IRS Issues Report on “Identifying and Reducing Tax Regulatory Burdens”
The Treasury Department, on October 4, 2017, released a report on planned upcoming actions that it believes would reduce the burden of eight tax regulations identified earlier this year. Treasury also announced that it continues to work to identify additional regulations for modification or repeal by evaluating significant regulations issued recently and initiating a comprehensive review of all regulations, regardless of when they were issued.
The Treasury report identifies the following regulations to consider for partial revocation:
- Final and Temporary Regulations Under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness
Treasury and the IRS are considering a proposal to revoke Section 385 documentation regulations and replacing them with streamlined documentation rules. (In Notice 2017-36, the Treasury and the IRS announced that they intended to delay the application of the documentation rules by twelve months.) The proposed rules would include a prospective effective date that would allow sufficient time for comments and compliance. Consideration is also being given to modifying the requirements related to a reasonable expectation of ability to pay indebtedness and the treatment of ordinary trade payables.
Treasury noted it is working with Congress on fundamental tax reform, and Treasury is hopeful that these efforts will address base erosion and earnings stripping while removing tax incentives for foreign takeovers of U.S. companies or for U.S. companies to invert. Pending enactment of tax reform, Treasury plans to retain the “distribution regulations” under Section 385 -- 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. Treasury believes that these regulations are necessary to safeguard against earnings stripping. Tax reform is expected to eliminate the need for the distribution regulations. However, Treasury currently believes that it would be irresponsible to revoke these regulations before enactment of tax reform. Additionally, Treasury is also considering ways to simplify the distribution regulations and ease compliance if tax reform does not eliminate the need for these regulations.
- Final Regulations Under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview
Under the proposed changes to these regulations, attorneys who are private contractors would be prohibited from assisting the IRS in the auditing of taxpayers, including in the interview process. Revised regulations would continue to allow outside subject-matter experts to participate in summons proceedings.
- Regulations Under Section 707 and Section 752 on Treatment of Partnership Liabilities
Treasury and the IRS are considering whether the proposed and temporary regulations relating to disguised sales should be revoked and the prior regulations reinstated. While Treasury and the IRS will continue to study the issues and consider comments, they do not plan to propose substantial changes to the temporary regulations on bottom-dollar guarantees.
The Treasury report identified the following regulations for substantial revision:
- Temporary Regulations Under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies and Real Estate Investment Trusts
Treasury and the IRS plan to propose to replace the temporary regulations with revised regulations designed to narrow their application.
- Final Regulations Under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations
After considering the comments and studying further the legal and policy issues, Treasury and IRS have concluded that an exception to the current regulations may be justified by both the structure of the statute and its legislative history. Thus, to address taxpayers’ concerns about the breadth of the regulations, the Office of Tax Policy and IRS are actively working to develop a proposal that would expand the scope of the active trade or business exception to include relief for outbound transfers of foreign goodwill and going-concern value attributable to a foreign branch under circumstances with limited potential for abuse and administrative difficulties, including those involving valuation.
- Final Regulations Under Section 987 on Income and Currency Gain or Loss with Respect to a Section 987 Qualified Business Unit
These final regulations pertain to foreign currency translations and other foreign currency transactions. Treasury plans to immediately announce relief allowing taxpayers to postpone the application of these rules. Treasury plans to propose changes to further simplify the regulations and also plans to consider more fundamental changes that might be implemented to address taxpayer concerns.
The Treasury and IRS plan to publish a withdrawal of the following proposed regulations shortly in the Federal Register:
- Proposed Regulation Under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes
Treasury and the IRS plan to withdraw proposed regulations under Section 2704 that would have hurt family-owned and operated businesses by limiting valuation discounts. The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation. Commenters warned that the valuation requirements of the proposed regulations were unclear and could not be meaningfully applied.
- Proposed Regulations Under Section 103 on Definition of Political Subdivision
Treasury also plans to withdraw proposed Section 103 regulations on the definition of political subdivision. The proposed regulations would have added new requirements to be considered a “political subdivision” for purposes of issuing tax-exempt municipal bonds. The new requirements would have imposed enhanced standards to show a governmental purpose and governmental control. The changes proposed by the regulations would have been costly and burdensome. Treasury and the IRS may propose more targeted guidance after further study of the relevant legal issues.