Rethinking Regulations: Treasury Report Targets Regulations to Reduce Burden

On October 2, 2017, the Treasury Department (Treasury) released a report identifying certain significant regulations for full withdrawal, partial revocation or substantial revision and noting that over 200 additional regulations are under review for potential revision or revocation (the Report). 

• Treasury recommended that, as discussed below, of the eight significant regulations previously identified in Notice 2017-38: (i) two proposed regulations be withdrawn entirely; (ii) three temporary or final regulations be revoked in substantial part (including regulations under sections 385 and 707); and (iii) the remaining three regulations be substantially revised (including regulations under sections 367 and 987).
• Treasury identified regulations under section 871(m) and sections 1471 through 1474 (commonly known as FATCA), which were not identified for review in Notice 2017-38, for possible reform. 
• Treasury noted that over 200 additional regulations have been determined to be unnecessary, duplicative or obsolete to varying degrees and identified for potential revocation. In this regard, the prior revocation of the proposed “net value” regulations was an early indication of a broader effort to reduce the backlog of regulations. For prior coverage see our Legal Alert.

Treasury also announced that consistent with the administration’s mandates in Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, and Executive Order 13777, Enforcing the Regulatory Reform Agenda, it will continue to evaluate other regulations for modification or repeal, regardless of when they were issued. For prior coverage see our Legal Alert.

Proposed Regulations to Be Withdrawn Entirely:

• Proposed regulations under section 2704 on restrictions on liquidation of an interest for estate, gift and generation-skipping transfer taxes (REG-163113-02; 81 F.R. 51413).
  • Citing a lack of clarity and uncertainty with respect to these proposed regulations and skepticism about their efficacy in successfully curtailing artificial valuation discounts, the Report provides that Treasury and the Internal Revenue Service (IRS) have determined that the proposed regulations are unworkable and plan to publish a withdrawal of the proposed regulations shortly.
• Proposed regulations under section 103 on definition of political subdivision (REG-129067-15; 81 F.R. 8870).
  • While indicating that Treasury and the IRS continue to believe that some enhanced standards for qualifying as a political subdivision may be appropriate and may propose more targeted guidance in the future, the Report provides that Treasury and the IRS have determined that the regulations have an unjustifiable far-reaching impact on existing legal structures and plan to publish a withdrawal of the proposed regulations shortly.

Regulations to Consider Revoking in Part:

• Final and temporary regulations under section 385 on the treatment of certain interests in corporations as stock or indebtedness (TD 9790; 81 F.R. 72858).
  • Treasury and IRS previously announced in Notice 2017-36 a deferral of the implementation of certain rules under section 385 related to the documentation requirements for intercompany debt obligations. The Report indicates that in addition to deferral of implementation, Treasury and the IRS are considering modifying significantly the requirement of a reasonable expectation of the ability to pay indebtedness. More broadly, they are considering revoking the documentation regulations as issued and instead proposing streamlined documentation rules.
  • Treasury and the IRS, however, will not revoke, prior to the enactment of tax reform, rules under section 385 treating as stock certain debt issued by a corporation to a related holder in, or in connection with, certain transactions. If fundamental tax reform does not entirely eliminate the need for these regulations, Treasury and IRS plan to reassess these regulations.
• Temporary and proposed regulations under section 707 on the treatment of partnership liabilities (T.D. 9788; 81 F.R. 69282).
  • The Report indicates that Treasury and the IRS believe that the temporary and proposed regulations’ novel approach to addressing disguised sale treatment warrants systematic study and they are considering whether these regulations should be revoked and the prior regulations reinstated. 
  • By contrast, the Report indicates that Treasury and the IRS believe that the proposed and temporary regulations under section 752 for determining whether so-called bottom-dollar guarantees create the economic risk of loss necessary to be taken into account as a recourse liability should be retained. They will continue to study the technical issues as part of a more general review of ways to rationalize and lessen the burden of partnership tax regulations governing liabilities and allocations. 
• Final regulations under section 7602 on the participation of a person described in Section 6103(n) in a summons interview (T.D. 9778, F.R. 45409).
  • Citing concerns regarding granting private attorneys government powers and the risk that a private attorney could take practical control over important decisions under these regulations, the Report provides that Treasury and the IRS are currently considering an amendment prohibiting the IRS from enlisting outside attorneys to participate in an examination, including a summons interview, but would allow outside subject-matter experts to participate in summons proceedings where specialized knowledge is required.

Regulations to Consider Substantially Revising:

• Final regulations under section 367 on the treatment of certain transfers of property to foreign corporations (T.D. 9803; 81 F.R. 91012).
  • The Report indicates that the Office of Tax Policy and the IRS are developing a proposal to expand the scope of the active trade or business exception to include relief for outbound transfers of foreign goodwill and going-concern value attributable to a foreign branch. 
• Temporary regulations under section 337(d) on certain transfers of property to Regulated Investment Companies and Real Estate Investment Trusts (REITs) (T.D. 9770; 81 F.R. 36793).
  • The Report indicates that Treasury and the IRS are considering revisions that would limit potential taxable gain recognition in certain section 355 spin-off transactions followed by a REIT election. In addition, they are considering other technical changes to further narrow the application of the rules that were intended to prevent certain spin-off transactions involving property transfers by corporations to REITS from qualifying for non-recognition treatment. 
• Final regulations under section 987 on income and currency gain or loss with respect to a section 987 Qualified Business Unit (QBU) (T.D. 9794; 81 F.R. 88806).
  • The IRS issued Notice 2017-57 on the same day as the Report, announcing the deferral of the applicability date of the section 987 regulations until at least 2019, depending on the beginning date of the taxpayer’s taxable year. 
• The Report and Notice 2017-57 indicate that the Treasury and IRS are considering modifications to allow taxpayers to elect for a simplified method as well as alternatives to the transition rules. For expanded coverage, see our Legal Alert.