On Friday September 30, 2016, the U.S. Treasury Department ("Treasury") delivered a package containing the regulations under IRC Section 385 to the Office of Management and Budget ("OMB") for review by the Office of Information and Regulatory Affairs ("OIRA"). This is likely the final step before these regulations are published in the Federal Register. The OIRA generally has 90 days to complete the process of review of these regulations prior to their publication by Treasury. This action by Treasury likely indicates that these regulations will be published in the Federal Register before the end of 2016.
Unsubstantiated reports indicate that the Section 385 regulation packet contains final regulations under Section 1.385-2 (documentation requirements), as well as temporary regulations under Section 1.385-3 (per se recast of debt incurred in certain specified transactions) and Section 1.385-4 (special rules applicable to consolidated return groups). Section 1.385-2 of the regulations contains the new documentation requirements for certain intercompany debt that must be adhered to in order to avoid reclassification of these arrangements as equity.
Although it is unclear what, if any, changes have been made to the documentation requirements since Treasury issued its notice of proposed rulemaking in April, we recommend that you take certain actions immediately, as outlined in our prior releases (see “Proposed New Documentation Rules for Related-Party Debt: A Practical Approach”), to ensure that your organization will adhere to the mandatory documentation requirements, which will come into effect 30 days after the regulations are finalized. The final regulations could very well provide for mandatory documentation of aged trade payables and other common intercompany business payments.
Additionally, in light of what appears to be the imminent finalization of the Section 385 Regulations, Alvarez & Marsal Taxand will be publishing a weekly blog series highlighting specific traps, pitfalls and perils of all aspects of the Section 385 Regulations. The intention of this blog series is to inform companies of certain aspects of the regulations that might not be readily apparent, but can lead to harmful results if careful attention is not provided. Additional information is forthcoming.
Alvarez & Marsal Taxand Says:
A&M Taxand can help you assess your inventory of intercompany obligations and create and monitor your risk profile going forward. Contact our tax professionals for a copy of our New Debt Rules discussion checklist to help ensure that your organization will be in a position to properly implement the documentation requirements under the final regulations, as well as to avoid unexpected consequences under other aspects of the regulations.