TCJA—So Many Questions, So Little Time
Law leaves significant open questions for Treasury and the IRS to answer

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On December 22, 2017, President Trump signed into law the act commonly referred to as the Tax Cuts and Jobs Act (TCJA, PL 115-97). Like much tax legislation, the TCJA provides a legislative framework but leaves a significant number of questions to be answered by the Treasury Department and the Internal Revenue Service in guidance implementing the new law.

The usual role that Treasury and the IRS fulfill in issuing guidance is complicated by the fact that the TCJA made sweeping changes, particularly to the U.S. international tax system, including the addition of several brand-new provisions. Moreover, the truncated legislative process (approximately seven weeks from the time the Ways and Means Committee introduced draft legislation to when the TCJA was signed) gave Congress little opportunity to describe its legislative intent. As a result, Treasury and the IRS are required to make numerous substantive decisions when drafting guidance, without the benefit of a robust legislative history indicating how Congress intended various provisions to operate. These decisions will have a big impact on how well the different provisions operate together, whether the TCJA is administrable for taxpayers and the IRS, and how complicated (or not) the tax system will be going forward.

In addition, Treasury generally will have to issue guidance by June 2019 for that guidance to be effective as of the date the TCJA was enacted. Under Section 7805(b) of the Internal Revenue Code, regulations cannot generally be retroactive—but an exception in Section 7805(b)(2) provides that regulations that are filed or issued within eighteen months of the enactment of a statute may be retroactive to the date of enactment. Many provisions in the TCJA were effective for tax years beginning on or after January 1, 2018, putting further pressure on Treasury and the IRS to issue guidance before the end of 2018, because, without guidance, taxpayers will be required to make their own reasonable interpretations of what the TCJA requires when filing their tax returns. It will be impossible for Treasury and the IRS to issue all guidance required by the TCJA within eighteen months—that process will take years—but we expect that Treasury will address the key international and domestic business provisions within that timeframe.

This article provides some examples illustrating areas where guidance is needed and identifies what considerations taxpayers should take into account in the short term.

Where Is Guidance Needed?

Below, we identify some areas where Treasury and the IRS will need to issue guidance. This list is illustrative only and is nowhere near exhaustive. Rather, we intend to give a sense of the general types of questions that Treasury and the IRS will need to address and the ground that the guidance will need to cover.

Before determining “How do we issue guidance that helps taxpayers apply this rule?,” Treasury and the IRS will first need to answer the fundamental question, “What did Congress intend with this rule?” For some provisions—such as the limitation on interest deductions in Section 163(j)—answering that question should be relatively straightforward. For other provisions, particularly the international provisions, where Congress made sweeping changes, answering the question is much more difficult. Over the past year, for example, writers have spilled much ink on the subject of whether the base erosion and anti-abuse tax (BEAT) in new Section 59A is a mechanism to prevent base erosion or merely a minimum tax. Although this article will not weigh in on that debate, for the purposes of organization Treasury will need to determine the BEAT’s purpose before writing effective rules to implement it.

Another basic question Treasury will need to answer before issuing guidance is, “What’s the statutory authority for issuing this guidance?” Section 7805(a) contains a general grant of regulatory authority under the Code, permitting the Secretary to “prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” In addition to this grant of general rulemaking authority, many provisions in the TCJA contain specific grants of regulatory authority that provide Treasury with guidance from Congress on areas where Congress specifically expects Treasury to act, including by drafting anti-abuse rules and providing for elections.

Ordering Rules

“Who’s on first?” is a key question that Treasury will have to answer when it issues guidance, since the TCJA is generally silent about the order in which taxpayers should apply the different provisions. For example, when should Section 163(j) be applied? Legislative history indicates that Congress intended for Section 163(j) to be applied after provisions that subject interest to deferral, capitalization, or other limitations are applied, but the statutory language is not explicit. When should Section 163(j) be applied in relation to the international provisions in the TCJA? The statute includes a specific rule coordinating the application of Section 163(j) and the BEAT, but taxpayers are still awaiting additional guidance on how Section 163(j) applies, particularly in the context of controlled foreign corporations (CFCs). Taxpayers have recommended that amounts included in a taxpayer’s income for U.S. tax purposes, such as global intangible low-taxed income (GILTI), should be allocated to the taxpayer’s trade or business and included in a taxpayer’s adjustable taxable income for Section 163(j) purposes—meaning that GILTI rules would be applied before Section 163(j). Going in the other direction, however, the preamble to the proposed GILTI regulations suggests that, because CFCs are to determine their tested income and loss as though they are domestic corporations, the denial of deductions under Section 163(j) would indeed apply so as to prevent nondeductible interest expense from reducing GILTI. The preamble then reminds us that “[i]ssues related to sections 163(j), 245A, and 267A will be addressed in future guidance.”

As another example, does the BEAT apply to payments that also give rise to Subpart F or GILTI income? If one believes that the fundamental policy rationale for the BEAT is to prevent base erosion, then the answer to this question should be no, because payments that are already subject to tax in the United States cannot erode the U.S. tax base. Treasury will need to provide taxpayers with a clear answer in the proposed BEAT regulations.

Other provisions raise similar questions. For instance, in the new branch incorporation rule in Section 91, Congress provided some ordering rules (with respect to overall foreign losses) but was silent about the coordination with the dual consolidated loss rules (which now include an outdated cross-reference to Section 367(a)(3)(C)) and when Section 987 is taken into account.


The TCJA includes several new international provisions—BEAT, GILTI, a deduction for foreign-derived intangible income (FDII), a participation exemption in Section 245A, and the anti-hybrid rules in Section 267A—all of which contain new terms that are not fully defined by the statute and require Treasury to issue additional guidance. For example, the BEAT provisions in new Section 59A do not provide a definition for “taxable income,” which is the starting point for calculating modified taxable income. Taxpayers have asked Treasury to clarify in BEAT guidance that taxable income may be reduced below zero for current-year operating losses and also by a net operating loss (NOL) deduction attributable to a pre-2018 NOL. In addition, taxpayers have questioned what “dividends” are subject to Section 245A—for instance, are distributions from one CFC to another potentially subject to this provision, as a footnote in the conference report suggests?

Open questions about key terms in the statute are not limited to the international provisions. For example, Section 199A introduces a deduction for noncorporate taxpayers, based on the amount of “qualified business income” and the amount of W-2 wages with respect to a “qualified trade or business.” In addition to general guidance on these new defined terms, Treasury will need to fill in various gaps specifically identified by Congress, including, among other things, the treatment of payments to partners for services, rules for allocating wages and other items, reporting requirements, application of the rules to tiered entities, and preventing deductions by more than one taxpayer for the same activity. Treasury will also need to address open items under Section 163(j). For example, while Treasury has announced that proposed regulations will address the application of Section 163(j) to consolidated groups, Treasury will need to flesh out many details, such as the allocation of the Section 163(j) limitation to group members and the treatment of members joining and leaving the group.

How Do Calculations Work?

The new provisions have plenty in them to bedevil taxpayers, even where Treasury has already begun to provide guidance. With significant open questions remaining, the mysteries of preparing a tax return appear utterly unknowable. The computational aspects of GILTI, for example, are laid out in detail in the proposed regulations, but significant gaps remain—for instance, individuals making a Section 962 election still do not know whether they are eligible for the fifty percent deduction under Section 250.

Before determining “How do we issue guidance that helps taxpayers apply this rule?,” Treasury and the IRS will first need to answer the fundamental question, “What did Congress intend with this rule?”

The piece of the puzzle many taxpayers have awaited most anxiously is the related foreign tax credit. The application, non-application, or partial application of expense allocation and apportionment to the new GILTI category in the Section 904 limitation immediately became one of the most controversial interpretive aspects of the GILTI regime. Because of the combination of the twenty percent foreign tax credit “haircut” and the prohibition on carrybacks and carryforwards of excess GILTI basket credits, the allocation and apportionment of expenses to the GILTI basket could pose fairly dire limitations on taxpayers whose effective foreign tax rates exceed the putative “break even” rate of 13.125 percent. Taxpayers whose effective foreign tax rates remain well below this threshold rate, on the other hand, likely care much less about maximizing their GILTI basket limitation and, on the contrary, might be content to allow the GILTI basket to attract expenses away from their other foreign source income categories.

Similar uncertainty has arisen around the application of Section 904 “look-through” rules to payments by CFCs when there is GILTI. Treasury has already signaled that it anticipates issuing guidance providing that the Section 78 gross-up resulting from a Section 960(d) deemed-paid credit will fall in the GILTI basket. It still remains uncertain how look-through would apply to other payments from a CFC to its U.S. parent—for example, royalties or interest. Can a CFC be considered to have GILTI to which to “look through”? What about a net tested loss CFC? Again, as with the expense allocation and apportionment issue, some taxpayers may prefer the additional GILTI basket limitation resulting from look-through, whereas others may prefer additional general basket income.

The branch basket is the other new limitation category that taxpayers are addressing in their calculations, but with very little to guide them. Under Section 904(d)(2)(J), “foreign branch income” is defined as business profits attributable to a qualified business unit (QBU). The statute provides that “the amount of business profits attributable to a qualified business unit shall be determined under rules established by the Secretary,” and thus taxpayers must wait for these rules before they can calculate such attributable profits.

Other aspects simply require correction and clarification in order for taxpayers to complete their calculations. It has been widely remarked that Congress failed to update the cross-reference to general basket income in Section 904(d)(2)(H)—perhaps Treasury could promulgate rules to help the situation, but it could be that the glitch belongs to Congress alone to fix. Taxpayers should also receive the kind of transitional guidance that Treasury has provided in the past for branch basket income to be eligible for a one-year carryback to the general basket.

The GILTI provisions are just one example of the many computational complexities that Treasury will need to resolve; similar issues exist under other provisions of the TCJA.

Substantiation Requirements

Several provisions in the TCJA require taxpayers to substantiate information “to the satisfaction of the Secretary.” For example, under the FDII provisions, to be eligible for a deduction with respect to income from the sale of property or the provision of services, the taxpayer must show that the sale of property by a taxpayer to a foreign person must be “for a foreign use,” or that the services are provided to a person, or with respect to property, “not located within the United States.” Similarly, under Section 162(f) as revised by the TCJA, a taxpayer must show that an amount paid by a taxpayer pursuant to a settlement agreement or court order “constitutes restitution . . . or is paid to come into compliance with any law” to be eligible to deduct the payment. Treasury and the IRS will need to identify what is required to substantiate eligibility for these provisions in guidance.

Although Treasury intends to issue proposed guidance on these key provisions by the end of 2018, taxpayers should be mindful that there are significant unanswered questions and that Treasury may not be able to resolve them all satisfactorily in its first round of guidance.

When taxpayers are required to substantiate items to be eligible for a particular deduction, both taxpayers and the IRS benefit from the establishment of a straightforward substantiation rule in guidance. This provides certainty for both taxpayers and the IRS and minimizes the risk of disparate treatment of otherwise similar taxpayers. In the case of the FDII deduction for the sale of property, the taxpayer must establish that there is use, consumption, or disposition of the property outside the United States. There are many ways that Treasury and the IRS could require taxpayers to demonstrate that they meet the “foreign use” requirement, but a straightforward way to allow taxpayers to demonstrate foreign use would be to permit a taxpayer to provide on audit those documents, prepared and maintained in the ordinary course of the taxpayer’s business, that show foreign use—for example, customs documentation, a certificate showing delivery of the property outside the United States, insurance documentation with respect to property shipped outside the United States, or a written statement from the purchaser that the property is for foreign use. Similarly, Section 162(f) appears to require the taxpayer to demonstrate that the amount is, in fact, restitution (or an amount paid to come into compliance with the law), and a straightforward approach to satisfy this requirement would be to permit a taxpayer to provide on audit documentation establishing this character, such as a calculation of the amount of restitution. Interestingly, the statute itself already requires that the amount be identified in the settlement or court order as restitution or an amount paid to come into compliance with the law, which would seem sufficient to establish the parties’ intent. Some taxpayers have suggested that identification in the settlement or court order should create a rebuttable presumption as to the character of the payment.

Withholding and Reporting Rules

Multiple provisions in the TCJA, including the partnership withholding rules under Section 1446(f), the partnership rules relating to carried interests under Section 1061, and Section 6050X, will require Treasury and the IRS to issue guidance regarding how to withhold taxes and report certain amounts to both taxpayers and the IRS. From a purely procedural standpoint, this will require the IRS to develop new forms or modify existing ones, draft instructions, and prepare publications. From a more substantive standpoint, Treasury and the IRS will have to determine the appropriate timing for reporting, including whether to suspend certain withholding or reporting requirements, as Treasury did for certain Section 1446(f) withholding rules in Notice 2018-8, and, if such requirements are suspended, for how long. Treasury and the IRS will also need to determine whether to exercise their discretion to increase the threshold for when reporting is required beyond the statutory threshold (as many commenters have requested under Section 6050X) or to create other exceptions to reporting. Finally, Treasury and the IRS will need to develop a mechanism for taxpayers to correct erroneous reporting, and determine what enforcement actions, if any, to take against entities that fail to report in a timely fashion.

One significant TCJA change requiring updates to the reporting rules is the repeal of “downward attribution” under former Section 958(b)(4). This change vastly increased the number of foreign entities treated as CFCs for U.S. tax purposes, including in situations where U.S. shareholders are technically treated as owning shares in the CFC by attribution but are not subject to the income inclusions under Subpart F or the GILTI provisions because they do not hold shares directly or indirectly through a chain of foreign entities. Treasury has indicated that it intends to grant limited relief from filing Form 5471 where the foreign corporation is a CFC solely because of downward attribution and no U.S. shareholder owns shares in the CFC within the meaning of Section 958(a). Treasury has not yet updated the instructions to Form 5471, however, and it remains to be seen whether Treasury will grant further relief from the Form 5471 filing obligation.

Effective Dates

As discussed above, although Section 7805 permits Treasury to issue guidance that is effective as of the date of enactment if that guidance is issued within eighteen months, whether Treasury should issue guidance that is effective as of December 22, 2017, is an entirely separate question. Instead, Treasury could choose to issue guidance that is effective on the date that final regulations are published in the Federal Register or even, in appropriate cases, to delay a provision’s effective date. In at least one instance, Treasury has already decided to grant relief. Although Section 162(f) currently applies to limit the deductibility of amounts paid or incurred to a governmental entity for violating the law or the investigation or inquiry into the potential violation of any law, Treasury has already announced in Notice 2018-23 that the corresponding reporting requirements in Section 6050X, which require the government to report the deductible amounts to the IRS, will not apply until proposed regulations are released and, in any event, no earlier than January 1, 2019.

This reasonable approach to the reporting requirements in Section 6050X indicates that Treasury realizes there are circumstances when an effective date that is retroactive to the date of enactment is not appropriate. Although many of the provisions for which Treasury plans to issue guidance are effective for tax years beginning on or after January 1, 2018, taxpayers have not been inert while waiting for guidance. Their business activities have continued and financial statements have been filed. At a minimum, Treasury and the Securities and Exchange Commission should not penalize taxpayers who have interpreted the TCJA’s provisions differently from how Treasury subsequently has interpreted them in published guidance, provided that those taxpayers’ interpretations were reasonable and in good faith.

What If Treasury, IRS Don’t Issue Guidance by Year-End?

As discussed above, Treasury and the IRS are working to issue guidance within a very tight timeframe. Although it is possible that Treasury will meet its goals for issuing guidance, taxpayers should recognize that the timeline for issuing proposed rules and finalizing those rules means that Treasury has little margin for error. As a result, taxpayers would be wise to prepare for the possibility that final regulations may not be issued in a timely fashion or, if guidance is issued, that it may not answer all open questions. There also may be circumstances where taxpayers have reasonably interpreted the TCJA but subsequent guidance adopts a different interpretation. Taxpayers should work with their advisors to determine what their options are in such circumstances.

Transactions Haven’t Stopped While Taxpayers Wait for Guidance

Tax practitioners may prefer certainty and wish for additional clarity on how the TCJA’s provisions operate, but their business colleagues haven’t hit the pause button on entering into deals. Instead, in the context of mergers and acquisitions, some taxpayers have sought to address uncertainties by negotiating more robust clauses relating to rights and responsibilities in the event of a change in law, or by entering into special tax indemnities. We anticipate that this pattern will continue as long as guidance implementing key provisions of the TCJA is outstanding.

Satisfying Auditors and Filing Financial Statements in the Absence of Guidance

Each taxpayer is likely to have a slightly different experience with its auditors and when filing its financial statements, but taxpayers should consider the effects of taking a reasonable approach and relying on opinions from counsel. Taxpayers should also consider the extent to which their auditors may get comfortable with a position in the absence of guidance, but subsequently require the company to put up a reserve if proposed guidance is issued that differs from the company’s interpretation of a provision.

What to Do Now to Mitigate Future Negative Consequences

Because the TCJA was enacted under reconciliation procedures and was required to satisfy specific revenue targets, there are several provisions with built-in changes that are scheduled to occur in the near term, such as provisions where amounts change (for example, the BEAT rate increases from five percent in 2018 to ten percent in 2019), adjustments are made to calculations (for example, the Section 163(j) limitation is thirty percent of EBITDA until 2026, when the limitation will change to thirty percent of EBIT), or items expire (for example, taxpayers may no longer add back eighty percent of their applicable Section 38 credits when calculating their regular tax liability for purposes of the BEAT in 2026).

Taxpayers affected by provisions with such built-in changes should begin developing a strategy now to prepare for these changes and to mitigate any harmful effects. For example, taxpayers subject to the BEAT who are advocating before Congress for legislative changes should emphasize the fact that the BEAT rate doubles in 2019, which increases the urgency either for Congress to address the BEAT or for affected taxpayers to develop mitigation strategies. Kevin Brady, chairman of the House Ways and Means Committee, has noted that international tax reform, in particular, is complex and that Congress intends to make future amendments to the international tax rules. Now is the time for taxpayers to consider what amendments might be necessary and to begin advocating for them.


Nearly a year after the enactment of the TCJA, there is still substantial uncertainty as to what the different provisions mean and how they should be applied—particularly with respect to Section 163(j), Section 199A, the partnership provisions, and the international rules. Although Treasury intends to issue proposed guidance on these key provisions by the end of 2018, taxpayers should be mindful that there are significant unanswered questions and that Treasury may not be able to resolve them all satisfactorily in its first round of guidance. Taxpayers should be prepared to actively participate in the notice-and-comment process on proposed regulations to identify areas where Treasury’s interpretation is reasonable, where they disagree with Treasury, and where uncertainty remains even after guidance is issued. Taxpayers should also be prepared to negotiate who bears the risk for potential rule changes in deal activity, and should lay the foundation for mitigating future negative consequences—whether that means advocating before Congress for legislative amendments to the TCJA or changing a taxpayer’s structure or business operations.

Alexandra Minkovich is of counsel in Baker McKenzie’s Washington, D.C., office, and Paula Levy and Julia Skubis Weber are partners in Baker McKenzie’s Palo Alto and Chicago offices, respectively.

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