Treasury rolls back some tax regulations

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The Treasury Department released a report Wednesday outlining a set of actions it plans to reduce eight tax regulations it identified earlier this year as burdensome.

The Treasury is also planning to identify more regulations for modification or repeal by evaluating significant regulations issued recently and undertaking a comprehensive review of all regulations, regardless of when they were issued. Its review has already found over 200 regulations that it believes should be repealed, starting in the fourth quarter of this year.

“This is only the beginning of our efforts to reduce the burden of tax regulations,” Treasury Secretary Steven Mnuchin said in a statement. “Our tax code has been broken for too long, and this retrospective review, along with our efforts on tax reform, will ensure that we have a tax system that fosters economic growth.”

In the report released Wednesday, the Treasury said it plans to withdraw proposed regulations under Section 2704 that it says would hurt family-owned and operated businesses by limiting valuation discounts by making it difficult and costly for a family to transfer its business to the next generation. Commenters warned the valuation requirements of the proposed regulations were unclear and couldn't be meaningfully applied.

The Treasury also intends 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.

The Treasury also wants to propose revoking the Section 385 documentation regulations and replacing them with streamlined documentation rules. The proposed rule should include an effective date that would allow sufficient time for comments and compliance. The proposed streamlined documentation rules are expected to modify the requirements related to a reasonable expectation of ability to pay indebtedness and treatment of ordinary trade payables.

The Treasury noted it is continuing to work with Congress on tax reform, including efforts to address base erosion and earnings stripping while removing tax incentives for foreign takeovers of U.S. companies or for U.S. companies to invert.  The Treasury plans to retain the distribution regulations under Section 385 pending enactment of tax reform, saying it believes these regulations are necessary to safeguard against earnings stripping. Tax reform is expected to eliminate the need for the distribution regulations. However,the Treasury currently believes it would be irresponsible to revoke these regulations before enactment of tax reform. On top of that, the Treasury is also considering ways to simplify the distribution regulations and ease compliance if tax reform doesn't do away with the need for these regulations. 

The Treasury report identifies the following regulations to consider for partial revocation:

• 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 this regulation that Treasury is considering, attorneys who are private contractors would be prohibited from assisting the IRS in the auditing of taxpayers, including in the interview process. A revised regulation would still enable outside subject-matter experts to participate in summons proceedings. 

• Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities. Treasury and the IRS currently believe that the temporary regulations relating to disguised sales should be proposed for revocation and the prior regulations reinstated. The Treasury and the IRS will keep studying the issue and consider comments related to bottom-dollar guarantees.

The Treasury report identified the following regulations to consider 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. These rules, which get rid of the ability to transfer certain property to foreign corporations without immediate or future U.S. tax, address issues that could also be addressed as the Treasury keeps working with Congress on fundamental tax reform. To protect the tax base in the meantime, the Treasury intends to keep implementing these regulations, but the Treasury and the IRS also plan to develop exceptions to the rules.

• Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit. These regulations deal with foreign currency translations and other foreign currency transactions, and the Treasury intends to propose substantial revisions to them. The Treasury plans to immediately announce relief permitting taxpayers to postpone the application of these rules.  The Treasury also wishes to propose changes to further simplify the regulation, and plans to consider more substantial changes that may be put in place to address taxpayer concerns.  

House Ways and Means Committee chairman Kevin Brady, R-Texas, praised the Treasury's action. “Today’s announcement by the Treasury Depart is welcome news for our nation’s businesses, workers, and families," Brady said in a statement. "For too long, our broken tax code has tied the hands of America’s job creators with burdensome tax regulations that increase costs and hurt their competitiveness. On everything from the death tax to the recent section 385 regulations, Ways and Means Members have been vocal and constructive in encouraging the Treasury Department to scale back or eliminate harmful Washington red tape. Today, the Trump Administration showed they are listening closely and that they are committed to delivering a tax code that works with our businesses – not against them – as they grow and create jobs. We look forward to building on this progress with President Trump and the Senate as we move forward on bold, pro-growth tax reform.”

The leader of a coalition of advocacy groups, the Financial Accountability and Corporate Transparency (FACT) Coalition, had a more guarded reaction to the Treasury's announcement Wednesday. “We appreciate the administration’s decision to preserve an important safeguard against offshore tax dodging today," said Clark Gascoigne, deputy director of the FACT Coalition, in a statement. "However, Treasury’s decision to maintain the modest rule against ‘earnings-stripping’ stands in stark contrast to its own framework for overhauling that tax code—which would open the largest offshore tax loophole in American history by moving to a so-called ‘territorial’ tax system. This afternoon, a group of lawmakers unveiled an alternate approach to fixing the U.S. tax code that would end the ability of multinational corporations to game the system with accounting gimmicks. The administration and congressional leaders should use that proposal—which stops giving multinationals an advantage over wholly domestic and small businesses—as a model for sensible reform.”

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Tax regulations BEPS Steven Mnuchin Kevin Brady Treasury Department