Sunita Lough was in Los Angeles, stewing over her ruined 2017 Christmas vacation 3,000 miles from home, when a phone call brought a prodigious present.
“Omigosh!” was Lough’s instant reaction to her boss’s announcement that Lough would leave her post as commissioner of the IRS Tax-Exempt and Government Entities Division to lead the agency’s implementation of the Tax Cuts and Jobs Act (P.L. 115-97), passed by Congress December 22, 2017. Lough’s startled response was shared by many of her soon-to-be lieutenants as they set in motion the human networks that would execute one of the farthest-reaching tax administration reforms in modern history.
The IRS estimates that 530 full-time equivalent employees have logged more than 1.1 million hours translating the TCJA from law into regulations, guidance, FAQs, and other instruments useful to tax practitioners. Given that more IRS employees worked part time on tax reform or simply didn’t charge for hours they worked, the tax agency said exact numbers spent interpreting the TCJA were “challenging to determine.”
Because the law mandated changes for the 2018 filing season — just days away when Lough and her lieutenants began their work — IRS employees made numerous personal and professional sacrifices. Tax reform work frightened family members. It sparked disputes at dinner parties, interrupted domestic relationships, and postponed retirement plans. IRS managers and employees traded vacation days, and in some cases suspected employees of working uncompensated hours, to make TCJA targets.
“If you had asked me two years ago if I could do what I’m doing right now, I would have laughed at you,” said Marie Milnes-Vasquez, special counsel to the IRS associate chief counsel and a leader in determining how the TCJA affected the corporate world.
The accelerated IRS regulatory development process that emerged under the pressure of TCJA deadlines “has made a lot of us much more confident in some ways, and almost fearless,” Milnes-Vasquez said. “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.”
For their roles in implementing many TCJA regulations in less than a year, with an alacrity that impressed outsiders and perspicacity that surprised the tax administrators themselves, Tax Notes named the IRS’s tax reform regulatory team as Person of the Year for 2018.
Tax Reform ‘Tiger Team’
Within days of getting her new assignment, Lough had selected a “tiger team” of executives for the new Tax Reform Implementation Office (TRIO). Somebody packed Lough’s old office near Union Station in Washington and moved her across town to a new office at IRS headquarters — occupied at that moment by little more than a phone, a desk, and a willing assistant.
Tamera Ripperda, deputy commissioner of the Small Business/Self-Employed Division, who managed TCJA small business issues for the TRIO, said her initial joking reaction to the assignment was “Who did I tick off?” But her family wasn’t kidding when they asked the same question, she said. “They expressed concern that if it didn’t go well, what did that mean for my career?” she recalled. “And I’ve been here for 30 years, so that’s important for me.”
Carolyn A. Tavenner, director of Affordable Care Act implementation, who worked on individual and wage and investment issues, was contemplating retirement when she got the call over the 2017 Christmas holiday. But “all you have to do is tell me there’s going to be a new program, or a new piece of legislation, and it kind of recharges me,” she said.
Lough said she was recruiting people “you can trust to get the job done and never have to look back.” Team members would recognize gaps in their own knowledge and fill in each other’s, she said. “It’s the judgment you trust in the people, more than the ability to get the work done,” she said.
Race to Filing Season
TRIO executives were on a conference call on Christmas Eve in 2017, Ripperda remembered. But Lough added, “We still hadn’t read the law.”
The TCJA mandated 21 provisions, among them a new section 965 transition tax and a new Form W-4 and withholding instructions, that needed to be at least partly ready for the January 29 start of the 2018 filing season. “No one had to tell everyone in the IRS . . . that we were on a clock,” said Thomas Kane, division counsel for the IRS Large Business and International Division, whom Lough had named the TRIO’s project director.
Changes to forms and publications would normally be submitted to the IRS’s programming department by January 31, Lough noted. The TRIO hadn’t even finished reading the law by then, she said.
Curtis Freeman, senior technical adviser for the Wage and Investment Division’s forms and publications, said that as late as December 2017, he and his colleagues didn’t think the TCJA would pass. Yet his team eventually issued 250 work request notifications to the IRS’s information technology programming department for TCJA changes to forms and publications, including 34 on their April 30 deadline. That shattered the previous record of 150 for a year, he said. Projects such as the Form 1040 redesign that normally took up to two years were finished in a matter of weeks, he noted.
LB&I’s Theresa Newton recalled spending three days locked in a Washington conference room from sunup to sundown co-leading the section 965 implementation team. “There were a couple of times I wanted to cry . . . and I’d think of the old adage ‘There’s no crying in tax,’” she said.
Better Something Than Nothing
The TCJA included a total of 119 provisions that would substantially change individual and business income taxes. The IRS told Tax Notes its cross-functional working groups have produced more than 500 new or revised tax forms, publications, and instructions to implement the law.
Milnes-Vasquez said it took IRS attorneys a while “to just understand they weren’t going to be able to hold themselves to the same standards, and to understand that was just acceptable — that it was better to get something out than not to get anything out.”
Beverly Babers left Treasury to become the TRIO’s communications liaison with the department. “We had to create what that [collaboration] would look like,” she recalled. Brett York, Treasury associate international tax counsel, said he had “some trepidations initially” about stark differences of opinion among the many TCJA stakeholders in government. But Brian Jenn, Treasury deputy international tax counsel, observed that the “difficult task of coordinating all these regs was actually made much easier than expected by the sheer number of people.”
The normal regulatory drafting process is linear. Kane noted, “I do my job and hand it off.” But with time and agency resource constraints, and a looming filing season, “all of a sudden it wasn’t linear. . . . We had to break down those silos to some extent, and sit and talk in the same language, at the same time, with all of the people who were involved in that process,” he said. Mass meetings of the IRS business operating division managers, Treasury and chief counsel attorneys, and sometimes other stakeholders became a way to expedite the drafting of TCJA regulations and guidance.
All Hands on Deck
The IRS made quick calls on projects including proposed section 163(j) rules and global intangible low-taxed income rules, released in September, Milnes-Vasquez said. “We said OK . . . we’re going to make this call and we’re going to trust the [tax law] bar to give us good feedback,” she added.
The new process could be nerve wracking. In a conference room crammed with lawyers and business representatives debating the minutiae of the section 199A qualified business income deduction, Ripperda said, “I literally looked around that room and thought, there is no way we’re going to get there.” But proposed section 199A regulations and a revenue procedure were released August 8.
“I never thought [section 199A proposed regulations] would come out when they did,” Lough agreed. But in meetings with the Treasury Office of Tax Policy and other decision-makers, “we also talked about what will be in the guidance, [and] what can be pulled out and can be given later. So we really talked about what . . . the taxpayers really need now,” she said.
The Daily Grind
As winter turned to spring, eight- and 10-hour IRS workdays gave way to 12- and 14-hour TCJA days and nights, with weekends and holidays erased for TRIO employees.
Freeman remembered arranging to get printed copies and accompanying documents for his mostly off-site staff a few weeks after the TCJA’s passage. Within minutes of the documents’ arrival, about 20 people showed up at his office clamoring for copies. “One person even said, ‘Wow, this is like Christmas,’” he said.
TCJA implementation crowded out IRS employees’ normal work of tax administration. “Most of our days were spent in meetings or on calls,” Newton said. “It wasn’t until after the business day was done that you could catch up on emails.”
Scott Dinwiddie, IRS associate chief counsel (income tax and accounting), said one of his review attorneys found a group working late on a regulation, after Washington’s public transportation had shut down for the night. The team had planned ahead by choosing one person to drive to work so the others could catch a ride home in the wee hours, he said.
LB&I section 965 team members were spread all over the country, said Eloy Flores, co-lead for that group. “There were a lot of long nights, and some unexpected travel when it was better for us to work face-to-face,” he recalled.
John Tuzynski, director of headquarters examination at SB/SE, said he sat his 13-year-old cat in a chair next to him for late work and dinners at home. “There are times when, frankly, we just thought we couldn’t take anymore because the demands were so great,” he said.
The Dinner Party
Working on TCJA implementation could be tough to explain to people outside the IRS. Ripperda recalled attending a neighbor’s dinner party. “They asked what tax reform meant,” she said. “They really didn’t even have a concept that there was anything that needed to be done — that these forms just magically appeared and got revised.”
So Ripperda explained it to them. She was carrying a copy of the TCJA. A financial adviser asked how the IRS could expect to release guidance in time for software vendors to make filing season programming adjustments.
“I really did kind of share a little bit of how the sausage is made,” Ripperda said. By the time she was finished, Ripperda said party guests were talking about contacting their accountants the next morning.
But tax reform could also be hard to explain to the people it affects first. Lough said, “I always felt that our job is to take the burden off the [business operating division] commissioners and the functional units, because we do this as a full-time [job], but they have to run their organization” day to day.
“The hardest part of the job is . . . to go to them and say, ‘You need to pay attention to this,’ and take them away from what they are doing” to advance a TCJA reform, Lough said. “If somebody doesn’t make the decision, I will decide for them.”
Getting IT Right
Senior TRIO executives credited the IRS’s IT workers and managers for much of their success to date. The all-hands meeting process produced effective IT results, Tavenner said. “Once people understand what’s really needed from [the IRS business operating divisions] and IT, then you come up with breakthroughs, and both sides have now done that,” she said.
IT remains central to tax reform’s success. For Craig Drake, director of IT enterprise systems testing for IRS products, including the new Form 1040, the work demands remain intense. His group normally receives products for testing in the summer, he said. This year it’s mostly been October or later. Testing didn’t begin on the new Form 1040 until November 13, he noted.
“That creates some angst for us because we don’t have as much runway to test that out and ensure that the new 1040 is working as designed,” Drake said. Only about 35 percent of IT testing was finished by early November, compared with the usual 60 or 70 percent, he said. But even working within a compressed time frame, Drake said IT’s goal “isn’t to get it done fast; it’s to get it done right.”
‘Fight, Bleed, and Die’
In David Foster Wallace’s unfinished opus The Pale King — perhaps the only novel ever published that’s set in an IRS processing center — the author observed, “If you are immune to boredom, there is literally nothing you cannot accomplish.”
Lough used to work in a private sector law firm, doing corporate transactions. “That’s boring,” she said. But attorneys coming to the IRS looking for a ruling on a tax matter? “That’s exciting,” she said. “I really have to hand it to our people who are just pouring themselves into this, and they are learning so much, and giving so much to the process, and it’s really hard not to get burned out.”
Drake said his people volunteered to work extra hours, including weekends and holidays, to meet TCJA deadlines. Kristine A. Crabtree, senior technical reviewer, branch 2 (international), said employees traded working hours to make rare vacations possible.
Dinwiddie said some IRS employees working extra hours don’t qualify for comp time. “So this is just uncompensated time that they are, in essence, donating to the federal government to make sure everything gets done that needs to get done,” he said.
As tax reform implementation winds down, most IRS employees will pick up where they left off. Lough and Ripperda plan to resume their old posts at the TE/GE and SB/SE divisions, respectively. Tavenner said she’ll take another crack at retirement. For others, finishing the job will be a leap into the unknown. “I don’t have an office to go back to,” said Kane, who began his IRS career during the 1986 tax reform. Babers lamented, “The hardest part is knowing career-wise what’s next, because I don’t have a ‘next.’”
Lawrence B. Gibbs, who was IRS commissioner when the 1986 tax reform was implemented, said, “Tax may be boring to most, but to some it’s fascinating.” The IRS attracts people who will “fight, bleed, and die” over the right choice of words for a new tax regulation, he said. “I think the work that has been done by the IRS, Treasury, and chief counsel has been magnificent this past year,” he added. Ripperda said, “Those collaborative sessions that we sit in this room, and we work through the problems, and we work through the guidance that’s needed — for tax geeks, that is the fun part.”
“We will have succeeded, not because people say what a great job we’ve done, [but] if people don’t even know that it happened,” Lough said. “Most Americans are oblivious [to tax reform]. That’s success for me. It just went so smoothly for them that they didn’t even notice the difference.”
Runners-Up
David Kautter — The Man With Two Hats
During one of the IRS’s busiest periods in recent memory, David Kautter oversaw the agency in an acting capacity while also serving as Treasury assistant secretary for tax policy.
Kautter ran the IRS as acting commissioner for over 10 months, longer than any acting commissioner since the office was created in 1862. He stepped into the role on November 13, 2017 — a little over a month before the TCJA was signed into law — and stepped down September 30, the day before Charles Rettig was sworn in as the 49th IRS commissioner.
Kautter’s selection for acting commissioner was generally well received by the tax world, although some expressed concern about his ability to concurrently serve in two such significant roles. Kautter brought 40 years of experience in tax policy to Treasury and the IRS, including his management of EY’s national tax office and the Kogod Tax Center at American University. He served from 1979 to 1982 as tax legislative counsel for then-Sen. John Danforth of Missouri and is a former member of the board of directors at Tax Analysts.
While serving as acting commissioner, Kautter oversaw the issuance of numerous guidance projects regarding the TCJA, including proposed regulations on the new passthrough deduction, bonus depreciation, and the transition tax. Moreover, he helped the IRS secure $320 million to implement the TCJA on top of the agency’s $11.1 billion budget. Former IRS Commissioner Lawrence Gibbs said Kautter had been “surprisingly effective in getting more resources for IRS than in the recent past.”
The Ninth Circuit on Altera
It’s not every day that words like “exciting” and “shocking” can be used to describe a tax case, let alone one involving transfer pricing, but the Ninth Circuit produced some unexpected twists this summer in Altera. The court kicked things off July 24 with a stunning reversal of the Tax Court’s unanimous 2015 decision (145 T.C. 91) that Treasury’s 2003 cost-sharing regulations violated the Administrative Procedure Act (APA).
The tax world was still digesting the decision when, two weeks after its release, the Ninth Circuit announced it was withdrawing the opinion and that the case would get a second look from a newly reconstituted panel. In the since-withdrawn opinion, Nos. 16-70496 and 16-70497 (9th Cir. 2018), the panel majority (Chief Judge Sidney R. Thomas and the late Judge Stephen Reinhardt) held that the final regs, which require participants in qualified cost-sharing arrangements to share stock-based compensation costs, passed muster under the APA. The majority found that Treasury provided sufficient notice of its intent and adequately considered stakeholder objections that unrelated parties don’t share such costs.
Judge Kathleen M. O’Malley, in her 22-page dissent, concluded that the regs were procedurally invalid under the APA because Treasury didn’t adequately signal to interested parties that it was departing from a traditional arm’s-length analysis. Further, she disagreed with the government’s position that cost-sharing arrangements are subject to the commensurate with income standard.
Given the IRS’s historical losing record in major transfer pricing cases, the Ninth Circuit’s reversal set off shock waves and prompted many practitioners and academics to examine the decision’s possible impact on transfer pricing and, more widely, the government’s rulemaking authority.
With the addition of a new panel member, it’s anybody’s guess whether the Ninth Circuit will reverse the Tax Court’s decision again. Many assumed that the Ninth Circuit withdrew its opinion to quell criticism regarding the propriety of letting Reinhardt, who died five months after oral arguments but signed off on the majority opinion before his death, cast a deciding vote from the grave.
The questions posed during oral reargument October 16 by Judge Susan P. Graber — Reinhardt’s replacement — suggested the court may again uphold the validity of the cost-sharing regulations.
Kristin E. Hickman Takes On New Rules
The Office of Management and Budget took center stage this year thanks to a new memorandum of agreement between Treasury and OMB, and Kristin E. Hickman was one of the people tasked with ensuring its terms are met.
Hickman, a special assistant administrator at OMB’s Office of Information and Regulatory Affairs (OIRA), came on board right after the April MOA was inked. The document ushered out OIRA’s long-standing practice of rarely doing a detailed review of tax regulations, raising concerns that it would slow the pace of guidance while the IRS and Treasury were attempting to clarify the TCJA.
Hickman’s job at OIRA — she also teaches at the University of Minnesota Law School — is to bridge the gap between administrative practice and tax rulemaking, as well as to expedite the review process for tax rules. Her academic writing has focused on administrative law and challenging tax exceptionalism, which suits her new role in bringing transparency to regulatory decisions made by Treasury and the IRS.
A theme in Hickman’s scholarly articles is the APA’s importance in promulgating tax guidance, and her work at OIRA reflects that. The notable brevity of Notice 2018-54, 2018-24 IRB 750, which warned high-tax states that Treasury and the IRS were working on guidance regarding charitable contribution strategies for avoiding the federal cap on state and local tax deductions, appeared to bear her imprimatur. Subsequent notices seemed to follow the pattern of giving taxpayers a heads-up about the IRS’s thinking about coming guidance, without exposing the IRS to a challenge under the APA’s notice and comment rules.
Dana L. Trier’s Candid Approach
The tax practicing community loves candor. Treasury? Not so much.
Dana L. Trier, former Treasury deputy assistant secretary for tax policy, came out of retirement to help shape the TCJA and oversee the Office of Tax Legislative Counsel’s early implementation efforts. Always a big draw as a speaker at tax conferences, Trier in his comments about the state of the tax law was often colorful, and occasionally biting.
Most Treasury and IRS officials’ public comments on aspects of the TCJA have been cautious and vague, reflecting a listening posture more than an informing one. Trier’s wit and frankness, on the other hand, showed his eagerness to share his opinion on just about any element of the tax law.
However, that straightforwardness proved to be a liability. He resigned abruptly in late February, a few weeks after the American Bar Association Section of Taxation meeting in San Diego, where he had made public comments suggesting that some elements of the TCJA were not well thought out, including the carried interest provision.
Trier’s departure came as a shock to many in the tax practitioner community, and some worried that Treasury was losing an invaluable mind at a time when it needed the most help. But Trier himself says he thinks Treasury has gotten along fine without him.
Now back at Davis Polk & Wardwell LLP, Trier told Tax Notes that Treasury has “gotten off to an outstanding start” implementing the tax law’s new provisions. “The sheer quantity of guidance that has been developed this year is unprecedented,” he said.
Looking ahead, Trier said that to make the TCJA workable, the IRS and Treasury will have to be “genuinely responsive” to taxpayer feedback before finalizing the bevy of proposed regulations that have been released this year and in refining those regs over time. Even with a talented team at Treasury, implementing the international tax provisions poses “particularly great challenges,” and Treasury may need to be granted more regulatory authority to “perform quite major surgery,” he said.
Robert Mueller Follows the (Tax) Money
Special counsel Robert Mueller’s investigation into possible ties between President Trump’s presidential campaign and the Russian government has been making tax crimes great again.
This summer saw the trial of former Trump campaign chair Paul Manafort on charges of filing false tax returns, failing to file foreign bank account reports, and bank fraud resulting from his lobbying work for Ukrainian President Viktor Yanukovych and the funneling of those proceeds through nominee-held offshore bank accounts. After a 10-day trial, a Virginia federal jury convicted Manafort of all the tax charges and one of the FBAR charges.
Manafort had been separately charged in the U.S. District Court for the District of Columbia with failing to register as a foreign agent, obstruction of justice, perjury, and conspiracy. Eventually, Manafort pleaded guilty in the D.C. case, and the charges that were mistried in Virginia were dropped.
On the same day Mueller’s team got a conviction in Manafort’s case, Trump’s former attorney, Michael Cohen, pleaded guilty to tax evasion, lying to a bank, and campaign finance charges. The U.S. attorney for the Southern District of New York handled Cohen’s case, but it had been referred by Mueller’s team. Cohen was sentenced to three years in prison on December 12. (Related coverage: p. 1563.)
In the lead up to Manafort’s trial, Trump complained about the prosecution and compared it to that of the most famous tax cheat in American history: Al Capone.
Charles Rettig Bucks the Trend
The Senate confirmed a tax attorney to be commissioner of the IRS for the first time in more than two decades.
Charles Rettig, a veteran tax controversy lawyer from the Beverly Hills, California, firm Hochman Salkin Toscher & Perez PC , in September became the first tax professional to head the agency since Charles Rossotti ended his five-year term in 2002. Rettig weathered a political storm during his confirmation process, spurred by Republicans’ passage of the TCJA at the end of 2017.
After being nominated by Trump in February, Rettig didn’t receive a hearing to consider his nomination until late June. During the hearing and leading up to his approval in the Finance Committee in July, Senate Democratic taxwriters questioned Rettig on several controversial policies in the new tax law, including the $10,000 cap on the state and local tax deduction.
Finance Committee Democrats voted unanimously against his nomination over an unrelated decision by the IRS and Treasury to end required disclosures for the names of donors to exempt organizations other than those in section 501(c)(3).
On the Senate floor, some of the Democratic taxwriters who opposed him in the Finance Committee supported him in his confirmation vote. Rettig was confirmed on a 64-43 vote September 12, and took charge of the IRS October 1.
Emily Foster, Kristen Parillo, Stephanie Cumings, Nathan Richman, Eric Yauch, Marie Sapirie, and Jonathan Curry contributed to this story.
Correction, December 17, 2018: An earlier version of this article misidentified Eloy Flores by gender as female. Tax Notes regrets the error.