Executive Order Endangers Eight Significant IRS Regulations

Executive Order Endangers Eight Significant IRS Regulations

On April 21, 2017, Pres. Donald Trump issued Executive Order 13789 on Identifying and Reducing Tax Regulatory Burdens. The order directed the Secretary of the Treasury to review all “significant” tax regulations issued by the Treasury Department on or after January 1, 2016. This review will culminate with the issuance of two separate reports.

The first report is an interim report to be completed by the Treasury Secretary in consultation with the Administrator of the Office of Information and Regulatory Affairs (OIRA) and the Office of Management and Budget (OMB) identifying all “significant” tax regulations that: (1) impose an undue financial burden on U.S. taxpayers; (2) add undue complexity to the Federal tax laws; and (3) exceed the statutory authority of the IRS. This report was to be completed no later than 60 days from the initial date of the order.

The second report is due no later than 150 days from the initial date of the order. This report is supposed to outline specific actions to mitigate the burden imposed by the regulations identified in the interim report. These mitigating actions may include delay or suspension, modification, or rescission as appropriate and consistent with law, including, if necessary, through notice and comment rulemaking. All mitigating actions which are not completed within 180 days of the submission of the second report must be included in an initial report summarizing the actions taken to that point.

IRS tax regulations

On June 14, 2017, IRS Notice 2017-38 was released by the IRS as the interim report mentioned in the Executive Order. Fifty three of the 105 Treasury and IRS regulations released between January 1, 2016 and April 21, 2017 were deemed to be minor or technical in nature and thus not considered significant. The remaining 52 regulations were treated as potentially significant and thus were reexamined for purposes of developing the interim report. Based on the reexamination eight regulations were determined to have been significant and to meet the additional criteria for burden mitigation actions to be taken. These eight regulations are as follows:

  1. Proposed Regulations under Internal Revenue Code (IRC) §103: These regulations define a “political subdivision” of a State (such as a city) that is eligible to issue tax-exempt bonds for governmental purposes. A principal complaint from commentators has been that these regulations would disrupt the status of a myriad of existing entities and become burdensome and costly as it would require many issuers to revise their organizational structures to meet the new requirements.

  1. Temporary Regulations under IRC §337 (d) on certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs): These regulations change the existing general rules regarding transfers of property by C corporations to RICs and REITs. They also provide further guidance relating to certain 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 non-recognition treatment. A major concern of this regulations was that it could result in over-inclusion of gain in some cases, particularly where a large corporation acquires a small corporation that engaged in an IRC §355 spinoff and the large corporation subsequently makes a REIT election.

  1. Final regulations under IRC §7602 on the participation of third-parties in a summons interview: These regulations provide that persons described in IRC §6103 (n) and its corresponding regulations with whom the IRS contracts (such as outside economists, consultants, or attorneys) may receive documents and data summoned by the IRS as well as participate fully in a summons interview of a taxpayer in the presence and under direction of an IRS officer or employee. Commentators argued that a summons interview is an “inherently governmental” function and thus the participation of the third-party would be unlawful.

  1. Proposed regulations under IRC §2704 on restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes: IRC §2704 (b) provides that certain non-commercial restrictions on the ability to dispose of or liquidate family-controlled entities should be disregarded in determining the fair market value (FMV) of interest in that entity for estate and gift tax purposes. These regulations would create an additional category of restrictions that would also be disregarded in assessing the FMV of an interest.

  1. Temporary regulations under IRC §752 on liabilities recognized as recourse partnership liabilities: These regulations generally provide: (1) rules for how liabilities are allocated under IRC §752 solely for purposes of disguised sales under IRC §707; and (2) rules for determining whether “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be taken into account as a recourse liability. Commentators argued that 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. Commentators were also concerned that the second rule could prevent business transactions and suggested they be more permissive.

  1. Final and temporary regulations under IRC §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. The regulations are primarily composed of (1) rules establishing minimum documentation requirements for related-party debt; and (2) transaction rules that treat as stock certain debt to related-parties that achieves an economically similar result. Commentators have argued that the compliance burden is much too high and the tracking of transactions would be extremely complex.

  1. Final regulations under IRC §987 on income and currency gain or loss with respect to IRC §987 qualified business unit: These 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. Commentators argued that parts of the regulations impose an undue financial burden and are unduly complex.

  1. Final regulations under IRC §367 on the treatment of certain transfers of property to foreign corporations: IRC §367 generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions. These 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. Commentators argued that the regulations would tax transactions which were previously exempt, noting that the legislative history of IRC §367 contemplated an exception for outbound transfers of foreign goodwill and going concern value. Commentators also stated the allowing non-taxed transfers of foreign goodwill and going concern value in certain circumstances would not lead to abuse of the exception.

The second report which explains the burden mitigating actions to be taken in regard to the above regulations is set to be released by September 18, 2017.

For more information about the above regulations and the possible impact of the burden mitigating actions which may be taken please contact a tax professional.

About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas. https://www.linkedin.com/in/drquintana