The IRS and Treasury Department have issued the 2016-2017 Priority Guidance Plan (the Plan). The Plan provides an overview of the issues that the IRS and Treasury intend to address in the 12-month period ending in June 2017. As in prior years, the IRS and Treasury state that they will update and reissue the Plan periodically to reflect additional guidance that they intend to publish, to allow for consideration of comments received from taxpayers and practitioners on additional projects, and to respond to developments arising during the Plan year. The Plan contains several items of interest to the financial services sector and to other domestic and multinational taxpayers that enter into financial instruments or engage in other Treasury activities and planning. While some of the items on the Plan have carried over from prior year guidance plans, it does contain a number of new items. The Plan also lists some completed projects, which are not described here.

New projects

1. Regulations relating to the definition of registered form under Sections 149(a) and 163(f).

2. Regulations relating to the applicable high yield discount obligation rules in Section 163(e)(5) and (i).

3. Regulations under Section 246 relating to diminished risk of loss.

4. Regulations under Section 385 relating to characterization of certain related-party arrangements as debt or equity. Proposed regulations were published on April 8, 2016. See Tax Alert 2016-632.

5. Guidance under Sections 446, 1275 and 6050H to address the treatment and reporting of capitalized interest on modified home mortgages.

6. Guidance under Section 446 relating to accounting for hedging transactions.

7. Guidance under Section 851 relating to investments in stock and securities.

8. Regulations under Section 1001 on the modification of non-debt financial instruments.

9. Regulations under Section 1001 on the modification of debt instruments, including issues relating to disregarded entities.

10. Regulations under Section 1256(g)(2) on the definition of foreign currency contracts in light of the Sixth Circuit decision in Wright v. Comm'r. See Tax Alert 2016-87.

11. Regulations under Section 7872. Proposed regulations were published on August 20, 1985.

Carryover projects

1. Guidance applicable to banks and certain other regulated corporations under Section 166 on the conclusive presumption of worthlessness for bad debts. Notice 2013-35, which requested comments on the existing rules, was published in June 2013. See Tax Alert 2013-1016.

2. Regulations under Section 249 relating to the amount of repurchase premium attributable to the cost of borrowing.

3. Regulations under Section 446 relating to the timing and character of payments, including contingent payments, made pursuant to notional principal contracts (NPCs) and prepaid forward contracts. For NPCs, proposed regulations were published on February 26, 2004, and temporary and proposed regulations were published on May 8, 2015. See Tax Alert 2015-924. For prepaid forward contracts, Notice 2008-02 and Revenue Ruling 2008-01 were published on January 14, 2008. See Tax Alerts 2007-1028 and 2007-1027.

4. Regulations addressing issues relating to mark-to-market accounting under Section 475. Proposed regulations were issued in January 1995 and January 1999. The Section 475 global dealing regulations, proposed in 1998, are not part of this project.

5. Final regulations under Section 856 clarifying the definition of real property for purposes of the rules for real estate investment trusts. Proposed regulations were issued in May 2014. See Tax Alert 2014-924.

6. Guidance clarifying the definition of income in Section 856(c)(3) for purposes of the real estate investment trust qualification tests.

7. Guidance defining congregate care for purposes of the definition of a real estate investment trust health care facility under Section 856(e)(6)(D)(ii) and (l)(4)(B).

8. Final regulations on the application of Section 1256 to certain derivative contracts. Proposed regulations were published September 16, 2011. See Tax Alert 2011-1597. Those proposed regulations would, if finalized, delineate the scope of Section 1256, clarify the tax treatment of credit default, weather-related and other non-financial swaps, and treat most bullet swaps as NPCs.

9. Regulations relating to accruals of interest (including discount) on distressed debt. The existing IRS pronouncements in this area (e.g., TAM 9538007) have caused confusion.

10. Guidance under Section 954(c), including regarding foreign currency gains, and the active rents and royalties exception. Temporary and proposed regulations were published on September 2, 2015. See Tax Alert 2015-1760.

11. Final regulations on the treatment of upfront payments on swaps under Section 956. Temporary and proposed regulations were published in May 2015. See Tax Alert 2015-924.

12. Final regulations under Section 871(m) on dividend equivalent payments. Final, temporary, and proposed regulations were published on September 18, 2015. See Tax Alert 2015-1819.

13. Long-awaited guidance in the form of final regulations under Section 987. Proposed regulations were published in September 2006.

14. Guidance on Section 988 transactions.

Implications

Although the IRS and Treasury have historically issued guidance identified in the Plan, it is not a guarantee that guidance will be issued on identified projects by June 2017 (the current business Plan year is July 2016-June 2017). Additionally, the IRS and Treasury intend to update the Plan over the course of the business Plan year to reflect additional items that become priorities during the Plan year. Furthermore, the absence of an item from the original Plan (or any updated Plans) does not necessarily mean that the IRS and Treasury will not address an issue within the Plan year. Therefore, the Plan should not be relied upon as an exclusive list of projects the IRS and Treasury will focus on during the coming year. Interested taxpayers should continue to monitor tax news for future developments.

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