JCT Blue Book language is contrary to IRS forms and directive
As reported in our recent alert, LB&I Directive Provides Guidance on DPAD Claims Risk Review Campaign, Treasury and the IRS have provided guidance in the form of a directive to its LB&I examiners and in draft Form 1040 instructions advising individual taxpayers that the section 199 domestic production activities deduction (DPAD) may be claimed on their 2018 tax returns, to the extent the deduction is based on activities that occurred in a pass-through entity with a fiscal year that began in 2017 and ended in 2018. This is the guidance provided, even though the DPAD was repealed for tax years beginning after Dec. 31, 2017.
The Joint Committee on Taxation, which is a function of Congress, recently released its technical summary of the Tax Cuts and Jobs Act (TCJA), commonly known as the ‘Blue Book.’ The Blue Book release is the subject of much controversy, because several technical explanations in the Blue Book are contrary to Treasury and IRS interpretations of the TCJA, which have been communicated in published guidance. Among those disparities in interpretation is the treatment of DPAD passed through from fiscal year entities discussed above.
The relevant section of the Blue Book states the following:
“As the enactment of section 199A is also effective for taxable years beginning after December 31, 2017, any item taken into account in determining the qualified production activities income of the taxpayer under former section 199 cannot be taken into account in determining the combined qualified business income amount of the taxpayer under section 199A. For example, assume that an individual holds an interest in a fiscal-year partnership or S corporation, the taxable year of which began before January 1, 2018, and ends within or with the individual’s first taxable year beginning after December 31, 2017 (e.g., the individual’s 2018 calendar taxable year). The individual’s share of any item from the partnership or S corporation that constitutes qualified business income, qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income and that is taken into account in determining taxable income for the individual’s 2018 taxable year is eligible for the section 199A deduction. However, the individual’s share of any item from the partnership or S corporation that would otherwise be taken into account in determining qualified production activities income for the individual’s 2018 taxable year is not eligible for the former section 199 deduction, as former section 199 is repealed for taxable years beginning after December 31, 2017.”
The JCT interpretation appears to raise a dilemma for fiscal year S corporations and partnerships and their individual shareholders and partners for 2018 tax return filings. It is important to understand that the Blue Book is a technical analysis by a government agency but is not ‘authority’ in the way that Treasury Regulations, IRS rulings and other published IRS guidance are. Our sources at Treasury have indicated that Treasury does not plan to change its guidance notwithstanding the JCT Blue Book interpretation and that the IRS does not plan to change its tax forms, instructions or other guidance to reflect the JCT interpretation.
Taxpayers affected by the DPAD repeal and other TCJA transition issues should consult with their tax advisor to determine how to report these items on their 2018 tax returns.