David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week: A clearer picture on TCJA guidance. The American Bar Association tax section recently met in Atlanta, and as with their May meeting, the Tax Cuts and Jobs Act was a main focus of the discussion. Since May, we've seen the release of several highly anticipated proposed regulations, including part of the global intangible low-taxed income, or GILTI rules, guidance on the transition tax, and passthrough deduction rules, but there remain myriad questions yet to be answered. Here to talk about what we learned at the ABA meeting is Worldwide Tax Daily's senior legal reporter Andrew Velarde. Andrew, welcome back.
Andrew Velarde: Hi, Dave. It's good to be back here.
David Stewart: I mentioned in the intro a bunch of proposed regulations that have come out. What else can we expect in the immediate future?
Andrew Velarde: Well, Dave, we got several more timelines on planned guidance releases, especially those relevant in the international tax realm. International tax is where some of the greatest changes took place under the TCJA, and the IRS and Treasury are putting in Herculean efforts to get out this much-needed guidance as quickly as possible. So, what did we learn? Well, most practically, that practitioners may want to skip the Thanksgiving football and curl up with a copy of their favorite reg package instead.
Last week, Chip Harter from Treasury announced the planned release of four proposed reg projects around November. Those projects include the base erosion and antiabuse tax, or BEAT, the business interest limitations provision, antihybrid rules, and guidance under the foreign tax credit. All told, practitioners can expect guidance of more than a thousand pages.
Some of Harter's comments may also tamp down some of the highest of practitioner expectations related to these packages. It appears that these regs are prepared to sacrifice completeness for the sake of speed. These proposed regs aren't going to answer all questions, and Treasury intends to resolve gaps and complexities in the guidance once final rules are issued by June of next year.
David Stewart: You mentioned Chip Harter. He was one of the higher-ranking Treasury officials that was speaking at ABA, and he was on several of the panels. Did he provide any further insights into what we can expect in the international tax realm?
Andrew Velarde: Interestingly, he remarked how the GILTI provision is being examined by other countries as a template for designing CFC rules. This stands in stark contrast to the initial reaction to the other very noteworthy international provision, the BEAT, which has drawn intense international criticism. The international interest with a GILTI-like regime would like to see it apply across industries, according to Harter. And he credits the U.S. moving first with potentially bringing about these significant changes.
David Stewart: Did we get any more clarity on some of the guidance that's already out there?
Andrew Velarde: Sure did. The transition tax was the first piece of major proposed guidance released by the IRS and Treasury, and that happened back in August. And not too far off in the future is another stated Treasury goal: Finalization of these regs before the end of the year.
And some practitioners awaiting more guidance on this front could find solace in an announcement made by an IRS official at the ABA. Relief is being granted from the otherwise onerous October 9th deadline for taxpayers seeking to file transfer agreements to prevent the acceleration of the transition tax installment payments. Taxpayers don't have to worry about missing that deadline, as the IRS will soon be providing more guidance and transfer agreements filed in accordance with those rules will be timely filed.
David Stewart: There was a lot of discussion of TCJA and some international tax provisions. What did we learn outside of those areas?
Andrew Velarde: Well we received a very interesting revelation from a senior IRS official relevant to the corporate world — specifying potential “guideposts” that research-intensive corporations could look to as factors when aiming to engage in tax-free spinoffs. These companies, frequently in the pharmaceutical and biotechnology industries, often have trouble satisfying the active trade or business requirement for a tax-free transaction because, despite heavy spending in R&D, haven't generated much revenue.
Robert Wellen from the IRS announced the IRS letter ruling program should accommodate spinoffs that would otherwise qualify as active trade or businesses. According to Wellen, the six guideposts that are being considered as a substitute for actual income are:
Regular, continuing research and related activities by a significant number of full-time management and operational employees;
Regular, continuing expenses for research and related activities;
Significant progress toward developing an income-producing product;
Holding out that the business is available to enter into an income-producing arrangement;
An actual offer or specific expression of interest made or received by the business to enter into an income-producing arrangement; and
similarly situated businesses have entered into income-producing arrangements with research that has progressed to a similar level as the taxpayer's research.
As you can see, the general theme behind these factors is that they are predictable, repeatable, fair, and reasonable.
David Stewart: Alright, turning back to some guidance under the TCJA, specifically section 199A, which deals with the passthrough deduction for business owners. Now, section 199A allows a 20 percent deduction for business owners, up to certain income thresholds, and then beyond that, specified service trades or businesses are barred from using it. We received some guidance on that, but did we get any more clarity at ABA about that?
Andrew Velarde: Absolutely, although I think it is fair to say that the insights gained on the deduction’s de minimis rule were both a surprise and a disappointment to practitioners. Under the rules, to determine what is a trade or business for calculating qualified business income, the IRS and Treasury relied on section 162(a) definition related to trade or business expenses. Taxpayers have expressed concern that the definitions under that section are unclear. The proposed rules provide a de minimis test that says if a trade or business has gross receipts of $25 million or less for a taxable year, the business is treated as a specified service if less than 10 percent of its gross receipts are attributable to the barred services. If a trade or business has gross receipts of more than $25 million, the percentage is lowered to 5 percent. A Treasury official indicated that if a taxpayer's receipts from banned services for a business that has less than $25 million of gross receipts is 11 percent, none of the income from that business is allowed to use the deduction. This essentially creates a cliff effect within the de minimis rule.
Later, the official also indicated that which entity holds rental property may determine whether taxpayers have a separate trade or business. If multiple buildings are held in one regarded passthrough entity, that's likely one trade or business for purposes of calculating the passthrough deduction. But if those buildings are held in separate regarded passthrough entities, under section 162 they are probably treated as separate trades or businesses. The official also indicated that there will have to be some further clarifications in final regs.
David Stewart: The other notable regulations that we saw over the summer were bonus depreciation rules. What did we learn on those?
Andrew Velarde: Well, we got word that Treasury and the IRS have concluded that they do not have the authority to write rules to fix the 2017 tax law's drafting error that omitted qualified improvement property from the 100 percent bonus depreciation deduction. Qualified improvement property includes interior improvements to nonresidential real property. Both regular renovations, such as those done in the retail and restaurant industries and single substantial changes such as a business moving into a new headquarters can include this type of property. Instead of a regulatory fix, a technical correction will be needed, as officials cannot override what is viewed as otherwise clear statutory language.
This conclusion will likely dismay practitioners who had suggested subregulatory options like a safe harbor to fix the problem. The proposed regs provided a very limited fix for this qualified improvement property problem by allowing bonus depreciation for this property acquired and placed in service between September 27th and December 31st, 2017. The depreciation regs are not likely to be finalized this year, but rather, early 2019, according to an official at ABA.
David Stewart: Well, it sounds like even though we've gotten a lot of guidance over the last few months, we're looking forward to a lot more in the coming months. So I guess, Andrew, you and your fellow reporters are going to have your hands full. We'll definitely have to have you back to talk about what we learn over the next few months. Andrew, thank you for taking the time to talk to us today.
Andrew Velarde: Certainly. It's been a pleasure, Dave. Thank you.
David Stewart: And now, Coming Attractions. Each week, we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes, practitioners from Ropes & Gray describe how tax-exempt organizations with endowment assets can apply Notice 2018-67, issued in August, to help taxpayers aggregate their activities under unrelated business taxable income. Also, Libin Zhang and Michael Grisolia discuss issues involving earnings and profits from real estate investment trusts, specifically when it doesn't reflect taxable income to the REIT.
In State Tax Notes, Annette Nellen identifies stakeholder considerations regarding the U.S. Supreme Court's ruling in Wayfair and how the decision presents an opportunity to improve sales tax systems. Further, practitioners from Mayer Brown discuss New York case law involving other business receipts, and suggests considerations for companies with high in-state costs.
And in Tax Notes International, practitioners from Skadden examine the tax consequences of Brexit on cross-border reorganizations involving Germany and the United Kingdom. Also, practitioners from GEB Partners consider the European Union's 2015 Telecommunications Single Market Regulation and its recently proposed digital services tax.
David Stewart: You can read all that and a lot more in the October 15th editions of Tax Notes, State Tax Notes, and Tax Notes International.
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