Comments on economic performance and the accrual of state and local property taxes, February 27, 1990

Tax Executive, The, March-April, 1990

Comments on Economic Performance and the Accrual of State and Local Property Taxes

On February 27, 1990, Tax Executives Institute filed comments with the Internal Revenue Service concerning forthcoming regulations under section 461(h) of the Internal Revenue Code. Section 461(h), which was enacted in 1984, provides that a liability otherwise subject to accrual under the "all events" test may not be taken into account for tax purposes until "economic performance" in respect of that item occurs. (For example, with respect to a liability arising out of services provided to the taxpayer, economic performance occurs as the services are provided.) On February 13, 1990, Ralph J. Weiland of Abbott Laboratories and Timothy J. McCormally, TEI Tax Counsel, attended a meeting at the IRS on section 461(h). TEI's comments, prepared under the aegis of the Federal Tax Committee, are reprinted below.

Tax Executives Institute appreciates the opportunity it had to participate in your February 13, 1990, meeting on section 461(h) of the Internal Revenue Code. (TEI was represented at the meeting by Ralph Weiland and Timothy McCormally.) This letter follows up on one of the issues discussed during that meeting - the proper treatment of state and local property taxes under the economic performance standard.

Stated simply, TEI does not believe the statutory provision (or its legislative history) mandates an abandonment of published rulings providing that such expenses are accrued as of the lien (or personal liability) date or the assessment date. Consequently, we believe that the retroactive application of regulations overturning such rulings would not only be at odds with the general principles underlying section 7805(b) of the Code, but would also be inconsistent with the legislative history of section 461(h).

General Comments

In addressing this question, we believe it is important to keep in mind that the premature accrual provisions of the Deficit Reduction Act of 1984 were not promoted by general concern over the tax treatment of myriad routine, recurring business transactions under the accrual method of accounting. Rather, they were the result of congressional concern over the treatment of special expense items such as mine reclamation and nuclear decommissioning expenses, workers compensation claims, and tort liabilities. Ironically, under the final legislation, these items are governed not by the general rules of section 461(h) but by more targeted provisions of the Code.(*)

In discussions with representatives of the Internal Revenue Service (including Commissioner Roscoe Egger and then-Chief Counsel Fred Goldberg) shortly after the 1984 Act became law, it was acknowledged that section 461(h) should properly not affect the majority of routine business transactions. Although more than five years have elapsed since that time, we remain convinced that the IRS's forthcoming economic performance regulations should confirm that conclusion. As a general matter, therefore, we urge the IRS to adopt a balanced and reasoned approach to section 461(h) and to fashion regulations that, consistent with the legislative history of the 1984 Act, neither disrupt normal business and accounting practices nor impose undue burdens on taxpayers. See H.R. Rep. No. 98-861, 98th Cong, 2d Sess. 873 (1984) (Conference Report on the Deficit Reduction Act of 1984).

Treatment of State and

Local Property Taxes

Clearly, state and local property taxes are not the type of expenses that prompted Congress to enact section 461(h). Thus, we believe the grafting of the economic performance standard on the "all events" test does not require a deferral of the deduction beyond the date on which the deduction would otherwise accrue. Rather, regulations under section 461(h)(2)(D) could properly provide that economic performance occurs at the time the tax lien attaches or the tax is assessed. Such a rule would be consistent with legislative history of the statute. Specifically, it would comport with the following statement from the report of the Senate Committee on Finance:

The committee expects that

these regulations will provide

that economic performance

might be considered to occur

earlier than indicated by the

above principles where existing

regulations or rulings permit

earlier accruals and the taxpayer

accounts for such items

consistently from year to year.

For example, in the case of state

and local property taxes, the

regulations could provide that

economic performance may be

treated as having occurred at

the time the tax lien attaches or

the time the tax is assessed.

Thus, the expenses could continue

to be accrued at the same

time as under present law.

S. Print No. 98-169, 98th Cong., 2d Sess. 268 (1984).

The IRS's Authority to Issue

Retroactive Regulations

TEI appreciates that the IRS does not share its view of continuing validity of "lien date" or "assessment date" accruals under the economic performance test. What particularly concerns us, however, is not so much the prospect of a rule deferring the accrual of the deduction for state and local property taxes, but rather the possibility that the IRS might seek to impose such a rule retroactively to July 18, 1984. In this regard, we were taken aback by your comments about the scope of the IRS's authority to issue retroactive regulations under section 461(h).