Perspectives

Managing the impacts of section 385 

For a well-planned treasury process

Our tax alert discusses the final and temporary regulations addressing treatment of certain interests in corporations as stock or indebtedness.

Overview

On October 13, 2016, the US Treasury and the IRS released final and temporary regulations under section 385 of the Internal Revenue Code that (i) establish threshold documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for US federal income tax purposes; and (ii) treat as stock certain related-party interests that otherwise would be treated as indebtedness for US federal income tax purposes.

Although the section 385 regulations were released on October 13, 2016, they are expected to have a published date of October 21, 2016, for determining when the various effective dates described below begin to apply to taxpayers.

The section 385 regulations follow the issuance of, and are significantly narrower in scope than, the proposed regulations issued on April 4, 2016, under section 385 that would have (i) authorized the IRS to treat certain related-party interests as part stock and part debt for federal tax purposes; (ii) established contemporaneous documentation requirements that must be satisfied for certain related-party debt to be respected for federal tax purposes; and (iii) treated certain related-party debt as stock for all purposes of the Code when issued in connection with certain distributions and acquisitions.

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