David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week, what did we learn at ABA? This is a follow-up to our last episode, where we previewed the guidance we were expecting to hear about at the American Bar Association Tax Section meeting. As expected, there were no bombshell revelations. But we did get some interesting insights into the implementation of the Tax Cuts and Jobs Act. Joining us again is Tax Notes Today senior legal reporter Andrew Velarde to give us a rundown on what we learned. Andrew, welcome back.
Andrew Velarde: Hi, Dave. It's good to be here.
David Stewart: Andrew, what did officials have to say about TCJA guidance that we're still waiting for?
Andrew Velarde: I think the most interesting revelation we got, and it happened on a number of occasions, was we actually got some insights into the timelines of several of the most important upcoming TCJA guidance drops. This is interesting particularly because of the five W's, “when” is typically the most difficult question to get a straight answer for as a reporter. The specificity this time went beyond the "coming soon" we frequently get from officials. Perhaps that might have been because they sensed practitioner nervousness over getting the much-needed details out in a timely fashion. We don't know. But some of these insights came from assistant secretary for treasury [tax policy], Dave Kautter.
Notably, we've gotten a mid-to-late July timeline for proposed regs related to section 199A. That relates to the 20 percent passthrough deduction for qualified business income. We know that this guidance will not answer every question, but it will address which businesses can take the deduction, netting for multiple trades or businesses, as well as other limitations. And these limitations in the law are based on wages and basis, and there's also a complete barring of the deduction for specified services. We also got insight that existing code sections are being consulted for these new rules. For example, defining a trade or business will be done by heeding the advice of practitioners to consult section 469, which defines specific activities.
This flow of information may be a little one way, however. So, the coming guidance on the qualified trade or business definition under the passthrough deduction will not necessarily be imported into future rules that are a part of the small business stock exclusion for gain under section 1202. Section 1202 is referenced in section 199A.
Treasury also killed speculation that the deduction would apply S corporation reasonable compensation principles to partnerships. Dave Kautter also said that we could expect, by late summer to early fall, the 163(j) business interest deduction limitation proposed regs. This is the provision that provides a 30 percent cap based on adjusted taxable income for these interest deductions.
We had some insight as well on the 100 percent bonus depreciation guidance. We're expecting that out by early July at the latest, so coming up very shortly here. That will address written binding contract issues arising out of business acquisitions, which will be treated as stock acquisitions. And there's a potential for safe harbors, such as for when a substantial modification causes a contract to cease to be binding.
David Stewart: The TCJA made significant changes to international taxation and introduced some new concepts. What more have we learned about those areas?
Andrew Velarde: Sure, we've got some timelines there as well. Now, maybe not quite as specific as the expensing one, but we can expect summer release for several international provisions related to the GILTI. Remember, that essentially operates like a minimum tax. And section 965, the transition tax, is part of a move towards a greater territorial system. We've already seen three notices in the 965 area. Practitioners, though, waiting for the BEAT will just have to wait a bit longer. We're not expecting that out until November or December, according to officials.
The interrelationships between the GILTI, the BEAT, and FDII are being used to Treasury’s advantage to diminish the magnitude of the reg projects — this, according to Dave Kautter again. We received a little bit of insight too on section 78 gross-ups for deemed paid foreign tax credits attributable to the GILTI, as it will be includable in the GILTI basket for foreign tax credit limitation purposes. So a U.S. shareholder of a controlled foreign corporation would include GILTI and the section 78 gross-up in net income, before the 50 percent deduction is applied. The 80 percent limitation on FTCs would then be applied after that.
Finally, there was some interest in the international realm. There were some interesting insights from an IRS official, a warning almost, to practitioners not to reverse transfer pricing positions in order to get better liability results under the TCJA, as this might face increased IRS suspicion.
David Stewart: Now beyond the TCJA, what other news did we get on guidance?
Andrew Velarde: Sure. Well, we got a few insights about the guidance process, just generally. So, going back a number of months, we had a previous proclamation from a Treasury official to expect far more regs and fewer notices going forward. Well, that seems to be old news now, or at least something that may not work in every situation. As Treasury has recognized now, the need for immediate guidance may require notices in some circumstances — again, according to Dave Kautter.
We have the potential for another notice in 965 coming out in a few weeks. Again, this is the one we already had three notices in. This runs somewhat counter to another statement made by a Treasury official back in April that notices might just continue to slow down the reg process. And generally, we can expect about 25 to 30 pieces of guidance between now and August 15th, so a little less than three months from now. And that's not including some of the more informal pieces of guidance like FAQs. I guess you could say this is not a deluge, but it's not a trickle either, and it's certainly a far cry from the regulatory freeze that we saw last year.
Additionally, there's still some questions remaining about reliance on proposed regs we're expecting to see. That's an open issue essentially at this point. It's under consideration for the 100 percent bonus depreciation for qualifying new assets. And in the passthrough realm, its reliance is uncertain, according to the IRS. This is not reform-related, but taxpayers can rely on the proposed regs that allow the mark-to-market method for accounting for some foreign currency transactions. This was confirmed by an IRS official at ABA, which cleared up some confusion on the issue.
David Stewart: How about nonguidance news? What else did we learn at ABA?
Andrew Velarde: Sure. I think most importantly was practitioners probably can count on in-person conferences coming back for campus cases in the IRS Appeals process. This has been a long saga since IRS Appeals announced a move away from in-person conferences in favor of phone and virtual conferences back in 2016. There was significant pushback from practitioners on this. And back in October, they announced they would be moving back to in-person conferences for field cases, but they left campus cases as a TBD essentially. [National] Taxpayer Advocate Nina Olson criticized this very roundly, calling it disturbing. Well, at the ABA, Andy Keyso, acting deputy chief for Appeals, announced that he was confident that these in-person conferences for campus cases would be returning. They are still working up the details on this, so there's no timeline yet. And he mentioned how the logistical issues pose a challenge. But none of these challenges are insurmountable, according to the IRS. So, we could probably expect that in the future.
David Stewart: Well Andrew, you and the other reporters did an excellent job of covering all the panels again this year. Thank you for being here.
Andrew Velarde: It was a pleasure, Dave. Thank you.
David Stewart: Listeners interested in learning more about what we talked about today or other stories from this year's ABA meeting should go to taxnotes.com and enter American Bar Association in the search bar.
And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We are joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: Well, in Tax Notes, practitioners from Simpson Thacher examine how corporations that conduct some of their business through partnerships can satisfy the active trade or business requirement during a section 355 distribution. Also, Sarah-Jane Morin of Morgan Lewis highlights new considerations for practitioners involved in corporate mergers and acquisitions, including debt, net operating losses, and valuation.
In State Tax Notes, John Swain provides a primer discussing the purposes and operation of various state tax credits. And Dario Arezzo navigates the definition of farming as it applies to New York farm wineries.
And in Tax Notes International, Elizabeth Rosenthal explains why the transfer pricing methods applied to pipeline businesses are inappropriate for highly digitized, platform-based multinational enterprises, and proposes an alternative model. Finally, Torsten Fensby examines whether the U.S. patent box and its European counterpart violate the WTO's Agreement on Subsidies and Countervailing Measures.
David Stewart: You can read all that and a lot more in the May 28th editions of Tax Notes, State Tax Notes, and Tax Notes International.
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