Key members of the Congressional tax-writing committees have, for the second straight day, sent a letter to Treasury Secretary Mnuchin, voicing their displeasure with IRS guidance on a CARES Act issue and requesting that the agency reverse this guidance.[1] This time the letter, signed by Senate Finance Committee Chair Chuck Grassley (R-IA), Ranking Member Ron Wyden (D-OR) and House Ways & Means Committee Chair Richard Neal (D-MA), raises issues with the guidance in Notice 2020-23.

Notice 2020-23 provided that amounts expended that were used to justify the forgiveness of a PPP loan would not be deductible by the taxpayer in computing federal taxable income. The Treasury Secretary had defended that guidance specifically in an interview with Fox News on May 4. Tax Analysts, in a May 5, 2020 story, provided the following quotes from the Fox News Interview:

“The money coming in the PPP is not taxable,” Mnuchin said May 4 in an interview on Fox Business. “So if the money that's coming is not taxable, you can't double dip.”

…

Mnuchin said the IRS guidance is correct, adding, “I have reviewed this personally. This is basically Tax 101.”[2]

The authors of the letter clearly do not agree with the Secretary’s view of the Tax 101 answer. The letter cites the intent of Congress in enacting the exclusion—that the most obvious reason to include the language was to give those receiving forgiveness a better tax result than they would have obtained had the language not been in the bill:

Section 1106(i) was specifically included in the CARES Act to exclude from income loan forgiveness, which would otherwise be taxable, to provide a tax benefit to small businesses that received the PPP loan. Had we intended to provide neutral tax treatment for loan forgiveness, Section 1106(i) would not have been necessary. In that case, loan forgiveness generally would have been added to the borrower’s taxable income, and the expenses covered by the PPP loan would be deductible, reducing taxable income by an offsetting amount and resulting in no additional net income. Notice 2020-32 effectively renders Section 1106(i) meaningless. That, clearly, is contrary to the intent of Section 1106(i) and the CARES Act more generally.

The Chairs and the Ranking Member of the Senate Finance Committee go on to give the Secretary their own lesson in proper interpretation of tax law, apparently not arriving at the same “Tax 101” conclusion as the Secretary:

In addition to disregarding congressional intent, we believe Notice 2020-32 is flawed in its analysis of the applicability of Section 265(a) of the Internal Revenue Code. Section 265(a)(1) applies to deny a deduction only if the deduction is allocable to a class of income that is “wholly exempt from the taxes imposed by this subtitle [of the Internal Revenue Code].” In this case, the deduction is not allocable to the exempt income resulting from the forgiven loan. The deductions for expenses that make a borrower eligible for loan forgiveness are attributable to the conduct of its business. Accordingly, they are properly allocable to the income produced by the business, not to the PPP loan forgiveness. Moreover, the loan forgiveness is not a class of income that is “wholly exempt from the taxes imposed by this subtitle.” The loan may or may not be forgiven, and the amount of the forgiveness is limited by a number of factors. Therefore, even putting aside clear congressional intent, we believe Section 265(a) should not be read to deny ordinary and necessary business deductions in this case.

The letter adds a footnote to the paragraph:

Similarly, such intent is a distinguishing factor and a key consideration in the case law cited in Notice 2020-32.

While the letter did not say that Congress would pass legislation to override the ruling if it was not reversed by Treasury, Tax Analysts reported Senator Grassley has now stated that legislation to reverse this ruling is in the works for his Committee in the Senate. Representative Neal had made a similar commitment immediately following the release of Notice 2020-23 to bring forth legislation in the House to reverse the ruling.[3]

[1] Letter to U.S. Treasury Secretary Mnuchin from Senator Chuck Grassley, Representative Richard Neal and Senator Ron Wyden on Notice 2020-32, May 5, 2020, https://www.finance.senate.gov/imo/media/doc/2020-05-05%20CEG,%20RW,%20RN%20to%20Treasury%20(PPP%20Business%20Deductions).pdf (retrieved May 5, 2020)

[2] Jad Chamseddine, “‘Tax 101’: Mnuchin Defends Nondeductibility of PPP Expenses,” Tax Notes Today Federal, May 5 2020, 2020 TNTF 87-2, https://www.taxnotes.com/tax-notes-today-federal/exemptions-and-deductions/tax-101-mnuchin-defends-nondeductibility-ppp-expenses/2020/05/05/2ch77 (retrieved May 6, 2020)

[3] Jad Chamseddine, “Top Taxwriters Urge IRS to Reconsider PPP Tax Deduction Stance,” Tax Notes Today Federal, May 6, 2020, 2020 TNTF 88-2, https://www.taxnotes.com/tax-notes-today-federal/exemptions-and-deductions/top-taxwriters-urge-irs-reconsider-ppp-tax-deduction-stance/2020/05/06/2chdp (retrieved May 6, 2020)