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IRS provides guidance on Section 385 rules

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Tax Hot Topics newsletter The IRS released Notice 2019-58 on Oct. 11 to issue guidance on the temporary and proposed Section 385 regulations issued in October 2016.

The Section 385 regulations (i.e., the debt-equity regulations) provide rules that treat certain debt instruments as equity when issued in certain related-party transactions. For more details, see our prior coverage.

The temporary and proposed regulations issued under Treas. Reg. Secs. 1.385-3T and 1.385-4T contain, among other things, guidance on certain exceptions (including the qualified short-term debt exception and the consolidated group exception).

Treas. Reg. Secs. 1.385-3T and 1.385-4T expired on Oct. 13. Notice 2019-58 allows taxpayers to rely on identical proposed regulations (which do not expire) for any period following the expiration of the temporary regulations, but only if the taxpayer consistently applies rules contained in the proposed regulations in their entirety.

It is important to note that the notice does not change the general rules of Treas. Reg. Sec. 1.385-3, which were released as final regulations in 2016. Rather, it allows taxpayers to rely on limited exceptions (and other coordinating rules) that were released concurrently to the final regulations as temporary and proposed regulations.

A submission presumably relating to Section 385 was recently reviewed by the Office of Management and Budget’s Office of Information and Regulatory Affairs. The submission was described as a “pre-rule” on the office’s website, but was taken down on Oct. 21.

Contact
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Manager
Washington National Tax Office
T +1 202 521 1522

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