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Democrats Seek Transition Rules for Debt-Equity Regs

Posted on June 23, 2016 by Cooper, Stephen K.

House Ways and Means Committee Democrats asked the Treasury Department on June 22 to consider providing transition rules to protect industries that may be hurt by its proposed debt or equity regulations.

In a letter to Treasury Secretary Jacob Lew signed by 11 committee Democrats, the lawmakers asked the administration to consider "whether exceptions or special rules, including transition rules, are appropriate" for the proposed regs (REG-108060-15).

"Our country is an incubator for some of the most valuable innovations, home to the world's most robust workforce, and a preferred destination for foreign investment," the letter says. "The United States cannot lead in these areas if our tax laws continue to allow planning techniques like earnings stripping to erode our nation's tax base."

Business groups have appealed to Treasury, the IRS, the Commerce Department, and lawmakers to delay finalizing the regs, which would generally treat related-party debt as equity unless it facilitates new net investment in the borrower's operations. Many groups have asked that the public comment period be extended to October 5, but Treasury has scheduled a July 14 hearing on the regs, signaling its intent to move ahead.

The letter to Treasury was signed by Ways and Means ranking minority member Sander M. Levin, D-Mich., and Democratic members Charles B. Rangel and Joseph Crowley of New York, Richard E. Neal of Massachusetts, John Lewis of Georgia, Mike Thompson and Linda T. Sánchez of California, John B. Larson of Connecticut, Danny K. Davis of Illinois, Bill Pascrell Jr. of New Jersey, and Ron Kind of Wisconsin. The lawmakers requested a meeting with Treasury before the regulations are finalized.

The lawmakers noted that the regulations could affect ordinary transactions between businesses that are not attempting to avoid taxation. For example, the regulations may cause unforeseen challenges to financial services companies, insurers, and utilities because of various regulatory requirements unique to those industries, the lawmakers said in the letter.

"We also have been informed that there are broader concerns related to various internal cash management practices such as cash pooling, and appreciate that Treasury is continuing to examine the effect of the proposed regulations on those practices," the letter says.

Hearing on Section 385 Likely, Hatch Says

Senate Finance Committee Chair Orrin G. Hatch, R-Utah, told reporters that there will probably be a hearing on the Treasury regulations but that he prefers to eliminate the rule's necessity through his corporate integration plan, which is still waiting for a Joint Committee on Taxation report. Hatch recently told reporters that the JCT is still finalizing its estimates of his plan. He said he hoped the plan could be released before the start of Congress's Independence Day recess.

Hatch said that businesses "hate" the section 385 regulation. "They know it's just a phony approach toward trying to get them to not be able to have the options that they need to run their businesses," Hatch told reporters. "Let's face it: We wouldn't need section 385 if we would pass laws that would make it easier for our companies to stay here and do business here."

Hatch said the best way to initially keep businesses from inverting and moving headquarters overseas would be his corporate integration plan, but that the better long-term approach would be to reduce the corporate tax rate to about 20 percent.

Meanwhile, Ways and Means Committee member James B. Renacci, R-Ohio, told Tax Analysts June 22 that the committee majority are working alongside their taxwriting counterparts in the Senate to formulate a response to Treasury.

"I think the Ways and Means Committee is going to be working on a response with the Senate Finance Committee. . . . We really need to work on solutions, and I think there will be some discussions about those," Renacci said.

Renacci said he hopes the two committees will be able to produce some sort of response soon because the regulations are a "barrier" that will make it "more difficult for businesses to operate in this country."

Follow Stephen K. Cooper (@scoop1200) and Dylan F. Moroses (@DMoroses3244) on Twitter for real-time updates.