Editor's Note -

Welcome to Tax Talk 9.02. By this fall, we may look back on Q2 2016 with some nostalgia. Of course, there is the U.S. presidential election on November 8th, but U.S. tax advisors right now are more focused on the proposed Section 3851 debt-equity regulations released in early April. Despite over 100 comment letters and a three-hour public hearing on July 14, 2016, U.S. Treasury Department officials have not budged from their plan to release final regulations after Labor Day. Once they do, some debt instruments will only have 90 days to live before they are recharacterized as equity for federal income tax purposes. And that’s just one of the features of the proposed regulations which have been roundly criticized from every angle. Lost in the shuffle, however, was an IRS announcement2 that any challenge to a taxpayer brought under the regulations once they are final (assuming they become final) needs an additional layer of approval—the IRS Associate Chief Counsel. This reminds us of the Treas. Reg. §1.702-2 partnership anti-abuse rule and the codification of the economic substance doctrine where similar requirements exist.3 A cynic might say the government gets the most out of the regulations like these when taxpayers simply don’t do their transactions. If the government allowed its audit teams unbridled ability to assert the regulations, they would bring lots of cases, not all of them strong ones. This would also provide taxpayers more incentive and more opportunities to challenge the regulations. If a taxpayer won, that could begin to undermine the entire effort. But by restricting audit team access to the provision, the government achieves the desired “in terrorem” effect with less risk of a successful taxpayer challenge. The government understands quite well that few taxpayers have the gumption (and resources) to bet the ranch on tax litigation. Having said that, you might be willing to bet the ranch (and a whole lot more) on a taxpayer challenging these particular regulations in the future if they are finalized.4 We’ll be reporting on that in Tax Talk 15.04.

Back to Tax Talk 9.02, however, we cover the fallout from the proposed Section 385 regulations in detail. We also cover proposed changes to the model qualified intermediary agreement, proposed regulations for disregarded entities wholly owned by foreign persons, the Republican tax reform plan, and more.