Treasury delays documentation requirements, hints at more regulation changes

The Treasury Department has delayed for one year the effective date of the documentation requirements under the Section 385 regulations, with more changes to the regulations likely under an ongoing Treasury review of burdensome regulations.

The controversial final and temporary regulations on the determination of debt versus equity were issued last October (T.D. 9790). Ostensibly meant to combat “earnings stripping” after an tax-inversion transaction, the rules can affect many other types of related-party debt. The documentation requirements under Treas. Reg. Sec. 1.385-2 were considered among the most controversial and burdensome aspects of the new rules and were scheduled to take effect at the start of 2018. New Notice 2017-36 delays the requirements for one year so that they are applicable to interests issued or deemed issued on or after Jan. 1, 2019.

Additional changes to the regulations could come after Treasury releases recommendations in September in response to an executive order (EO 13789) to review recent tax regulations. The Section 385 regulations were one of eight tax regulatory projects identified by Treasury as either imposing an undue burden on U.S. taxpayers or adding undue complexity to tax laws. Treasury is required to issue specific recommendations by Sept. 18, 2017, to mitigate these burdens. Based on recent comments from Treasury officials, the full rescission of the regulations appears unlikely.

Thomas West, acting Treasury assistant secretary for tax policy, said Treasury does not plan to recommend rescinding any of the identified regulations, while Karl Walli, senior counsel (Financial Products) in Treasury's Office of Tax Policy, described the likely fixes the Section 385 regulations as “surgical.”

Taxpayers should continue to comply with the aspects of the final and temporary regulations still in effect, parts of which became effective on April 4, 2016. For more information on the Section 385 regulations, see our FAQ.


Andrew Cordonnier
Partner, Corporate Tax
Washington National Tax Office
T +1 202 521 1502

Jeff Borghino
Partner, Corporate Tax
Washington National Tax Office
T +1 202 521 1532

David Sites
Partner, International Tax Services
Washington National Tax Office
T +1 202 861 4104

Cory Perry

Manager, International Tax Services
Washington National Tax Office
T +1 202 521 1509

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