Reviewing Obama’s “Midnight” Regulations—Another Inversion Wave?

A recent executive order from the Trump Administration authorized the Treasury Department to review all significant tax regulations issued on or after January 1, 2016.  The executive order instructed the Secretary of the Treasury to find any regulations that go against certain stated tax goals of the Administration such as fairness and simplicity, and to recommend actions to mitigate such burdens.  Many believe that the anti-inversion regulations promulgated under Section 7874 and the anti-earnings stripping rules under Section 385 are potential targets under this order. May 15, 2017
On April 21, 2017, President Trump signed an executive order titled “Identifying and Reducing Tax Regulatory Burdens,” which authorized the Treasury Department to review all significant tax regulations issued on or after January 1, 2016. The stated purpose of this review is to find any regulations 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 IRS. 
The Treasury Department and IRS finalized a number of projects in the final months of the Obama Administration. However, of these regulations, industry groups have focused on the most recent set of anti-inversion regulations issued in April 2016 (including the “serial inversion”  and “top hat” rules) and the controversial debt/equity regulations under Section 385 finalized in October 2016. The Section 385 regulations capture transactions outside of the inversion context; for example, these rules affect foreign-parented multinationals in their ability to extract value from their U.S. subsidiaries.
Liberalizing these rules—especially the inversion-specific regulations, with the result of potentially encouraging a new wave of expatriation transactions or foreign takeovers of U.S. targets—may appear inconsistent with the populist, “America First” rhetoric that is commonly associated with the current administration. It is unclear whether, politically, the administration would want to be regarded as encouraging or bringing back such activities and transactions.        
However, given the broad-based effect of the Section 385 regulations on businesses, many would breathe a sigh of relief with the modification or rescission of the debt/equity regulations due to the collateral effects of the regulations.  Many of these provisions address non-inverted companies, so the administration could explore narrowing these regulations in a way that would be politically popular, without being regarded as reopening the gate on inversion transactions.
Notwithstanding the above, if interest deductions are not permitted following tax reform (as proposed by the House Republicans’ Blueprint), the debt/equity regulations would appear to be less relevant. The Trump Administration remained silent in its tax reform outline regarding whether interest should continue to be deductible following tax reform.