n-17-38.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Implementation of Executive Order 13789 (Identifying and Reducing Tax Regulatory
Burdens)

Notice 2017-38

I. INTRODUCTION

On April 21, 2017, President Donald J. Trump issued Executive Order 13789, a
directive designed to reduce tax regulatory burdens. The order instructed the Secretary
of the Treasury to review all “significant tax regulations” issued on or after January 1,
2016, and submit two reports, followed promptly by concrete action to alleviate the
burdens of regulations that meet criteria outlined in the order. Specifically, the
President directed the Secretary, in consultation with the Administrator of the Office of
Information and Regulatory Affairs, to submit a 60-day interim report identifying
regulations that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue
complexity to the Federal tax laws; or (iii) exceed the statutory authority of the Internal
Revenue Service (IRS).
1
The order further instructs the Secretary to submit a final
report to the President by September 18, 2017, recommending “specific actions to
mitigate the burden imposed by regulations identified in the interim report.”
2

II. SCOPE OF THE TREASURY DEPARTMENT’S REVIEW

From January 1, 2016, through April 21, 2017, Treasury and the IRS issued 105
temporary, proposed, and final regulations.
3
During this time period, Treasury and the
IRS issued one regulation—under Section 385 of the Internal Revenue Code—that the
Office of Management and Budget designated as significant pursuant to Executive
Order 12866. Executive Order 13789 provides, however, that in determining whether a
regulation is significant for the purpose of this review, past determinations made
pursuant to Executive Order 12866 are not controlling.

Fifty three of the 105 regulations issued during the relevant review period are
minor or technical in nature and generated minimal public comment. To ensure a
comprehensive review, Treasury treated the remaining 52 regulations as potentially
significant and reexamined all of them for the purpose of formulating the interim report.
4

1
Executive Order 13789 § 2(a) (2017).
2
Id. § 2(b).
3
This number excludes the following Federal Register documents: (1) corrections to proposed,
temporary, or final regulations; (2) notices of proposed rulemaking cross-referencing temporary
regulations required pursuant to 26 U.S.C. § 7805(e)(1); (3) notices of proposed rulemaking issued on or
after January 1, 2016, for which a subsequent final rule was issued on or before April 21, 2017; (4)
notices relating to public hearings; (5) notices withdrawing prior notices of proposed rulemaking; and (6)
non-tax regulations jointly issued by the IRS and other Departments of the Federal Government.
4
See https://www.treasury.gov/resource-center/tax-policy/Pages/Executive-Orders.aspx for a list of the
regulations that were reviewed.

2

Based on that reexamination, Treasury has identified regulations that meet the
criteria of the President’s order and qualify as significant in view of the Presidential
priorities for tax regulation outlined in Executive Order 13789.
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III. REGULATIONS IDENTIFIED FOR BURDEN REDUCTION
Treasury has concluded that the following eight regulations meet at least one of
the first two criteria specified by Section 2 of Executive Order 13789. Consistent with
the order, Treasury intends to propose reforms—potentially ranging from streamlining
problematic rule provisions to full repeal—to mitigate the burdens of these regulations in
a final report submitted to the President.

1. Proposed Regulations under Section 103 on Definition of Political Subdivision
(REG-129067-15; 81 F.R. 8870)

These proposed regulations define a “political subdivision” of a State (e.g., a city
or county) that is eligible to issue tax-exempt bonds for governmental purposes
under Section 103 of the Internal Revenue Code. The proposed regulations
require a political subdivision to possess three attributes: (i) sovereign powers;
(ii) a governmental purpose; and (iii) governmental control. Commenters stated
that the longstanding “sovereign powers” standard was settled law and had been
endorsed by Congress, and additional limitations were unnecessary.
Commenters also stated that the proposed regulations would disrupt the status of
numerous existing entities and that it would be burdensome and costly for
issuers to revise their organizational structures to meet the new requirements of
the proposed regulations.

2. Temporary Regulations under Section 337(d) on Certain Transfers of Property to
Regulated Investment Companies (RICs) and Real Estate Investment Trusts
(REITs) (T.D. 9770; 81 F.R. 36793)

These temporary regulations amend existing rules on transfers of property by
C corporations to REITs and RICs generally. In addition, the regulations provide
additional guidance relating to certain newly-enacted provisions of the Protecting
Americans from Tax Hikes Act of 2015, which were intended to prevent certain
spinoff transactions involving transfers of property by C corporations to REITs
from qualifying for nonrecognition treatment. Commenters expressed concern

5
See Executive Order 12866 § 3(f) (1993) (defining “significant regulatory action” to include, inter alia,
“any regulatory action that is likely to result in a rule that may ... [r]aise novel ... policy issues arising out
of ... the President’s priorities”). To assess “undue financial burden,” Treasury considered the degree to
which the regulation at issue imposed compliance costs or resulted in tax liabilities that exceed the
minimum required to achieve the relevant statutory objectives. To assess “undue complexity,” Treasury
considered the extent to which the regulation at issue imposed new substantive, computational, or other
requirements not required to achieve the relevant statutory objectives, or introduced rules that added
uncertainty for taxpayers.

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that the REIT 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 Section 355 spinoff and the large corporation subsequently makes a REIT
election.

3. Final Regulations under Section 7602 on the Participation of a Person Described
in Section 6103(n) in a Summons Interview (T.D. 9778; 81 F.R. 45409)

These final regulations provide that persons described in Section 6103(n) of the
Internal Revenue Code and Treas. Reg. §301.6103(n)-1(a) with whom the IRS
contracts for services—such as outside economists, engineers, consultants, or
attorneys—may receive books, papers, records, or other data summoned by the
IRS and, in the presence and under the guidance of an IRS officer or employee,
participate fully in the interview of a person who the IRS has summoned as a
witness to provide testimony under oath. Commenters objected to the IRS’s
ability to contract with outside attorneys and permit them to question witnesses
under oath, and the U.S. Senate Finance Committee approved legislation in
2016 that would prohibit the IRS from delegating to third-party contractors the
authority under Section 7602. Treasury will review these regulations as they
concern the outside attorneys under contract with the IRS to participate in the
taking of compulsory testimony under oath.

4. Proposed Regulations under Section 2704 on Restrictions on Liquidation of an
Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-
02; 81 F.R. 51413)

Section 2704(b) of the Internal Revenue Code provides that certain non-
commercial restrictions on the ability to dispose of or liquidate family-controlled
entities should be disregarded in determining the fair market value of an interest
in that entity for estate and gift tax purposes. These proposed regulations would
create an additional category of restrictions that also would be disregarded in
assessing the fair market value of an interest. 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. Commenters were also concerned that the proposed regulations would
make valuations more difficult and that the proposed narrowing of existing
regulatory exceptions was arbitrary and capricious.

5. Temporary Regulations under Section 752 on Liabilities Recognized as
Recourse Partnership Liabilities (T.D. 9788; 81 F.R. 69282)

These temporary regulations generally provide: (i) rules for how liabilities are
allocated under Section 752 solely for purposes of disguised sales under Section
707 of the Internal Revenue Code; and (ii) rules for determining whether “bottom-
dollar payment obligations” provide the necessary “economic risk of loss” to be

4

taken into account as a recourse liability. Commenters stated that the first rule
was novel and would unduly limit the amount of partners’ bases in their
partnership interests for disguised sale purposes, which would negatively impact
ordinary partnership transactions. Commenters were concerned that the bottom-
dollar payment obligation rules would prevent many business transactions
compared to the prior regulations and suggested their removal or the
development of more permissive rules.

6. Final and Temporary Regulations under Section 385 on the Treatment of Certain
Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)

These final and temporary regulations address the classification of related-party
debt as debt or equity for federal tax purposes. The regulations are primarily
comprised of (i) rules establishing minimum documentation requirements that
ordinarily must be satisfied in order for purported debt among related parties to
be treated as debt for federal tax purposes; and (ii) transaction rules that treat as
stock certain debt that is issued by a corporation to a controlling shareholder in a
distribution or in another related-party transaction that achieves an economically
similar result. Commenters to the documentation rules criticized the financial
burdens of compliance, particularly with respect to more ordinary course
transactions. Commenters also requested a longer delay in the effective date of
the documentation rules. Commenters to the final transaction rules criticized the
complexity associated with tracking multiple transactions through a group of
companies and the increased tax burden imposed on inbound investments.

7. Final Regulations under Section 987 on Income and Currency Gain or Loss With
Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)

These final regulations provide rules for (i) translating income from branch
operations conducted in a currency different from the branch owner’s functional
currency into the owner’s functional currency, (ii) calculating foreign currency
gain or loss with respect to the branch’s financial assets and liabilities, and (iii)
recognizing such foreign currency gain or loss when the branch makes a transfer
of any property to its owner. Commenters on the regulations stated that the
transition rule in the final regulations imposes an undue financial burden on
taxpayers because it disregards losses calculated by the taxpayer for years prior
to the transition but not previously recognized. Commenters also stated that the
method prescribed by the final regulations for calculating foreign currency gain or
loss was unduly complex and costly to comply with, particularly where the final
regulations differ from financial accounting rules.

8. Final Regulations under Section 367 on the Treatment of Certain Transfers of
Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)

Section 367 of the Internal Revenue Code generally imposes immediate or future
U.S. tax on transfers of property (tangible and intangible) to foreign corporations,

5

subject to certain exceptions. These final regulations 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, noting in particular that the
legislative history to Section 367 contemplated an exception for outbound
transfers of foreign goodwill and going concern value. Commenters also stated
that an exception should be provided for transfers of foreign goodwill and going
concern value in circumstances that would not lead to an abuse of the exception.

IV. REQUEST FOR COMMENTS

Treasury is requesting comments on whether the regulations described in this
notice should be rescinded or modified, and in the latter case, how the regulations
should be modified in order to reduce burdens and complexity. Comments from the
public are due by August 7, 2017. Comments should be submitted to: Internal Revenue
Service, CC:PA:LPD:PR (Notice 2017-38), Room 5205, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20224. Alternatively, comments may be hand-delivered
Monday through Friday between the hours of 8:00 a.m. to 4:00 p.m. to: CC:PA:LPD:PR
(Notice 2017-38), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue,
N.W., Washington, DC. Comments may also be submitted electronically via the
following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include
Notice 2017-38 in the subject line of any electronic submissions. Comments will be
available for public inspection and copying.

Pursuant to Executive Order 13777, Presidential Executive Order on Enforcing
the Regulatory Reform Agenda, Treasury is responsible for conducting a broader review
of existing regulations, including tax regulations beyond those addressed in this notice.
In a Request for Information published on June 14, 2017 (82 F.R. 27217), Treasury
invited public comment concerning regulations that should be modified or eliminated in
order to reduce unnecessary burdens. Comments in response to the Request for
Information are due by July 31, 2017. In addition, in Notice 2017-28, Treasury and the
IRS invited public comment on recommendations for the 2017-2018 Priority Guidance
Plan for tax guidance, including recommendations relating to Executive Order 13777.
Taxpayers may submit recommendations for tax guidance at any time during the year.

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