United States

Treasury identifies eight regulations for review under executive order

TAX ALERT  | 

In Notice 2017-38, the Treasury Department identified eight significant tax regulations it will review under the president’s executive order directing agencies to identify and reduce tax regulatory burdens.

The executive order, issued April 21, 2017, requires the Treasury Department to review all ‘significant tax regulations’ issued during 2016 and 2017, then submit an initial report identifying regulations that impose undue financial burden, undue complexity or exceed the statutory authority of the IRS. Once the initial report identifying these regulations is submitted, the order requires the Treasury Department to submit a final report to the president recommending ‘specific actions’ to reduce the burden imposed by the identified regulations.

In the first of these two reports, the Treasury has identified the following eight regulations as meeting the criteria outlined in the executive order:

  1. Final and Temporary Regulations under Section 385 regarding the Treatment of Certain Interests in Corporations as Stock or Indebtedness.  (See T.D. 9790; 81 F.R. 72858)

    The final and temporary regulations under section 385 provide rules related to the classification of certain related party debt as equity or indebtedness, as well as provide generally applicable minimum documentation requirements necessary for companies to meet in order to avoid default equity treatment for certain related party debt. Treasury issued these rules to stem the tide of corporate inversions, after a series of high profile inversion transactions. However, the regulations have been extremely controversial, so much so that a proposal to repeal them under the Congressional Review Act has been introduced in Congress, so we are not surprised to see these regulations slated for review under the president’s executive order.

    For more information on the final and temporary regulations, see US Treasury's much-anticipated debt-equity regulations
  2. Temporary Regulations under Section 337(d) regarding Certain Transfers of Property to Regulated Investment Companies and Real Estate Investment Trusts.  (See T.D. 9770; 81 F.R. 36793)

    These temporary regulations provide that a spin-off involving a real estate investment trust (REIT) generally may qualify as tax-free only if both corporations, the one that was spun off (Controlled) via distribution of its stock, and the one that distributed the stock of Controlled (Distributing), are REITs immediately after the distribution. REITs may also spin off certain taxable REIT subsidiaries. Separate legislation passed in 2015 also imposed a 10-year prohibition on making REIT elections for corporations that have been involved in tax-free spin-offs but these regulations apply in addition to what this legislation provides. In addition, the temporary regulations extended the post-spin-off REIT conversion tax trigger to corporations other than the two directly involved in the spin-off—Distributing and Controlled. Finally, these temporary regulations that provide tax is also triggered by REIT conversions by predecessors or successors of these corporations or by other members of their respective separate affiliated groups.

    For more information on these temporary regulations, see New regulations imposing tax on spin-offs followed by REIT conversions.
  3. Final Regulations under Section 987 regarding Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit.  (See T.D. 9794; 81 F.R. 88806)

    These final regulations provide rules governing the translation of income from foreign branch operations into a branch owners function currency, as well as rules for calculating foreign currency gain or loss associated with the financial assets and liabilities of a foreign branch. In addition, the final regulations provide rules for calculating foreign currency gain or loss upon a transfer of property from a branch to its owner. The regulations set forth an extremely complex approach to calculating foreign exchange gains and losses that deviates significantly from the approach taken for financial statement purposes and would also impose significant recordkeeping burdens.

    For more information on these final regulations, see IRS issues key foreign currency tax regulations.
  4. Final Regulations under Section 367 regarding the Treatment of Certain Transfers of Property to Foreign Corporations.  (See T.D. 9803; 81 F.R. 91012)

    The final regulations under section 367 generally provide for the immediate or future recognition of U.S. income tax on transfers of property, either tangible or intangible, to a foreign corporation. Most notably, these regulations eliminate the favorable tax treatment (i.e., no immediate or future U.S. income tax) previously afforded to transfers of foreign goodwill and going concern value to a foreign corporation.

    For more information on these final regulations, see Treasury finalizes regulations relating to foreign goodwill.
  5. Temporary Regulations under Section 752 regarding Liabilities Recognized as Recourse Partnership Liabilities.  (See T.D. 9788; 81 F.R. 69282)

    These temporary regulations address the rules pertaining to disguised sales of property and some of the corresponding rules regarding the allocation of certain partnership liabilities under section 752. Additionally, these temporary regulations provide rules for determining whether certain partner guarantees, specifically so-called ‘bottom dollar’ guarantees, are to be taken into consideration when allocating certain partnership liabilities.

    For more information on these temporary regulations, see New IRS rules for disguised sales and partnership liabilities.
  6. Proposed Regulations under Section 103 regarding the Definition of Political Subdivision.  (See REG-129067-15; 81 F.R. 8870)

    The proposed regulations under section 103 provide the definition of a ‘political subdivision’ of a state for the purposes of determining eligibility to issue tax-exempt bonds. These regulations generally require a political subdivision to possess three attributes; sovereign powers, a governmental purpose and governmental control.
  7. Proposed Regulations under Section 2704 regarding Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes.  (See REG-163113-02; 81 F.R. 51413)

    The proposed regulations under section 2704 address certain perceived shortcomings in the effectiveness of section 2704 and are designed to prevent taxpayers from using various structural artifices to discount the value of interests in family-controlled entities for gift, estate and generation-skipping transfer tax purposes. The proposed regulations met with considerable technical skepticism on the part of estate planners and valuation professionals as well as considerable concern from taxpayer groups around the country. What’s more, various members of Congress have expressed concern about the proposed regulations and recently, the House’s fiscal 2018 IRS appropriations bill would prohibit the IRS from using funds to ‘finalize, implement or enforce amendments to the controversial estate tax rules under tax code section 2704 or any substantially similar amendments to such regulations.' It is therefore no surprise to see that these proposed regulations have been identified as ‘burdensome.’

    For more information on these proposed regulations, see Treasury releases proposed regulations to section 2704.
  8. Final Regulations under Section 7602 regarding the Participation of a Person Described in Section 6103(n) in a Summons Interview.  (See T.D. 9778; 81 F.R. 45409)

    The final regulations under section 7602(a) permit outside professionals, such as economists, engineers, consultants and attorneys to receive books, papers, records or other information that was summoned by the IRS. These regulations also allow for such outside professionals to participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath.

Moving forward, the Treasury Department has requested public comments by Aug. 7, 2017, regarding ways to reduce the burden, either through rescission or modification, created by these identified regulations. The Treasury then has until Sept. 18, 2017, to issue a final report to the president with its recommendations for actions to be taken to reduce or otherwise mitigate the burden imposed by these eight regulations.

If Treasury decides to rescind any final or temporary regulations, it will need to go through the same lengthy notice and comment procedures that must be followed under the Administrative Procedures Act (APA) in order to issue a new regulation. The notice and comment process would require Treasury to hold a hearing to give interested parties an opportunity to voice their concerns over rescission and Treasury would have to publish a reasoned explanation for any withdrawal or amendment of any final or temporary regulation. It may take Treasury several months, if not longer, to fully rescind any such regulation. However, Congress could bypass the APA notice and comment procedure if it rescinds a regulation under the Congressional Review Act (CRA). As Congress considers tax reform legislation, lawmakers may decide that it would be faster and more expedient to rescind one or more of these regulations under the CRA rather than having Treasury expend resources going through a notice and comment process for each regulation. It is not clear at this time which of these two paths will be taken by policy makers.

For more information on the CRA, see House resolution would revoke controversial debt/equity regulations.

Take aways

Taxpayers affected by one or more of these regulations should pay close attention to the remainder of this process, as the identified regulations are likely to be modified, or potentially rescinded either under the normal regulatory process or under the CRA. This could create significant planning opportunities. Taxpayers should consult their tax advisors to better understand how this guidance could impact their business.

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