On April 21, 2017, President Trump issued Executive Order 13789 (the "Order") with the objective of identifying and reducing tax regulatory burdens imposed by Treasury Regulations (the "Regulations"). The Order required the I.R.S to issue an interim report identifying Regulations issued on or after January 1, 2016, that either

  • impose an undue financial burden on U.S. taxpayers,
  • add undue complexity to the Federal tax laws, or
  • exceed the statutory authority of the I.R.S.

Pursuant to the Order, the I.R.S. issued an interim report vide Department No­tice 2017-38, identifying eight Regulations that met at least one of the first two above-mentioned criteria. Five of such regulations are discussed below:

1.  Temporary Regulations Under Code §337(d) on Certain Transfers of Property to Regulated Investment Companies and Real Estate Investment Trusts1

These temporary regulations amend existing rules on transfers of property by C-cor­porations to Real Estate Investment Trusts ("R.E.I.T.'s") and Regulated Investment Companies generally. Commenters expressed concern that the R.E.I.T. spinoff rules could result in over-inclusion of gain in some cases, particularly where a large corporation acquires a small corporation that engaged in a Code §355 spinoff and the large corporation subsequently makes a R.E.I.T. election.

2.  Proposed Regulations Under Code §2704 on Restrictions on Liquidation of an Interest for Estate, Gift, and Generation-Skipping Transfer Taxes2

Proposed regulations under Code §2704(b) added additional restrictions to the list of restrictions on the ability to dispose of or liquidate family-controlled entities that are disregarded in determining the fair market value of an interest in that entity for estate and gift tax purposes. Commenters expressed concern that the pro­posed regulations would eliminate or restrict common discounts, such as minority discounts and discounts for lack of marketability, which would result in increased valuations and transfer tax liability that would increase financial burdens.

3.  Temporary Regulations Under Code §752 on Liabilities Recognized as "Re­course Partnership Liabilities"3

These temporary regulations generally provide: (i) rules for how liabilities are allo­cated under Code §752 solely for purposes of the disguised sales rules under Code §707, 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. Commenters stated that the first rule would negatively impact ordinary partnership transactions and that the second rule would prevent many business transactions.

4.  Final and Temporary Regulations Under Code §385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness4

These final and temporary regulations address the classification of related-party debt as debt or equity for Federal tax purposes. Commenters criticized the financial burdens of compliance, particularly with respect to more ordinary course transac­tions, the complexity associated with tracking multiple transactions through a group of companies, and the increased tax burden imposed on inbound investments.

5.  Final Regulations Under Code §367 on the Treatment of Certain Transfers of Property to Foreign Corporations5

The final regulations under Code §367, which generally imposes immediate or future U.S. tax on transfers of property (tangible and intangible) to foreign corporations, 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. Some commenters stated that the final regulations would increase burdens by taxing transactions that were previously exempt.

The I.R.S. has requested public comments on whether the above Regulations should be rescinded or modified and, in the latter case, how the Regulations should be modified in order to reduce burden and complexity. Comments from the public are due by August 7, 2017.

According to the Order, the I.R.S. is also instructed to submit a final report to the President by September 18, 2017, recommending specific actions to mitigate the burden imposed by the Regulations identified in the interim report.

Footnotes

1 T.D. 9770; 81 F.R. 36793.

2 R.E.G.163113- 02; 81 F.R. 51413.

3 T.D. 9788; 81 F.R. 69282.

4 T.D. 9790; 81 F.R. 72858.

5 T.D. 9803; 81 F.R. 91012.

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