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October 10, 2016

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.


The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.
Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.
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Related Issues:

Impact of Section 385 Proposed Regulations on Real Estate Investment Structures

In prior editions of the Tax Advisor Weekly, we have discussed the proposed regulations under Section 385 issued by the Internal Revenue Service and the Treasury Department that address whether related-party indebtedness is treated as stock or debt for federal income tax purposes (see “Section 385 Proposed Regulations: Treasury’s Attempt to Clamp Down on Earnings Stripping and a Whole Lot More,” April 19, 2016, and “Proposed New Documentation Rules for Related-Party Debt: A Practical Approach,” April 28, 2016).

IRS Steps Up Enforcement, Challenging Related-Party Debt

On Monday, July 25, the IRS posted a revised version of a previously issued Chief Counsel Notice making it clear that any case in exam or litigation raising an issue under Internal Revenue Code Section 385 must be coordinated with the Associate Chief Counsel (ACC) offices. This increased IRS focus on related-party indebtedness should serve as a call to taxpayers to review all existing related-party debt to identify and remediate, where possible, any exposures.