US Treasury delays debt-equity tax regulation documentation rules

The US Treasury today announced a one year delay in the effective date of final section 385 debt-equity regulation documentation rules.

Notice 2017-36 announces that the US will amend Treas. Reg. § 1.385-2 to apply only to interests issued or deemed issued on or after January 1, 2019.  The notice, which will be included in IRB: 2017-33, dated August 14, also requests comments concerning whether this delay provides sufficient time for taxpayers to develop any necessary systems or processes to comply with the documentation regulations.

The section 385 regulations were identified in Notice 2017-38, released July 7, as significant tax regulations requiring revision pursuant President Trump’s Executive Order 13789, aimed at reducing regulatory burdens. These revisions could range from streamlining problematic provisions to outright repeal.

In today’s notice, Treasury said the decision to delay the regs’ effective date was taken in response to concerns raised by taxpayers about the documentation requirements and “in light of further actions concerning the final and temporary regulations under section 385 in connection with the review of those regulations.”

The Section 385 regulations are designed to stop a tax technique known as “interest stripping,” targeting instruments that are issued to a member of the issuer’s “expanded group” that would otherwise be considered indebtedness for tax purposes. Extensive documentation requirements must be met to establish the instrument is in fact debt.






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