As you will recall, earlier this year, President Trump issued an Executive Order requiring the Department of Treasury to identify regulations issued during the last year of the Obama Administration that would increase burdens on taxpayers and impede economic growth.  After identifying eight such regulations in an interim report released in June, Treasury last week issued a follow-up report with specific recommended actions.

• Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness

Treasury plans to propose revoking the Section 385 documentation regulations and replacing them with streamlined documentation rules. According to Treasury, the proposed rule should include an effective date that would allow sufficient time for comments and compliance. The proposed streamlined documentation rules are expected to modify the requirements related to a reasonable expectation of ability to pay indebtedness and treatment of ordinary trade payables.

Moreover, Treasury will continue to work with Congress on fundamental tax reform in an effort to address base erosion and earnings stripping while removing tax incentives for foreign takeovers of U.S. companies or for U.S. companies to invert.  That said, Treasury plans to retain the distribution regulations under Section 385 pending enactment of tax reform, as they are seen as necessary to safeguard against earnings stripping.  At the same time, Treasury is considering ways to simplify the distribution regulations and ease compliance if tax reform does not eliminate the need for these regulations.

In addition, the report identifies the following regulations to consider for:

Withdrawal:

• Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes

• Proposed Regulations under Section 103 on Definition of Political Subdivision

Partial Revocation:

• Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons Interview

• Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities

Substantial Revision:

• Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies and Real Estate Investment Trusts

• Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations

• Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit

Treasury also announced that it will continue to work to identify additional regulations for modification or repeal by evaluating recently-issued significant regulations and initiating a comprehensive review of all regulations, regardless of when they were issued. The comprehensive review has already identified over 200 regulations that Treasury believes should be repealed – a process that will begin this quarter.  According to Secretary Mnuchin, “this is only the beginning of our efforts to reduce the burden of tax regulations…Our tax code has been broken for too long, and this retrospective review, along with our efforts on tax reform, will ensure that we have a tax system that fosters economic growth.”