International Tax Alert - July 2017

July 2017

President’s Executive Order 13789: Eight Regulations for Review

 
Summary

On April 21, 2017, President Trump issued Executive Order 13789, a directive that instructed the Secretary of the Department of the Treasury, to review all “significant tax regulations” issued on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, to submit a 60-day interim report identifying regulations that (1) impose an undue financial burden on U.S. taxpayers; (2) add undue complexity to the Federal tax laws; or (3) exceed the statutory authority of the Internal Revenue Service (“IRS”). In addition, the executive order further instructs the Secretary to submit a final report to the President by September 18, 2017, recommending specific action to alleviate the burdens of the identified regulations. Notice 2017-38 (the “Notice”) was published on July 7, 2017, and identifies eight regulations for review in response to President Trump’s executive order.
 

Details

The Notice identifies eight regulations that meet at least one of the first two criteria specified by the executive order (i.e., impose an undue financial burden or add undue complexity to the Federal tax laws). Consistent with the order, the Department of the Treasury intends to propose reforms – ranging from streamlining problematic rule provisions to full repeal – to mitigate the burdens of these regulations in a final report submitted to the President.
 
  1. Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15; 81 F.R. 8870)
 
These proposed regulations define a “political subdivision” of a State (e.g., a city or county) that is eligible to issue tax-exempt bonds for governmental purposes under Section 103 of the Internal Revenue Code. The proposed regulations require a political subdivision to possess three attributes:  (i) sovereign powers; (ii) a governmental purpose; and (iii) governmental control.
 
  1. Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) (T.D. 9770; 81 F.R. 36793)
 
These temporary regulations amend existing rules on transfers of property by C corporations to REITs and RICs generally.  In addition, the regulations provide additional guidance relating to certain 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 nonrecognition treatment.
 
  1. Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview (T.D. 9778; 81 F.R. 45409)
 
These final regulations provide that persons described in Section 6103(n) of the Internal Revenue Code and Treas. Reg. §301.6103(n)-1(a) with whom the IRS contracts for services—such as outside economists, engineers, consultants, or attorneys—may receive books, papers, records, or other data summoned by the IRS and, in the presence and under the guidance of an IRS officer or employee, participate fully in the interview of a person who the IRS has summoned as a witness to provide testimony under oath.
 
  1. 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)
 
Section 2704(b) of the Internal Revenue Code 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 of an interest in that entity for estate and gift tax purposes.  These proposed regulations would create an additional category of restrictions that also would be disregarded in assessing the fair market value of an interest.
 
  1. Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788; 81 F.R. 69282)
 
These temporary regulations generally provide: (i) rules for how liabilities are allocated under Section 752 solely for purposes of disguised sales under Section 707 of the Internal Revenue Code; and (ii) rules for determining whether “bottom-dollar payment obligations” provide the necessary “economic risk of loss” to be taken into account as a recourse liability.
 
  1. Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)
 
These final and temporary regulations address the classification of related-party debt as debt or equity for federal tax purposes.  The regulations are primarily comprised of (i) rules establishing minimum documentation requirements that ordinarily must be satisfied in order for purported debt among related parties to be treated as debt for federal tax purposes; and (ii) transaction rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result.
 
  1. Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)
 
These final regulations provide rules for (i) translating income from branch operations conducted in a currency different from the branch owner’s functional currency into the owner’s functional currency, (ii) calculating foreign currency gain or loss with respect to the branch’s financial assets and liabilities, and (iii) recognizing such foreign currency gain or loss when the branch makes a transfer of any property to its owner.
 
  1. Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)
 
Section 367 of the Internal Revenue Code generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, subject to certain exceptions.  These 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 U.S. income tax.
 
Treasury is requesting comments on whether the regulations described in the Notice should be rescinded or modified, and in the latter case, how the regulations should be modified in order to reduce burdens and complexity. Comments from the public are due by August 7, 2017.
 
Pursuant to Executive Order 13777, Presidential Executive Order on Enforcing the Regulatory Reform Agenda, Treasury is responsible for conducting a broader review of existing regulations, including tax regulations beyond those addressed in the Notice.  In a Request for Information published on June 14, 2017 (82 F.R. 27217), Treasury invited public comment concerning regulations that should be modified or eliminated in order to reduce unnecessary burdens.  Comments in response to the Request for Information are due by July 31, 2017.  In addition, in Notice 2017-28, Treasury and the IRS invited public comment on recommendations for the 2017-2018 Priority Guidance Plan for tax guidance, including recommendations relating to Executive Order 13777.  Taxpayers may submit recommendations for tax guidance at any time during the year.
 

BDO Insights

It is interesting to note that no regulations were identified in the Notice as exceeding the statutory authority of the Internal Revenue Service. In addition, it should be noted that controversial anti-inversion regulations under Section 7874 were also not identified in the Notice.
 
Taxpayers that may be impacted by any of the eight regulations identified in the Notice should pay particular attention when the final report is submitted to the President as these regulations may be rescinded or substantially modified. 
 

For more information, please contact one of the following practice leaders:
 
Robert Pedersen
Partner
     Chip Morgan 
Partner 

 
Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office 
  Jerry Seade
Principal 

 
William F. Roth III
Partner
National Tax Office
  Monika Loving
Partner and International Tax Practice Leader

 
Scott Hendon
Partner 
  Sean Dokko
Senior Manager 
National Tax Office 

 
Annie Lee
Partner