IRS Identifies Tax Regulations Imposing Financial Burdens or Adding Undue Complexity
In Notice 2017-38, released July 7, the Treasury announced that it will propose reforms to mitigate the burdens created by eight specified tax regulations. The revisions could range from streamlining problematic rule provisions to full repeal, according to the Treasury.
In Executive Order 13789, issued on April 21, 2017, President Trump directed the secretary of the Treasury, in consultation with the administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, to submit a 60-day interim report identifying regulations issued on or after January 1, 2016, 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 order further instructs the secretary to submit a final report to the President by September 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.”
Treasury concluded that eight regulations satisfy at least one of the first two criteria specified. No regulations were identified as exceeding the statutory authority of the IRS.
The eight regulations are the following:
- Final and temporary regulations (T.D. 9790) under Internal Revenue Code (“IRC”) Sec. 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 and are primarily comprised of: (1) rules establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt among related parties to be treated as debt for federal 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.
- Proposed regulations (REG-129067-15) on the definition of a political subdivision of a state (e.g., a city or county) that is eligible to issue tax-exempt bonds for governmental purposes under IRC Sec. 103.
- Temporary regulations (T.D. 9770) under IRC Sec. 337(d) on transfers of property by C corporations to real estate investment trusts (“REITs”) and regulated investment companies (“RICs”). The regulations also provide guidance relating to provisions enacted as part of the Protecting Americans from Tax Hikes Act of 2015, that were intended to prevent certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for nonrecognition treatment.
- Final regulations (T.D. 9778) under IRC Sec. 7602 that provide that certain persons with whom the IRS contracts for services – such as outside economists, engineers, consultants, or attorneys – may receive books, papers, records, or other data summoned by the IRS and, in the presence and under the guidance of an IRS officer or employee, may participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath.
- Proposed regulations (REG-163113-02) under IRC Sec. 2704 on the valuation of interests in corporations and partnerships for certain estate, gift and generation-skipping transfer tax purposes that address the treatment of certain rights and restrictions in liquidation in determining the value of the transferred interests. The proposed regulations create an additional category of restrictions that would be disregarded in assessing the fair market value of an interest.
- Temporary regulations (T.D. 9788) on liabilities recognized as recourse partnership liabilities. The regulations provide rules for how liabilities are allocated under IRC Sec. 752 solely for purposes of disguised sales under IRC Sec. 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.
- Final regulations (T.D. 9794) under IRC Sec. 987 on income and currency gain or loss with respect to a Sec. 987 qualified business unit. These 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.
- Final regulations (T.D. 9803) under IRC Sec. 367 on the treatment of certain transfers of property to foreign corporations. The regulations eliminate the ability of taxpayers under prior regulations to transfer foreign goodwill and going-concern value to a foreign corporation without immediate or future U.S. income tax.
Comments are requested as to whether these eight regulations should be rescinded or modified, and if modified, how this is to be done to reduce burdens and complexity. Comments from the public are due by August 7, 2017.
Probably the most controversial of the regulations identified are the IRC Sec. 385 regulations. The IRC Sec. 385 regulations have drawn substantial criticism as to the financial burdens of compliance, particularly with respect to ordinary course transactions, and to the documentation required. Current tax reform proposals which deny in whole or part the deductibility of interest could, if adopted, make much of these regulations effectively moot. There would appear to be several options regarding the IRC Sec. 385 regulations:
- Significant modifications, or
- Delay the effective date until Congress passes tax reform legislation.