Treasury Identifies Eight Regulations for Burden Reduction

The U.S. Treasury Department issued Notice 2017-38 on July 7, 2017, identifying eight Treasury Regulations considered to be burdensome and which may be modified or eliminated pursuant to an Executive Order issued April 21, 2017.

The Order tasked the Secretary of the Treasury to identify within 60 days significant regulations issued on or after January 1, 2016, that:

1. Imposed an undue financial burden on U.S. taxpayers,
2. Added undue complexity to U.S. federal tax law, or
3. Exceeded the statutory authority of the Internal Revenue Service.

Of the 105 regulations issued within this timeframe, 53 were deemed insignificant and the remaining 52 were reviewed further.

The eight regulations deemed to be burdensome include the following:

1. Proposed Regulations on the Definition of Political Subdivision

These proposed regulations define a “political subdivision” for a state for purposes of issuing tax-exempt bonds for governmental purposes. Commenters stated that some of these definitions were unnecessary due to settled law and that these regulations would disrupt the status of numerous entities which would have to revise their organizational structures to meet the new requirements posed by these regulations.

2. Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs)

These temporary regulations amend existing rules on transfers of property by C Corporations to REITs and RICs generally. The regulations also provide additional guidance on newly enacted 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. Commenters were concerned these regulations would provide for over-inclusion of gain in certain cases.

3. Participation of a Person in a Summons Interview

These final regulations provide that certain persons contracted by the IRS, such as outside economists, engineers, consultants, or attorneys, may receive books, papers, or other data summoned by the IRS and, in the presence of an IRS officer or employee, may 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 allow outside attorneys to question witnesses under oath.

4. Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes

These proposed regulations stipulate that certain non-commercial restrictions on the ability to liquidate or otherwise dispose of family-controlled entities should be disregarded when determining fair market value of an interest in that entity for estate and gift tax purposes. Commenters were concerned that these proposed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would lead to higher valuations and transfer tax liability that would increase financial burdens.

5. Liabilities Recognized as Recourse Partnership Liabilities

These temporary regulations generally provide:

1. Rules for how liabilities are allocated solely for purposes of disguised sales, and
2. Rules for determining whether “bottom dollar payment obligations” provide the necessary “risk of economic loss” to be taken into account as a recourse liability.

Commenters stated that the first item would unduly limit partner bases in partnership interests for disguised sale purposes and that “bottom dollar payment obligations” would prevent many business transactions, compared to prior regulations.

6. Treatment of Certain Interests in Corporations as Stock or Indebtedness

These final regulations address the classification of related-party debt as debt or equity for federal income tax purposes. Commenters noted that the costs of compliance caused undue burdens and the need to track multiple transactions through corporate groups causes undue complexities, and requested a delay in the effective date of the regulations.

7. Income and Currency Gain or Loss with Respect to a Qualified Business Unit

These final regulations provide rules for:

1. Translating income from branch operations conducted in a different functional currency,
2. Calculating foreign currency gain or loss with respect to foreign branch assets and liabilities, and
3. Recognizing such gain or loss when the branch makes a transfer of property to its owner.

Commenters stated that these regulations disregard losses incurred but not recognized prior to transition and also caused undue burden where the regulations deviated from financial accounting rules.

8. Treatment of Certain Transfers of Property to Foreign Corporations

These final regulations eliminate the ability of taxpayers to transfer foreign goodwill and going concern value to a foreign corporation without immediate or future U.S. income tax. Commenters stated that these regulations would cause undue burden as these transactions were previously exempt, and that an exception should be provided for transfers in circumstances where there would be no abuse of the exception.

The Treasury Secretary has until September 18, 2017, to submit a report to the President describing specific actions that can be taken to reduce such burdens and complexity. The Treasury is requesting public comments by August 7, 2017, on whether the regulations described in the notice should be rescinded or modified, and if modified, what modifications should be made to reduce burdens and complexity.

If you have any questions related to how these changes may affect your business, please contact your Marcum tax professional for assistance.