The Treasury Department has issued a notice proposing to revoke eight tax regulations under President Trump’s executive order aimed at reducing burdensome regulations.
In April, Trump issued an executive order designed to reduce tax regulatory burdens. The order instructed the Treasury Secretary to review all “significant tax regulations” issued on or after Jan. 1, 2016, and submit two reports, followed promptly by actions to alleviate the burdens of regulations that meet criteria outlined in the order. Trump directed the Treasury Secretary Steven Mnuchin, in consultation with the Administrator of the Office of Information and Regulatory Affairs, to submit a 60-day interim report identifying regulations that impose an undue financial burden on U.S. taxpayers; add undue complexity to the federal tax laws; or exceed the statutory authority of the Internal Revenue Service. The order further instructs the Secretary to submit a final report to the President by Sept. 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.”
1. Proposed Regulations on Definition of Political Subdivision
The proposed regulations define a “political subdivision” of a state (such as a city or county) that is eligible to issue tax-exempt bonds for governmental purposes under Section 103 of the Tax Code. The proposed regulations require a political subdivision to possess three attributes: (i) sovereign powers; (ii) a governmental purpose; and ( iii) governmental control. Some peole who commented on the proposed regulations pointed out that the longstanding “sovereign powers” standard was settled law and had been endorsed by Congress, and additional limitations were unnecessary. They said the proposed regulations would disrupt the status of numerous existing entities and it would be burdensome and costly for issuers to revise their organizational structures to meet the new requirements of the proposed regulations.
2. Temporary Regulations on Certain Transfers of Property to Regulated Investment Companies and Real Estate Investment Trusts
These temporary regulations amend the existing rules on transfers of property by C corporations to REITs and RICs generally. They also provide guidance on some newly enacted provisions of the Protecting Americans from Tax Hikes Act of 2015 , also known as the PATH Act, which were aimed at preventing certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for nonrecognition treatment . Some commenters expressed concern that the REIT spinoff rules could lead to over-inclusion of gain in some cases, particularly where a large corporation acquires a small corporation that engaged in a Section 355 spinoff and the large corporation subsequently makes a REIT election.
3. Final Regulations on the Participation of a Person Described in a Summons Interview
The final regulations provide that persons described in Section 6103(n) of the Internal Revenue Code and Treas. Reg. §301.6103(n) -1(a) with whom the IRS contracts for services—such as outside economists, engineers, consultants, or attorneys—can 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, participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath. Commenters objected to the IRS’s ability to contract with outside attorneys and allow them to question witnesses under oath. They noted the U.S. Senate Finance Committee approved legislation in 2016 that would prohibit the IRS from delegating to third- party contractors the authority under Section 7602.
The Treasury said it would review the regulations as they concern the outside attorneys who are under contract with the IRS to participate in the taking of compulsory testimony under oath.
4. Proposed Regulations on Restrictions on Liquidation of an Interest for Estate, Gift and Generation- Skipping Transfer Taxes
Section 2704(b) of the Tax Code provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded whenn determining the fair market value of an interest in the entity for estate and gift tax purposes. The proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.
Some people who commented expressed concern that the proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability that would increase financial burdens. Commenters were also concerned that the proposed regulations would make valuations more difficult and that the proposed narrowing of existing regulatory exceptions was arbitrary and capricious.
5. Temporary Regulations on Liabilities Recognized as Recourse Partnership Liabilities
The temporary regulations generally provide: (i) rules for how liabilities are allocated under Section 752 solely for purposes of disguised sales under Section 707 of the Tax Code; and ( ii) rules for determining whether “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be taken into account as a recourse liability.
Some commenters observed that the first rule was novel and would unduly limit the amount of partners’ bases in their partnership interests for disguised sale purposes, which would negatively impact ordinary partnership transactions. They were also concerned that the bottom-dollar payment obligation rules would prevent many business transactions compared to the prior regulations and suggested their removal or the development of more permissive rules.
6. Final and Temporary Regulations 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 primarily include (i) 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 (ii) 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.
Some commenters on the documentation rules were concerned about the financial burdens of compliance, especially with respect to more ordinary course transactions. They also asked for a longer delay in the effective date of the documentation rules. Commenters who wrote about the final transaction rules criticized the complexity associated with tracking multiple transactions through a group of companies and the increased tax burden imposed on inbound investments.
7. Final Regulations on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit
The final regulations provide rules for (i) translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency, (ii) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and (iii) recognizing such foreign currency gain or loss when the branch makes a transfer of any property to its owner.
Some commenters on the regulations said the transition rule in the final regulations imposes an undue financial burden on taxpayers because it disregards losses calculated by the taxpayer for years prior to the transition but not previously recognized. They also said the method described in the final regulations for calculating foreign currency gain or loss was unduly complex and costly to comply with, especially where the final regulations differ from financial accounting rules.
8. Final Regulations on the Treatment of Certain Transfers of Property to Foreign Corporations
Section 367 of the Tax Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions. The final 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.
Some commenters said the final regulations would increase burdens by taxing transactions that were previously exempt. They pointed out that the legislative history for Section 367 contemplated an exception for outbound transfers of foreign goodwill and going concern value. They said the regulations should provide an exception for transfers of foreign goodwill and going concern value in circumstances that would not lead to an abuse of the exception.
