The US IRS today issued final regulations under section 385 on the treatment of certain interests in corporations as stock or indebtedness.
The Service finalized the “distribution regulations” of proposed regulations (REG-130314-16), issued on October 21, 2016, without change. These regulations allow the IRS to recast some related-party debt as equity if issued in transactions involving a non-taxable distribution to related parties.
The specific rules concern the treatment of certain qualified short-term debt instruments, transactions involving controlled partnerships, and transactions involving consolidated groups.
The text of these proposed regulations is the same as the text of simultaneously issued temporary regulations, §§1.385-3T and 1.385-4T, which had expired on October 13, 2019, and which were withdrawn today.
Though the Service finalized the proposed regulations, it also said it will continue to study an approach to revising the distribution regulations that it described in a November 4, 2019, advance notice of proposed rulemaking.
This advance notice states that the IRS believes that distribution regulations are necessary to prevent multinational corporations from generating additional interest deductions without new investment; however, the government’s goal is to limit the scope of such rules to the extent possible.
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