On April 21, 2017, President Trump issued Executive Order Number 13789 designed to reduce the burden imposed by significant tax regulations issued on or after January 1, 2016. The Executive Order directed the Secretary of the Treasury to submit a report identifying significant tax regulations that (i) impose an undue financial burden on U.S. taxpayers, (ii) add undue complexity to the federal tax laws, or (iii) exceed the statutory authority of the IRS. The Executive Order also requires Treasury to submit a report by September 18 recommending specific actions to mitigate the burden imposed by the regulations being identified. On July 7, Treasury released Notice 2017-38 that contains an interim list of eight tax regulations that satisfy the criteria of the Executive Order.
According to the Notice, there were 105 final, temporary and proposed regulations issued since January 1, 2016. Of these, 53 regulations were “minor or technical in nature”. The 52 remaining regulations were treated as “potentially significant” and were then re-examined. Of these, eight have been identified as meeting one of the first two criteria of the Executive Order and qualify as significant. Treasury did not indicate that any of the potentially significant regulations exceeded the statutory authority of the IRS. The Notice states that Treasury, in the final report to be submitted to the President, intends to propose reforms ranging from streamlining problematic rule provisions, to full repeal to mitigate the burden of these regulations.
Details of the eight regulations identified for burden reduction
- Proposed regulations under Section 109 on the definition of a political subdivision that is eligible to issue tax-exempt bonds for governmental purposes. The proposed regulations require a political subdivision to have sovereign powers, a governmental purpose and governmental control in order to issue tax-exempt bonds.
- Temporary regulations under Section 337(d) on certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs). These regulations provide guidance relating to measures enacted in the PATH Act of 2015 which are intended to prevent certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for nonrecognition treatment under Section 355.
- Final regulations under Section 7602 on the participation of a person described in Section 6103(n) in a summons interview. These regulations allow outside economists, engineers, consultants or attorneys with whom IRS has contracts, to receive books, papers, records or other data summoned by the IRS and participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath.
- Proposed regulations under Section 2704 on restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes. The Internal Revenue Code provides that certain non-commercial restrictions on the ability to dispose or liquidate family controlled entities, should be disregarded in determining the fair market value of an interest in that entity for estate and gift purposes. These proposed regulations would require all intra-family transfers be valued by ignoring liquidation and voting restrictions. If implemented, these regulations could eliminate almost all valuation discounts in the transfer of family business ownership interests.
- Temporary regulations under Section 752, on liabilities recognized as recourse partnership liabilities, to provide rules for how liabilities are allocated solely for purposes of disguised sales under Section 707 and rules for determining whether “bottom-dollar payment obligations” provide the necessary economic risk of loss to be taken into account as a recourse liability. Both parts of these temporary regulations have been criticized as being unnecessarily complex in comments previously received by Treasury after these regulations were published.
- Final and temporary regulations under Section 385 on the treatment of certain interests in corporations as stock or indebtedness. These regulations address the classification of related-party debt as debt or equity for federal tax purposes. The regulations are comprised of (1) rules establishing minimum documentation requirements that ordinarily must be satisfied in order for debt among related parties to be treated as debt for tax purposes; and (2) transaction rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result. The current version of these regulations issued in October 2016 are substantially revised and narrowed from the original proposed regulations issued in April 2016, after Treasury received numerous comments from taxpayers, trade groups and other interested parties. The rules are intended to limit the effectiveness of certain types of planning by recharacterizing specified types of related party debt obligations as equity when the debt arrangement either fails the documentation requirements or is contrary to one of the specified categories of transactions set forth in the regulations.
- Final regulations under Section 987 on income and currency gain or loss with respect to a Section 987 qualified business unit. These long-awaited final regulations provide rules for (1) translating income from branch operations conducted in a currency, different from the branch owner’s functional currency, into the owner’s functional currency, (2) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and (3) recognizing such foreign currency gain or loss when the branch makes a transfer of any property to its owner. These are complex regulations that largely follow the proposed regulations originally issued in 2006, with certain simplifying elections and conventions.These rules have been criticized because the transition rules disregard losses calculated for years prior to the transition but not previously recognized. Commenters have also indicated the rules for calculating foreign currency gain or loss were still unduly complex and costly to comply with.
- Final regulations under Section 367 on the treatment of certain transfers of property to foreign corporations. Section 367 generally imposes immediate or future tax on transfers of property to foreign corporations subject to certain exceptions. These regulations eliminate the ability of taxpayers to transfer foreign goodwill and going-concern value to a foreign corporation without immediate or future U.S. tax. Such transfers were afforded favorable treatment under existing prior law for over 30 years.
Treasury is requesting comments on whether these eight regulations need to be rescinded or modified to reduce both burden and complexity. Comments are due by August 7, 2017. Notice 2017-38 does not specify what action Treasury will ultimately take or when such changes would be effective. Therefore, taxpayers should continue to apply these regulations in their current form pending further guidance. We will continue to keep you apprised of further developments.