United States

House resolution would revoke controversial debt/equity regulations

TAX ALERT  | 

Rep. Todd Rokita, R-I.N., introduced H.J.Res. 54 that would revoke the documentation requirement of the controversial debt/equity regulations governing related-party instruments (81 Fed. Reg. 72858). There had been much speculation that the section 385 regulations would not last long under the Trump administration; H.J.Res. 54 provides the first indication that a repeal is in the works.

Typically, the removal of regulations is carried out by the administrative agency that issued them, and the process requires the same lengthy notice and comment procedures that were required when the regulations were first issued. However, under the Congressional Review Act (CRA), Congress can use an expedited process to revoke recently issued final agency rules. The standard window for review is 60 legislative days, which means regulations issued after June 2016 may be subject to the CRA. The section 385 regulations were finalized in October 2016.

The CRA has received a lot of attention lately. While it has only been successfully used once, the Republican-controlled government appears ready to change that. Proposed legislation, the Midnight Rules Act, would both extend the review period to a year and allow Congress to group several revocations into a single joint resolution. However, with regard to the review period for Treasury rules, the extension may not be necessary.

Under the CRA, before an administrative rule can take effect a report must be submitted to Congress. The 60-day review period does not begin until the later of when a rule is published, or when the required report is submitted. This is important with regard to Treasury and IRS rules because a recent study from the Government Accountability Office concluded that the Treasury and IRS routinely did not comply with fundamental rulemaking requirements, including the CRA report requirement. Therefore, it may be possible to use the CRA, without modification, to revoke Treasury regulations going back several years, possibly through the entire Obama administration.

H.J.Res. 54 has been assigned to the House Committee on Ways and Means, where it must be reviewed before possibly being sent to the House or Senate as a whole. Whether or not this particular joint resolution ultimately makes its way to President Trump’s desk remains to be seen. However, H.J.Res. 54 serves as a notice that the section 385 regulations may not be around much longer. Taxpayers fretting the implementation of the section 385 regulations, or other recently issued onerous Treasury rules, should consult their tax advisors to better understand how the CRA may impact their business and how they can still impact proposed legislation.

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