On August 7, 2017, TEI submitted comments to the Internal Revenue Service on the final and temporary regulations under section 385 (ID. 9790, 81 Fed. Reg. 72,858) concerning the treatment of certain interests in corporations as stock or indebtedness.
On July 7, 2017, the Department of the Treasury ("Treasury") and the Internal Revenue Service ("IRS") issued Notice 2017-38, Implementation of Executive Order 13789 (Identifying and Reducing Tax Regulatory Burdens) (the "Notice"). (1) The Notice identifies eight tax regulations issued between January 1, 2016, and April 21, 2017, that Treasury has found to impose an undue financial burden on U.S. taxpayers or add undue complexity to the federal tax laws, or both. The final and temporary regulations under section 385, concerning the treatment of certain interests in corporations as stock or indebtedness, (2) were identified in the Notice as significant tax regulations requiring additional review.
Executive Order 13789 requires Treasury to recommend specific actions--potentially ranging from streamlining problematic rule provisions to full repeal--to mitigate the burden imposed by these regulations in a final report submitted to the President by September 18, 2017. (3) To that end, Treasury and the IRS have requested comments on whether the regulations described in the Notice should be rescinded or modified, and in the latter case, how the regulations should be modified in order to reduce burdens and complexity. On behalf of Tax Executives Institute Inc. ("TEI"), I am pleased to respond to the government's request for comments on the final and temporary section 385 regulations. (4)
About Tax Executives Institute
TEI is the preeminent association of in-house tax professionals worldwide. Our more than 7,000 members represent 2,800 of the leading companies in North and South America, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, promoting the uniform and equitable enforcement of the tax laws, and reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works--one that is administrable and with which taxpayers can comply in a cost-efficient manner.
TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises, including complying with complex regulations regarding the treatment of interests in corporations as stock or indebtedness, such as those under section 385. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the final and temporary regulations under section 385, and we are eager to assist Treasury and the IRS in their laudable efforts to mitigate the financial burden and complexity of these regulations.
Section 385 authorizes the Secretary of the Treasury to prescribe regulations to determine whether an interest in a corporation is to be treated, for purposes of the Code, as stock or indebtedness by setting forth factors to be taken into account with respect to particular factual situations. On April 4, 2016, Treasury and the IRS issued proposed regulations under section 385 concerning the treatment of certain interests in corporations as stock or indebtedness, along with a request for public comments. (5) In response to this request, TEI submitted comments on July 6, 2016.
On October 13, 2016, Treasury and the IRS issued final and temporary regulations under section 385, primarily comprising: (i) rules establishing threshold documentation requirements that ordinarily must be satisfied for purported debt among related parties to be treated as indebtedness for federal tax purposes (the "Documentation Requirements" in Treas. Reg. [section] 1.385-2); and (ii) transaction rules that treat as stock certain debt issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result (the "Transaction Rules" under Treas. Reg. [section][section] 1.385-3 and -3T). The regulations generally affect domestic corporations, including those that are partners in certain partnerships, when those corporations or partnerships issue purported debt to related corporations or partners.
As set forth above, Treasury and the IRS issued the Notice on July 7, 2017, requesting comments on the final and temporary regulations under section 385. Shortly thereafter, on July 27, 2017, Treasury and the IRS issued Notice 2017-36 announcing a delay in the application...