Treasury releases final Section 385 regulations

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May 2020

Overview

Today, Treasury and IRS released final regulations (the ‘2020 Final Regulations’) on the treatment of certain interests in corporations as stock or indebtedness. Treasury had previously published an advance notice of proposed rulemaking (ANPR) in the Federal Register on November 4, 2019. The final regulations generally affect corporations, including those that are partners of certain partnerships, when those corporations or partnerships issue purported indebtedness to related corporations or partnerships. The 2020 Final Regulations are effective on May 14, 2020 (anticipated date regulations will be published in the Federal Register). The 2020 Final Regulations contain 11 pages of preamble language and 53 pages of regulatory text, including 14 examples. The 2020 Final Regulations finalize the 2016 Proposed Regulations (described below) without any substantive change.

Previously, on October 21, 2016, Treasury and the IRS issued final regulations under Section 385 on the treatment of certain interests in corporations as stock or indebtedness, as well as temporary regulations providing exceptions for certain short-term debt instruments and providing additional rules regarding partnerships and consolidated groups (the Temporary Regulations). On the same date, Treasury and the IRS also published a notice of proposed rulemaking (2016 Proposed Regulations) by cross-reference to Temporary Regulations. The text of the 2016 Proposed Regulations is the same as the text of the Temporary Regulations. The Temporary Regulations expired on October 13, 2019; however, Notice 2019-58 and ANPR published on November 4, 2019, provided that a taxpayer may rely on the 2016 Proposed Regulations for periods following the expiration date of the Temporary Regulations, provided that the taxpayer consistently applies the rules in the Proposed Regulations in their entirety.

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Doug McHoney

International Tax Services Leader, PwC US

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