IRS provides guidance on Section 385 rules

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.

David Sites
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
Washington National Tax Office
T +1 202 521 1522

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.