Presentation by Proposed Section 168(k) Regulations Team Provides Insight Into Significant Policy Decisions

On August 21, 2018, the Federal Bar Association hosted at Eversheds Sutherland’s Washington, D.C. office, a panel discussion with the team of IRS and Treasury professionals who drafted the proposed regulations for section 168(k).  Kathy Reed and Betsy Binder of the IRS Office of Chief Counsel were joined by Ellen Martin of the Department of the Treasury, as well as Barbara Young, Vice President of Global Tax Accounting and Compliance at Marriott International, Inc., and Eversheds Sutherland partners Ellen McElroy, Brad Seltzer, and Wes Sheumaker.  In a lively discussion, the government personnel provided clarity regarding a number of open items from the proposed regulations, confirmed many assumptions that practitioners have made since the regulation package was released, and answered a number of questions posed by the audience related to certain, more nuanced provisions within the regulations.

To no surprise, the panel kicked off with a discussion regarding the QIP quagmire, in connection with the amended section 168(e)’s failure to assign a 15-year recovery period to the new QIP provision, which renders QIP ineligible for full expensing under section 168(k)(2).  Ellen Martin confirmed that Treasury “understood the issue and was very sympathetic” to taxpayers facing the dilemma as to how to treat such property for tax years 2018 and beyond, and while there was “clear Congressional intent” for QIP to be eligible for full expensing, there was also “clear statutory text.”  The panel discussed the recent letter issued by the Senate Finance Committee, and while the government guests agreed the letter was welcome, Kathy Reed, in particular, mentioned how it still may be helpful to hear from Ways & Means as well.  The issue is certainly on the minds of taxpayers though, particularly those in the Service’s CAP program, as Barbara Young indicated, for taxpayers in CAP, the 2018 tax year is beginning to be examined, and “someone has to address the issue soon.”

With respect to broadening the definition of qualified property to include used property, the government guests unanimously agreed that the hardest question was defining what “used” meant, and by focusing on a prior depreciable interest rather than active use, the government came to an administrable standard, although acknowledging the uncertainty left for certain lessees that may acquire property they previously leased.

Remaining on the topic of used property, Wes Sheumaker of Eversheds Sutherland noted a number of provisions in connection with partnership basis adjustments that seemed inequitable and resulted in disparate treatment for taxpayers in economically-similar transactions based on the underlying structure used in a transaction.  Ellen Martin confirmed the government gave a lot of thought to the partnership adjustments and decided that the difference in treatment of adjustments under section 168(k) stemmed from the difference in approach between section 734 and 743, with section 734 focusing on the entity level, while section 743 focused on the aggregate treatment.  Additionally, practitioners sought guidance regarding why section 704(c) remedial allocations were not eligible for bonus depreciation.  Ellen Martin indicated that Treasury did not think taxpayers would ever want such allocations to qualify for full expensing as no party would be interested in the corresponding immediate built-in gain, but practitioners in the audience confirmed there are a number of situations where parties may be interested in that treatment.  This engagement between the government guests and FBA audience reflects the engagement that Treasury and the IRS guests both requested from practitioners as they seek comments regarding these provisions, and in particular, the look back safe harbor for used property.

Among other topics discussed, the panelists fielded questions confirming the unambiguity of the statute with respect to written binding contracts, as well as the current mismatch in effective dates between section 168(k) and 163(j).  After an engaging discussion by all participants, it is clear the IRS and Treasury are both open to receiving comment letters on any number of issues that have arisen subsequent to the release of the proposed regulations, beyond the mere provisions that call for comments in the preamble to the regulations, e.g., regarding a potential look back safe harbor for used property.  As taxpayers begin finalizing their 2017 tax returns and turn to 2018, hopefully the Service and Treasury will be able to address the outstanding issues in a timely manner with helpful guidance.

For more information and analysis regarding the proposed section 168(k) regulations, please see our more detailed legal alert.

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