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IRS Issues Final Regulations Under Section 385


The IRS yesterday issued final regulations that aim to curtail earnings stripping transactions by corporations. The rules set documentation requirements "for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes, and treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes," the IRS explains.  A copy of the 518-page regulations is available here.

A major revision in the final 518-page rule eliminates the "bifurcation rule," which would have given the IRS broad discretion to treat certain interests in a corporation as debt in part and stock in part. "The Treasury Department and the IRS will continue to study this issue," the rules explain.

Treasury officials noted that the final rules include a broad exemption for cash pooling and short-term loans, and special protections for "foreign-to-foreign" transactions. Also cited were accommodations for Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs), as well as S-corporations and other passthroughs.

According to a Treasury fact sheet, the regulations provide a broad exception for cash pools and other loans that are short-term in both form and substance and don't pose an earnings-stripping risk.

In cases where the risk of earnings stripping is low, the guidance also provides limited exceptions for transactions between:

  • foreign subsidiaries of U.S. multinational companies;
  • subchapter S corporations;
  • regulated financial companies;
  • regulated insurance companies; and
  • mutual funds such as regulated investment companies (RICs) and real estate investment trusts (REITs).

Treasury said the rules expand exceptions for ordinary business transactions, such as distributions, to generally include future earnings and allowing corporations to net distributions against capital contributions. The rules also include exceptions for ordinary course transactions such as stock acquisitions associated with employee compensation plans.

The final rule also extends the effective date for tough documentation requirements by one year, to take effect Jan. 1, 2018.

In addition to the final and temporary rules, Treasury issued proposed rules (REG-130314-16, RIN:1545-BN68) addressing the treatment of instruments issued by partnerships, consolidated groups, and certain transactions involving qualified cash-management arrangements.

The text of the temporary regulations also serves as the text of proposed regulations.

#taxpolicy #IRS #IntheNews #LegislationandRegulation
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