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IRS Withdraws Proposal on Property Valuations as Part of Tax Reform Initiative

Oct 20th 2017
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Only weeks after Treasury Department Secretary Steven Mnuchin recommended revoking regulations proposed under Section 2704, the IRS withdrew the proposal that would have changed property valuations for estate and gift taxes.

The withdrawal notice is scheduled to be officially published in the Federal Register Oct. 20.

The now-defunct proposed changes to Section 2704 addressed restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes.

Mnuchin said in a recent report that “the proposed regulations, through a web of dense rules and definitions, would have narrowed longstanding exceptions and dramatically expanded the class of restrictions that are disregarded under Section 2704. In addition, the proposed regulations would have required an entity interest to be valued as if disregarded restrictions did not exist, either in the entity’s governing documents or under state law. No exceptions would have been allowed for interests in active or operating businesses.”

By direction of President Donald Trump’s Executive Order 13789, Mnuchin recommended what now are seven tax regulations that should be eliminated or otherwise mitigate burdens on taxpayers.

Trump, who believes tax regulations should provide clarity and useful guidance, directed Mnuchin to determine regulatory measures issued on or after Jan. 1, 2016 that met three criteria: They impose an “undue financial burden” on taxpayers, add undue complexity to federal tax laws, and exceed the statutory authority of the IRS.

The seven regulations originally were identified by Mnuchin in a June 22 report to the president. This second report, Identifying and Reducing Tax Regulatory Burdens, offers Mnuchin’s recommendations for specific actions.

According to the report, Treasury and the IRS also have begun a review under the Treasury Regulatory Reform Task Force of all tax regulations regardless of when they were issued — and many were issued before Jan. 1, 2016.

The review includes longstanding temporary or proposed regulations that have not expired or been made final. The IRS already has identified more than 200 regulations for potential revocation, most of which have been outstanding for many years, the report states.

Here’s what Mnuchin recommended:

Regulations to be completely revoked

  • Proposed regulations under Section 103 on definition of political subdivision Section 103 excludes from a taxpayer’s gross income the interest on state or local bonds, including obligations of political subdivisions. Proposed regulations would have required a “political subdivision” to possess not only significant sovereign power, but also to meet enhanced standards to show a governmental purpose and governmental control.

Regulations to be partially revoked

  • Final regulations under Section 7602 on the participation of a person described in Section 6103(n) in a summons interview.  According to the report, these final regulations allow the IRS to use private contractors to assist in auditing taxpayers. The IRS may contract with people who are not government workers, and the private contractors may participate in IRS interviews of taxpayers or other witnesses summoned to provide testimony during an examination.
  • Regulations under Section 707 and Section 752 on treatment of partnership liabilities. These regulations include proposed and temporary regulations governing how liabilities are allocated for purposes of disguised sale treatment, and proposed and temporary regulations for determining whether so-called bottom-dollar guarantees create the economic risk of loss necessary to be taken into account as a recourse liability, the report states.
  • Final and temporary regulations under Section 385 on the treatment of certain interests in corporations as stock or indebtedness. According to the report, these final and temporary regulations address the classification of related-party debt as debt or equity for U.S. federal income tax purposes. They are comprised of rules establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt obligations among related parties to be treated as debt for federal tax purposes (the “documentation regulations”), and 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 “distribution regulations”).

Regulations to be revised

  • Final regulations under Section 367 on the treatment of certain transfers of property to foreign corporations. According to the report, Section 367 of the Internal Revenue Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions, including an exception for certain property transferred for use in the active conduct of a trade or business outside of the U.S. Prior regulations provided favorable treatment for foreign goodwill and going concern value. To address difficulties in administering these exceptions, the regulations eliminated the ability of taxpayers to transfer foreign goodwill and going-concern value to a foreign corporation without immediate or future U.S. income tax. However, no active trade or business exception was provided for such transfers.
  • Temporary regulations under Section 337(d) on certain transfers of property to regulated investment companies and real estate investment trusts. According to the report, these temporary regulations amend existing rules on transfers of property by C corporations to real estate trusts and regulated companies generally. The regulations also provide rules relating to newly enacted provisions of the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”).
  • Final regulations under Section 987 on income and currency gain or loss with respect to a Section 987 qualified business unit. According to the report, these final regulations provide rules for translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency, calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and recognizing such foreign currency gain or loss when the branch makes certain transfers of any property to its owner.

Tax reform is one of the platforms of the Trump Administration. Congress last month released proposals on changes in income taxes.

Editor’s Note: This story is an update from an earlier version titled "Transfers of Property Part of New Treasury Rules Aimed at Easing Taxpayer Burden" to reflect the withdrawal notice’s Oct. 20 publication date