Tax & Accounting Blog

U.S. Treasury and Internal Revenue Service Delay Application of Documentation Regulations under Section 385

BEPS, Blog, Checkpoint, ONESOURCE, Transfer Pricing August 1, 2017

U.S. Internal Revenue Code (IRC) section 385 authorizes the Secretary of the Treasury to prescribe rules to determine whether an interest in a corporation is treated for purposes of the IRC as stock or indebtedness (or as in part stock and in part indebtedness) by providing factors to be taken into account with respect to specific factual situations. Final and temporary regulations (T.D. 9790) under IRC section 385 were published in the Federal Register on October 21, 2016.  See BEPS Action 4.

T.D. 9790 says that the IRS issued temporary and final regulations generally applicable to tax years ending on or after January 19, 2017 that treat certain related-party interests, that otherwise would be treated as indebtedness, as stock for tax purposes, and that set threshold documentation requirements that must be met for certain related-party interests in corporations, issued or deemed issued on or after January 1, 2018, to be treated as indebtedness.

In response to taxpayer concerns with respect to the application of Treas. Reg. 1.385-2 (the “Documentation Regulations”) to interests issued on or after January 1, 2018, and in light of further actions concerning the final and temporary regulations under section 385 in connection with the review of those regulations, the Treasury Department and the IRS intend to amend the Documentation Regulations to apply only to interests issued or deemed issued on or after January 1, 2019. See Notice 2017-36.

The Documentation Regulations have two principal purposes. The first is to provide guidance regarding the documentation and other information that must be prepared, maintained, and provided to determine whether an instrument will be treated as debt for federal tax purposes. The second is to establish certain operating rules, presumptions, and factors to be taken into account.

Comments to Notice 2017-36 should be submitted by September 1, 2017.

On April 21, 2017, President Trump issued Executive Order 13789 to reduce tax regulatory burdens. The order instructed the Secretary of the Treasury to review all “significant tax regulations” issued on or after January 1, 2016. Specifically, the President directed the Secretary to submit a 60-day interim report identifying 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 order instructs the Secretary to submit a final report to the President by September 18, 2017, recommending “specific actions to mitigate the burden imposed by regulations identified in the interim report.”

Treasury has concluded that T.D. 9790 meets at least one of the first two criteria specified in Executive Order 13789.