Updates and guidance on key IRS practice developments.

• Author: Chambers, Valrie

Practice & Procedures

A preparer-client decision: Whether to rely on the Sec. 199A proposed or final regulations

Regulations are Treasury's official interpretation of how a particular Internal Revenue Code section is to be applied. Treasury gets its authority to issue regulations from U.S.C. Title 31. Accordingly, although regulations are not laws, they carry significant authority, as long as they are in furtherance of and consistent with a particular enacted law.

However, regulations that are merely proposed are not binding on the IRS or on taxpayers, and taxpayers cannot rely on them to support a position unless the IRS or the proposed regulations themselves state that they can. Proposed regulations might typically allow for reliance when they are issued to provide needed guidance for a complex new law. This type of proposed regulation is appropriately referred to as a reliance regulation. The need for such reliance regulations arises because, before final regulations can be issued, Treasury must follow specific rule-making procedures to issue them, as outlined in the notice requirements of the Administrative Procedure Act. Following those procedures takes time. Proposals must be publicized in the Federal Register to allow the public to gain insight into how Treasury is interpreting a particular law. The public must be invited with adequate notice to participate in the rule-making process through making comments or participating at hearings. Ultimately, Treasury needs to consider all of these and decide whether to withdraw the proposed regulations or make them final or temporary, with or without modification.

According to Sec. 7805(b), a final, temporary, or proposed regulation can be effective no earlier than the earliest of:

* Its publication in the Federal Register,

* The date when a notice that substantially describes the expected contents of the regulations is issued; or

* Solely in the case of final regulations, the date on which an earlier proposed or temporary regulation to which it relates was published in the Federal Register.

However, there is a specific exception for regulations issued within 18 months of the enactment of the statute to which they relate. There are also other exceptions having a retroactive effect, notably, for regulations issued to prevent abuse (anti-abuse rules), regulations issued to correct a procedural defect, and regulations issued when Congress authorizes a retroactive application.

What happens when proposed regulations are relied on and contradictory final regulations are subsequently issued?

Typically, the proposed regulations would already have specified that a taxpayer may rely on them for a defined period, and, typically, any more restrictive provisions provided under final regulations would be effective only later. The Tax Court has held that final regulations that differ from proposed regulations cannot be enforced against a taxpayer who has already relied on the proposed regulations (Elkins, 81 T.C. 669 (1983)). This needs to be understood: "[Treasury's] discretion to apply ... regulations retroactively is very broad, but its counterpart is the responsibility to provide taxpayers with adequate guidance as to the extent to which [this] power will be exercised, or at the very least to avoid misleading them" (id. at 681).

Thus, proposed regulations either can be used to support a taxpayer position, if they are reliance regulations, or at the very least represent evidence of the unofficial position of the IRS with respect to the law at the time they were originally issued, in which case they constitute a reasonable view of the law and provide substantial authority for the tax treatment of an item under Regs. Sec. 1.6662(d)(3)(iii).

Where a Code section specifically authorizes Treasury to provide operational rules for Code sections, they are regarded as legislative-type regulations and have the weight of the law itself. Typically, regulations issued pursuant to such authority will detail the statutory authority under which they are issued, and, generally, they constitute a type of regulations not easily subject to challenge.

The explanatory statements that preface the regulations that are issued in the Treasury Decisions, called Treasury Decision preambles, are nearly, if not completely, regarded as part of their regulations. In any case, the IRS is basically bound to what it issues, although taxpayers for their part need to stay aware of any language on the part of Treasury that addresses when proposed regulations cannot be relied on.

Sec. 199A

Sec. 199A, created by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, conferred general and specific "legislative" regulatory authority to Treasury. Pursuant to the TCJA, Treasury issued Sec. 199A proposed regulations in August 2018 (REG-107892-18) and on Feb. 8, 2019, issued final regulations (T.D. 9847). Consistent with Sec. 7805(b), Treasury made both regulations effective for tax years ending after the date of the issuance of the final regulations, i.e., for tax years ending after Feb. 8, 2019, except for the anti-abuse rules of the regulations, which were made effective retroactive to tax years ending after the date the TCJA became law, i.e., for tax years ending after Dec. 22, 2017. Treasury also provided that taxpayers may rely either on the August proposed regulations in their entirety or on the final regulations in their entirety, for tax years ending during 2018. As such, taxpayers can choose to be bound by either the proposed regulations or the final regulations for the 2018 tax year or choose not to be bound by either. Again, the anti-abuse rules are effective retroactively, but they are nearly identical in both sets of rules.

Accordingly, practitioners need to recognize that there...