Proposed Sec. 385 regulations update: Is a MTC model rule on the horizon?
Multistate Tax alert | July 26, 2016
On July 26, 2016, at a meeting of the Multistate Tax Commission (MTC) Uniformity Committee, MTC counsel Bruce Fort discussed the potential state income tax effect of the proposed Treasury Regulations under Sec. 385 of the Internal Revenue Code (Prop. Treas. Reg. §§ 1.385-1, et seq., REG-1080-15 (Apr. 4, 2016)).
In the “Report on New IRS Proposed Sec. 385 Regulations,” July 22, 2016 (available here), Fort stated that “in most states . . . it should be possible to apply the substantive provisions of the [Proposed Sec. 385 Regulations] without adopting state-level regulations.” (Report at p. 2, emphasis added). In the MTC Uniformity Committee meeting, Fort explained that, in certain circumstances, the Proposed Sec. 385 Regulations could potentially apply for state income tax purposes where they are not applicable for federal income tax purposes. Fort highlighted that, for state income tax purposes only, the substantive requirements of the Proposed 385 Regulations could apply to transactions among members of the same federal consolidated group who are:
- Filing separately for state income tax purposes
- Filing on a combined basis for state income tax purposes but not included in same combined group
Fort also indicated that states should expect challenges to a state-only application of the Proposed Sec. 385 Regulations unless a separate state regulation is adopted. Fort suggested that the MTC may need to consider developing a model state rule to clarify the application of the Proposed Sec. 385 Regulations for state income tax purposes.
Companies should undertake a careful consideration of the potential impact of the Proposed Sec. 385 Regulations on any existing or planned intercompany debt, including:
- Applicability of the Proposed Sec 385 Regulations to existing and anticipated intercompany debt for state purposes;
- Intercompany debt documentation practices, including cash management systems and recordkeeping of payments made on intercompany receivables;
- Federal/state basis differences where transactions are recast for state tax purposes but not federal tax purposes; and
- Deductibility of interest expense on originally filed returns and the associated financial statement implications.
If you have questions regarding the state tax impact of the Proposed Sec. 385 Regulations, please contact any of the following Deloitte Tax LLP professionals.
Valerie Dickerson, partner, Deloitte Tax LLP, Washington, DC, +1 202 220 2693
Mike Porter, principal, Deloitte Tax LLP, Boston, MA, +1 617 437 2607
David Vistica, managing director, Deloitte Tax LLP, Washington, DC, +1 202 370 2268
Mike Bryan, managing director, Deloitte Tax LLP, Philadelphia, PA, +1 215 977 7564
Alexis Morrison-Howe, senior manager, Deloitte Tax LLP, Boston, MA, +1 617 437 2345
Scott Schiefelbein, senior manager, Deloitte Tax LLP, Portland, OR, +1 503 727 5382
Snowden Rives, manager, Deloitte Tax LLP, Washington, DC, +1 202 220 2753
Multistate Tax alert archive
The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.
View the list of archived Multistate Tax alerts.