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United States: Treasury’s year-end housekeeping

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Tax News and Developments December 2023

In brief

For months, Treasury’s attention may have been focused on guidance implementing the Inflation Reduction Act, particularly the green energy provisions. Seasoned tax professionals know better than to let their guards down as fall turns to winter, however. Treasury and the IRS are notorious for releasing a flurry of guidance before the new year, often addressing imminent deadlines or tidying up loose ends. Below, we discuss some recently-released guidance that falls into these categories and some urgently needed guidance we hope to see soon.

Housekeeping items

Transactions between related persons and partnerships

On 27 November 2023, Treasury and the IRS released proposed regulations (REG-131756-11) addressing a decades-old housekeeping issue to conform existing regulations under sections 267 and 707(b) with the statutory language of those sections (i.e., sections 267(b)(10), 267(e), and 707(b)(1)(B)), which require entity treatment of partnerships. This issue was specifically listed on IRS Priority Guidance Plans between 2012 and 2017.

Sections 267 and 707 operate to disallow or defer certain deductions for losses and expenses related to transactions between partnerships and related persons. The existing regulations were issued in the 1950s and pre-date statutory changes to sections 267 and 707(b) enacted since 1982. These changes clarify that a partnership is treated as an entity, rather than as an aggregate of its partners, for purposes of applying the loss disallowance rules under sections 267(a)(1) and 707(b)(1), the gain recharacterization rules under section 707(b)(2) and the matching rule under section 267(a)(2). Related committee reports expressly state the intent to replace Question and Answers 2 and 3 in Treas. Reg. §1.267(a)-2T(c) with the changes to section 707(b)(1)(B).

As such, the proposed regulations would:

  • Remove Treas. Reg. §1.267(b)-1(b)
  • Amend Treas. Reg. §1.267(a)-1 to incorporate the rules of Questions and Answers 1 and 4 in Treas. Reg. §1.267(a)-2T(c)
  • Remove Questions and Answers 2 and 3 in Treas. Reg. §1.267(a)-2T(c)
  • Amend Treas. Reg. §1.707-1(b)

The proposed rules would not be effective until published as final regulations. Comments are due by 26 February 2024.

Section 367(b) Regulations

For all the buzz around the so-called “Killer B” transactions a few years back, the 2017 Tax and Jobs Act (TCJA) effectively took all the sting out of proposed regulations issued on 6 October 2023. For a detailed discussion, see our partners’ previous analysis in Did Anyone Notice the TCJA Made Code Sec. 367(b) Obsolete?

The proposed regulations follow years of guidance in the form of previously-issued proposed regulations and Notice 2014-32 and Notice 2016-73 (“Notices“) meant to address the appropriate carryover of tax attributes from foreign to domestic corporations in inbound corporate non-recognition transactions. Specifically, section 367(b)’s purpose under the former worldwide tax system was to prevent the avoidance of US federal income tax on a CFC’s current or accumulated E&P in these situations. Under the territorial approach of the TCJA, the majority of a CFC’s income is immediately taxed under GILTI or permanently exempt from taxation under section 245A.

While practitioners suggested that Treasury and the IRS revoke the section 367(b) regulations as a result, they instead issued the proposed regulations, which narrow the situations in which certain guidance in the Notices would apply in the post-TCJA world. The rules announced in the Notices and implemented in the proposed regulations would generally apply retroactively to the date the respective notice was issued, subject to exceptions that may require further clarification. Taxpayers and related parties may choose to apply the entirety of rules in the Notices or the proposed regulations for all open years before the proposed regulations are finalized. At that time, the Notices will become obsolete.

Further currency regulations

Treasury and the IRS recently took action to clean up proposed regulations issued on 8 December 2016, relating to the determination and recognition of taxable income or loss and foreign currency gain or loss with respect to a qualified business unit (QBU) (the 2016 Proposed Regulations). Comments were received at that time and some of the 2016 Proposed Regulations were finalized in TD 9857.

On 14 November 2023, Treasury extended the comment period relating to the 2016 Proposed Regulations, while simultaneously reissuing new proposed regulations and withdrawing certain provisions in the 2016 Proposed Regulations. In doing so, Treasury leaves open the possibility of finalizing the parts of the 2016 Proposed Regulations that remain outstanding after the extended comment period, including:

  • Rules regarding the treatment of section 988 transactions of a section 987 QBU
  • Rules regarding QBUs with the US dollar as their functional currency
  • Rules regarding the translation of income used to pay creditable foreign income taxes
  • Rules requiring the deferral of certain section 988 loss that arises with respect to related-party loans

Comments are due by 12 February 2024.

We are preparing a detailed alert on this development.  

Imminent deadlines

Beneficial ownership reporting relief

On 30 November 2023, Treasury and FinCEN published final regulations allowing for a temporary extension of time for newly-formed “Reporting Companies” to register their beneficial ownership information for calendar year 2024 as required under the Corporate Transparency Act (CTA). These rules were only proposed at the end of September, emphasizing the urgency of increasing taxpayer awareness before the 1 January 2024 effective date. For more information on the CTA, see our previous client alerts, the latest of which is New Businesses Get More Time to Report Beneficial Ownership Information.

CTA reporting deadlines

Within one year of effective date or 1 January  2025Within 90 daysWithin 30 days
Reporting Companies in existence before
1 January 2024		Reporting Companies formed on or after 1 January 2024, but before 1 January 2025Reporting Companies formed on or after 1 January 2025
Error in Beneficial Owner information (after discovery/within 90 days of filing) Updates to Beneficial Owner (death is not a change)
Reporting Company becomes exempt or vice versa

What we want

Treasury and IRS officials continue to speak about the possibility of new guidance by the end of the year or early next year, including:

  • Proposed regulations on the Corporate Alternative Minimum Tax (CAMT) that will address, among other issues, the risk of double counting of CFC distributions
  • Proposed regulations on the excise tax applicable to stock buybacks
  • Proposed regulations addressing the creditability of Pillar 2 taxes for foreign tax credit purposes
  • An extension of Notice 2023-55 (which provides temporary relief from certain aspects of the final FTC regulations)
  • Long-awaited rules on the taxation of repatriated previously taxed earnings and profits (PTEP)
  • Final rules under section 897 reconciling a US real-estate tax exemption for foreign pension funds with other rules on income from foreign governments

Taxpayers should be aware that some of these guidance projects may come with relatively short comment periods.

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Author

Alexandra Minkovich is a partner in Baker McKenzie's North American Tax Practice with more than fifteen years of experience handling a variety of tax, tax controversy, and legislative and regulatory matters. She also brings significant experience representing clients with respect to domestic tax issues, particularly in the life sciences, pharmaceutical, retail, and manufacturing industries, and is well versed in administrative law. Immediately prior to joining the Firm, Ms. Minkovich served as Associate Tax Legislative Counsel with the US Department of Treasury, Office of Tax Policy. In that role, Ms. Minkovich advised the Assistant Secretary (Tax Policy) and General Counsel regarding tax policy considerations in regulations and Internal Revenue Bulletin guidance, provided advice on tax legislative proposals, and provided litigation advice regarding the validity of Treasury and IRS guidance. She also provided technical comments on tax legislation to the Senate Committee on Finance and the House Ways & Means Committee, as well as to individual members’ offices. Ms. Minkovich speaks regularly at seminars and writes on a variety of topics related to legislative and regulatory developments, and administrative law.

Author

Elizabeth Boone joined Baker McKenzie in November 2019 as a Knowledge Lawyer for the North America Tax Practice Group. She supports the Practice Group on knowledge management matters; focusing heavily on thought leadership, U.S. and global tax policy, training agendas, and information exchange. Before joining Baker McKenzie, Elizabeth was with Bloomberg Tax and Accounting, where she focused on the taxation of U.S.–based businesses. She also served as an Attorney Advisor to Ret. Judge Diane L. Kroupa of the United States Tax Court.

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