ARTICLE
3 February 2020

IRS Proposes Narrowing Debt Recast Rules

CW
Cadwalader, Wickersham & Taft LLP

Contributor

Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
IRS Proposes Narrowing Debt Recast Rules
United States Finance and Banking

Regulations issued in 2016 treat a putative debt instrument as equity if, among other things, (1) the instrument is issued to a person related to the borrower through chains of 80% or greater ownership and (2) a principal purpose of the issuance is to fund certain acquisitions or distributions by the borrower. Under a "per se" rule, the principal purpose test in clause (2) above is automatically satisfied if the putative debt instrument is issued within 36 months of the relevant acquisition or distribution.  

The "per se" rule has raised significant concerns, particularly in the securitization space, because securitization vehicles frequently make distributions to their equity holders within 36 months of issuing debt. We discuss these concerns here.

On October 31, the IRS announced that it intends to eliminate the "per se" rule. Instead, the regulations would apply only if the putative debt issuance "has a sufficient factual connection to a distribution to a member of the taxpayer's expanded group or an economically similar transaction."  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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