Finance Committee Republicans Clarify Congressional Intent of Certain Provisions in New Tax Law

Letter to Mnuchin, Kautter Clarifies Qualified Improvement Property Expensing, Net Operating Losses Deduction and Sexual Misconduct Settlement Deduction

WASHINGTON – As the administration continues to implement the largest overhaul of the nation’s tax code in more than three decades, Senate Finance Committee Chairman Orrin Hatch (R-Utah) today led Finance Committee Republicans in calling on U.S. Treasury Secretary Steven Mnuchin and Internal Revenue Service (IRS) Acting Commissioner David Kautter to issue guidance that is consistent with the congressional intent of H.R. 1 section 13204, qualified improvement property expensing; section 13302, the net operating losses deduction; and section 13307, sexual misconduct settlement deduction.

“We write to clarify the congressional intent of this recently enacted tax legislation (specifically, sections 13204, 13302, and 13307 of H.R. 1), which is reflected in the conference report, revenue estimates, and other legislative history,” Finance Committee Republicans wrote in a letter. “While this letter focuses on these three important provisions, we are continuing a thorough review…to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress. After this review, we intend to introduce technical corrections legislation to address any items identified in the on-going review.”

Joining Hatch on the letter: Sens. Chuck Grassley (R-Iowa), Mike Crapo (R-Idaho), Pat Roberts (R-Kan.), Mike Enzi (R-Wyo.), John Cornyn (R-Texas), John Thune (R-S.D.), Richard Burr (R-N.C.), Johnny Isakson (R-Ga.), Rob Portman (R-Ohio), Pat Toomey (R-Pa.), Dean Heller (R-Nev.), Tim Scott (R-S.C.) and Bill Cassidy (R-La.).

The full letter can be found below or by clicking here.

Dear Secretary Mnuchin and Acting Commissioner Kautter:

We are writing as the Members of one of the Committees of jurisdiction responsible for the drafting of the tax-reform legislation that was enacted on December 22, 2017 (H.R. 1, 115th Cong., 1st Sess., Pub. L. 115-97). We write to clarify the congressional intent of this recently enacted tax legislation (specifically, sections 13204, 13302, and 13307 of H.R. 1), which is reflected in the conference report, revenue estimates, and other legislative history.

While this letter focuses on these three important provisions, we are continuing a thorough review of Pub. L. No. 115-97 to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress. After this review, we intend to introduce technical corrections legislation to address any items identified in the on-going review.

Section 13204 of H.R. 1 provides rules related to the depreciation of real property. We have identified a technical correction that is necessary to reflect the legislative intent with respect to this provision. Specifically, in eliminating the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property and providing a new single definition of qualified improvement property, the language in section 13204(a) failed to designate qualified improvement property as 15-year property under the modified accelerated cost recovery system (“MACRS”). In addition, there is a typographical error in a cross-reference identifying qualified improvement property as property which is recovered over 20 years under the alternative depreciation system (“ADS”). Congressional intent was to provide a 15-year MACRS recovery period and a 20-year ADS recovery period for qualified improvement property. Such intent is set forth in the Conference Report to accompany H.R. 1 (H.R. Rep. 115-466, at p. 366).

Section 13302 of H.R. 1 modifies the rules governing the deduction of net operating losses (“NOLs”). We have identified a technical correction that is necessary to reflect the legislative intent with respect to this provision. Specifically, section 13302(e)(2) includes language stating that the modifications made to NOL carryforwards and carrybacks apply to net operating losses arising in taxable years ending after December 31, 2017. Congressional intent was to provide that the NOL carryforward and carryback modifications are effective for NOLs arising in taxable years beginning after December 31, 2017. Such intent is set forth in the Conference Report to accompany H.R. 1 (H.R. Rep. 115-466, at p. 394).

Section 13307 of H.R. 1 denies a deduction for (1) any settlement or payment related to sexual harassment or sexual 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. We have identified a technical correction that is necessary to reflect the legislative intent with respect to this provision. Specifically, the provision arguably prohibits the recipient of any payment from deducting legal fees incurred in pursuing sexual harassment cases, because such legal fees are “related to” a settlement or payment that is subject to a NDA. Congressional intent was that these attorney’s fees would not be subject to this rule.

We send this letter to provide sufficient clarification so that any guidance that is issued related to sections 13204, 13302, and 13307 of H.R. 1 (Pub. L. No. 115-97) and the Internal Revenue Service’s enforcement of them reflects the Congress’ intent. Thank you for your cooperation on this matter.

Sincerely,

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