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Companies seeking new tax guidance from the Treasury Department may be in for a long wait.
The department is putting 2016 guidance under the microscope under orders from the White House, and may soon be devoting much of its energy to tax reform—both potential roadblocks for anything new, tax attorneys told Bloomberg BNA.
There’s no doubt both of those are shrinking the resources Treasury can devote to new guidance, they said. And that may make tax compliance difficult.
“This is a big deal,” Thomas Linguanti, a partner with Morgan Lewis & Bockius LLP, said. “Taxpayers are in this world of uncertainty. They’re looking for anything they can hold on to while they’re trying to run their businesses. It’s a very difficult time.”
Attorneys said three big areas on which they’re hoping for guidance include the manufacturing tax credit under tax code Section 199, the partnership audit rules under the Bipartisan Budget Act, and rules on foreign currency gains and losses under Section 987.
Both Robert Kovacev, a partner with Steptoe & Johnson LLP, and Daniel Rosen, a partner with Baker & McKenzie LLP, said proposed rules (REG-136459-09) under Section 199—caught up in a January government-wide freeze on regulations—are a major source of concern for their clients.
Issued in August 2015, the rules restrict companies using contract manufacturers from taking a tax deduction for producing goods domestically—a position that has caused a continuing outcry in the business community and led to five members of Congress sending a July 25 letter to Treasury Secretary Steven Mnuchin urging him to withdraw parts of the rules.
Rosen said in the absence of final rules, “taxpayers are left to fend for themselves.” As audits proceed, he said, the lack of formal regulations has caused both companies and Internal Revenue Service agents to rely on less-formal internal IRS guidance.
This would include chief counsel advice memorandums and other guidance that doesn’t provide any kind of formal precedent for IRS actions on the issue.
Action on proposed rules to implement a new partnership audit regime (REG-136118-15) is more likely, with the regime taking effect in 2018 and the IRS scrambling to get final rules out. An IRS hearing is scheduled for mid-September.
John Harrington, a partner with Dentons US LLP, said Treasury needs to take quick action to delay the Section 987 foreign currency rules. Although the guidance is among eight projects targeted for repeal or modification as part of the Treasury review process, Treasury won’t announce its recommendations until September.
Harrington said compliance with the existing rules is so difficult that Treasury needs to act swiftly.
A Treasury spokeswoman declined to comment.
In addition to the two overall issues that may be holding up new rules—the review of 2016 guidance and the possibility of tax reform—practitioners and former Treasury officials said a big reason for the delay may be the department’s lack of senior tax officials.
Movement on guidance may be more likely under new Treasury Assistant Secretary for Tax Policy David J. Kautter, but Mark Mazur, who held Kautter’s position under former President Barack Obama, said more people are needed.
With no one filling the jobs of Treasury tax counsel and international tax counsel, among others, “the big problem is not having the appropriate political staff,” said Mazur, now director of the Urban-Brookings Tax Policy Center.
Another potential holdup, according to several practitioners interviewed by Bloomberg BNA, is a heavy procedural burden where rule-writers have to make sure regulations meet the requirements of the Administrative Procedure Act.
Both Linguanti and Michael Desmond, a former Treasury tax legislative counsel now in private practice in Santa Barbara, Calif., said IRS court losses under the APA have spelled a slowdown of regulations as the agency tries to make sure it explains its response to all comments it receives.
As Treasury and the IRS struggle to “un-stick” guidance now in the pipeline that practitioners want to see, Linguanti said some taxpayers are deciding they can’t wait any longer.
In the absence of guidance, Linguanti said, some companies are going ahead with business decisions as the end of the tax year approaches, and “we’re going to see more of that.”
Meanwhile, a lawsuit is simmering against an executive order calling for agencies to pull two rules for every new one they want to write, based on cost and burden.
Public Citizen, a liberal activist group, is suing President Trump over the executive order, asserting Trump doesn’t have the right to force agencies to pull rules that Congress ordered them to write ( Pub. Citizen, Inc. v. Trump, D.D.C., No. 1:17-cv-00253, hearing 8/10/17 ).
“We think it’s unconstitutional,” said Allison M. Zieve, the Public Citizen attorney who is handling the case.
She said the administration hasn’t made clear which rules it is planning to pull, leading to a potential “shadow” regulatory regime. The group is asking the U.S. District Court for the District of Columbia to declare that the order can’t be lawfully implemented and to bar the agencies from implementing it.
The court held a hearing on the case Aug. 10 but Zieve said there is no way to tell how long it might be before it issues a formal opinion.
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