income),” published by the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS” or the “Service”) in the Federal Register on October 10, 2018 (the “Proposed Regulations”). Like other professional services firms, Mayer Brown represents many clients affected by the Proposed Regulations.

We appreciate very much the hard work of Treasury and the IRS in addressing the complexities and challenges of section 951A¹ in the Proposed Regulations. Our comments are focused only on one aspect of the anti-abuse provision in section 1.951A-2(c)(5), specifically the application of section 1.951A-2(c)(5) to section 197 deductions in determining tested income or tested loss. We are not commenting on the application of section 1.951A-2(c)(5) to section 167 deductions in determining tested income or tested loss, or the anti-abuse provisions in section 1.951A-3(h).

Mayer Brown submits that Treasury and the IRS do not have the statutory authority to issue anti-abuse regulations that deny controlled foreign corporations (“CFCs”) a section 197 deduction for purposes of determining their tested income or loss under section 951A(c). The only anti-abuse authority in section 951A is in section 951A(d)(4), which by its terms is limited to transactions affecting a CFC's qualified business asset investment (“QBAI”). A CFO's section 197 deductions relate to intangible property that is specifically excluded from the CFC's QBAI. These deductions are permitted under section 951A(c), for which there is no anti-abuse provision. The one sentence from the Conference Report referring to non-economic transactions that affect tested income and loss does not provide authority to extend section 1.951A-2(c)(5) to section 197 deductions, as the Conference Report cannot override the plain meaning of the statutory language. Nor does section 7805(a) provide Treasury and IRS with authority to issue anti-abuse regulations that so clearly depart from the statute and statutory framework.

Our letter discusses two overlapping but technically distinct points as to why section 1.951A-2(c)(5)'s application to section 197 deductions, if finalized, would be invalid. First, under fundamental statutory construction principles, Congress did not grant Treasury and the IRS authority to issue anti-abuse regulations that, for purposes of determining tested income or loss of the purchaser, deny section 197 deductions arising from a sale of assets by a fiscal year (e.g., 11/30/2018) transferor CFC to a related CFC. Second, we explain the invalidity of section 1.951A-2(c)(5)'s application to section 197 deductions under a Chevron deference standard.

Thus, while we respect very much the efforts Treasury and the IRS have undertaken to promulgate regulations in this complicated area, we submit that section 1.951A-2(c)(5)'s application to section 197 deductions should be eliminated from the final regulations when issued.

I. Congress Did Not Intend for Treasury/IRS to Issue Anti-Abuse Regulations relating to Section 197 Deductions

A. Section 951A Provisions Relevant to Section 1.951A-2(c)(5)

Section 951A contains the rules applicable to the tax imposed on global intangible low-taxed income (“GILTI”). These rules were enacted as part of the Tax Cut and Jobs Act (“TCJA”) in December 2017. The following is a summary of the key provisions of section 951A that are relevant to the application of section 1.951A-2(c)(5).

Section 951A(b)(1) defines GILTI, with respect to any United States shareholder for any taxable year of such shareholder, as the excess (if any), of (A) such shareholder's net CFC tested income for such taxable year, over (B) such shareholder's net deemed tangible income return for such taxable year.

Section 951A(b)(2) defines “net deemed tangible income return,” with respect to any United States shareholder for any taxable year, as the excess of (A) 10% of the aggregate of such shareholder's pro rata shares of QBAI of each CFC of such shareholder, determined based on the taxable year of the CFC that ends in the taxable year of such shareholder, over (B) certain interest expense of the CFCs.

Section 951A(c)(1) defines “net CFC tested income,” with respect to any United States shareholder for any taxable year of such shareholder, as the excess (if any) of (A) the aggregate of such shareholder's pro rata shares of tested income of each CFC of such shareholder, determined based on the taxable year of the CFC that ends in the taxable year of such shareholder, over (B) the aggregate of such shareholder's pro rata shares of tested loss of each CFC of such shareholder, determined based on the taxable year of the CFC that ends in the taxable year of such shareholder.

Section 951A(c)(2)(A) defines “tested income,” with respect to any CFC for any taxable year of such CFC, as the excess (if any) of (i) the gross income of such CFC, excluding certain items of income such as Subpart F income, over (ii) the deductions properly allocated to such gross income under rules similar to the rules of section 954(b)(5). Under Section 951A(c)(2)(B), a “tested loss” results from the reverse computation: if, instead, (ii) exceeds (i), the CFC will be considered to have a “tested loss.”

Section 951A(d), titled “QUALIFIED BUSINESS ASSET INVESTMENT” provides in section 951A(d)(1) that “qualified business asset investment” means, for any CFC's taxable year, its aggregate adjusted basis in “specified intangible property” at the close of each quarter, to the extent such property is (A) used in a trade or business of the CFC, and (B) “of a type with respect to which a deduction is allowable under section 167.”

Section 951A(d)(2)(A) defines “specified tangible property” to mean, except as provided in clause (B) with respect to dual use property, any “tangible property” used in the production of tested income.

Section 951A(d)(3) requires that the adjusted basis of QBAI property be determined by using the alternative depreciation system under section 168(g).

Section 951A(d)(4) directs Treasury to issue regulations as follows: “The Secretary shall issue regulations or other guidance as the Secretary determines appropriate to prevent the avoidance of the purposes of this subsection, including regulations or other guidance which provide for the treatment of property if (A) such property is transferred, or held, temporarily, or (B) the avoidance of the purposes of this paragraph is a factor in the transfer or holding of such property.”

B. Section 951A Unambiguously Expresses Congressional Intent that Treasury Address only Abuses Associated with a CFC's QBAI

Section 951A(d)(4)'s authorization for anti-abuse regulations is, by its reference to “the avoidance of the purposes of this subsection [(d)],” expressly limited to combating abuses in the calculation of a CFC's QBAI. Per sections 951A(d)(1) and (2), QBAI is the taxpayer's basis in “specified tangible property,” which is tangible property “for which a deduction is allowable under section 167.”

Intangible property amortized under section 197 cannot be considered tangible property for which a section 167 deduction is “allowable,” for purposes of applying section 951A. First, the obvious reason is that tangible property does not include intangible property. Second, it automatically follows that an amortization deduction “allowable” under section 197 could not also be allowable under section 167. Courts and the IRS have interpreted the term “allowable” to mean the amount permitted or granted by the tax statutes.² Thus, amortizable section 197 intangibles could not possibly be counted as QBAI.³

Section 951A(d)(3) provides further support for the position that property “for which a deduction is allowable under section 167” could not possibly include section 197 intangibles, since the section 167 property is required to be depreciated under the alternative depreciation system of section 168(g). That system of depreciation applies only to assets that are actually depreciated under section 167.

Nor does section 951A(c), which sets forth Congress's definition of tested income, grant Treasury the authority (by anti-abuse rule or otherwise) to disallow section 197 amortization deductions in a manner inconsistent with other Code sections. That section allows “the deductions . . . properly allocable to . . . gross income under rules similar to the rules of section 954(b)(5) [related to Subpart F income]. . . .”⁴ This statutory language does not authorize the disallowance of deductions. Similarly, section 954(b)(5) relates only to the allocation of deductions to income and no rule thereunder would authorize the disallowance of a deduction. Further, no statute or regulation denies an amortization of section 197 intangibles in determining Subpart F income.⁵

In summary, section 951A(d)(4)'s regulatory authorization is limited to abuses associated with QBAI, and does not support anti-abuse regulations that target non-QBAI property by denying section 197 amortization deductions under section 951A(c). And section 951A(c) does not provide any authority for anti-abuse regulations, relating to section 197 deductions or otherwise.

C. Issuing an Anti-Abuse Regulation to Deny Section 197 Deductions Would be Contrary to the Statutory Framework

Congress made a deliberate choice to tax US shareholders of CFCs only on their otherwise untaxed return on intangible assets. It defined the intangible return as the excess of the shareholder's “net CFC tested income” over 10% of its share of the aggregate QBAI investments made by CFCs with tested income.

Congress defined QBAI as the basis in tangible property depreciable under section 167 because it wanted to isolate the return associated with the CFC's tangible business assets and exempt it from US taxation. Section 197 assets clearly are excluded from QBAI, as including the basis of intangible assets in QBAI would run counter to the statutory purpose.

Recognizing that taxpayers might generate transactions with section 167 property for the purpose of increasing their QBAI and, as a result, decreasing their GILTI, Congress gave anti-abuse regulatory authority to Treasury in the subsection titled “Qualified Business Asset Investment.” Nothing in the statutory framework suggests that an anti-abuse rule focused on basis step-ups in section 167 trade or business “tangible” assets for purposes of inflating QBAI should also apply to section 197 intangibles.

D. Issuing an Anti-Abuse Regulation to Deny Section 197 Deductions is Not Supported by Legislative History of Section 951A

Section 951A(d)(4), as enacted in the TCJA, was first proposed with identical language in section 951A(d)(5) of the “Tax Cuts and Jobs Act of 2017” (HR 1) bill, approved by the House Ways and Means Committee on November 9, 2017.⁶ The same day, the Senate Finance Committee released the “Chairman's Mark,” also entitled the “Tax Cuts and Jobs Act of 2017,” containing identical statutory language in section 951(d)(4).

As indicated in the Conference Report for the TCJA, the House and Senate Reports described Treasury's authority under section 951(d)(4) in a single paragraph under the heading “Qualified business asset investment,” as follows:

For purposes of determining QBAI, the Secretary is authorized to issue anti-avoidance regulations or other guidance as the Secretary determines appropriate, including regulations or other guidance that provide for the treatment of property if the property is transferred or held temporarily, or if avoidance was a factor in the transfer or holding of the property. (emphasis added)

The Conference Report stated that it “follows the Senate amendment provision, with clarifications and modifications” focused on select provisions of section 951A, including QBAI and regulatory authority. First, the Conference Report moved the explanation of section 951A(d)(4) out from under the heading “Qualified business asset investment,” and put it under a new heading entitled “Regulatory authority to address abuse.” Second, the Conference Report provided a completely different explanation of the Treasury's regulatory authority:

The conferees intend that non-economic transactions intended to affect tax attributes of CFCs and their U.S. shareholders (including amounts of tested income and tested loss, tested foreign income taxes, net deemed tangible income return, and QBAI) to minimize tax under this provision be disregarded. For example, the conferees expect the Secretary to prescribe regulations to address transactions that occur after the measurement date of post-1986 earnings and profits under amended section 965, but before the first taxable year for which new section 951A applies, if such transactions are undertaken to increase a CFC's QBAI.⁷ (emphasis added).

The House and Senate Reports, with their introductory clause “For purposes of determining QBAI,” are entirely consistent with Treasury's regulatory authority being limited to QBAI-related abuses. The second sentence of the Conference Report refers to the exact transaction that is targeted by section 1.951A-2(c)(5), and explicitly states that such transactions may be the subject of anti-abuse regulations “if such transactions are undertaken to increase a CFC's QBAI.” That statement is also entirely consistent with Treasury's regulatory authority being limited to QBAI-related abuses; conversely, in no way does it support anti-abuse regulations that target perceived abuses involving increases in non-QBAI property. While the first sentence of the Conference Report reads broader than the second, it says nothing about non-QBAI property, and to read that sentence as going beyond QBAI-related abuses would be taking it way out of context.

E. Under Fundamental Statutory Construction Principles, Treasury's Authority Is Limited to QBAI-Related Abuses

A fundamental principle of statutory construction provides that, if the language of a statute has a plain and ordinary meaning, courts should look no further than the words of the statute and apply the statute as written — the “plain meaning” rule.⁸ Departure from the plain meaning rule is permissible only if a literal application of the statute would reach an absurd result that could not have possibly been the intent of the legislature.⁹ Generally, consideration of a statute's legislative history to ascertain legislative intent is permissible only if the statute is ambiguous.¹⁰ If the meaning of a statute is ambiguous, legislative history and canons of statutory construction may be considered in ascertaining the statute's meaning.¹¹

Under the plain meaning of the statute, Treasury's regulatory authority to address abuses is limited to QBAI-related abuses and so construing the statute does not lead to an absurd result. Even if legislative history were viewed as relevant, it could not be read to expand the authority of Treasury and the IRS beyond the limits imposed by the statutory language. Specifically, regarding the first sentence of the Conference Report, it at most supports the promulgation of regulations addressing QBAI-related abuses. The Conference Report cannot override the statutory language to address perceived abuses involving non-QBAI property.

(1) Congress's specific delegation of authority for regulations to address QBAI-related abuses cannot support the issuance of purported anti-abuse regulations unrelated to QBAI

In divining congressional intent, the statutory language is considered in the context of the overall statutory framework. The key language here is the phrase “for purposes of this subsection” in section 951A(d)(4). In using this language, Congress plainly limited the authority for anti-abuse regulations to subsection (d) relating to QBAI. To interpret section 951A itself as authorizing anti-abuse regulations relating to tested income without any relationship to QBAI would render section 951A(d)(4) surplusage, contrary to established principles of statutory construction.¹²

Further, Congress's explicit delegation of authority in one part of a statute or with respect to one area of regulation impliedly negates the agency's authority to promulgate a similar but different rule under its general authority to effect congressional intent.¹³ Here, in Section 951A(d)(4), Congress specifically authorized an anti-abuse rule to modify the calculation of QBAI “to prevent the avoidance of the purposes of [that] subsection.” By negative implication, Congress did not sanction a similar rule with respect to tested income. Rather, by explicitly granting Treasury anti-abuse rulemaking authority to modify the definition of QBAI, it impliedly withheld such authority in defining tested income.¹⁴

(2) Permitting section 197 deductions resulting from a targeted basis step-up transaction would not reach an absurd result

Treasury apparently believes there must be symmetry between the seller CFC's and buyer CFC's tax consequences: if a seller CFC does not pay US tax on the gain from an intercompany sale of section 197 intangibles before GILTI applies, then it would be “inappropriate” for the buyer CFC to claim section 197 amortization deductions going forward in determining its GILTI.¹⁵

Nothing in the U.S. tax system requires such symmetry. In fact, similar situations exist, and have existed for decades, under the Subpart F rules. If a CFC sells a section 197 intangible to a related CFC, any gain from such sale may not constitute foreign personal holding company income for the seller CFC.¹⁶ However, the buyer CFC may secure section 197 amortization deductions that would reduce the buyer CFC's Subpart F income.¹⁷

Similarly, nothing in the TCJA requires such symmetry. And unlike the situation actually targeted by the section 951A(d)(4) anti-abuse rule, a buyer CFC that claims section 197 deductions only defers tax — it does not permanently escape it. That is, the buyer CFC will reduce its basis in the section 197 assets as it amortizes them and will have gain taxable as GILTI when those assets are later sold. By comparison, in the absence of the section 951A(d)(4) anti-abuse rule, the buyer CFC would increase QBAI by a basis step-up in section 167 property and permanently reduce GILTI by the 10% return on the increased QBAI each year (albeit in a decreasing amount each year as the basis is depreciated), in addition to benefiting from a timing difference as it deducts section 167 depreciation under section 951A(c).

(3) Legislative history that cannot be reconciled with the statute does not authorize the issuance of regulations contrary to the statutory terms

From time to time, legislative history will contain a statement suggesting a purpose for legislation contrary to the plain words of the statute. A Seventh Circuit case from 1989, In re Sinclair, provides a good lesson in how a court resolves “a conflict between a statute and its legislative history.”¹⁸ That case involved petitioners who asked the bankruptcy court to convert their case from Chapter 11 to Chapter 12, in reliance on legislative history stating “it is expected that courts will exercise their sound discretion in each case, in allowing conversions only where it is equitable to do so.”¹⁹ The 1986 statute adding Chapter 12, however, said it did “not apply with respect to cases commenced under title 11.” After searching for an answer from a century of Supreme Court decisions, ranging from United States v. American Trucking Association, Inc. (which consulted the legislative history even though the text was “clear”)²⁰ to Caminetti v. United States (which relied exclusively on the text),²¹ the court set forth some principles for evaluating legislative history under these circumstances.

In holding that the text prevailed over the legislative history, the court stated that “[S]tatutes are law, not evidence of law.”²² Specifically, “[w]e do not inquire what the legislature meant; we ask only what the statute means.”²³ Legislative history “may help a court discover but may not change the original meaning.”²⁴ It “helps us learn what Congress meant by what it said, but it is not a source of legal rules competing with those found in the U.S. Code.”²⁵ In this case the legislative history “contradicts rather than explains the text. So the statute must prevail.”²⁶

So, too, here. The legislative history cannot support the promulgation of an anti-abuse regulation contrary to the plain language of the statute.

II. Section 1.951A-2(c)(5), as Applicable to Section 197 Deductions, Would Not be Entitled to Chevron Deference

A. Predicates for Chevron Deference

The famous two-step Chevron analysis²⁷ is used to determine whether regulations issued by federal agencies, including Treasury, are consistent with Congressional intent.²⁸ To quote from Chevron, the first question is always “whether Congress has directly spoken to the precise question at issue,” and “[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”²⁹ On the other hand, if “Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation.”³⁰ Rather, “if the statute is silent or ambiguous with respect to the specific issue, the [second] question for the court is whether the agency's answer is based on a permissible construction of the statute.”³¹

The nature of the agency's authority is “the making of . . . rules to fill any gap left, implicitly or explicitly, by Congress.”³² When “Congress has explicitly left a gap for an agency to fill,” called an “express delegation of authority,” the regulations are upheld “unless they are arbitrary, capricious, or manifestly contrary to the statute.” If, however, the “legislative delegation to an agency on a particular question is implicit, rather than explicit, . . . a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.”³³

B. Sections 951A(d)(4) and 951A(c), Together, Unambiguously Evidence Congressional Intent for Anti-Abuse Regulations to Address Only QBAI-Related Abuses

Under Chevron Step One, congressional intent is ascertained by using standard tools of statutory construction.³⁴ It is typical to examine the text of the statute along with the “structure” and “purpose” of the statutory scheme.³⁵ Certain interrelated points are fundamental: An ambiguity is needed before there is a gap to fill, and a gap to fill is needed in order to create an implicit delegation of authority to the federal agency.³⁶ These three concepts of ambiguity, a gap to fill, and delegation of authority are all connected with one another. No deference is given to the agency on the question of whether the statute is ambiguous; that question is solely for a reviewing court.³⁷ Thus, “[d]eference to the agency's interpretation under Chevron is warranted only where 'Congress has left a gap for the agency to fill pursuant to an express or implied delegation of authority to the agency.'”³⁸ And where there is no express delegation of authority, a court “must conclude first that the words of the statute are ambiguous in such a way as to make the [agency's] decision worthy of deference under the second step of Chevron.”³⁹

As demonstrated in our statutory construction analysis in Section I. above, the statutory text unambiguously limits Treasury's authority to issue anti-abuse regulations to those addressing QBAI-related abuses. While it might be contended that the first sentence of the Conference Report quoted above interjects ambiguity as to the meaning of the statute, Chevron Step One focuses only on whether there is an ambiguity in the statute itself that provides the basis for an implicit delegation. While some appellate circuits permit a court to consult the legislative history when considering ambiguity under Chevron Step One,⁴⁰ they do so only for purposes of determining whether the statute is ambiguous, and here it is not.

C. Sections 951A(d)(4) and 951A(c), Together, Are Not Silent Regarding Congressional Intent for Anti-Abuse Regulations to Address Only QBAI-Related Abuses

The references in Chevron Step One as to whether Congress addressed the precise question, or whether the statute is simply silent, have sometimes prompted arguments that Step One is met merely by Congress's silence on a particular issue, even where the statute is otherwise unambiguous. Here, the argument might be that Congress has implicitly delegated regulatory authority to Treasury to address perceived abuses involving non-QBAI property, based solely on the fact that Section 951A did not preclude Treasury from exercising such authority. As we know, with a few notable exceptions,⁴¹ Congress rarely issues a directive that regulations shall not be issued on a particular topic. Thus, if that argument could be made, there would seemingly be no end to the scope of Treasury's authority.

An argument might simply be that Congress's silence on whether anti-abuse regulations may address non-QBAI property left open a gap, thereby giving Treasury implicit authority in that area. That argument seems misplaced, in light of Congress explicitly addressing abuses relating to sales of QBAI property.⁴² That is, since Congress clearly knew how to delegate authority to Treasury to address perceived abuses involving QBAI property but said nothing about non-QBAI property, it would be difficult, to say the least, to argue that Congress's silence constitutes an implicit delegation to address non-QBAI property.

Moreover, courts have rejected these kinds of attempts to force an analysis of a regulation under Chevron Step Two merely because the statute does not explicitly prohibit such a rule. For example, in Chamber of Commerce v. NLRB,⁴³ the Fourth Circuit addressed the validity of an NLRB rule that required employers to post a notice informing employees of their rights under the National Labor Relations Act, with adverse consequences for failing to do so. In holding that the NLRB exceeded its authority in issuing the notice-posting requirement, the court rejected NLRB's argument that it had authority to issue the rule because Congress did not expressly withhold that authority. The “appropriate” question for analyzing the rule is not whether “Congress expressly withheld that authority,” but, rather, “whether Congress intended to grant authority.”⁴⁴ Having phrased the question in that manner, the court concluded that Step One was not automatically met, stating: “Because we do not presume a delegation of power simply from the absence of an express withholding of power, we do not find Chevron's second step is implicated 'any time a statute does not expressly negate the existence of a claimed administrative power.'”⁴⁵ Instead, the court engaged in a detailed statutory construction analysis under Chevron Step One to conclude there was “no indication in the plain language of the Act that Congress intended to grant the Board the authority to promulgate such a requirement.”⁴⁶

D. Section 7805(a) Does Not Provide Authority to Issue Anti-Abuse Regulations Apart From Authority Originating Within the Statute at Issue

The preamble of the Proposed Regulations describes Treasury's authority for the anti-abuse regulations as being derived from section 951A(d)(4), the Conference Report and its “broad authority” under section 7805(a).⁴⁷ This statement is followed by brief descriptions of sections 1.951A-3(h)(1) and (2), and a cross-reference to section 1.951A-2(c)(5). It is not clear what exactly Treasury is citing as authority for its decision to deny section 197 deductions for a transaction like the one described in the Conference Report.

As already discussed, section 951A(d)(4) unambiguously evidences Congress's intent to provide regulatory authority to address only perceived abuses involving QBAI property. In addition, the plain language of section 951A(c), including its provision for deductions without any specific limitation or reference to an anti-abuse rule, evidences Congress's intent that regulatory authority is not being provided to modify tested income or loss. Further, as discussed, Treasury does not have implicit authority to fill a gap in the statute just because Congress was silent with respect to non-QBAI property, particularly when it explicitly addressed QBAI property.

We also have explained that Treasury and the IRS cannot rely on a single sentence in the Conference Report that contradicts the plain language of sections 951A(d)(4) and 951A(c) and that goes well beyond the House and Senate Reports discussing the same statute. The Conference Report cannot create an ambiguity providing implicit authority to Treasury to issue anti-abuse regulations that deny section 197 deductions. The implicit authority must be derived from the statute, and here there is none because the statute is unambiguous.

That leaves section 7805(a) as a source of authority for section 1.951A-2(c)(5). Section 7805(a) is a general grant of authority to Treasury to issue regulations that are “needful” and “necessary” to enforce the Code, and has existed since 1954. The Supreme Court's Mayo decision confirmed that regulations issued under section 7805(a)'s general grant of authority are entitled to the same Chevron deference as regulations issued under a specific grant of authority, if issued pursuant to the notice and comment process of the Administrative Procedure Act.⁴⁸ That does not mean, however, that any regulation issued under section 7805(a) — which is nearly every tax regulation other than regulations issued under a specific grant of authority — has an automatic path to Chevron's Step Two. Any section 7805(a) regulation hoping for Chevron deference must still point to a gap in the statute that needs to be filled, in order to have the requisite authority to fill that gap.⁴⁹

To our knowledge no case has squarely addressed the question of whether section 7805(a) provides Treasury authority to promulgate anti-abuse regulations addressing perceived abuses, even when it cannot point to a gap in the statute. This issue has been before courts several times in the context of perceived partnership-related tax shelters, where the government has asserted application of the partnership anti-abuse rule of Treas. Reg. § 1.701-2 (in addition to asserting various judicial doctrines), but the courts have side-stepped the issue each time by deciding the case on some basis other than the partnership anti-abuse rule.⁵⁰

An analogous issue was addressed by the Fourth Circuit in Chamber of Commerce v. NLRB, discussed previously. There, one provision of the National Labor Relations Act, among many others, granted the NLRB authority to issue rules that are “necessary to carry out” the provisions of the Act. The court held that this general delegation of authority did not provide NLRB with implicit authority to issue the notice-posting requirement; rather, the implicit authority had to be derived from one of the operative sections of the Act: “We, like the Chamber, read the language . . . as requiring that some section of the Act provide the explicit or implicit authority to issue a rule.”⁵¹

The NLRB then argued that the word “necessary” is “inherently ambiguous,” which by itself takes the analysis directly to Chevron Step Two. The court held that the real focus should be on “the substantive provisions of the Act,” which “do not imply that Congress intended to allow proactive rulemaking of the sort challenged here through the general rulemaking provision.”⁵²

There are also a number of pre-Mayo decisions invalidating various types of “anti-abuse” regulations issued under section 7805(a) that contradict the unambiguous language of the statute or otherwise add a requirement or restriction that is not supported by Congressional intent.⁵³ While these decisions typically apply the lower deference standard under National Muffler Dealer Ass'n v. United States,⁵⁴ they still should be precedent for the proposition that section 7805(a) does not by itself support the validity of a regulation independent of the underlying statute that is being interpreted.

III. Conclusion

We commend Treasury and IRS for their efforts in delivering this substantial and detailed guidance on a complex set of statutory provisions. We also appreciate that Treasury and IRS have a responsibility to prevent taxpayers from circumventing the U.S. tax laws and, where statutorily authorized, may do so by promulgating anti-abuse regulations. However, we also believe that these concerns must be addressed within the parameters of the statute and Congressional intent. Accordingly, we urge Treasury and IRS to reconsider the application of section 1.951A-2(c)(5) to section 197 deductions in light of our comments.

We would be pleased to discuss with appropriate personnel the issues addressed in this letter if that would be helpful. Please feel free to contact Gary Wilcox at (202) 263-3399 or Thomas Kittle-Kamp at (312) 701-7028.

Sincerely,

MAYER BROWN LLP
Washington, DC

Cc:
Lafayette “Chip” G. Harter III
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury

Douglas L. Poms
International Tax Counsel
Department of the Treasury

Brian Jenn
Deputy International Tax Counsel
Department of the Treasury

Marjorie A. Rollinson
Deputy Associate Chief Counsel (International)
Internal Revenue Service

Jeffrey G. Mitchell
Branch Chief, Office of Associate Chief Counsel (International)
Internal Revenue Service

Melinda Harvey
Attorney-Advisor, Branch 2, Office of Associate Chief Counsel (International)
Internal Revenue Service

Michael Kaercher
Office of Associate Chief Counsel (International)
Internal Revenue Service