[Federal Register Volume 84, Number 213 (Monday, November 4, 2019)]
[Proposed Rules]
[Pages 59318-59320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23819]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-123112-19]
RIN 1545-BP51
The Treatment of Certain Interests in Corporations as Stock or
Indebtedness
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: This document announces that the Department of the Treasury
(Treasury Department) and the IRS intend to issue proposed regulations
regarding the treatment of certain interests in corporations as stock
or indebtedness and requests comments from the public regarding the
contemplated rules. This document also announces that, following the
expiration of the 2016 Temporary Regulations (described in the
Background section of this advance notice of proposed rulemaking), a
taxpayer may rely on the 2016 Proposed Regulations (also described in
the Background) until further notice is given in the Federal Register,
provided that the taxpayer consistently applies the rules in the 2016
Proposed Regulations in their entirety.
DATES: Written or electronic comments must be received by February 3,
2020.
ADDRESSES: Submit electronic submissions via the Federal eRulemaking
Portal at https://www.regulations.gov (indicate IRS and REG-123112-19)
by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Treasury Department and the IRS will publish for
public availability any comment received to its public docket, whether
submitted electronically or in hard copy. Send hard copy submissions
to: CC:PA:LPD:PR (REG-123112-19), Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposals, Azeka J.
Abramoff at (202) 317-6938; concerning submissions of comments, Regina
Johnson at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Overview
Section 385 authorizes the Secretary of the Treasury or his
delegate (Secretary) to prescribe rules to determine whether an
interest in a corporation is treated as stock or indebtedness (or as in
part stock and in part indebtedness). On October 21, 2016, the Treasury
Department and the IRS published T.D. 9790 in the Federal Register (81
FR 72858), which included final regulations under section 385 and
temporary regulations under section 385 (Temporary Regulations). On the
same date, the Treasury Department and the IRS also published a notice
of proposed rulemaking (REG-130314-16) in the Federal Register (81 FR
72751) (2016 Proposed Regulations) by cross-reference to the Temporary
Regulations, which include Sec. Sec. 1.385-3T and 1.385-4T. Technical
corrections to the final regulations and the Temporary Regulations were
published in the Federal Register (82 FR 8169) on January 24, 2017.
The final regulations under section 385, the Temporary Regulations,
and the 2016 Proposed Regulations address the classification of certain
related-party debt as debt or equity for Federal tax purposes. Treasury
Decision 9790 included rules set forth in Sec. 1.385-2, which
establish minimum documentation requirements that ordinarily must be
satisfied in order for debt obligations among related parties to be
treated as debt for Federal tax purposes (Documentation Regulations).
Treasury Decision 9790 also included 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
[[Page 59319]]
shareholder in a distribution or in another related-party transaction
that achieves an economically similar result (the Distribution
Regulations). The Distribution Regulations are applicable for taxable
years ending on or after January 19, 2017.
The Temporary Regulations set forth rules regarding the treatment
under the Distribution Regulations of certain qualified short-term debt
instruments, transactions involving controlled partnerships, and
transactions involving consolidated groups. The Temporary Regulations
apply to taxable years ending on or after January 19, 2017. The
Temporary Regulations expired on October 13, 2019. See section 7805(e);
Sec. 1.385-3T(l); Sec. 1.385-4T(h).
The 2016 Proposed Regulations cross-referencing the Temporary
Regulations are proposed to apply to taxable years ending on or after
January 19, 2017; in contrast to the Temporary Regulations, the 2016
Proposed Regulations do not expire.
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, which was published
on July 24, 2017, included the final 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.
E.O. 13789 further instructed the Secretary to submit to the
President a report (Second Report) that recommended specific actions to
mitigate the burden imposed by regulations identified in the First
Report. On October 16, 2017, the Secretary published in the Federal
Register the Second Report (82 FR 48013), which stated that (i) the
Treasury Department and the IRS were considering a proposal to revoke
the Documentation Regulations as issued and (ii) the Treasury
Department will reassess the distribution regulations in light of
impending tax reform and the Treasury Department and the IRS may then
propose more streamlined and targeted regulations. On September 24,
2018, the Treasury Department and the IRS issued proposed regulations
that, if finalized, would remove the Documentation Regulations from the
Code of Federal Regulations. See 83 FR 48265 (September 24, 2018). The
Treasury Department and the IRS are publishing in the Rules section of
this issue of the Federal Register final regulations that remove the
Documentation Regulations.
Some taxpayers submitted comments in response to E.O. 13789 and the
September 2018 proposed regulations recommending that the Treasury
Department and the IRS revoke the Distribution Regulations in addition
to the Documentation Regulations, while another comment recommended
that the Treasury Department and the IRS issue more streamlined and
targeted Distribution Regulations. This advance notice of proposed
rulemaking announces that the Treasury Department and the IRS intend to
propose more streamlined and targeted Distribution Regulations.
III. The Distribution Regulations
Under the Distribution Regulations' general rule, the issuance of a
debt instrument by a member of an expanded group to another member of
the same expanded group in a distribution, or an economically similar
transaction, may result in the treatment of the debt instrument as
stock. See Sec. 1.385-3(b)(2). The Distribution Regulations include a
funding rule that treats as stock a debt instrument that is issued as
part of a series of transactions that achieves a result similar to a
distribution of a debt instrument. See Sec. 1.385-3(b)(3)(i).
Specifically, Sec. 1.385-3(b) treats as stock a debt instrument that
was issued in exchange for property, including cash, to fund a
distribution to an expanded group member or another transaction that
achieves an economically similar result. Id. Furthermore, the
Distribution Regulations include a per se rule, which treats a debt
instrument as funding a distribution to an expanded group member or
other transaction with a similar economic effect if it was issued in
exchange for property during the period beginning 36 months before and
ending 36 months after the issuer of the debt instrument made the
distribution or undertook a transaction with a similar economic effect.
See Sec. 1.385-3(b)(3)(iii). The Distribution Regulations also include
several exceptions limiting their scope. See, e.g., Sec. 1.385-3(c).
The Distribution Regulations address debt instruments that do not
finance any new investment in the operations of the borrower and
therefore have the potential to create significant Federal tax
benefits, including interest deductions that erode the U.S. tax base,
without having meaningful non-tax significance. The Treasury Department
and the IRS are cognizant that a complete withdrawal of the
Distribution Regulations could restore incentives for multinational
corporations to generate additional interest deductions without new
investment. Accordingly, the Treasury Department and the IRS have
determined that the Distribution Regulations continue to be necessary
at this time.
Explanation of Contemplated Regulations
Pursuant to E.O. 13789, the Treasury Department and the IRS intend
to issue proposed regulations modifying the Distribution Regulations.
To make the Distribution Regulations more streamlined and targeted, the
Treasury Department and the IRS intend to issue proposed regulations
substantially modifying the funding rule, including by withdrawing the
per se rule. The Treasury Department and the IRS intend that the
proposed regulations would not treat a debt instrument as funding a
distribution or economically similar transaction solely because of
their temporal proximity; rather, the proposed regulations would apply
the funding rule to a debt instrument only if its issuance has a
sufficient factual connection to a distribution to a member of the
taxpayer's expanded group or an economically similar transaction (for
example, when the funding transaction and distribution or economically
similar transaction are pursuant to an integrated plan). Thus, under
the proposed regulations, a debt instrument issued without such a
connection to a distribution or similar transaction would not be
treated as stock. As a result, the proposed distribution regulations
would be more streamlined and targeted while continuing to deter tax-
motivated uneconomic activity. As part of the intended revisions of the
funding rule, the Treasury Department and the IRS also are considering
substantial revisions to, or removal of, certain exceptions in the
regulations, consistent with the revised standard. The proposed
distribution regulations would not alter materially the definition of a
covered member (defined in Sec. 1.385-1(c)(2) as a member of an
expanded group that is a domestic corporation).
Proposed Applicability Date
The Treasury Department and the IRS intend to provide that the
proposed regulations would apply to taxable years beginning on or after
the date of publication of the Treasury decision
[[Page 59320]]
adopting those rules as final regulations in the Federal Register.
Reliance on the 2016 Proposed Regulations
For periods after October 13, 2019 (the expiration date of the
Temporary Regulations), a taxpayer may rely on the 2016 Proposed
Regulations until further notice is given, provided that the taxpayer
consistently applies the rules in the 2016 Proposed Regulations in
their entirety.
Request for Comments
The Treasury Department and the IRS request comments on all aspects
of the rules described in part III of this advance notice of proposed
rulemaking. In particular, the Treasury Department and the IRS request
comments on the appropriate standard for determining the existence of a
connection between a debt instrument and a distribution or economically
similar transaction under the funding rule. For example, the funding
rule could apply solely in cases in which a debt instrument is issued
as part of an overall plan to fund the distribution or economically
similar transaction. The Treasury Department and the IRS also request
comments on whether the proposed regulations should include particular
factors that indicate when the funding rule applies and factors that
indicate when the funding rule does not apply. The Treasury Department
and the IRS also request comments on what additional guidance, if any,
should be issued (or which provisions should be eliminated from the
final regulations) to reduce the compliance burdens associated with the
Distribution Regulations. The Treasury Department and the IRS also
request comments on how the Distribution Regulations may affect small
businesses. All comments will be available at http://www.regulations.gov or upon request.
Effect on Other Documents
Notice 2019-58, 2019-44 I.R.B. 1022 (October 28, 2019), which
addresses the status of the 2016 Proposed Regulations after October 13,
2019, is obsoleted.
Statement of Availability
IRS Notices and other guidance 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 https://www.irs.gov.
Drafting Information
The principal author of this advance notice of proposed rulemaking
is Azeka J. Abramoff of the Office of Associate Chief Counsel
(International). However, other personnel from the Treasury Department
and the IRS participated in its development.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-23819 Filed 10-31-19; 4:15 pm]
BILLING CODE 4830-01-P