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February 13, 2019

Mr. William M. Paul Mr. Scott K. Dinwiddie

Acting Chief Counsel Associate Chief Counsel

Re: Small Business Relief from Definition of Tax Shelter

Dear Messrs. Paul and Dinwiddie:

The American Institute of CPAs (AICPA) requests that the Department of the Treasury

(“Treasury”) and the Internal Revenue Service (IRS) provide certain small businesses relief from

the definition of a tax shelter to ensure that they will qualify for the small business simplifying

provisions available under Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs

Act (TCJA).

2017. However, a small business that meets the definition of a tax shelter, regardless of its ability

to meet the $25 million gross receipts test, is ineligible to use the above simplifying provisions.

BACKGROUND

Many simplifying provisions under TCJA provide an exception for certain small businesses.

Certain small businesses are generally defined as “any taxpayer (other than a tax shelter prohibited

from using the cash receipts and disbursements method of accounting under section 448(a)(3))

All references to “section” or “§” are to the Internal Revenue Code of 1986, as amended, and all references to “Treas.

Reg. §” and “regulations” are to U.S. Treasury regulations promulgated thereunder.

Mr. William M. Paul

Mr. Scott K. Dinwiddie

February 13, 2019

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 Section 471(c) provides an exemption for certain small businesses from the section 471

into by small businesses from the section 460 special rules for long-term contracts.

 Section 163(j)(3) provides an exemption for certain small businesses from the section 163(j)

limitation on business interest deduction.

An entity meets the Section 448(c) gross receipts test if the “average annual gross receipts of such

entity for the 3-taxable-year ending with the taxable year which precedes such taxable year does

not exceed $25,000,000.”

Section 448(a)(3) provides that “in the case of a tax shelter, taxable income shall not be computed

defined in section 6662(d)(2)(C)(ii)).”

Section 1256(e)(3)(B) defines a syndicate as “any partnership or other entity (other than a

corporation which is not an S corporation) if more than 35 percent of the losses of such entity

during the taxable year are allocable to limited partners or limited entrepreneurs.”

RECOMMENDATION

The AICPA urges Treasury and the IRS to provide relief to certain small businesses from the

definition of a syndicate, which if unaddressed, would result in their treatment as a tax shelter. To

b) Meets the definition of a syndicate under section 1256(e)(3)(B); and

Mr. William M. Paul

Mr. Scott K. Dinwiddie

February 13, 2019

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c) Does not qualify “for making an election under section 163(j)(7)(B) to be an electing real

property trade or business”

farming business”

the Secretary should determine (by regulations or otherwise) that all interests in the entity “should

Many small businesses have significant concerns with the specific definition of a syndicate, as the

disallowance of the simplifying provisions for such entities erodes Congressional intent to reduce

uncertainty and complexity for small businesses. If an entity meets the $25 million gross receipts

test, the entity should benefit from the simplifying provisions, regardless of whether the entity has

taxable income or loss for the tax year.

Businesses that fluctuate between having taxable income and loss are eligible for the simplifying

provision in some years but not others. The fluctuation between income and loss would require

small businesses to frequently change methods of accounting. This inconsistency creates

unnecessary administrative burdens for small businesses and the IRS.

actively participates in the management of such entity, and that such entity and such interest are

not used (or to be used) for tax-avoidance purposes.”

Accordingly, we recommend that Treasury and the IRS use their authority under section

1256(e)(3)(C)(v) to provide relief from the definition of syndicate to small business entities that

meet certain conditions. The first condition is that an entity must qualify under the gross receipts

test. Secondly, an entity must meet the definition of a syndicate. Finally, an entity must not qualify

to make an election as an electing real property business or electing farming business.

If a small

business satisfies these three conditions, then the Secretary should determine that all interests in

Section 1256(e)(3)(C)(v).

Limitation on Deduction for Business Interest Expense, 83 Fed. Reg. 248 (December 28, 2018). Federal Register:

The Daily Journal of the United States. Web. 28 December 2018; page 67520, “The Treasury Department and the

IRS also have determined that small businesses that are exempt under section 163(j)(3) and proposed §1.163(j)-2(d)(1)

may not make an election under proposed §1.163(j)-9.” Proposed §1.163(j)-9 is the “Elections for Excepted Trades

or Businesses” regarding section 163(j)(7)(B) to be an electing real property trade or business and an election under

section 163(j)(7)(C) to be an electing farming business.

Mr. William M. Paul

Mr. Scott K. Dinwiddie

February 13, 2019

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the entity are treated as held by partners or owners who actively participate in the management of

such entity.

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The AICPA is the world’s largest member association representing the CPA profession, with more

than 431,000 members in 137 countries and territories, and a history of serving the public interest