The recently released regulations under Internal Revenue Code Section 385, addressing the circumstances under which related company debt will be classified as equity for federal income tax purposes, will have a significant impact on not only federal taxes but also on state and local taxes. For a more detailed discussion of these implications by our own Peter Faber, please see here.
Tax Bar Has Serious and Substantial Comments to the Proposed IRC Section 385 Regulations
On April 4, 2016, the Internal Revenue Service and the US Department of the Treasury issued proposed regulations pursuant to Internal Revenue Code (IRC) section 385 addressing whether an interest in a related corporation is treated as stock or indebtedness for US federal income tax purposes (Proposed Regulations). On June 29, 2016, both the DC Bar Taxation Section and the New York State Bar Association Tax Section submitted comments on the Proposed Regulations. Both Tax Sections urged Treasury not to finalize the Proposed Regulations. The DC Bar Taxation Section letter can be found here and the New York State Bar Association Tax Section letter can be found here.
The Proposed Regulations have been met with substantial criticism by the tax bar and taxpayers alike. The Proposed Regulations would have a significant impact on intercompany debt of multinational groups and could, if finalized in their proposed form, force major changes in the way that taxpayers conduct routine business.