The IRS has issued final and temporary regulations under Code Sec. 385 that establish threshold documentation requirements that must be satisfied in order for certain related-party interests in a corporation to be treated as debt, and that treat as stock certain related-party instruments that otherwise would be treated as debt. In other words, it has reduced but not eliminated the reach of what had been viewed as overly broad proposed regulations last April designed to stop "corporate inversions" and other maneuvers to escape U.S. business taxes.
The regulations narrowly target certain earnings-stripping transactions (which generate deductions for interest payments on related-party debt that does not finance new investment in the United States) while minimizing unintended consequences for regular business activities. The regulations generally affect corporations, including those that are partners of certain partnerships, when those corporations or partnerships issue purported debt to related corporations or partnerships.
In response to the numerous comments received, the final and temporary regulations substantially revise the proposed regulations issued in April 2016 to achieve a better balance between minimizing the burdens imposed on taxpayers and fulfilling the important policy objectives of the proposed regulations. The final and temporary regulations generally limit the type and size of businesses affected and the types of transactions and activities to which they apply.
Congressional Reaction
"While the final regulations will need to be scrutinized closely, it is immensely concerning that, despite stark bipartisan concern, the Obama Administration moved forward with completing rules that could jeopardize American businesses and the economy here at home," Senate Finance Committee (SFC) Orrin G. Hatch, R-Utah, said in a statement. Hatch, just three days prior on October 11, again sent Treasury Secretary Jack Lew a letter seeking information regarding the regulations and asked that Treasury delay finalization.
SFC ranking member Ron Wyden, D-Ore., also weighed in on the now final regulations. "For too long, Congress has sat on a broken and outdated tax system, which is why the U.S. has resorted to rule changes to respond to wave after wave of tax avoidance," Wyden said. "The answer is for Congress to reform the tax code on a bipartisan basis."
If you have any questions about tax planning, please contact your tax advisor or Todd Reich, Manager, Tax Services, at 314.983.1296 or treich@bswllc.com.
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