On April 22, 2021, the IRS issued Revenue Procedure 2021-20. This guidance obsoletes Rev. Proc. 2020-51 to reflect the recent change in the law allowing deductions for PPP expenses even though there was a reasonable expectation of reimbursement in the year the expenses were paid or incurred. See Rev. Rul. 2020-27, obsoleted by Rev. Rul. 2021-2.
In the subject revenue procedure, the IRS provided a safe harbor for taxpayers who, for their 2020 tax year, followed the guidance then applicable under Rev. Rul. 2020-27 and did not claim its PPP expenses as deductions for that year. In lieu of filing an amended return or an AAR (for a partnership), the revenue procedure allows the deductions to be taken in the following tax year (2021).
Regulation §1.461-1(a)(3), not cited in Rev. Proc. 2021-20, states:
Each year’s return should be complete in itself, and taxpayers shall ascertain the facts necessary to make a correct return. The expenses, liabilities, or loss of one year generally cannot be used to reduce the income of a subsequent year. A taxpayer may not take into account in a return for a subsequent taxable year liabilities that, under the taxpayer’s method of accounting, should have been taken into account in a prior taxable year. If a taxpayer ascertains that a liability should have been taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file a claim for credit or refund of any overpayment of tax arising therefrom. Similarly, if a taxpayer ascertains that a liability was improperly taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file an amended return and pay any additional tax due….
This regulation was not cited or discussed or distinguished in the subject revenue procedure. It was ignored.
Somewhat similar type relief was provided in the predecessor to this revenue procedure, Rev. Proc. 2020-51, that was obsoleted in Rev. Proc. 2021-20. However, that revenue procedure allowed deductions to be taken in the 2021 tax year if the application for forgiveness of the PPP loan was not allowed and, thus, the expenses paid or incurred in the 2020 tax year would have been allowed. Once again, the purpose was to avoid requiring taxpayers to file an amended return or AAR but, arguably unlike the current revenue procedure, authority has allowed deductions to be taken in a later year (such as a loss sustained in a prior year where the expectation for reimbursement is eliminated in a later year) where the restrictions no longer exist. See, e.g., §1.165-1(d). On the other hand, an argument can be made that the 2020 revenue procedure was also ultra vires.
Even if the revenue procedure is ultra vires, how, if at all, can it be challenged? If the revenue procedure was anti-taxpayer, then the taxpayer could either not pay the tax and challenge it in court or pay the tax and sue for a refund. There would be no pre-enforcement challenge in those cases under current law due to the Anti-Injunction Act absent a favorable opinion by SCOTUS in the pending CIC Services case or a new statute allowing such challenges. This is all quite difficult to do. If, on the other hand, the guidance is pro-taxpayer, who will have standing to challenge the guidance? The answer under the law as of this writing is that no one will have standing to challenge the guidance. See a letter to the editor of Tax Notes by Michael Schler where he states:
“The problem, as I have pointed out previously, is that anti taxpayer regulations can be freely challenged by taxpayers, but pro-taxpayer regulations are invulnerable to challenge because of the lack of anyone with standing. I do not believe this makes for a balanced tax system.”
It would appear that Rev. Proc. 2021-20 is inconsistent with Reg.§1.461-1(a)(3) and cannot stand. And yet, who will challenge the revenue procedure? Most likely no one. But, in the words of some, “this is not anyway to run a railroad”.