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Saturday, March 19, 2022

Who is in charge? Dealing with conflicting guidance

In March 2022, the Joint Committee on Taxation released a Bluebook on tax legislation enacted in the 116th Congress (JCS-1-22, 3/8/22). On page 315 of this report, there is what I find to be a troubling statement and footnote on how the Employee Retention Credit (ERC) works. The ERC was enacted in March 2020 by the CARES Act and applied to qualified wages from March 13, 2020 through September 30, 2021 (longer for recovery startup businesses). So this credit has been around for a while and widely claimed.

The issue is one I raised in a blog post on 6/4/20. The ERC is fairly complex due to numerous definitions and special rules and changes made when it was extended and one change enacted in December 2020 was retroactive. The ERC works differently depending if the employer is large or small based on number of full-time employees.

The CARES Act Sec. 2301 provides the following in defining full-time employee: "in the case of an eligible employer for which the average number of full-time employees (within the meaning of section 4980H of the Internal Revenue Code of 1986) employed by such eligible employer during 2019 was not greater than 100."

As I noted in my June 2020 blog post, section 4980H defines full-time as working at least 30 hours per week. For purposes of section 4980H to determine if an employer is an applicable large employer who must offer minimum essential coverage to full-time employees to avoid risk of penalties, the employer must also factor in full-time equivalent employees (FTE). 

I don't read the above CARES Act text as including FTE but just to use the 30 hour measure for full-time. Of course, it would have been more clear to just say full-time is 30 or more hours per week rather than add confusion by referring to section 4980H. 

BUT, please look at my June 2020 post on why for policy reasons the ERC measure should include FTE, but that doesn't seem to be what Congress wrote.

AND, in Notice 2021-20 (Q&A31) and Notice 2021-49 (footnote 3 and pages 20-21) the IRS is explicit that full-time for the ERC does NOT include FTE ("For purposes of determining whether an eligible employer is a large eligible employer or a small eligible employer, eligible employers are not required to include full-time equivalents when determining the average number of full-time employees.") That is very clear!

Well, in JCT's April 2020 report on the CARES Act (footnote 145), JCT says full-time includes FTE. That was issued before the IRS issued its binding guidance in Notices 2021-20 and 2021-49 saying the opposite.

And now in March 2022, text and footnote 1120 in the 116th Congress Bluebook states: 

  "The definition of qualified wages depends on the average number of full-time and full-time-equivalent employees of the eligible employer during 2019." [emphasis added]

That is also very clear and opposite of what we have in 2021 binding guidance from the IRS.

The fact that the JCT continues to say FTE is included after IRS has said otherwise and likely all employers followed IRS's taxpayer-favorable binding guidance, is troubling. Why didn't JCT either change its interpretation or explain why the IRS took a different view?

What if the JCT guidance was taxpayer favorable compared to the IRS guidance? Would it be ok to follow that? Can taxpayers pick and chose which guidance it wants to follow?

Missing: What does Treasury think? In testimony before the House Ways and Means Subcommittee on Oversight on March 17, 2022, Commissioner Rettig emphasized that IRS doesn't make policy as that is the role of Treasury. When Congresswoman Plaskett (D-VI) challenged him to say that IRS has influence over what Treasury does regarding tax policy, the Commissioner stressed that was not correct.  He said, policy is the "exclusive arena of Treasury we are a tax administrative agency that follows the law."  [Emphasis added. See the hearing recording starting at about minute 51 where there is a question about the Virgin Islands]  [note this hearing was not about the ERC]

And Treasury does have a connection with IRS IRB guidance. First, the IRS is an agency of the Treasury Department. According to the website of Treasury's Tax Legislative Counsel: "In consultation with IRS, TLC is responsible for review of all Treasury regulations and IRS revenue rulings, revenue procedures, and other published guidance relating to domestic tax issues."

So, we should assume Treasury and the IRS created the interpretation on ERC. Why is there still a different interpretation between the JCT and Treasury/IRS two years after enactment of the CARES Act? What are taxpayers and practitioners to do?

The question remains: What is "the law"? The CARES Act language which is not entirely clear? The position of the Joint Committee on Taxation who is present when the law is being written? Or the IRS with its role to administer the law? I think it is JCT. So why did Treasury and IRS not follow JCT interpretation of the CARES Act? Given that the ERC became effective March 13, 2020 and the CARES Act was enacted March 27, 2020, there certainly wasn't time for proposed regs and public comment so likely there was little policy discussion and no opportunity for public input.

This is not the first time that IRS interpretation differed from JCT. One more is the JCT Bluebook on the TCJA page 189 that says a meal is non-deductible entertainment if included in an activity or event that primarily constitutes entertainment. Yet, Notice 2018-76 and Final Reg. 1.274-11(b) instead provide that if the meal is separately billed/charged it is not entertainment.

To best help taxpayers and practitioners, can't JCT and Treasury/IRS work to resolve these matters before guidance is issued?

What do you think?

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