Deloitte Tax Comments on Regs Targeted as Burdensome

August 7, 2017

CC:PA:LPD:PR (Notice 2017-38)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Comments pursuant to Notice 2017-38

Dear Sir or Madam:

We are pleased to submit comments on behalf of Deloitte Tax LLP (“Deloitte Tax”), a subsidiary of Deloitte LLP¹, pursuant to Notice 2017-38. On April 21, 2017, the President issued Executive Order 13789, 82 Fed. Reg. 19317 (April 26, 2017), which directs the Treasury Secretary to review all significant tax regulations issued on or after January 1, 2016, and submit two reports:

• An interim report that identifies regulations that:

• A final report that recommends specific actions to mitigate the burden imposed by the regulations listed in the interim report.

On July 7, 2017, the IRS and Treasury issued the interim report as Notice 2017-38, 2017-30 I.R.B. 147 (the “Notice”). The Notice:

• lists eight regulations that Treasury has concluded either impose an undue financial burden or add undue complexity, and states that Treasury intends to propose reforms to mitigate the burden of these regulations; and

• requests comments on how the eight regulations should be modified to reduce burdens or complexity or whether they should simply be rescinded, which are due by August 7th.

The eight regulations include, among others, regulations under sections:

• 385, on the treatment of interests in corporations as debt or equity (TD 9790);

• 987, on qualified business units with functional currencies different from those of their owners (TD 9794);

• 367, on outbound transfers of property (TD 9803); and

• 337(d), on transfers of property to regulated investment companies and real estate investment trusts (TD 9770).

In comment letters submitted by Deloitte Tax on the proposed versions of the regulations under sections 385 and 367, we suggested revisions and discussed issues regarding the proposed regulations’ complexity, cost of implementation, and statutory authority.² Deloitte Tax was one of the many participants in drafting comments submitted by NAREIT on July 29, 2016, on the final, temporary, and proposed section 337(d) regulation, and Deloitte Tax supports the revisions recommended therein. Deloitte Tax also contributed to comments submitted by the AICPA on March 29, 2007 regarding the 2006 proposed section 987 regulation.³ In the process of issuing final and temporary regulations. Treasury and IRS made some of the changes recommended by commenters, including Deloitte Tax. Notwithstanding the changes that Treasury made to the proposed versions of the regulations listed above, they continue to raise issues of financial burden, complexity, and authority. We believe that Treasury should revisit the balance of the regulatory burden imposed on taxpayers relative to the tax administration objectives that are associated with the enabling legislation.

In light of the actions announced in the Notice, and the uncertainty as to whether these regulations will or will not be significantly modified or withdrawn, taxpayers affected by the four regulations listed above are forced to choose whether or not to devote a significant portion of their existing resources to develop and implement the costly systems and processes necessary to comply with these complex regulatory frameworks and their extensive reporting requirements — resources that must be diverted from the growth of their business operations.

Accordingly, we recommend that Treasury and IRS withdraw these regulations and issue notices of proposed rulemaking only after addressing the issues identified in the Notice. Withdrawal of the regulations will enable companies to dedicate their resources to economically productive activities.

We appreciate that the implementation of the section 385 documentation rules has already been postponed for one year. We believe that withdrawal of all four of these regulations is necessary to avert the burdens and costs imposed by the regulations, as well as to avoid uncertainty as to their interim application, while Treasury considers its options, including ways to narrow the regulations in light of the concerns identified in the Notice. In addition, future regulations pursuant to these provisions should be effective on a prospective basis and allow sufficient time for taxpayers to institute systems and procedures to adapt to these new regulatory frameworks and reporting obligations.

Before binding guidance is issued by the IRS and the Treasury, we recommend that the IRS permit taxpayers to use any reasonable method to interpret the Code provisions under which those regulations were promulgated. In addition to a taxpayer’s treatment that is reasonable solely by reference to the Code, its legislative history, and relevant ease law and rulings, we believe that a taxpayer’s treatment of a relevant item that conforms to any pertinent proposed, temporary, or final regulations, including those that were superseded by the above-listed regulations or their antecedent notices of proposed rulemaking, should be considered reasonable per se for this purpose.⁴

This interim approach to interpreting the applicable statutory provisions will be particularly appropriate in the context of the section 987 regulation. Some taxpayers have already elected the 2016 final section 987 regulations in reliance on the transition rules provided by regulations, and have expended significant resources to adopt methods and systems of applying those regulations. For taxpayers with such a reliance interest, the regulations should continue to be effective until comprehensive binding guidance is finally issued. In particular, we believe that any taxpayer who has already expended the resources to comply with the temporary and final section 987 regulations should be allowed to adopt early the application of those regulations in 2017 or transition to those rules in 2018 if they choose to do so. Other taxpayers have applied principles consistent with proposed regulations issued in 1991 and do not intend to modify their application of section 987 until required to do so. The ability to use a variety of approaches for applying section 987 was acknowledged by the Government in the past and considered reasonable. Taxpayers and the IRS have managed to operate with no temporary or final regulations since the enactment of section 987 nearly 31 years ago, and with no other guidance besides proposed regulations and one short anti-abuse notice for the last 26 of those 31 years. During that period, the IRS allowed taxpayers to apply any reasonable method consistent with the statue and its legislative history.⁵ This standard should continue to apply until binding guidance is issued by the IRS and Treasury. Taxpayers have incurred substantial costs to comply with the rules of section 987 and they should be allowed to apply any form of regulatory guidance previously issued until Treasury addresses the issues identified in the Notice and issues future guidance.

We appreciate your consideration of our comments.

Sincerely yours,

W. A. Banks Edwards
Managing Partner, Washington National Tax
Deloitte Tax LLP
Washington, DC