Federal Register / Vol. 82, No. 198 / Monday, October 16, 2017 / Proposed Rules 48013 

1 42 U.S.C. 7173 (2012). 

2 82 FR 46940 (Oct. 10, 2017). 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

■ 1. The authority citation for part 71 

continues to read as follows: 

Authority: 49 U.S.C. 106(f), 106(g); 40103, 

40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR, 

1959–1963 Comp., p. 389. 

§ 71.1 [Amended] 

■ 2. The incorporation by reference in 

14 CFR 71.1 of FAA Order 7400.11B, 

Airspace Designations and Reporting 

Points, dated August 3, 2017 and 

effective September 15, 2017, is 

amended as follows: 

Paragraph 6010(a) Domestic VOR Federal 

Airways. 

* * * * * 

V–20 [Amended] 

From McAllen, TX, via INT McAllen 038° 

and Corpus Christi, TX, 178° radials; 10 

miles 8 miles wide, 37 miles 7 miles wide 

(3 miles east and 4 miles west of centerline), 

Corpus Christi; INT Corpus Christi 054° and 

Palacios, TX, 226° radials; Palacios; Hobby, 

TX; Beaumont, TX; Lake Charles, LA; 

Lafayette, LA; Reserve, LA; INT Reserve 084° 

and Gulfport, MS, 247° radials; Gulfport; 

Semmes, AL; INT Semmes 048° and 

Monroeville, AL, 231° radials; Monroeville; 

Montgomery, AL; Tuskegee, AL; Columbus, 

GA; INT Columbus 068° and Athens, GA, 

195° radials; Athens; Electric City, SC; 

Sugarloaf Mountain, NC; Barretts Mountain, 

NC; South Boston, VA; to Richmond, VA. 

The airspace on the main airway above 

14,000 feet MSL from McAllen to 49 miles 

northeast and the airspace within Mexico is 

excluded. 

V–31 [Amended] 

From Baltimore, MD; INT Baltimore 004° 

and Harrisburg, PA, 147° radials; Harrisburg; 

Selinsgrove, PA; Williamsport, PA; Elmira, 

NY; INT Elmira 002° and Rochester, NY, 120° 

radials; Rochester; to INT Rochester 279° and 

Buffalo, NY 023° radials. 

V–33 [Amended] 

From Baltimore, MD; INT Baltimore 004° 

and Harrisburg, PA, 147° radials; Harrisburg; 

Philipsburg, PA; Keating, PA; Bradford, PA; 

Buffalo, NY. 

V–308 [Amended] 

From Waterloo, DE; Sea Isle; NJ; INT Sea 

Isle 050° and Hampton, NY, 223° radials; 

Hampton; Groton, CT; to Norwich, CT. The 

airspace below 2,000 feet MSL that lies 

outside the United States and the airspace 

below 3,000 feet MSL between Kennedy, NY, 

087° and 141° radials is excluded. 

V–379 [Removed] 

V–433 [Amended] 

From Dupont, DE; Yardley, PA; INT 

Yardley 047° and Kennedy, NY, 253° radials; 

INT Kennedy 253° and LaGuardia, NY, 213° 

radials; LaGuardia; Bridgeport, CT; INT 

Bridgeport 324° and Pawling, NY, 160° 

radials; Pawling; INT Pawling 304° and 

Rockdale, NY, 116° radials; Rockdale; INT 

Rockdale 325° and Syracuse, NY, 100° 

radials; to Syracuse. 

Issued in Washington, DC, on October 10, 

2017. 

Gemechu Gelgelu, 

Acting Manager, Airspace Policy Group. 

[FR Doc. 2017–22235 Filed 10–13–17; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF ENERGY 

Federal Energy Regulatory 

Commission 

18 CFR Part 35 

[Docket No. RM18–1–000] 

Grid Reliability and Resilience Pricing 

AGENCY: Federal Energy Regulatory 

Commission, Department of Energy. 

ACTION: Proposed rule; Request for 

Comments. 

SUMMARY: The Federal Energy 

Regulatory Commission (Commission) is 

inviting comments on the proposed rule 

published on October 10, 2017 in the 

Federal Register by the Commission at 

the direction of the Department of 

Energy. 

DATES: Interested persons are invited to 

submit comments on all matters and 

issues regarding the Proposal. 

Comments are due on or before October 

23, 2017. Reply comments are due on or 

before November 7, 2017. 

ADDRESSES: Comments must refer to 

Docket No. RM18–1–000 and must 

include the commenter’s name, the 

organization they represent, if 

applicable, and their address. 

The Commission encourages 

comments to be filed electronically via 

the eFiling link on the Commission’s 

Web site at http://www.ferc.gov. The 

Commission accepts most standard 

word processing formats. Documents 

created electronically using word 

processing software should be filed in 

native applications or print-to-PDF 

format and not in a scanned format. 

Commenters filing electronically do not 

need to make a paper filing. 

Commenters that are not able to file 

comments electronically must send an 

original of their comments to: Federal 

Energy Regulatory Commission, 

Secretary of the Commission, 888 First 

Street NE., Washington, DC 20426. 

SUPPLEMENTARY INFORMATION: On 

October 10, 2017, pursuant to section 

403 of the Department of Energy 

Organization Act,1 the Secretary of 

Energy (Secretary) published in the 

Federal Register a proposed rule for 

final action (Proposal) by the Federal 

Energy Regulatory Commission 

(Commission).2

All comments will be placed in the 

Commission’s public files and may be 

viewed, printed, or downloaded 

remotely. Commenters on the Proposal 

are not required to serve copies of their 

comments on other commenters. 

Dated: October 2, 2017. 

Kimberly D. Bose, 

Secretary. 

[FR Doc. 2017–22215 Filed 10–13–17; 8:45 am] 

BILLING CODE 6717–01–P 

DEPARTMENT OF THE TREASURY 

26 CFR Parts 1 and 301 

Executive Order 13789—Second 

Report to the President on Identifying 

and Reducing Tax Regulatory Burdens 

AGENCY: Department of the Treasury. 

ACTION: Regulatory review. 

SUMMARY: On April 21, 2017, the 

President issued Executive Order 13789 

(82 FR 19317), a directive designed to 

reduce tax regulatory burdens. The 

order directed the Secretary of the 

Treasury to identify significant tax 

regulations issued on or after January 1, 

2016, that impose an undue financial 

burden on U.S. taxpayers, add undue 

complexity to the Federal tax laws, or 

exceed the statutory authority of the 

Internal Revenue Service (IRS). In an 

interim Report to the President dated 

June 22, 2017, Treasury identified eight 

such regulations. Executive Order 13789 

further directs the Secretary to submit to 

the President and publish in the Federal 

Register a report recommending specific 

actions to mitigate the burden imposed 

by regulations identified in the interim 

report. This Second Report sets forth the 

Secretary’s recommendations. 

DATES: October 16, 2017. 

FOR FURTHER INFORMATION CONTACT: 

Austin Bramwell, Senior Advisor, Office 

of Tax Policy, (202) 622–7827 (not a 

toll-free call). 

SUPPLEMENTARY INFORMATION: 

Introduction 

This Second Report recommends 

actions to eliminate, and in other cases 

mitigate, consistent with law, the 

burdens imposed on taxpayers by eight 

regulations that the Department of the 


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1Executive Order 13771, titled ‘‘Reducing 

Regulation and Controlling Regulatory Costs,’’ 

manages the costs associated with the regulatory 

compliance by, among other things, generally 

requiring the identification of two regulations for 

repeal for every new regulation that is proposed. 

Executive Order 13777, titled ‘‘Enforcing the 

Regulatory Reform Agenda,’’ sets forth procedures 

for implementing and enforcing regulatory reform. 

2See Executive Order 13777 § 3(f) (directing 

‘‘each agency head [to] prioritize’’ revocation of 

regulations which are ‘‘outdated, unnecessary, or 

ineffective’’). 

3Comments can be found at the following Web 

site: https://www.regulations.gov/ 

docketBrowser?rpp=25&so=DESC&sb=comment 

DueDate&po=0&dct=PS&D=IRS-2017-0012. 

Treasury (Treasury) has identified for 

review under Executive Order 13789. As 

stated in the order, it is the policy of the 

President that tax regulations provide 

clarity and useful guidance. Recent 

regulations, however, have increased tax 

burdens and impeded economic growth. 

The order therefore calls for immediate 

action to reduce tax regulatory burdens 

and provide useful and simplified tax 

guidance. 

The order directed the Secretary of 

the Treasury to identify significant tax 

regulations issued on or after January 1, 

2016, that (i) impose an undue financial 

burden on U.S. taxpayers, (ii) add 

undue complexity to the Federal tax 

laws, or (iii) exceed the statutory 

authority of the Internal Revenue 

Service (IRS). In an interim Report to 

the President dated June 22, 2017 (the 

‘‘June 22 Report’’), Treasury identified 

eight such regulations. Executive Order 

13789 further directs the Secretary to 

submit to the President a report 

recommending ‘‘specific actions to 

mitigate the burden imposed by 

regulations identified in the interim 

report.’’ 

This Second Report sets forth the 

Secretary’s recommendations. Treasury 

expects to issue additional reports on 

reducing tax regulatory burdens, 

including, as directed in the order, the 

status of Treasury’s actions 

recommended in this Second Report. 

Treasury Department Retrospective 

Regulatory Review 

Treasury is committed to reducing 

complexity and lessening the burden of 

tax regulations. In response to Executive 

Order 13789, Treasury’s Office of Tax 

Policy completed a comprehensive 

review of all tax regulations issued in 

2016 and January 2017. The June 22 

Report identified eight proposed, 

temporary, or final regulations for 

withdrawal, revocation, or modification. 

Treasury continues to analyze all 

recently issued significant regulations 

and is considering possible reforms of 

several recent regulations not identified 

in the June 22 Report. These include 

regulations under Section 871(m), 

relating to payments treated as U.S. 

source dividends, and the Foreign 

Account Tax Compliance Act. 

In addition, in furtherance of the 

policies stated in Executive Order 

13789, Executive Order 13771, and 

Executive Order 13777,1 Treasury and 

the IRS have initiated a comprehensive 

review, coordinated by the Treasury 

Regulatory Reform Task Force, of all tax 

regulations, regardless of when they 

were issued. Thus, most of the 

regulations subject to this review 

predate January 1, 2016. This review 

will identify tax regulations that are 

unnecessary, create undue complexity, 

impose excessive burdens, or fail to 

provide clarity and useful guidance, and 

Treasury and the IRS will pursue reform 

or revocation of those regulations. 

Included in the review are longstanding 

temporary or proposed regulations that 

have not expired or been finalized. As 

part of the process coordinated by the 

Treasury Regulatory Reform Task Force, 

the IRS Office of Chief Counsel has 

already identified over 200 regulations 

for potential revocation, most of which 

have been outstanding for many years. 

These regulations remain in the Code of 

Federal Regulations (CFR) but are, to 

varying degrees, unnecessary, 

duplicative, or obsolete, and force 

taxpayers to navigate unnecessarily 

complex or confusing rules.2 Treasury 

and the IRS expect to begin the 

rulemaking process for revoking these 

regulations in the fourth quarter of 2017. 

Treasury and the IRS are also seeking to 

streamline rules where possible. Later 

reports and guidance will provide 

details on the regulations identified for 

possible action, the reasons that they 

may be revoked, and the manner in 

which revocation would occur. 

Treasury has considered carefully the 

burdens that the eight regulations 

identified in the June 22 Report impose 

and, in conjunction with the IRS Office 

of Chief Counsel, has extensively 

studied possible actions to provide 

relief. In response to a public request for 

comments following the June 22 Report, 

Treasury received over 140 comments 

from the public—as well as thousands 

of duplicate form comments— 

concerning the potential modification or 

revocation of the eight regulations 

identified.3 The thrust of the comments 

varied widely, with some 

recommending that Treasury withdraw 

one or more of the regulations and 

others requesting that Treasury retain 

those same regulations. Treasury has 

carefully reviewed and considered the 

comments and possible reforms. One 

specific action—guidance delaying the 

documentation regulations under 

Section 385—has already been taken by 

the IRS in Notice 2017–36. As described 

below, Treasury now recommends, 

consistent with law, that two proposed 

regulations be withdrawn entirely, three 

temporary or final regulations be 

revoked in substantial part, and the 

remaining three regulations all be 

substantially revised. 

Proposed Regulations To Be Withdrawn 

Entirely 

1. Proposed Regulations Under Section 

2704 on Restrictions on Liquidation of 

an Interest for Estate, Gift and 

Generation-Skipping Transfer Taxes 

(REG–163113–02; 81 FR 51413) 

Section 2704 addresses the valuation, 

for wealth transfer tax purposes, of 

interests in family-controlled entities. In 

limited cases, Section 2704 disregards 

restrictions on the ability to liquidate 

family-controlled entities when 

determining the fair market value of an 

interest for estate, gift, and generationskipping transfer tax purposes. Also in 

limited cases, Section 2704 treats lapses 

of voting or liquidation rights as if they 

were transfers for gift and estate tax 

purposes. The proposed regulations, 

through a web of dense rules and 

definitions, would have narrowed 

longstanding exceptions and 

dramatically expanded the class of 

restrictions that are disregarded under 

Section 2704. In addition, the proposed 

regulations would have required an 

entity interest to be valued as if 

disregarded restrictions did not exist, 

either in the entity’s governing 

documents or under state law. No 

exceptions would have been allowed for 

interests in active or operating 

businesses. 

The goal of the proposed regulations 

was to counteract changes in state 

statutes and developments in case law 

that have eroded Section 2704’s 

applicability and facilitated the use of 

family-controlled entities to generate 

artificial valuation discounts, such as 

for lack of control and marketability, 

and thereby depress the value of 

property for gift and estate tax purposes. 

Commenters warned, however, that the 

valuation requirements of the proposed 

regulations were unclear and that their 

eff on traditional valuation discounts 

was uncertain. In particular, 

commenters argued that it was not 

feasible to value an entity interest as if 

no restrictions on withdrawal or 

liquidation existed in either the entity’s 

governing documents or state law. A 

legal vacuum in which there is no law 

relevant to an interest holder’s right to 


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4United States v. Microsoft Corp., 154 F. Supp. 

3d 1134, 1143 (W.D. Wash. 2015). 

5 Id. 

withdraw or liquidate is impossible, 

commenters asserted, and, therefore, 

cannot meaningfully be applied as a 

valuation assumption. Commenters also 

argued that the proposed regulations 

could have produced unrealistic 

valuations. For example, the lack of a 

market for interests in family-owned 

operating businesses is a reality that, 

commenters argued, should continue to 

be taken into account when determining 

fair market value. 

After reviewing these comments, 

Treasury and the IRS now believe that 

the proposed regulations’ approach to 

the problem of artificial valuation 

discounts is unworkable. In particular, 

Treasury and the IRS currently agree 

with commenters that taxpayers, their 

advisors, the IRS, and the courts would 

not, as a practical matter, be able to 

determine the value of an entity interest 

based on the fanciful assumption of a 

world where no legal authority exists. 

Given that uncertainty, it is unclear 

whether the valuation rules of the 

proposed regulations would have even 

succeeded in curtailing artificial 

valuation discounts. Moreover, merely 

to reach the conclusion that an entity 

interest should be valued as if 

restrictions did not exist, the proposed 

regulations would have compelled 

taxpayers to master lengthy and difficult 

rules on family control and the rights of 

interest holders. The burden of 

compliance with the proposed 

regulations would have been excessive, 

given the uncertainty of any policy 

gains. Finally, the proposed regulations 

could have affected valuation discounts 

even where discount factors, such as 

lack of control or lack of a market, were 

not created artificially as a valuedepressing device. 

In light of these concerns, Treasury 

and the IRS currently believe that these 

proposed regulations should be 

withdrawn in their entirety. Treasury 

and the IRS plan to publish a 

withdrawal of the proposed regulations 

shortly in the Federal Register. 

2. Proposed Regulations Under Section 

103 on Definition of Political 

Subdivision (REG–129067–15; 81 FR 

8870) 

Section 103 excludes from a 

taxpayer’s gross income the interest on 

state or local bonds, including 

obligations of political subdivisions. 

Proposed regulations would have 

required a ‘‘political subdivision’’ to 

possess not only significant sovereign 

power, but also to meet enhanced 

standards to show a governmental 

purpose and governmental control. 

Some commenters argued that settled 

law only requires a political subdivision 

to possess sovereign powers. Many 

commenters also argued that the 

proposed regulations would force costly 

and burdensome changes in entity 

structure to meet the new requirements. 

Treasury and the IRS continue to 

believe that some enhanced standards 

for qualifying as a political subdivision 

may be appropriate. After careful 

consideration of the comments on the 

proposed regulations, however, 

Treasury and the IRS now believe that 

regulations having as far-reaching an 

impact on existing legal structures as 

the proposed regulations are not 

justified. 

Thus, while Treasury and the IRS will 

continue to study the legal issues 

relating to political subdivisions, 

Treasury and the IRS currently believe 

that these proposed regulations should 

be withdrawn in their entirety, and plan 

to publish a withdrawal of the proposed 

regulations shortly in the Federal 

Register. Treasury and the IRS may 

propose more targeted guidance in the 

future after further study of the relevant 

legal issues. 

Regulations To Consider Revoking in 

Part 

3. Final Regulations Under Section 7602 

on the Participation of a Person 

Described in Section 6103(n) in a 

Summons Interview (T.D. 9778; 81 FR 

45409) 

These final regulations provide that 

the IRS may use private contractors to 

assist the IRS in auditing taxpayers. 

Under the regulations, the IRS may 

contract with persons who are not 

government employees, and those 

private contractors may ‘‘participate 

fully’’ in the IRS’s interview of 

taxpayers or other witnesses summoned 

to provide testimony during an 

examination. In particular, the 

regulations allow private contractors to 

receive and review records produced in 

response to a summons, be present 

during interviews of witnesses, and 

question witnesses under oath, under 

the guidance of an IRS officer or 

employee. These regulations were 

issued as temporary regulations in 2014 

and were finalized in 2016. 

Although only two comments were 

submitted during the public comment 

period, these regulations have since 

attracted public attention and criticism. 

In particular, the IRS’s ability to hire 

outside attorneys as contractors and 

have them question witnesses during a 

summons interview has raised concerns. 

After the IRS hired an outside law firm 

to assist with the audit of a corporate 

taxpayer, a federal court found that the 

‘‘idea that the IRS can ‘farm out’ legal 

assistance to a private law firm is by no 

means established by prior practice’’ 

and noted that it ‘‘may lead to further 

scrutiny by Congress.’’ 4 While the court 

determined, based on the statute, that 

the IRS had the legal authority to enlist 

the outside attorneys, the court was 

‘‘troubled by [the law firm’s] level of 

involvement in this audit.’’ 5 The Senate 

Finance Committee subsequently 

approved legislation that would prohibit 

the IRS from using any private 

contractors for any purpose in summons 

proceedings. This legislation has not 

been enacted into law. 

After reviewing and considering the 

foregoing concerns and the public 

comments received, Treasury and the 

IRS are looking into proposing a 

prospectively effective amendment to 

these regulations in order to narrow 

their scope by prohibiting the IRS from 

enlisting outside attorneys to participate 

in an examination, including a 

summons interview. Under the 

amendment currently contemplated by 

Treasury and the IRS, outside attorneys 

would not be permitted to question 

witnesses on behalf of the IRS, nor 

would they be permitted to play a 

behind-the-scenes role, such as by 

reviewing summoned records or 

consulting on IRS legal strategy. When 

the IRS enlists outside attorneys to 

perform the investigative functions 

ordinarily performed by IRS employees, 

the government risks losing control of 

its own investigation. 

IRS investigators wield significant 

power to question witnesses under oath, 

to receive and review books and 

records, and to make discretionary 

strategic judgments during an audit— 

with potentially serious consequences 

for the taxpayer. The current regulation 

requires the IRS to retain authority over 

important decisions, but the risk of a 

private attorney taking practical control 

may simply be too great. These powers 

should be exercised solely by 

government employees committed to 

serve the public interest, not by outside 

attorneys. These concerns outweigh any 

countervailing need for the IRS to 

contract with outside attorneys. 

Treasury remains confident that the core 

functions of questioning witnesses and 

conducting investigations are well 

within the expertise and ability of the 

IRS’s dedicated attorneys and 

examination agents. 

Although Treasury and the IRS are 

currently considering proposing an 

amendment to the regulations so that 

outside lawyers would no longer be 


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allowed to participate in an 

examination, Treasury and the IRS 

currently intend that the regulations 

would continue to allow outside 

subject-matter experts to participate in 

summons proceedings. In certain highly 

complex examinations, effective tax 

administration may require the 

specialized knowledge of an economist, 

an engineer, a foreign attorney who is a 

specialist in foreign law, or other 

subject-matter experts. In some cases, 

there is a compelling need to look 

outside the IRS for expertise that the 

IRS’s own employees lack. Because 

experts have a circumscribed role in 

providing subject-matter knowledge, 

outside experts do not pose the same 

risks as outside attorneys. Outside 

experts should thus continue to be 

permitted to assist IRS by reviewing 

summoned materials and, if necessary, 

by posing questions to witnesses under 

the guidance and in the presence of IRS 

employees. Such a role would be 

limited to the small subset of cases in 

which the IRS requires the assistance of 

a subject-matter expert to ensure 

effective tax administration. 

4. Regulations Under Section 707 and 

Section 752 on Treatment of Partnership 

Liabilities (T.D. 9788; 81 FR 69282) 

These partnership tax regulations 

include: (i) Proposed and temporary 

regulations governing how liabilities are 

allocated for purposes of disguised sale 

treatment; and (ii) proposed and 

temporary regulations for determining 

whether so-called ‘‘bottom-dollar’’ 

guarantees create the economic risk of 

loss necessary to be taken into account 

as a recourse liability. 

The first rule would have changed the 

tax treatment of forming many 

partnerships. In particular, for disguised 

sale purposes, the temporary regulations 

would, in general terms, have applied 

the rules relating to non-recourse 

liabilities to formations of partnerships 

involving recourse liabilities. According 

to commenters, the first rule was 

promulgated without adequate 

consideration of its impact. While 

Treasury and the IRS believe that the 

temporary regulations’ novel approach 

to addressing disguised sale treatment 

merits further study, Treasury and the 

IRS agree that such a far-reaching 

change should be studied 

systematically. Treasury and the IRS, 

therefore, are considering whether the 

proposed and temporary regulations 

relating to disguised sales should be 

revoked and the prior regulations 

reinstated. 

By contrast, Treasury and the IRS 

currently believe that the second set of 

regulations relating to bottom-dollar 

guarantees should be retained. Before 

the proposed and temporary regulations 

relating to bottom-dollar guarantees 

were issued, the liability allocation 

rules permitted sophisticated taxpayers 

to create basis artificially and thereby 

shelter or defer income tax liability. 

Bottom-dollar guarantees permitted 

taxpayers to achieve these results 

without meaningful economic risk, 

which is inconsistent with the 

economic-risk-of-loss principle 

underlying the debt allocation rules for 

recourse obligations. Thus, Treasury 

and the IRS continue to believe, 

consistent with the views of a number 

of commentators, that the temporary 

regulations on bottom-dollar guarantees 

are needed to prevent abuses and do not 

meaningfully increase regulatory 

burdens for the taxpayers affected. 

Consequently, although Treasury and 

the IRS will continue to study the 

technical issues and consider 

comments, they do not plan to propose 

substantial changes to the temporary 

regulations on bottom-dollar guarantees. 

Treasury and the IRS are reviewing and 

considering ways to rationalize and 

lessen the burden of partnership tax 

regulations governing liabilities and 

allocations more generally. In their 

review, Treasury and the IRS will take 

into account the ways in which the 

rules under different sections of the 

Internal Revenue Code interact, and 

may propose further changes to the 

relevant liability or allocation 

regulations. 

5. Final and Temporary Regulations 

Under Section 385 on the Treatment of 

Certain Interests in Corporations as 

Stock or Indebtedness (T.D. 9790; 81 FR 

72858) 

These final and temporary regulations 

address the classification of relatedparty debt as debt or equity for U.S. 

federal income tax purposes. Treasury 

received a very large number of 

comments on the Section 385 

regulations. Many supported the 

regulations, while others were critical. 

The regulations are primarily 

comprised of (i) rules establishing 

minimum documentation requirements 

that ordinarily must be satisfied in order 

for purported debt obligations among 

related parties to be treated as debt for 

federal tax purposes (the 

‘‘documentation regulations’’); and (ii) 

rules that treat as stock certain debt that 

is issued by a corporation to a 

controlling shareholder in a distribution 

or in another related-party transaction 

that achieves an economically similar 

result (the ‘‘distribution regulations’’). 

Although they each address debt/equity 

considerations, these two parts of the 

overall Section 385 regulations are very 

different in purpose, scope and 

application. The documentation rules 

apply principally to domestic issuers 

and are generally concerned with 

establishing certain minimum standards 

of practice so that the tax character of 

an interest can be objectively evaluated. 

The distribution regulations, on the 

other hand, principally affect interests 

issued to related-party non-U.S. holders 

and are the rules that limit earningsstripping, including in the context of 

inversions and foreign takeovers. 

Consistent with these fundamental 

differences, Treasury and the IRS 

currently plan to take different 

approaches to the two parts of these 

regulations. 

Potential revocation of documentation 

regulations. Many commenters strongly 

criticized the compliance burdens that 

those regulations imposed. Others urged 

that the regulations be retained. Several 

commenters argued that the burden 

imposed by the documentation 

regulations would be severe for all 

similarly situated taxpayers, and would 

exceed the perceived benefits for tax 

administration. Treasury and the IRS 

now agree with commenters that some 

requirements of the documentation 

regulations departed substantially from 

current practice and would have 

compelled corporations to build 

expensive new systems to satisfy the 

numerous tests required by the 

regulations. Treasury and the IRS do not 

believe that taxpayers should have to 

expend time and resources designing 

and building systems to comply with 

rules that may be modified to alleviate 

undue burdens of compliance. 

Accordingly, shortly after issuing the 

June 22 Report, Treasury and the IRS 

announced in Notice 2017–36 that 

application of the documentation rules 

would be delayed until 2019. 

After further study of the 

documentation regulations, Treasury 

and the IRS are considering a proposal 

to revoke the documentation regulations 

as issued. Treasury and the IRS are 

actively considering the development of 

revised documentation rules that would 

be substantially simplified and 

streamlined in a manner that will lessen 

their burden on U.S. corporations, while 

requiring sufficient legal documentation 

and other information for tax 

administration purposes. In place of any 

revoked regulations, Treasury and the 

IRS would develop and propose 

streamlined documentation rules, with a 

prospective effective date that would 

allow time for comments and 

compliance. Consideration is being 

given, in particular, to modifying 

significantly the requirement, contained 


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in the documentation regulations, of a 

reasonable expectation of ability to pay 

indebtedness. This aspect of the 

documentation regulations proved 

particularly problematic. The treatment 

of ordinary trade payables under the 

documentation regulations is also being 

reexamined. It is also expected that any 

proposed streamlined documentation 

rules would include certain technical, 

conforming changes to the definitional 

provisions of the Section 385 

regulations. 

Distribution regulations retained 

pending enactment of tax reform. The 

distribution regulations address 

inversions and takeovers of U.S. 

corporations by limiting the ability of 

corporations to generate additional 

interest deductions without new 

investment in the United States. In 

recent years, earnings-stripping by 

foreign-parented multinational 

corporations, as well as corporate 

inversions whereby U.S. corporations 

become foreign corporations and engage 

in earnings stripping, frequently as a tax 

artifice have put U.S. corporations at a 

competitive disadvantage compared to 

their foreign peers. Treasury is 

committed to the Administration’s goals 

of leveling the playing field for U.S. 

businesses, so that they may compete 

freely and fairly in the global economy, 

and implementing tax rules that reduce 

the distortion of capital and ownership 

decisions through earnings stripping 

and similar practices. 

Commenters have criticized the 

complexity and breadth of the 

distribution rules. They criticized in 

particular the funding rule that 

addresses multiple-step transactions 

and the burdens of tracking multiple 

transactions among affiliated companies 

over long periods of time. Treasury 

understands that the distribution rules 

are a blunt instrument for 

accomplishing their tax policy 

objectives, and continues to consider 

how the distribution rules might be 

made more targeted and compliance 

with the regulations made less onerous. 

At the same time, Treasury continues to 

believe firmly in maintaining safeguards 

against earnings-stripping and 

diminishing incentives for inversions 

and foreign takeovers. 

Treasury has consistently affirmed 

that legislative changes can most 

effectively address the distortions and 

base erosion caused by excessive 

earnings stripping, as well as the general 

tax incentives for U.S. companies to 

engage in inversions. Treasury is 

actively working with Congress on 

fundamental tax reform that should 

prevent base erosion and fix the 

structural deficiencies in the current 

U.S. tax system. Tax reform is expected 

to obviate the need for the distribution 

regulations and make it possible for 

these regulations to be revoked. 

In the meantime, after careful 

consideration, Treasury believes that 

proposing to revoke the existing 

distribution regulations before the 

enactment of fundamental tax reform, 

could make existing problems worse. If 

legislation does not entirely eliminate 

the need for the distribution regulations, 

Treasury will reassess the distribution 

rules and Treasury and the IRS may 

then propose more streamlined and 

targeted regulations. 

Regulations To Consider Substantially 

Revising 

6. Final Regulations Under Section 367 

on the Treatment of Certain Transfers of 

Property to Foreign Corporations (T.D. 

9803; 81 FR 91012) 

Section 367 of the Internal Revenue 

Code generally imposes immediate or 

future U.S. tax on transfers of property 

(tangible and intangible) to foreign 

corporations, subject to certain 

exceptions, including an exception for 

certain property transferred for use in 

the active conduct of a trade or business 

outside of the United States. Prior 

regulations provided favorable 

treatment for foreign goodwill and going 

concern value. To address difficulties in 

administering these exceptions, these 

regulations eliminated the ability of 

taxpayers to transfer foreign goodwill 

and going-concern value to a foreign 

corporation without immediate or future 

U.S. income tax. However, no active 

trade or business exception was 

provided for such transfers. 

Commenters noted that the legislative 

history to Section 367 indicated that 

Congress anticipated that outbound 

transfers of foreign goodwill and goingconcern value would generally not be 

subject to Section 367. Some 

commenters requested, if the regulations 

were not revoked, that transfers of 

foreign goodwill and going-concern 

value be made eligible for the active 

trade or business exception in 

circumstances not ripe for abuse. 

After considering the comments and 

studying further the legal and policy 

issues, Treasury and the IRS have 

concluded that an exception to the 

current regulations may be justified by 

both the structure of the statute and its 

legislative history. Thus, to address 

taxpayers’ concerns about the breadth of 

the regulations, the Office of Tax Policy 

and IRS are actively working to develop 

a proposal that would expand the scope 

of the active trade or business exception 

described above to include relief for 

outbound transfers of foreign goodwill 

and going-concern value attributable to 

a foreign branch under circumstances 

with limited potential for abuse and 

administrative difficulties, including 

those involving valuation. Treasury and 

the IRS currently expect to propose 

regulations providing such an exception 

in the near term. 

7. Temporary Regulations Under 

Section 337(d) on Certain Transfers of 

Property to Regulated Investment 

Companies (RICs) and Real Estate 

Investment Trusts (REITs) (T.D. 9770; 81 

FR 36793) 

These temporary regulations amend 

existing rules on transfers of property by 

C corporations to REITs and RICs 

generally. In addition, the regulations 

provide rules relating to newly-enacted 

provisions of the Protecting Americans 

from Tax Hikes Act of 2015 (the ‘‘PATH 

Act’’). The PATH Act’s provisions were 

intended to prevent certain spinoff 

transactions involving transfers of 

property by C corporations to REITs 

from qualifying for non-recognition 

treatment. Commenters criticized 

several aspects of the regulations. 

According to commenters, for example, 

the REIT spin-off rules could result in 

over-inclusion of gain in certain 

situations, particularly where a large 

corporation acquires a small corporation 

that engaged in a Section 355 spin-off 

and the large corporation subsequently 

makes a REIT election. 

Treasury and the IRS agree that the 

temporary regulations may produce 

inappropriate results in some cases. In 

particular, Treasury and the IRS agree, 

for example, that the regulations may 

cause too much gain in certain cases to 

be recognized. Thus, Treasury and the 

IRS are considering revisions that would 

limit the potential taxable gain 

recognized in situations in which, 

because of the application of the 

predecessor and successor rule in 

Regulation Section 1.337(d)–7T(f)(2), 

gain recognition is required in excess of 

the amount that would have been 

recognized if a party to a spin-off had 

directly transferred assets to a REIT. In 

a case in which a smaller corporation 

that is party to a spin-off merges into a 

larger corporation in a tax-free 

reorganization, and the larger 

corporation makes a REIT election after 

the spin-off, the temporary regulations 

require immediate gain recognition with 

respect to all of the assets of the larger 

corporation. The proposed revisions 

under consideration by Treasury would 

substantially reduce the immediately 

taxed gain of the larger corporation by 

limiting gain recognition to the assets of 

the smaller corporation. In addition, 


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48018 Federal Register / Vol. 82, No. 198 / Monday, October 16, 2017 / Proposed Rules 

other technical changes to narrow 

further the application of the rules are 

currently being considered. With these 

contemplated changes incorporated, 

Treasury and the IRS believe the revised 

regulations would more closely track 

the intent of Congress. 

8. Final Regulations Under Section 987 

on Income and Currency Gain or Loss 

With Respect to a Section 987 Qualified 

Business Unit (T.D. 9794; 81 FR 88806) 

These final regulations provide rules 

for: (i) Translating income from branch 

operations conducted in a currency 

different from the branch owner’s 

functional currency into the owner’s 

functional currency; (ii) calculating 

foreign currency gain or loss with 

respect to the branch’s financial assets 

and liabilities; and (iii) recognizing such 

foreign currency gain or loss when the 

branch makes certain transfers of any 

property to its owner. Commenters 

argued that the transition rule in the 

final regulations imposes an undue 

financial burden because it disregards 

losses calculated for years prior to the 

transition but not previously 

recognized. Many taxpayers have also 

commented that the method prescribed 

by the final regulations for calculating 

foreign currency gain or loss is unduly 

complex and financially burdensome to 

apply, particularly where the final 

regulations differ from financial 

accounting rules. 

After reviewing these comments and 

meeting with a significant number of 

affected taxpayers in different 

industries, Treasury and the IRS believe 

that the regulations have proved 

difficult to apply for many taxpayers. To 

address these difficulties, Treasury and 

the IRS currently expect to issue 

guidance that would permit taxpayers to 

elect to defer the application of 

Regulation Sections 1.987–1 through 

1.981–10 until at least 2019, depending 

on the beginning date of the taxpayer’s 

taxable year. 

In addition, Treasury and the IRS also 

intend to propose modifications to the 

final regulations to permit taxpayers to 

elect to adopt a simplified method of 

calculating Section 987 gain and loss 

and translating Section 987 income and 

loss, subject to certain limitations on the 

timing of recognition of Section 987 

loss. Under one variation of a simplified 

methodology currently being 

considered, taxpayers would treat all 

assets and liabilities of a Section 987 

qualified business unit (QBU) as marked 

items and translate all items of income 

and expense at the average exchange 

rate for the year. This methodology 

generally would result in 

determinations of amounts of Section 

987 gain or loss that are consistent with 

amounts of translation gain or loss that 

would be determined under applicable 

financial accounting rules, as well as 

under the 1991 proposed Section 987 

regulations. 

In this connection, the IRS and the 

Office of Tax Policy are considering 

alternative loss recognition timing 

limitations that would apply to electing 

taxpayers. Under the base limitation 

under consideration, the electing 

taxpayer would be permitted to 

recognize net Section 987 losses only to 

the extent of net Section 987 gains 

recognized in prior or subsequent years. 

As a possible additional approach to 

limiting losses, the IRS and the Office of 

Tax Policy are also considering the 

administrability of a limitation under 

which the electing taxpayer would defer 

recognition of all Section 987 losses and 

gains until the earlier of (i) the year that 

the trade or business conducted by the 

Section 987 QBU ceases to be performed 

by any member of its controlled group 

or (ii) the year substantially all of the 

assets and activities of the QBU are 

transferred outside of the controlled 

group. 

Finally, the IRS and the Office of Tax 

Policy are considering alternatives to 

the transition rules in the final 

regulations. One alternative would be to 

allow taxpayers that elect to apply the 

loss limitations applicable to the 

simplified methodology discussed 

above to carry forward unrealized 

Section 987 gains and losses, measured 

as of the transition date with 

appropriate adjustments, and subject to 

such loss limitations. A second 

alternative under consideration would 

be to allow taxpayers adopting the final 

regulations to elect to translate all items 

on the QBU’s opening balance sheet on 

the transition date at the spot exchange 

rate, but not carry forward any 

unrealized Section 987 gains or losses. 

David J. Kautter, 

Assistant Secretary of the Treasury for Tax 

Policy. 

[FR Doc. 2017–22205 Filed 10–13–17; 8:45 am] 

BILLING CODE 4810–25–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 17 

RIN 2900–AP46 

Prosthetic and Rehabilitative Items and 

Services 

AGENCY: Department of Veterans Affairs. 

ACTION: Proposed rule. 

SUMMARY: The Department of Veterans 

Affairs (VA) proposes to revise its 

medical regulations related to providing 

prosthetic and rehabilitative items as 

medical services to veterans. These 

revisions would reorganize and update 

the current regulations related to 

prosthetic and rehabilitative items, 

primarily to clarify eligibility for 

prosthetic and other rehabilitative items 

and services, and to define the types of 

items and services available to eligible 

veterans. 

DATES: Comments must be received by 

VA on or before December 15, 2017. 

ADDRESSES: Written comments may be 

submitted by email through http://

www.regulations.gov; by mail or hand 

delivery to Director, Regulations 

Management (00REG), Department of 

Veterans Affairs, 810 Vermont Avenue 

NW., Room 1063B, Washington, DC 

20420; or by fax to (202) 273–9026. 

Comments should indicate that they are 

submitted in response to ‘‘RIN 2900– 

AP46, Prosthetic and rehabilitative 

items and services.’’ Copies of 

comments received will be available for 

public inspection in the Office of 

Regulation Policy and Management, 

Room 1063B, between the hours of 8:00 

a.m. and 4:30 p.m. Monday through 

Friday (except holidays). Please call 

(202) 461–4902 for an appointment. 

(This is not a toll-free number.) In 

addition, during the comment period, 

comments may be viewed online 

through the Federal Docket Management 

System (FDMS) at http://

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Penny Nechanicky, National Program 

Director for Prosthetic and Sensory Aids 

Service (10P4RK), Department of 

Veterans Affairs, 810 Vermont Avenue 

NW., Washington, DC 20420; (202) 461– 

0337. (This is not a toll-free number.) 

Penny.Nechanicky@va.gov. 

SUPPLEMENTARY INFORMATION: Section 

1710 of title 38, United States Code 

(U.S.C.), authorizes VA to provide 

veterans with, among other things, 

‘‘medical services’’ when VA 

determines that they are ‘‘needed.’’ 

‘‘Medical services’’ is further defined in 

38 U.S.C. 1701(6)(F) to include the 

following items and services, for 

veterans who are otherwise receiving 

care or services under chapter 17 of title 

38 U.S.C.: Wheelchairs, artificial limbs, 

trusses, and similar appliances; special 

clothing made necessary by the wearing 

of prosthetic appliances; and such other 

supplies or services as the Secretary 

determines to be reasonable and 

necessary. 38 U.S.C. 1701(6)(F)(i)–(iii). 

The language in clauses (i) through (iii) 

of section 1701(6)(F) is the source of 


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