Pat Smith Quoted in Tax Notes on Multiple Trust Rule Under Section 199A

Ivins attorney Pat Smith was quoted in a Tax Notes article on potential challenges to the validity of a rule relating to the use of multiple trusts in connection with section 199A. 199A Regs’ Multiple Trust Rule May Invite Challenges.

The Tax Court considered the question of when the IRS has self-executing grants of regulatory authority in general terms in the 2016 Tax Court case of 15 West 17th Street LLC v. Commissioner, 147 T.C. No. 19 (2016). In that case, the court observed that self-executing regs are mostly taxpayer-favorable, usually allowing a taxpayer to obtain a benefit that Congress clearly intended but for which regs had not yet been issued.

But the Tax Court in that case also noted that “occasionally it goes the other way,” especially when the statutory grant of authority is mandatory rather than discretionary, observed Patrick J. Smith of Ivins, Phillips & Barker Chtd. And the language of section 643(f) seems to suggest mandatory authority, which would weigh in favor of treating it as self-executing, Smith said.

However, Smith continued, the “overwhelming factor that argues against that” is the length of time since section 643(f) was enacted, as well as the fact that the regulation was issued in connection with the section 199A regulatory package.

“It seems to me it would be very hard to say that in 1984 anybody was looking ahead 34 years and predicting that there would be a statutory provision like this, where potentially somebody might want to take advantage of creating multiple trusts,” Smith said.

Alternatively, Smith said there’s a “decent argument” to be made that because the section 643(f) rule was issued as part of the section 199A regulatory package, and because 199A was enacted in December 2017, the multiple trust rule could still fall within the section 7805 exception for regs issued within 18 months of a law’s enactment.

If a taxpayer with a trust that was created or modified before August 16 were to challenge the IRS on this rule, “I have no doubt that the lawyers representing the IRS would rely on [section 7805], and that they would argue that this provision relates to section 199A for purposes of the effective date,” Smith said.