United States

Treasury announces one year delay in debt-equity regulations

TAX ALERT  | 

In a recent notice (Notice 2017-36) the Treasury Department and IRS have announced that the documentation requirements set forth in the controversial “debt-equity” regulations issued under section 385 will now apply to interests issued or deemed to be issued on or after Jan. 1, 2019.  Prior to this notice, the documentation requirements were set to become effective beginning Jan. 1, 2018.

The documentation requirements represent a key component of the final section 385 regulations. As stated previously, the documentation rules will generally apply to interests issued or deemed issued on or after Jan. 1, 2019. The actual documentation itself, however, will not be required until the due date of the issuer’s timely filed tax return (including extensions).

The documentation requirements only apply if, at the time the debt first becomes an expanded group interest, at least one of the following applies:

  • The stock of any member of the expanded group is traded on an established market
  • All or any portion of the expanded group’s financial results were reported on applicable financial statements with total assets exceeding $100M
  • The expanded group’s financial results were reported on applicable financial statements that reflect annual total revenue exceeding $50M

Failure to satisfy the documentation requirements results in a presumption that the instrument in question is treated as equity for federal tax purposes (some exceptions could apply).

However, these thresholds make the documentation requirements small business friendly because they would exempt many small businesses from this section.

The regulations have received substantial public comments and criticism since issuance, however.  In fact, public backlash to these regulations has been so severe that Congress has even introduced a measure under the Congressional Review Act to withdraw the regulations.  In addition, they have been identified for review under President Trump’s executive order to identify and reduce tax regulatory burdens.

In light of this, and in response to continuing taxpayer outcry regarding the upcoming effective date of the documentation requirements contained in the regulations, Treasury and the IRS have extended the effective date of the documentation rules by 12 months.

This delay will certainly come as welcome relief, as taxpayers subject to the documentation requirements provided for in the regulations now have an additional 12 months to prepare to comply with the rules.  Taxpayers should not find this delay as cause to postpone the implementation process, however, as these regulations can be cumbersome to apply and potentially burdensome.  Accordingly, taxpayers should plan to appropriately identify and assess potential areas of exposure sooner rather than later.

In addition, taxpayers should continue to pay close attention to these regulations moving forward, as they are slated for review under President Trump’s executive order and may be further modified, or potentially rescinded, in order to comply with the order.

For more information on the final and temporary regulations, see US Treasury’s much-anticipated debt-equity regulations.

For more information on the regulations identified for review, see Treasury identifies eight regulations for review under executive order.

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