The IRS and Treasury Department have issued the 2017-2018 Priority Guidance Plan (the Plan). The Plan provides an overview of the projects that the IRS and Treasury intend to address in the 12-month period ending June 30, 2018. 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 projects have carried over from prior year guidance plans, the Plan does contain new items. The Plan also lists some completed projects, which are not described here. In addition, the Plan has removed from this year's list several projects that were included in last year's plan (listed below).

Unlike prior years' plans, the Plan is broken into four parts, with a focus on burden-reducing efforts. Part I reviews Treasury's plans with respect to the eight regulations from 2016 that were identified for review under Executive Order 13789 (see Tax Alert 2017-1198). Part II describes certain burden-reducing projects that Treasury believes it can complete during the year. Part III describes various projects related to the new partnership audit regime (see Tax Alerts 2017-168 and 2017-1002). Part IV includes the Treasury's list of planned projects for the year by subject area, similar to prior years' plans.

New projects

1. Guidance on application of the cure provisions under Section 851(i) for regulated investment companies (RICs) and Section 856(c)(7) and (g)(5) for real estate investment trusts (REITs).

2. Guidance under Section 856(c)(5)(J) to determine whether Subpart F income and passive foreign investment company (PFIC) inclusions are treated as qualifying income for purposes of Section 856(c). Presumably, this project developed from carryover project (5) below.

3. Guidance on the constant yield election under Section 1276(b).

4. Guidance on the exchange of mortgage-backed securities.

5. Guidance on the treatment of fees relating to debt instruments and other securities.

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

4. Guidance addressing issues relating to mark-to-market accounting under Section 475.

5. Final regulations under Section 851 relating to investments in stock and securities. Proposed regulations were published on September 28, 2016 (see Tax Alert 2016-1644).

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

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

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

9. 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).

10. Guidance under Section 954(c) regarding foreign currency gains.

Projects no longer included

1. Regulations on the applicable high-yield discount obligation rules in Section 163(e)(5) and (i).

2. Regulations under Section 246 on diminished risk of loss.

3. Regulations under Section 446 on 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. Guidance under Section 446 on accounting for hedging transactions.

5. Guidance defining congregate care for purposes of the definition of a REIT health care facility under Section 856(e)(6)(D)(ii) and (l)(4)(B).

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

7. Final regulations on the application of Section 1256 to certain derivative contracts. Proposed regulations were published on 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.

8. 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.

Implications

Although the IRS and Treasury have historically issued some of the guidance identified in the Plan, it is not a guarantee that guidance will be issued on identified projects by June 2018. 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. Some of the projects coming off the list could evidence a reallocation of resources away from areas that would be affected by passage of the Modernization of Derivatives Act. Some projects might also have been removed under a new "80% rule," under which only projects perceived as at least 80% likely to be published by the end of the plan year were included, according to a government official. 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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