The real estate and banking lobbies asked, the White House’s regulatory review office listened—and then the administration helped those industries become eligible for a $414.5 billion perk in the 2017 tax law.
New documents provided by the Office of Management and Budget show that during the White House body’s review of IRS proposed rules for the law’s 20 percent pass-through write-off, the regulations were revised to keep real estate agents and brokers, lenders, insurance agents and brokers, and others from losing out on the deduction if their income is above certain levels. It’s unclear whether the office, the Treasury Department, or the Internal Revenue Service directed the revisions.
The changes followed meetings between OMB and the National Association of Realtors, the Mortgage Bankers Association, and other banking groups. An April 2018 memorandum following months of negotiations between Treasury and the White House office granted OMB and its Office of Information and Regulatory Affairs (OIRA) new authority over tax regulations, reversing a decades-old arrangement exempting most tax rules from such scrutiny.
“There had to be some lobbying impact there,” said Tony Nitti, a partner and CPA at RubinBrown LLP in Denver who focuses on partnership and real estate tax. “Look who met and look who got results.”
Nitti, who viewed both versions of the proposed regulations, said it is clear that the IRS had a different interpretation and intent for the rules prior to the White House review.
Steve Schneider, a partner at Baker McKenzie in Washington who specializes in real estate tax, said evidence of the revision showed stakeholders have a sort of “appeals process” when it comes to advocating for their interests in the tax law regulations.
“It does create some examples of additional bites at the apple that others might see as helpful,” Schneider said, adding that he generally agreed with those changes. “It is helpful to know that, hey, you can go to appeals.”
IRS and Treasury spokespeople didn’t respond to requests for comment. An OIRA spokesperson declined to comment or answer questions.
The tax overhaul created a 20 percent write-off for owners of pass-through businesses, in which income is taxed at the individual owner level, under added tax code Section 199A. These structures include limited liability companies, S corporations, partnerships, and sole proprietorships. The nonpartisan Joint Committee on Taxation estimated it would cost $414.5 billion over a decade.
For single pass-through owners earning more than $157,500 and married owners earning more than $315,000, a restriction based on the wages they pay their employees and the capital they own phases in. For a category of activities known as “specified service” businesses, that deduction is gone completely above incomes of $207,500 for singles and $415,000 for married filers. The statute defines “specified services” to include health, law, accounting, performing arts, financial services, brokerage services, and businesses dealing in securities, commodities, and partnership interests, among others.
This prompted a scramble among various industry lobbying groups to get their members excluded from the definition of a “specified service” as the IRS began to craft its regulations.
Those groups included the Mortgage Bankers Association, the American Bankers Association, the Underwriters Group, and ABD Insurance & Financial Services, which wrote letters to Treasury and IRS officials asking them to leave their industries out of the definition.
‘Dealing in Securities’
The proposed rules for the new deduction, upon landing at OIRA, included real estate and insurance agents and brokers within the definition of “brokerage services,” according to a copy of that version of the rules recently obtained by Bloomberg Tax. The package of regulations also said a banking or lending business that regularly makes or sells loans to customers is treated as a dealer in securities.
In late July and early August, Quicken Loans, Independent Community Bankers of America, the National Association of Realtors, the American Bankers Association, and the Subchapter S Bank Association were among the groups participating in meetings with OMB and Treasury officials. Representatives of some of the groups told Bloomberg Tax at the time that the meetings mostly consisted of a presentation from the industry organizations with little feedback from the government.
The version of the proposed rules released to the public says “a taxpayer that regularly originates loans in the ordinary course of a trade or business of making loans but engages in no more than negligible sales of the loans is not dealing in securities.”
Two handouts brought to separate OIRA meetings by, respectively, the Mortgage Bankers Association and several other banking groups, urged IRS and Treasury officials to adopt a narrower reading of “dealing in securities” to ensure their industries didn’t fall into that “specified service” category.
Pete Mills, the Mortgage Bankers Association’s senior vice president of residential policy, said in an emailed statement that the group was “pleased that the final rule reflected changes in the definition of ‘dealing in securities’ that were consistent with the recommendations in our formal comments.”
Once the proposed rules were released to the public, a Quicken Loans vice chairman praised this narrow definition of “dealing in securities” and asked the IRS for clarity on one point in a September public comment letter.
Eileen Newell, vice president of tax at Quicken Loans owner Rock Holdings LLC, is listed as a participant in one OIRA meeting on the deduction via teleconference, but “only listened in on a group conference call with OIRA, which was held by an outside group,” a spokesperson said in a statement to Bloomberg Tax.
The public version of the proposal also added a few words carving out “real estate agents and brokers, or insurance agents and brokers” as exceptions to the brokerage service category.
The National Association of Realtors brought a handout to its meeting with OIRA officials requesting that the proposed rules state that the “brokerage services” definition “was not intended to encompass real estate and other transactions with close ties to building and construction.” The letter to IRS officials pointed to the explicit exclusion of engineering and architecture from the list of services, which, like real estate brokers, “add value to real estate.”
In an emailed statement, the association said it was “pleased to see the final regulations allow all real estate professionals to benefit” from the deduction and said the change resulted in fair tax treatment for real estate agents and pass-through businesses relative to corporations.
—With assistance from Allyson Versprille and Cheryl Bolen.