The Treasury Targeting the Recent Section 385 Debt-Equity Regulations (and Others) for Potential Repeal

On Friday, July 7th, the U.S. Department of the Treasury (the “Treasury”) announced in Notice 2017-38 that it is targeting eight tax regulations for potential repeal (click here). Included in the eight targeted are the final section 385 regulations issued in October of 2016. In a previous article from December of 2016 (click here), I discussed the onerous documentation requirements under the final section 385 regulations for related-party debt and touched on what effect these requirements may have on closely-held corporations. The Treasury’s announcement could prove as a relief to those corporations dreading the potential financial burden resulting from the new documentation requirements.

Background: Trump’s Executive Order 13789 and the Treasury’s Response

On April 21, 2017, President Trump issued Executive Order 13789 in an effort to reduce tax regulatory burdens. The Executive Order instructed the Treasury to review all “significant tax regulations” issued on or after January 1, 2016. “Significant tax regulations” are those regulations identified by the Treasury as (i) imposing an undue financial burden on U.S. taxpayers; (ii) adding undue complexity to the federal tax laws; or (iii) exceeding the statutory authority of the Internal Revenue Service. In response to President Trump’s Executive Order, the Treasury reviewed 105 temporary, proposed, and final regulations issued by the Internal Revenue Service between January 1, 2016 and April 21, 2017. Fifty-two of the regulations were identified as potentially “significant” and were reexamined.

Criticism of the Final Section 385 Regulations

Based on the reexamination, the Treasury has targeted eight tax regulations for reform, which could result in full repeal. Included in the eight targeted are the final section 385 regulations issued in October of 2016. The Treasury reveals in Notice 2017-38 that the final section 385 regulations have been criticized for creating “financial burdens of compliance, particularly with respect to more ordinary course transactions.” This criticism should not come as a huge surprise. The list of debt items required to be documented is onerous and includes the debt factors as well as an expansive definition of “events” triggering the requirement (see discussion from my previous article for more detail).

Other Tax Regulations Targeted for Potential Repeal

In addition to the final section 385 regulations, the Treasury also identified the following regulations for reform:  

• Proposed Regulations under Section 103 on the Definition of a Political Subdivision;
• Temporary Regulations under Section 337(d) on Certain Transfers of Property to     Regulated Investment Companies and Real Estate Investment Trusts;
• Final Regulations under Section 7602 on the Participation of a Person Described in     Section 6103(h) in a Summons Interview;
• Proposed Regulations under Section 2704 on Restrictions on Liquidation of an    Interest for Estate, Gift and Generation-Skipping Transfer Taxes;
• 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; and
• Final Regulations under Section 367 on the Treatment of Certain Transfers of    Property to Foreign Corporations.

If you have questions regarding Notice 2017-38 or the other tax regulations targeted for potential repeal, please contact Daniel Boysen at (214) 749-2413 or dboysen@meadowscollier.com.