In response to President Trump’s Executive Order 13789 issued in late April that directed the US Treasury Department to eliminate unnecessary tax burdens, Treasury has determined that eight tax regulations meet the order’s requirements.
The executive order requested Treasury to submit an interim report listing the regulations that impose an undue financial burden on US taxpayers, add “undue complexity” to federal tax laws, or exceed the statutory authority of the IRS.
A final report is due to President Trump by Sept. 18 and is expected to recommend specific actions to ease the regulatory burden identified in the interim report.
According to IRS Notice 2017-38, Treasury and the IRS issued 105 temporary, proposed, and final regulations from Jan. 1, 2016, through April 21, 2017. Fifty-three of those regulations were “minor or technical in nature” and didn’t generate many public comments. Treasury considered the remaining 52 regulations as “potentially significant” and re-examined them.
Based on the re-examination, Treasury identified eight regulations that meet at least one of the first two criteria specified by the executive order. Treasury intends to propose reforms – which could range from streamlining problematic rule provisions to full repeal – in the final report to mitigate the burdens of these regulations, according to the notice.
Here are the eight tax rules that Treasury earmarked as problematic:
1. Proposed regulations under Section 103 on the definition of political subdivision. The proposed regulations define a “political subdivision” of a state (a city or county) that’s eligible to issue tax-exempt bonds for governmental use under Section 103 of the Internal Revenue Code. The proposed regulations would require the political subdivision to have sovereign powers, a governmental purpose, and governmental control.
Some people who commented on the proposed regulations noted that the longstanding “sovereign powers” standard was settled law and that additional limitations weren’t necessary. They also said the proposed regulations would disrupt existing entities and require costly revisions to organizational structures to meet the new requirements.
2. Temporary regulations under Section 337(d) on certain transfers of property to regulated investment companies and real estate investment trusts. The temporary regulations amend existing rules on property transfers by C corporations to regulated investment companies and real estate investment trusts (REITs). The regulations also provide more guidance related to new provisions of the Protecting Americans from Tax Hikes Act of 2015, which were intended to prevent certain spinoff transactions involving transfers of property by C corporations to REITs from qualifying for nonrecognition treatment.
There were concerns that the REIT spinoff rules could result in overinclusion of gain, particularly when a large corporation acquires a smaller one that engaged in a Section 355 spinoff and the larger corporation makes a REIT election.
3. Final regulations under Section 7602 concerning the participation of a person described in Section 6103(n) in a summons interview. Outside contractors, such as attorneys, economists, engineers, and consultants, could receive IRS-provided material, such as books and records, under Section 6103(n) and Treasury Reg. §301.6103(n)-1(a) to participate in an interview of someone summoned by the IRS as a witness to testify under oath.
Commenters objected to the IRS’s ability to contract with outside attorneys and permit them to question witnesses under oath. In 2016, the Senate Finance Committee approved legislation that would prevent the IRS from delegating such authority.
4. Proposed regulations under Section 2704 on restrictions for liquidating an interest for estate, gift, and generation-skipping transfer taxes. Section 2704(b) provides that certain noncommercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes.
Commenters thought the proposed regulations would create additional restrictions that would be disregarded in assessing the fair market value of an interest. In addition, there were concerns that the proposed regulations would eliminate or restrict common discounts and make valuations more difficult.
5. Temporary regulations under Section 752 on liabilities recognized as recourse partnership liabilities. The temporary regulations pertain to how liabilities are allocated under Section 752 for purposes of disguised sales under Section 707 and for determining if “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be considered as a recourse liability.
Commenters though the first rule would unduly limit the amount of partners’ bases in their partnership interests for disguised sale purposes, which would negatively impact ordinary partnership transactions. The bottom-dollar payment obligation rules, commenters said, would prevent more business transactions compared to earlier regulations and suggested they be removed or more permissive rules be developed.
6. Final and temporary regulations under Section 385 on the treatment of certain interests in corporations as stock or indebtedness. These regulations concern rules that set minimum documentation requirements that ordinarily must be met in order for purported debt among related parties to be treated as debt for federal tax purposes; and treat as stock certain debt issued by a corporation to a controlling shareholder in a distribution or other related-party transaction that achieves a similar result.
Commenters were critical of the financial compliance burden, want a longer delay in the effective date of the documentation rules, and oppose the complexity in tracking multiple transactions through a group of companies and the increased tax burden imposed on inbound investments.
7. Final regulations under Section 987 on income and currency gain or loss with respect to a qualified business unit. The final regulations provide rules for translating income from branch operations conducted in different currencies, calculating foreign currency gains or losses, and recognizing the gain or loss when transferring any property to its owner.
There were concerns that the transition rule 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. Commenters also said the method for calculating foreign currency gains or losses is unnecessary costly and complex.
8. Final regulations under Section 367 on the treatment of certain transfers of property to foreign corporations. Section 367 imposes immediate or future taxes on property transfers (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 US income tax.
Some people who commented thought the final regulations would increase burdens by taxing previously exempt transactions, and that an exception should be provided for transfers of foreign goodwill and going concern value in situations that wouldn’t abuse the exception.
Treasury is requesting comments on whether the eight regulations should be rescinded or modified and, if modified, how they should be modified in order to reduce burdens and complexity. Comments are due by Aug. 7. Notice 2017-38 includes instructions on how to submit comments.