[Federal Register Volume 84, Number 213 (Monday, November 4, 2019)]
[Rules and Regulations]
[Pages 59297-59302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23817]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9880]
RIN 1545-BO02
Removal of Section 385 Documentation Regulations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document removes final regulations setting forth minimum
documentation requirements that ordinarily must be satisfied in order
for certain related-party interests in a corporation to be treated as
indebtedness for Federal tax purposes. This document also adopts
conforming amendments to other final regulations to reflect the removal
of the documentation regulations. The final regulations removed or
amended by this
[[Page 59298]]
document generally affect corporations that issue purported
indebtedness to related corporations or partnerships.
DATES: These regulations are effective November 4, 2019.
FOR FURTHER INFORMATION CONTACT: Austin Diamond-Jones, (202) 317-5363
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501-
3521), approval for the information collection included in these
regulations had been requested under control number 1545-2267. Because
of the removal of the final documentation regulations, the information
burden has been removed and control number 1545-2267 is no longer
needed.
Background
I. Overview
Section 385(a) of the Internal Revenue Code (Code) authorizes the
Secretary to ``prescribe such regulations as may be necessary or
appropriate to determine whether an interest in a corporation is to be
treated for purposes of [the Code] as stock or indebtedness (or as in
part stock and in part indebtedness).'' Section 385(b) requires such
regulations to ``set forth factors which are to be taken into account
in determining with respect to a particular factual situation whether a
debtor-creditor relationship exists or a corporation-shareholder
relationship exists.'' Section 385(b) also enumerates a nonexclusive
list of factors potentially to be included in those regulations.
On October 21, 2016, the Department of the Treasury (Treasury
Department) and the IRS published final and temporary regulations (T.D.
9790) under section 385 in the Federal Register (81 FR 72858). The
final and temporary regulations under section 385 (Section 385
Regulations) include rules set forth in Sec. 1.385-2, which establish
minimum documentation requirements that ordinarily must be satisfied in
order for purported debt obligations among related parties to be
treated as debt for Federal tax purposes (Documentation Regulations).
The Section 385 Regulations also include Sec. Sec. 1.385-3, 1.385-3T,
and 1.385-4T, which treat as stock certain debt that is issued by a
corporation to a controlling shareholder in a distribution or in
another related-party transaction that achieves an economically similar
result (Distribution Regulations).
The Documentation Regulations, as proposed, would have been
applicable with respect to interests issued or deemed issued on or
after the date of finalization. However, commenters expressed concern
that, if the Documentation Regulations were to be applicable as of that
date, taxpayers would lack adequate time to prepare for compliance with
the requirements set forth in those regulations. To assist taxpayers in
their preparation for the Documentation Regulations, the Treasury
Department and the IRS made the regulations applicable with respect to
interests issued or deemed issued after January 1, 2018. See Sec. Sec.
1.385-1(f), 1.385-2(d)(2)(iii), and 1.385-2(i).
II. Executive Order 13789
Executive Order 13789 (E.O. 13789), issued on April 21, 2017,
instructed the Secretary to review all significant tax regulations
issued on or after January 1, 2016, and to take concrete action to
alleviate the burdens of regulations that (i) impose an undue financial
burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax
laws; or (iii) exceed the statutory authority of the IRS. E.O. 13789
further instructed the Secretary to submit to the President within 60
days a report (First Report) that identifies regulations that meet
these criteria. Notice 2017-38 (2017-30 I.R.B. 147 (July 24, 2017))
included the Section 385 Regulations in a list of eight regulations
identified by the Secretary in the First Report as meeting at least one
of the first two criteria specified in E.O. 13789. In addition, E.O.
13789 instructed the Secretary to submit to the President a second
report (Second Report) that recommended specific actions to mitigate
the burden imposed by regulations identified in the First Report.
III. Additional Delay in Application of Documentation Regulations
As noted in Part I of this Background section, the Treasury
Department and the IRS had originally delayed the applicability date of
the Documentation Regulations to help taxpayers prepare for compliance
with those rules. Taxpayers, however, continued to express concern
regarding the timing and potential application of the Documentation
Regulations. Based on those continued concerns, and in light of the
contemplated additional action regarding the Section 385 Regulations
that resulted from E.O. 13789 review, the Treasury Department and the
IRS determined that a further delay in the application of the
Documentation Regulations would be appropriate. Accordingly, in Notice
2017-36 (2017-33 I.R.B. 208 (August 14, 2017)), the Treasury Department
and the IRS announced their intent to amend the Documentation
Regulations to delay the applicability of the regulations for 12
months, making the regulations applicable only to interests issued or
deemed issued on or after January 1, 2019.
IV. Proposed Removal of Documentation Regulations
The Second Report announced that the Treasury Department and the
IRS were considering a proposal to revoke the finalized Documentation
Regulations. See Executive Order 13789--Second Report to the President
on Identifying and Reducing Tax Regulatory Burdens, 82 FR 48013, 48016
(October 16, 2017). On September 24, 2018, the Treasury Department and
the IRS published a notice of proposed rulemaking (REG-130244-17) in
the Federal Register (83 FR 48265) that proposed removing the
Documentation Regulations and adopting conforming amendments to other
final regulations to reflect the removal of the Documentation
Regulations (Proposed Regulations). The preamble to the Proposed
Regulations provided that ``taxpayers may rely on these proposed
regulations, in their entirety, until the date a Treasury decision
adopting these regulations as final regulations is published in the
Federal Register'' (Reliance Provision). Proposed Regulations, 83 FR at
48267.
Summary of Comments
The Treasury Department and the IRS received three written comments
regarding the Proposed Regulations. Two of the comments supported
removal of the Documentation Regulations, while one comment opposed
removal. In connection with the Proposed Regulations, the Treasury
Department and the IRS also received a written comment addressing
solely the Distribution Regulations.
The single commenter that opposed removal of the Documentation
Regulations argued that the Proposed Regulations would hamper the
ability of the IRS to counter earnings stripping, and result in
significant decreases in Federal revenue. In addition, the commenter
asserted that the removal likely would reduce the overall perceived
legitimacy of the U.S. tax system, and consequently reduce voluntary
compliance. The commenter further argued that removal of the
Documentation Regulations would prove unnecessary because of (i) the
delayed applicability date provided by Notice 2017-36 and (ii)
substantial, taxpayer-favorable modifications included in the finalized
Documentation Regulations.
[[Page 59299]]
The two commenters that supported removal of the Documentation
Regulations contended that the regulations fail to balance
appropriately (i) the burdens imposed on taxpayers with (ii) the
expected benefits to the Federal government described in the preceding
paragraph. Both commenters expressed their appreciation for the
Reliance Provision, and emphasized that application of the
Documentation Regulations would have imposed onerous compliance burdens
and costs on taxpayers. One commenter also asserted that the Reliance
Provision appropriately reduced administrative burdens on the IRS.
The Treasury Department and the IRS have considered each of the
competing arguments and concerns set forth by the commenters and have
determined that the burdens imposed on taxpayers by the Documentation
Regulations outweigh the regulations' intended benefits. As a result,
this document adopts the Proposed Regulations with no change as final
regulations. The Treasury Department and the IRS, however, continue to
consider the issues addressed by the Documentation Regulations.
After this further review, the Treasury Department and the IRS may
propose a modified version of the Documentation Regulations. In any
modified version, the Treasury Department and the IRS would
substantially simplify and streamline the proposal to minimize taxpayer
burdens, while ensuring the collection of sufficient documentation and
other information necessary for tax administration purposes. The
Treasury Department and the IRS welcome comments regarding approaches
that would most effectively achieve that balance. Any modified version
of the Documentation Regulations would be proposed with a prospective
effective date to allow sufficient lead-time for taxpayers to design
and implement systems to comply with those regulations.
Effective Date
The removal of Sec. 1.385-2 and the conforming modifications are
effective as of November 4, 2019.
Statement of Availability of IRS Documents
IRS Notices cited in this document are published in the Internal
Revenue Bulletin and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at http://www.irs.gov.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Order 13777 directs agencies to alleviate unnecessary
regulatory burdens placed on the American people by managing the costs
associated with the governmental imposition of private expenditures
required to comply with Federal regulations. Executive Orders 13771,
13563, and 12866 direct agencies to prudently manage the cost of
planned regulations by assessing costs and benefits of available
regulatory alternatives and, if regulation is necessary, to select
regulatory approaches that maximize net benefits (including potential
economic, environmental, public health and safety effects, distributive
impacts, and equity). Executive Order 13563 emphasizes the importance
of quantifying both costs and benefits, of reducing costs, of
harmonizing rules, and of promoting flexibility.
The final regulations have been designated as subject to review
under Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations. OMB
has determined that the final regulations are not a significant
regulatory action. This final rule is an Executive Order 13771
deregulatory action.
A. Background
On October 21, 2016, the Treasury Department and the IRS published
final and temporary regulations (T.D. 9790) under section 385 in the
Federal Register (81 FR 72858). The final and temporary regulations
under section 385 include rules set forth in Sec. 1.385-2, which
establish minimum documentation requirements that ordinarily must be
satisfied in order for purported debt obligations among related parties
to be treated as debt for Federal tax purposes (that is, the
Documentation Regulations).
These final regulations withdraw the Documentation Regulations, and
thereby remove the requirements set forth in those regulations on
taxpayers with respect to certain transactions related to debt
issuance. If applicable, the Documentation Regulations would have
prescribed the nature of the documentation necessary to substantiate
the Federal income tax treatment of related-party interests as
indebtedness, including documentation of factors analogous to those
found in third-party loan agreements. In general, to comply with the
Documentation Regulations, taxpayers would have needed to provide or
otherwise establish the following: (1) Evidence of an unconditional and
binding obligation to make interest and principal payments on certain
fixed dates; (2) that the holder of the loan had the rights of a
creditor, including rights superior to shareholders in the case of
dissolution; (3) a reasonable expectation of the borrower's ability to
repay the loan; and (4) evidence of conduct consistent with a debtor-
creditor relationship. The Documentation Regulations would have applied
to relevant intercompany debt issued by U.S. borrowers beginning in
2019, and would have required that the taxpayer's documentation for a
given tax year be prepared by the time the borrower's Federal income
tax return is filed.
Since the issuance of the Documentation Regulations, Congress
enacted the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054
(2017) (TCJA). While the final regulations do not implement any
provisions of the TCJA, the final regulations would interact with the
TCJA. There are several provisions of the TCJA that reduced the tax
advantages of conducting activity as part of a foreign controlled
domestic corporation (FCDC) rather than in a domestically controlled
company (DCC), and thus may affect the economic efficiency of the
Documentation Regulations and, analogously, the removal of those
regulations. First, for taxable years beginning after December 31,
2017, the TCJA reduced the statutory corporate tax rate from 35 percent
to 21 percent, which lowers the effective tax rate for DCCs more than
for FCDCs. Second, the ability of FCDCs to strip earnings out of the
United States through the use of deductions for interest expense was
significantly reduced by the TCJA through amendments to section 163(j)
of the Internal Revenue Code. See section 13301(a) of the TCJA, 131
Stat. 2054, 2117-21. Specifically, the TCJA amendments to section
163(j) (1) eliminated the debt-equity ratio safe harbor, (2) reduced
the maximum net interest deductions' share of adjusted taxable income
from 50 percent to 30 percent, (3) limited all, rather than just
related-party, interest deductions, and (4) eliminated the carryforward
of excess limitation under pre-TCJA section 163(j). The TCJA's Base
Erosion Anti-abuse Tax (BEAT) further reduces the tax advantage to
deducting interest expense. See section 14401(a) of the TCJA, 131 Stat.
2054, 2226-32. Thus, the benefits of the Documentation
[[Page 59300]]
Regulations in reducing foreign acquisitions of U.S. assets and
interest stripping were reduced by the TCJA.
B. Need for the Final Regulations
These final regulations implement the fifth deregulatory action
identified for further consideration in the Second Report issued
pursuant to E.O. 13789. Accordingly, the final regulations are needed
to remove the Documentation Regulations.
C. Overview of the Final Regulations
These final regulations remove the Documentation Regulations, which
set forth minimum documentation requirements that ordinarily must be
satisfied in order for certain related-party interests in a corporation
to be treated as indebtedness for Federal tax purposes. In addition,
the final regulations adopt conforming amendments to other final
regulations to reflect the removal of the Documentation Regulations.
D. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of these final regulations compared to a no-action baseline that
reflects anticipated Federal income tax-related behavior in the absence
of these final regulations.
2. Summary of Economic Effects
These final regulations provide compliance cost savings for some
taxpayers by eliminating the need to document relevant transactions in
a prescribed manner. The behavior of taxpayers that nevertheless
continue to document such transactions would not be changed to any
measurable degree. While the removal of the Documentation Regulations
may lead to an increase in investment in the United States, this effect
is likely to be small given that a body of other regulations continue
to cover the terms of that investment. The final regulations may
increase costs of the IRS in administering the Distribution Regulations
and potentially lead to more noncompliance by some taxpayers.
An analysis discussing the anticipated economic effects of these
regulations was included in the preamble to the Proposed Regulations.
See Proposed Regulations, 83 FR at 48267-69. The Treasury Department
and the IRS received no substantive comments regarding that analysis in
response to the Proposed Regulations. The analysis included herein
presents the analysis set forth in those Proposed Regulations.
3. Number of Affected Taxpayers
The Treasury Department and the IRS project that approximately
6,300 large C corporations are likely to be affected by these
regulations. This estimate is based on the number of corporations that
have sufficient assets ($100 million) or revenue ($50 million) or are
publicly traded such that they would have been required to document the
relevant transactions.
4. Monetized Estimates of Compliance Burden Effects From Documentation
Regulations
The Treasury Department and the IRS estimate that removal of the
Documentation Regulations will reduce taxpayer compliance costs by $924
million over the period 2019-2028 (undiscounted nominal total). The net
present value of the compliance cost savings is $773 million and $685
million ($2018) using real discount rates of 3 percent and 7 percent,
respectively. These amounts are $90.6 million and $97.5 million on an
annualized basis, again based on 3 percent and 7 percent real rates,
respectively. See below the ``Change in Annual Compliance Costs''
table.
These estimates include an ongoing reduction in compliance costs
and a reduction in the start-up cost equal to four times the annual
ongoing compliance cost savings. In addition, the analysis includes a
sensitivity analysis in which the compliance costs are estimated for a
90-percent interval around our best estimate. First, the distributional
characteristics of critical parameters used to produce the estimate are
evaluated. Then, Monte Carlo simulations are used to vary the parameter
values. Finally, alternative high and low estimates are computed based
on parameter values at either end of the 90-percent range.
Table--Change in Annual Compliance Costs
------------------------------------------------------------------------
Fiscal years Fiscal years
Estimated change in annual compliance 2019 to 2028 2019 to 2028
costs (annualized value, $2018 million) (3% real (7% real
discount rate) discount rate)
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Central estimate........................ -$90.6 -$97.5
High estimate........................... -113.3 -121.9
Low estimate............................ -68.0 -73.1
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Technical note: In this rulemaking, the Treasury Department made
technical adjustments relative to the Documentation Regulations in
calculating the annualized compliance cost estimates. The cost stream
in this rulemaking is in 2018 dollars, reflects a two-year delay in
effective date (relative to the previous estimates), and applies real
discount rates of 3 percent and 7 percent. Technical adjustments
account for part of the difference in the estimates between the
rulemakings.
5. Higher Tax Administrative Costs for the IRS
The reduced loan documentation required of large corporations as a
result of the removal of the Documentation Regulations will reduce the
ability of the IRS to more effectively administer the tax laws by
making it more difficult for the IRS to evaluate whether purported
loans are properly treated as debt for Federal tax purposes. This will
raise the cost of auditing and evaluating the tax returns of companies
engaged in these transactions.
6. Other Economic Effects
a. Reduced Tax Compliance
As a result of the final regulations, taxpayers will not be
required to comply with the Documentation Regulations. Therefore, such
taxpayers will not need to satisfy the documentation requirements with
respect to relevant transactions formerly addressed by the
Documentation Regulations. That lack of documentation likely will
slightly reduce voluntary compliance by taxpayers to report accurately
the Federal income tax consequences of such transactions. The resulting
expected revenue reduction is $407 million over the period 2019 to 2028
(undiscounted nominal total). The annualized value of the revenue
reduction is $35.4 million and $34.5 million ($2018) using real
discount rates of 3 percent and 7 percent, respectively. The revenue
effects were estimated
[[Page 59301]]
using the methodology described in the preamble to the Section 385
Regulations, although the estimate presented herein covers 2019 to 2028
and reflects factors that changed as a result of the TCJA as well as
other technical adjustments.
b. Efficiency and Growth Effects
The removal of the Documentation Regulations will increase, to some
extent, the tax advantage some foreign owners have over some domestic
owners of U.S. assets, and consequently may increase the propensity for
foreign acquisitions and ownership of U.S. assets that are motivated by
tax considerations rather than economics. By increasing the ability to
undertake tax-motivated acquisitions or ownership structures, removal
of the Documentation Regulations may slightly reduce the incentive for
assets to be owned or managed by those most capable of putting the
assets to their highest-valued use. Moreover, removal of the
Documentation Regulations may put purely domestic U.S. firms on less
even tax footing than their foreign-owned competitors operating in the
United States.
On the other hand, removal of the Documentation Regulations may
slightly reduce the effective tax rate and compliance costs on
investment in the United States. While the magnitude of this reduction
is small, to the extent that the reduction increases new capital
investment in the United States its effects would be efficiency
enhancing.
II. Regulatory Flexibility Act
As described in more detail in this section, pursuant to the
Regulatory Flexibility Act (5 U.S.C. chapter 6), the Treasury
Department and the IRS hereby certify that these final regulations will
not have a significant economic impact on a substantial number of small
entities.
The Documentation Regulations, as finalized, were made applicable
with respect to interests issued or deemed issued on or after January
1, 2018. See Background section, part I. In Notice 2017-36, the
Treasury Department and the IRS further delayed the applicability of
the Documentation Regulations by making the regulations applicable only
to interests issued or deemed issued on or after January 1, 2019. See
Background section, part III. Because of the Reliance Provision, the
Documentation Regulations are not applicable to any interests issued by
any taxpayer, unless such taxpayer chooses to apply the regulations
despite the Reliance Provision. See Background section, part IV.
The Documentation Regulations apply to large corporate groups
(specifically, those that are publicly traded, or have assets exceeding
$100 million or annual total revenue exceeding $50 million in its
expanded group), thus limiting the scope of small entities affected.
The Documentation Regulations apply to financial institutions, which
are considered small entities under the Regulatory Flexibility Act if
they have less than $550 million in assets. See 13 CFR 121.201. The
Treasury Department and the IRS believe that the Documentation
Regulations do not affect a substantial number of small entities other
than small financial institutions. Even if the Documentation
Regulations affected a substantial number of small entities in that
sector, the economic impact of this rule would be minimal because the
final regulations adopt the Proposed Regulations, which remove the
Documentation Regulations and permit taxpayers not to apply such
regulations until adoption of these final regulations. Accordingly,
this final rule will not have a significant economic impact on a
substantial number of small entities.
Pursuant to section 7805(f), the proposed regulations preceding
these final regulations were submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business and no comments were received.
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2019, that threshold is approximately $164 million. This
final rule does not include any mandate that may result in expenditures
by state, local, or tribal governments, or by the private sector in
excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This final rule does not have
federalism implications and does not impose substantial, direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Drafting Information
The principal author of the final regulations is Austin Diamond-
Jones, Office of the Associate Chief Counsel (Corporate). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the sectional authority for Sec. 1.385-2 to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.385-1 is amended by:
0
1. Revising paragraph (a), the last sentence of paragraph (c), the last
sentence of paragraph (c)(4)(iv), paragraph (d)(1)(i), the first
sentence of paragraph (d)(1)(ii), and paragraphs (d)(1)(iii) and
(d)(1)(iv)(A); and
0
2. Removing and reserving paragraph (d)(2)(i).
The revisions read as follows:
Sec. 1.385-1 General provisions.
(a) Overview of section 385 regulations. This section and
Sec. Sec. 1.385-3 through 1.385-4T (collectively, the section 385
regulations) provide rules under section 385 to determine the treatment
of an interest in a corporation as stock or indebtedness (or as in part
stock and in part indebtedness) in particular factual situations.
Paragraph (b) of this section provides the general rule for determining
the treatment of an interest based on provisions of the Internal
Revenue Code and on common law, including the factors prescribed under
common law. Paragraphs (c), (d), and (e) of this section provide
definitions and rules of general application for purposes of the
section 385 regulations. Section 1.385-3 sets forth additional factors
that, when present, control the determination of whether an interest in
a corporation that is held by a member of the corporation's expanded
group is treated (in whole or in part) as stock or indebtedness.
* * * * *
[[Page 59302]]
(c) * * * For additional definitions that apply for purposes of
their respective sections, see Sec. Sec. 1.385-3(g) and 1.385-4T(e).
* * * * *
(4) * * *
(iv) * * * For purposes of the section 385 regulations, a
corporation is a member of an expanded group if it is described in this
paragraph (c)(4)(iv) immediately before the relevant time for
determining membership (for example, immediately before the issuance of
a debt instrument (as defined in Sec. 1.385-3(g)(4)) or immediately
before a distribution or acquisition that may be subject to Sec.
1.385-3(b)(2) or (3)).
* * * * *
(d) * * *
(1) * * *
(i) In general. If a debt instrument (as defined in Sec. 1.385-
3(g)(4)) is deemed to be exchanged under the section 385 regulations,
in whole or in part, for stock, the holder is treated for all Federal
tax purposes as having realized an amount equal to the holder's
adjusted basis in that portion of the debt instrument as of the date of
the deemed exchange (and as having basis in the stock deemed to be
received equal to that amount), and, except as provided in paragraph
(d)(1)(iv)(B) of this section, the issuer is treated for all Federal
tax purposes as having retired that portion of the debt instrument for
an amount equal to its adjusted issue price as of the date of the
deemed exchange. In addition, neither party accounts for any accrued
but unpaid qualified stated interest on the debt instrument or any
foreign exchange gain or loss with respect to that accrued but unpaid
qualified stated interest (if any) as of the deemed exchange. This
paragraph (d)(1)(i) does not affect any rules in Title 26 of the United
States Code that otherwise apply to the debt instrument prior to the
date of the deemed exchange (for example, this paragraph (d)(1)(i) does
not affect the issuer's deduction of accrued but unpaid qualified
stated interest otherwise deductible prior to the date of the deemed
exchange). Moreover, the stock issued in the deemed exchange is not
treated as a payment of accrued but unpaid original issue discount or
qualified stated interest on the debt instrument for Federal tax
purposes.
(ii) * * * Notwithstanding the first sentence of paragraph
(d)(1)(i) of this section, the rules of Sec. 1.988-2(b)(13) apply to
require the holder and the issuer of a debt instrument that is deemed
to be exchanged under the section 385 regulations, in whole or in part,
for stock to recognize any exchange gain or loss, other than any
exchange gain or loss with respect to accrued but unpaid qualified
stated interest that is not taken into account under paragraph
(d)(1)(i) of this section at the time of the deemed exchange. * * *
(iii) Section 108(e)(8). For purposes of section 108(e)(8), if the
issuer of a debt instrument is treated as having retired all or a
portion of the debt instrument in exchange for stock under paragraph
(d)(1)(i) of this section, the stock is treated as having a fair market
value equal to the adjusted issue price of that portion of the debt
instrument as of the date of the deemed exchange.
(iv) * * *
(A) A debt instrument that is issued by a disregarded entity is
deemed to be exchanged for stock of the regarded owner under Sec.
1.385-3T(d)(4);
* * * * *
Sec. 1.385-2 [Removed]
0
Par. 3. Section 1.385-2 is removed.
0
Par. 4. Section 1.385-3 is amended by revising paragraph (g)(4) to read
as follows:
Sec. 1.385-3 Transactions in which debt proceeds are distributed or
that have a similar effect.
* * * * *
(g) * * *
(4) Debt instrument. The term debt instrument means an interest
that would, but for the application of this section, be treated as a
debt instrument as defined in section 1275(a) and Sec. 1.1275-1(d).
* * * * *
0
Par. 5. Section 1.1275-1 is amended by revising the last sentence of
paragraph (d) to read as follows:
Sec. 1.1275-1 Definitions.
* * * * *
(d) * * * See Sec. 1.385-3 for rules that treat certain
instruments that otherwise would be treated as indebtedness as stock
for Federal tax purposes.
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: September 30, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-23817 Filed 10-31-19; 4:15 pm]
BILLING CODE 4830-01-P