Reform or Repeal – Regulations Identified as Imposing Undue Burden on Taxpayers

regulationsThe Secretary of the Treasury has identified eight regulations that it intends to modify or repeal as instructed by Executive Order 13789.  Under the Executive Order, the Treasury was given sixty (60) days to review all “significant tax regulations” issued on or after January 1, 2016 in order to identify 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.[1]  Out of the 105 temporary, proposed and final regulations issued from January 1, 2016 through April 21, 2017, the Treasury concluded that eight regulations met at least one of the criteria outline above.

  1. Proposed regulations under Section 2704 [2] concerning valuation of property in certain intra-family transfers. Section 2704(b) provides that certain restrictions on disposing of or liquidating family-controlled entities should be disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes.  Commentators expressed concern that the proposed regulations would eliminate or restrict minority discounts for lack of marketability, which would result in increased valuations and a transfer tax liability that would increase financial burdens.

 

  1. Temporary regulations under Section 752 on the allocation of partnership liabilities and disguised sale rules. These temporary regulations changed how liabilities are allocated under Section 752 solely for purposes of disguised sales under Section 707.  The temporary regulations also require certain partnership bottom-dollar payment obligations be ignored in allocating partnership liabilities.

 

  1. Final and temporary regulations under Section 385 on the treatment of certain interest in corporations as stock or indebtedness. These regulations established minimum documentation requirements that ordinarily must be satisfied so that purported related party debt be treated as bona fide debt for federal tax purposes.  The final and temporary regulations also provided certain situations where debt issued by a corporation to its controlling shareholder will be treated instead as stock.

 

  1. Final regulations under Section 987 on income and currency gain or loss with respect to a Section 987 qualified business unit. These final regulations provide rules for determining foreign currency gain or loss that arises when a qualified business unit uses a functional currency different from its owner.  Commentators stated that the transition rule in the final regulations imposes an undue financial burden on taxpayers because it disregards losses calculated by the taxpayers for years prior to the transition, but not previously recognized.
  2. Final regulations under Section 367 on the treatment of certain transfers of property to foreign corporations. These regulations treat certain outbound transfers of foreign goodwill and going concern value in otherwise nonrecognition transactions as taxable transfers.  Some commentators stated that the final regulations would increase burdens by taxing transactions that were previously exempt, noting in particular that the legislative history to Section 367 contemplated an exception for outbound transfers of foreign goodwill and going concern value.

 

  1. Proposed regulations under Section 103 regarding the definition of political subdivision. Commentators contend that the longstanding “sovereign powers” standard is settled law and has been endorsed by Congress.  As such, additional limitations imposed under the proposed regulations are argued to be unnecessary, burdensome and costly for issuers to revise their organizational structures to meet the new requirements in the proposed regulations.

 

  1. Temporary regulations under Section 337(d) on certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs). Commentators were concerned that the REIT spinoff rules potentially would result in over-inclusion of gain in cases where a large corporation acquires a small corporation that engaged in a Section 355 spinoff and subsequently makes a REIT election.

 

  1. Final regulations under Section 7602 on the participation of a person described in Section 6103(n) in a summons interview. These final regulations provide that a person contracted by the IRS for services, such as economists, engineers, consultants or attorneys, may participate fully in the interview of a witness summoned by the IRS.   Commentators objected to the IRS’s ability to contract outside attorneys and permit them to question witnesses summoned by the IRS under oath.

 

While the sixty (60) day deadline for the Treasury’s final report has past, in light of recent natural disasters, it may be some time before formal action is taken.  Nevertheless, the Treasury intends to propose reforms, including potentially full repeal, to mitigate the burdens of the regulations identified.


[1] Notice 2017-38, 2017-30 IRB 147.

[2] All Sections referred to in this Article are from the Internal Revenue Code.


Kristin L. Schmid is an associate with the firm. Ms. Schmid earned her J.D. from Villanova University School of Law specializing in Corporate Law, and has earned her bachelor’s degree at the University of Pennsylvania. Ms. Schmid is currently pursuing her Masters of Law (L.L.M.) in Taxation from New York University School of Law. She is a member of the Bar of the Commonwealth of Pennsylvania and the State of New Jersey. Her experience includes spin-offs, carve outs, liquidations, taxable transactions, and non-recognition transactions.