Regulations implemented last year under Section 385 of the US tax code could become less burdensome if they’re included on the final list of “significant tax regulations” the US Treasury’s reviewing for possible change. The list of eight regulations is part of Treasury’s marching orders issued by President Trump’s Executive Order 13789 in April to reduce tax regulatory burdens.
Under the original Sec. 385 proposal, the IRS would have been able to treat certain related-party interests as part stock and part debt; create documentation requirements for certain related-party debt and treat certain related-party debt as stock for all purposes related to certain distributions and acquisitions. But when Treasury released the final and temporary rules related to Sec. 385 Regulations in October 2016, they turned out to be significantly narrower in scope than earlier proposed in April 2016.
However, while the October rules weren’t as bad as anticipated, they still would have created headaches because the final rules still required minimum documentation for debt to be treated as debt instead of stock. This meant that companies still had to set up internal processes to avoid having debt turn to equity (by not having proper loan agreements, etc) as they issued debt between entities.
“Some people think that the documentation rules are too burdensome and should be made more practical,” one tax expert noted. “The mechanics of documentation may be modified; maybe the 72-month look-back and forward rule will also be revisited.”
Some even think all the new proposals under Sec. 385 will be scrapped altogether. Treasury is asking the public for comments on whether the eight regulations notice should be rescinded or modified, and for the latter, how they should be modified to reduce burdens and complexity. Comments from the public are due by August 7, 2017.
Not all of the regs on Treasury’s list are business-related; those that are include: Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs) and Real Estate Investment Trusts; Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities; Final Regulations under Section 987 on Income and Currency Gain or Loss with Respect to a Section 987 qualified Business Unit; Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations.
Whether they are altered or scrapped will be up to the new head of tax policy at Treasury, who will have confirmation hearings this week. On Tuesday July 18, the Republican-led Senate Finance Committee will weigh whether to confirm David Kautter, Trump’s nominee. If approved Mr. Kautter would become assistant Treasury secretary for tax policy, a position, according to reports, seen as vital to pushing through tax reform plans Trump and other Republicans promised to address later this year.