With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), tax executives face the most uncertainty in interpreting and applying the tax law they have ever encountered. As is the apparent norm these days, with game-changing congressional legislation, the TCJA was cobbled together quickly, and its clarity and consequences were insufficiently addressed before enactment.
The TCJA is complex and convoluted, with a dearth of administrative guidance, an absence of regulatory guidance, and no relief in sight. What's more, it is unlikely there will be any judicial interpretations of the provisions to rely upon for years. Thus, the interpretative skies are gray and foreboding, and impending technical corrections may or may not lift the clouds. The future is fraught with significant tax compliance and planning hazards, and there are sleepless and gloomy nights ahead for those who remain unprepared.
All hope is not lost, however. The following serves as a survival guide through the impending uncertainty. We address how tax executives can cope with the new and complex statute, including how to arrive at defensible tax positions, while managing penalty risk and consequent reputational risk, and how to prepare to defend these positions years down the road, upon examination.
Is Certainty Readily Attainable?
The short answer is no. Certainty prior to taking a tax reporting position or engaging in tax planning under the TCJA is not readily attainable. Taxpayers under the jurisdiction of the Large Business and International Division may request, under certain circumstances, that the Internal Revenue Service (1RS) examine specific tax issues involving completed transactions before a tax return is filed. If the taxpayer and the 1RS can resolve the issue before the tax return is filed, they may execute a pre-filing agreement (PFA). However, one criterion for selecting taxpayers to participate in the PFA program entails the suitability of the issue presented (i.e., whether it can be resolved by addressing factual questions under well-established law). Because the uncertain provisions of the TCJA do not fall under well-established law, the ability to enter into a PFA is limited. (1)
Requests for rulings are likewise not efficacious under these circumstances. The 1RS has a no-rulings policy in many areas, thus eliminating that possibility. (2) Even when ruling requests are available, they are expensive, time-consuming, and limited to the facts as represented at the time. The 1RS, however, will not ordinarily issue a private-letter ruling before the promulgation of a regulation or other published guidance. Add this to the 1RS' current resource constraints and its preoccupation with addressing the new legislation, and the ruling process is unlikely to be a viable option.
Uncertainty under the TCJA raises significant penalty exposure concerns for tax directors when they take unsettled tax positions on tax returns or plan transactions that will later be reflected on returns. Avoiding accuracy-related penalties, such as the substantial understatement penalty, is perhaps the most common relevant concern.
To Disclose or Not to Disclose? That Is the Question
Generally speaking, outside of the tax shelter context,' if the company has a reasonable basis for a tax return position and adequately discloses that position on the return, accuracy-related penalties may be avoided. (4) This begs the question as to whether disclosure is desirable. Often companies would prefer not to disclose an unsettled position, because it flags the issue to the 1RS and may lead to an expensive examination of the issue and even potential litigation. If, however, disclosure is mandated (for example, on Schedule UTP), then this may be the path of least resistance.
"Reasonable basis" is a relatively high standard of tax reporting, although it is a lower standard than, for example, "substantial authority" and "more likely than not," both of which will be discussed below. It requires a position that is significantly higher than "not frivolous" or "not patently improper." It is not satisfied by a return position that is merely arguable or a colorable claim. Reasonable basis requires reliance on legal authorities and not on opinions rendered by tax professionals. (5)
The reasonable basis standard is satisfied if the position is reasonably...