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Tax Cuts and Jobs Act

Lawmakers explain TCJA errors & request IRS guidance reflect Congressional intent pending corrections

Several Republican members of the Senate Finance Committee have written a letter to Treasury and IRS officials identifying three key provisions in the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) where the statutory language doesn’t reflect Congressional intent and asking IRS to reflect this intent in its guidance and enforcement of those provisions.

Qualified improvement property—TCJA Sec. 13204. Code Sec. 168(e)(6) defines qualified improvement property (QIP) as any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

Under the TCJA, the statutory language for Code Sec. 168(e)(3)(E) does not include QIP, leaving it as “nonresidential real property” (the cost of which is recovered over 39 years under the modified accelerated cost recovery system (MACRS)) and not subject to bonus depreciation or some other class of property (e.g., a property with 15 years MACRS). However, according to the conference committee, QIP was intended to be 15-year property, qualifying for bonus depreciation.

In the letter, the Senate Finance Committee members identified the above issue as requiring a technical correction, citing the conference report as demonstrating its intent.

Net operating losses—TCJA Sec. 13302. The TCJA repealed the general 2-year NOL carryback and the special carryback provisions, but provided (i) a 2-year carryback for certain losses incurred in a farming trade or business, and (ii) that NOLs may be carried forward indefinitely. (Code Sec. 172(b)(1)(A))

TCJA Sec. 13302(e)(2) provided that this change is effective for NOLs arising in tax years ending after Dec. 31, 2017. However, the conference committee provided an effective date for tax years “beginning after Dec. 31, 2017.”

The lawmakers’ letter also identified this issue as requiring a technical correction to reflect legislative intent, which was to provide the “beginning after” effective date reflected in the conference report.

Deductability of sexual harassment settlements or payments—TCJA Sec. 13307.  The TCJA denied a deduction for (1) any settlement or payment related to sexual harassment or abuse if such settlement or payment is subject to a nondisclosure agreement (NDA), or (2) attorney’s fees related to such a settlement or payment. (Code Sec. 162(q))

In the letter, the senators wrote that this provision “arguably prohibits” the recipient of such a settlement or payment from deducting legal fees incurred in pursuing sexual harassment cases because those fees are “related to” a settlement or payment subject to an NDA. However, according to the senators, these attorneys’ fees were not intended to be subject to the disallowance.

Senators request that IRS reflect legislative intent in guidance and enforcement.  The lawmakers stated that, once they’re done completing a thorough review of the TCJA to identify “other instances in which the language as enacted may require regulatory guidance or technical corrections” to reflect legislative intent, they intend to introduce a technical corrections bill.

However, pending any such legislation, the senators requested that, in issuing any guidance relating to and in enforcing the above provisions, IRS reflect legislative intent.

Checkmark Observation: IRS is limited in the extent to which it can “interpret” statutory text—it cannot interpret it in a manner contrary to plain language of the statute. Therefore, to the extent that the errors described above involve statutes’ plain language, only legislative corrections can fix the errors.

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