The departure of Billy Long late last week marks the tenure (to use the term loosely) of half a dozen IRS commissioners in little more than half a year. Many IRS watchers are left to wonder whether and how this tenuous continuity of leadership will affect desperately needed reforms to tax administration. While this concern is genuine and well-founded, there are some quick and straightforward steps that Acting IRS Commissioner Scott Bessent can take to turn policy around in favor of taxpayers—and none would be less difficult and more impactful than finishing the job of reversing bad guidance decreed under the Biden-era IRS.
High-ranking tax-writers in Congress agree. Late last month, 20 Republican lawmakers on the House Ways and Means Committee urged then-Commissioner Billy Long to repeal IRS Revenue Ruling 2024-14, the final portion of a three-part regulatory crusade the Service launched in the summer of 2024 purportedly to address what the government calls “basis-shifting” among partnerships (the other two parts are REG-124593-23, Notice 2024-54). But the letter from Reps. Lloyd Smucker (R-PA), Mike Kelly (R-PA), and 18 of their colleagues asserts:
For so long as the ruling [2024-14] remains, taxpayers must guess between two mutually exclusive outcomes – basis adjustments as required by the law or basis adjustments required by the ruling. This leaves taxpayers uncertain about how and when to apply the partnership tax laws to commercial transactions. Additionally, the ruling assumes that related-party transactions inherently lack a legitimate business purpose. This assumption is at odds with long-established tax law and the reality of how businesses operate. Related party transactions are routine in a variety of industries, including manufacturing, investment, and distribution . . .
Although partnership-level entities often arrange and rearrange assets for legitimate reasons, in typical fashion, the IRS’s three-part policy on “basis-shifting” declared virtually all such activities to be listed transactions and transactions of interest. These designations give the government license to require massive recordkeeping and other compliance tasks from taxpayers who may be engaging in perfectly innocent behavior.
Worse, the IRS used part of its rulemaking to assert the Economic Substance Doctrine (ESD) in exotic and unpredictable ways. As its name implies, ESD is invoked by tax authorities when they suspect a particular activity is occurring only for tax avoidance purposes rather than “economic substance.” Unfortunately, ESD can be a dangerous tool in the wrong hands.
Increasingly, the IRS has pushed novel ESD theories in court, leading NTU Foundation’s Taxpayer Defense Center (TDC) to file amicus briefs in support of taxpayer rights. As TDC’s Tyler Martinez noted, “Many tax incentives, such as S corporation status for small businesses, environmental investments, and home buying, are intentionally designed by Congress to influence economic behavior. Merely seeking these benefits should not automatically invalidate a transaction as lacking economic substance.”
NTU wholeheartedly supports the lawmakers’ request to repeal 2024-14, having filed comments in August 2024 on the tripartite “basis-shifting” dictate and following up earlier this year with Treasury calling for a clean slate in this area. As our comments from last year put the matter, “Strategic ambiguity may have utility for statecraft, but in the realm of tax law enforcement, such a position serves neither taxpayers nor the government.”
Notably, the IRS seems to appreciate the need for a new direction from some of the untenable guidance surrounding tax policy in the Biden years, such as the hideous implementation of the Corporate Alternative Minimum Tax (CAMT, or book tax) imposed through the Inflation Reduction Act of 2022. It took the IRS two years—until September 2024—and 600 pages of explanation to provide compliance instructions for businesses hit by CAMT, and still the introduction of the tax stalled around unresolvable administrative problems.
Businesses subject to CAMT still could not determine how to comply, and the government could not give them clear, concise, and complete answers. That is why, twice this year, the IRS has issued new interim guidance providing relatively “simplified methods” for determining applicable corporation status and investments in partnerships to figure out their CAMT bills. The overall rulemaking is being partially withdrawn.
CAMT is an instructive lesson that, just because Congress wills a thing to happen, does not mean it can. Book taxes, especially those drafted out of political vengeance like CAMT, are notoriously difficult to translate into practical policy because they are based on balance sheet calculations that are not grounded in normal tax accounting procedures. Like the dreaded personal AMT, the corporate AMT requires taxpayers with a liability the government deems insufficient to effectively create a separate financial world in which they owe more in taxes.
The CAMT debacle is also instructive in another way. Even with the headwinds of personnel reductions, budget realignments, and shifting leadership, the IRS managed to issue two rounds this year of comprehensive revisions to one of the most complex and onerous rulemakings in recent memory. The Service prioritized and deployed its resources to maximum effect in attempting to provide more navigable compliance pathways through the CAMT thicket.
By contrast, repealing 2024-12 would require virtually no such effort. The way forward has already been well-paved thanks to the withdrawal of REG-124593-23, Notice 2024-54; nullifying 2024-12 would constitute the “last mile” of that path. The end destination will be a welcome one for millions of taxpayers who are legitimately concerned that the government’s aggressive stance on partnerships is the opening volley in a wider war that weaponizes ESD.
Secretary (and Acting Commissioner) Bessent has his hands full managing the two related but distinct bureaucracies at the Treasury and IRS. This is even more reason to lighten the load, for himself and especially for taxpayers, by shedding unnecessary compliance tasks concocted under his predecessors. Revenue Ruling 2024-12 is one of those tasks, whose time is long gone.