Treasury includes TEI recommendations in final section 385 regulations.

• Author: Schoenecker, John L.
• Position: INSTITUTE NEWS

If pleasure is the absence of pain, as one panelist suggested at TEI's recent Annual Conference in Philadelphia, then the final Section 385 regulations, released October 13, are a welcome pleasure compared to what might have been. The final regulations, summarized in this issue's cover feature on page 20, seem to spare corporate taxpayers many difficulties that would have emerged under the regulations first proposed in early April. TEI's International Tax and Federal Income Tax Committees submitted a joint comment this past July that suggested several adjustments to the proposed regulations. The final regulations incorporated many of those suggestions.

The proposed regulations would have given IRS examiners a substantial power: to split a purported debt instrument partly into debt and partly into equity, depending on the circumstances. TEI suggested a twenty-five percent floor for equity treatment in such a bifurcation. This floor heads off the significant difficulties that could accompany an otherwise immaterial tax adjustment after an instrument is split into, say, ninety-nine percent debt and one percent equity. The final regulations avoid bifurcation altogether and reserve the issue for future consideration.

The proposed regulations also contained strict documentation requirements for debt instruments, the better to make intercorporate documents resemble arm's-length debt documentation. Under the proposed regulations, this documentation had to be completed within thirty days of issuance. Among its comments, TEI...