The IRS issued proposed regulations (REG-130244-17
) to remove final regulations under Treas. Reg. Sec. 1.385-2 that would become effective on Jan. 1, 2019.
The IRS issued final and temporary regulations under Section 385 on Oct. 21, 2016, which specified the minimum documentation required to be established and maintained for certain instruments to qualify as debt for U.S. federal income tax purposes. The documentation rules applied to instruments issued by a corporation to related parties that were members of its “expanded group” as defined in the regulations under Section 385. Specifically, the documentation rules mandated documentation to support: (i) an unconditional obligation to repay a sum certain; (ii) creditor’s rights; (iii) a reasonable expectation of ability to repay; and (iv) actions evidencing a debt-creditor relationship.
Under Treas. Reg. Sec. 1.385-2(b), if the requirements are met, the determination of an interest as debt or stock is determined based on general tax principles. If the requirements are not met, the instrument is treated as stock for all federal tax purposes subject to certain exceptions.
In Notice 2017-38, the IRS identified the documentation rules to either: (i) impose an undue financial burden on U.S. taxpayers; or (ii) add undue complexity to the federal tax laws. Additionally, in October 2017, Treasury identified the documentation rules to be considered for partial revocation in the Second Report to the President on Identifying and Reducing Tax Regulatory Burdens.
The preamble of the proposed regulations states that the Treasury and the IRS will continue to study the issues addressed by the documentation rules, and that they may propose a modified version when the study is complete.
Principal, Washington National Tax Office
+1 202 521 1563
Director, Washington National Tax Office
+1 202 521 1532
Managing Director, Washington National Tax Office
+1 202 861 4116
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.