Treasury Department Aims to Reduce Burden of Eight Tax Regulations
Earlier this year, the Treasury Department announced that it is working to identify tax regulations that should be modified or repealed to reduce the burden of compliance on the taxpayer. Treasury explained that, in addition to evaluating significant regulations that have been issued recently, they will perform a comprehensive review of all regulations. Over 200 regulations have already been identified by the Treasury as needing repeal. These actions will begin in the fourth quarter of 2017.
On October 5, 2017, the Treasury released a report on upcoming actions they plan to take to reduce the burden of eight of the identified tax regulations. Two of these regulations have an especially important impact on inbound investors and those with foreign operations.
Section 385. The final and temporary Section 385 regulations address the debt or equity classification of related-party debt. The regulations provide rules to establish minimum documentation requirements. The report states that Treasury will propose to revoke the current Section 385 regulations and replace them with streamlined documentation rules. It is anticipated that these streamlined documentation rules will modify the requirements related to a reasonable expectation of ability to pay indebtedness, as well as the treatment of ordinary trade payables.
Section 367. The proposed regulation on taxing foreign goodwill and going concern value when transferring assets to a foreign business (e.g., incorporation of a foreign branch or new foreign subsidiary) was controversial because it had previously been exempt. While Treasury plans to implement these regulations, it will now work with the IRS to develop an active trade or business exception for outbound transfers under circumstances with limited potential for abuse and administrative difficulties.
Here are the other proposed changes and modifications to the additional six regulations projects identified in the Treasury release.
Withdrawal of Proposed Regulations
Section 2704. This section addresses the valuation of interests in family-controlled entities for wealth transfer tax purposes. The goal of the proposed regulations was to counteract the ability to create artificial valuation discounts to depress property values for estate and gift tax purposes. Treasury plans to withdraw the proposed regulations under Section 2704, noting that limiting valuation discounts would have hurt family-owned and operated businesses. The report also recognizes that these regulations would make it difficult and costly for a family to transfer their businesses to the next generation.
Section 103. Under Section 103, a taxpayer may exclude interest on state or local bonds, including obligations of political subdivisions, from gross income. For purposes of issuing tax-exempt municipal bonds, the proposed regulations would have added new requirements to be considered a political subdivision. For instance, a political subdivision would have been required to possess significant sovereign power and demonstrate governmental purpose and control. Treasury expressed concern that these additional requirements would be costly and burdensome. Therefore, Treasury plans to publish a withdrawal of the proposed regulations, and may propose more targeted guidance in the future.
Partial Revocation of Current Regulations
Section 7602. Under current regulations, the IRS may use private contractors to assist in auditing taxpayers. These regulations have received criticism for allowing outside attorneys to question witnesses during a summons interview. Therefore, Treasury is considering an amendment to prohibit attorneys who are private contractors from assisting the IRS in the auditing of taxpayers, including during the interview process. However, a revised regulation would allow an outside subject matter expert to participate in summons proceedings.
Section 752. The proposed and temporary regulations govern how liabilities are allocated for purposes of disguised sale treatment. The temporary regulations would have applied the rules relating to non-recourse liabilities to the formation of partnerships involving recourse liabilities. Both Treasury and the IRS are considering the revocation of the temporary regulations, and reinstatement of the prior regulations.
Substantial Revision of Current Regulations
Section 337(d). The temporary regulations prevent certain spinoff transactions involving transfers of property by C corporations to Real Estate Investment Trusts (“REITs”) from qualifying for non-recognition treatment. Treasury and the IRS plan to propose the replacement of these temporary regulations under Section 337(d).
Section 987. Treasury plans to propose substantial revisions to these regulations, which address foreign currency translations and other foreign currency transactions. Treasury intends to: (1) allow taxpayers to postpone application of these rules, (2) propose new changes to further simplify the regulation, and (3) consider more fundamental changes.
Moore Stephens Doeren Mayhew can assist in determining what impact these changes to the tax regulations may have on you and your business. Contact us today.
Carrie Koshkin, JD
International Tax Director
With nearly 15 years of experience in international tax law, Carrie’s international tax services background includes implementing tax-efficient organizations and helping clients enter new jurisdictions. Additionally, she focuses on inbound/outbound tax issues, U.S. tax implications of international restructuring, and more. Contact her at firstname.lastname@example.org or +1.713.860.0219.