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Spotlight

Congressional Republican leaders offered some insights this week as to how they might achieve comprehensive US tax reform early in the next Congress. Senate Majority Leader Mitch McConnell (R-KY) was quoted as saying the Senate will pass two separate budget reconciliation bills in 2017, relating to revenue-neutral tax reform and repeal of the Affordable Care Act. Budget reconciliation only requires a simple majority of senators to pass, rather than the usual 60-vote majority.

Earlier, House Speaker Paul Ryan indicated his preference to use budget reconciliation to pass corporate tax reform that includes a 15% corporate tax rate, but only if it is revenue neutral. The revenue-neutral House Tax Reform Blueprint calls for a 20% corporate rate, in contrast to President-elect Trump's proposed 15% rate. In the meantime, House Ways and Means Committee Republican members held a two-day closed door meeting this week to discuss tax reform policy issues and ensure that progress is being made in writing tax reform legislation. Ways and Means Chairman Kevin Brady (R-TX) was quoted as saying that although there is no set completion date, he expects a tax reform plan will be ready by the time of the presidential inauguration on 20 January.

The IRS this week released final regulations (T.D. 9803) under Section 367 that eliminate the foreign goodwill exception under Reg. Section 1.367(d)-1T(b) and generally limit application of the Section 367(a)(3) active trade or business exception to certain tangible property and financial assets. As in the proposed regulations, the final regulations generally treat foreign goodwill and going concern value as an asset subject to Section 367(a) that is ineligible for the modified active trade or business exception. However, the regulations permit a US transferor to elect to apply Section 367(d), rather than Section 367(a), to an outbound transfer of this intangible.

Therefore, under the final regulations, all property transferred by a US person to a foreign corporation in a Section 351 or Section 361 exchange will be subject to either the rules of Section 367(a) or 367(d).

In response to comments, the final regulations restore the 20-year limitation on useful life for Section 367(d) intangible property, subject to certain conditions. The final regulations also modify the definition of "useful life" to include "the entire period during which exploitation of the transferred intangible property is reasonably anticipated to affect the determination of taxable income." The regulations further combine certain sections of the existing regulations under Section 367(a) into a single section.

Consistent with the proposed regulations, the final regulations generally apply to transfers occurring on or after 14 September 2015, and to transfers occurring before that date resulting from entity classification elections filed on or after 14 September 2015. An ITS Alert is pending.

The IRS also issued final regulations (T.D. 9796) under Section 6038A this week thatwould treat domestic disregarded entities wholly-owned by foreign persons as domestic corporations solely for purposes of making them subject to the reporting requirements under Section 6038A, that apply to 25% foreign-owned domestic corporations. As a result, these entities must file Form 5472, and maintain related records, for reportable transactions with the entities' foreign owners or other foreign related parties. The proposed regulations were released in May 2016.

The final Section 6038A regulations are substantially similar to the proposed regulations, but reflect a few changes. An ITS Alert provides details.

For ease of administration, the final Section 6038A regulations apply to taxable years of entities beginning on or after 1 January 2017, and ending on or after 13 December 2017. The proposed regulations would have applied to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the taxable year began.