Treasury Identifies Certain Debt Classification Regulations as Burdensome

The U.S. Department of Treasury has ruled several recent tax regulations as burdensome, including those under Section 385 of the Internal Revenue Code reclassifying certain related-party debt as equity for tax purposes.

The Treasury began examining all significant tax regulations issued since Jan. 1, 2016 following an executive order from President Donald J. Trump intended to reduce regulatory tax burdens. The Treasury looked for regulations that imposed needless financial stress on taxpayers, added unnecessary complications to tax laws, or surpassed the authority of the IRS. The treasury found eight regulations that meet the criteria outlined in President Trump’s directive, Executive Order 13789.

The Section 385 regulations concern rules setting minimum documentation requirements for purported debt among parties to be treated as debt for tax purposes. The regulations also set guidelines for transactions that treat as stock certain debt issued by a corporation to a shareholder in a distribution, or similar related-party transaction.

The documentation requirements were found to be burdensome. The increased taxes on incoming investments were criticized and the process of tracking multiple transactions across several companies were found to be too complex. As per President Trump’s directive, the Treasury will have to put in place a concrete plan alleviating the burdens. Those actions could range from a full repeal to simplifying problematic provisions. A final report must be submitted to the White House by Sept. 18, 2017.

The other seven regulations the Treasury outlined as burdensome to taxpayers were:

  • Proposed regulations under Sec. 103 on the definition of political subdivision (REG-129067-15)
  • Temporary regulations under Sec. 337(d) on certain transfers of property to regulated investment companies (RICs) and real estate investment trusts (REITs) (T.D. 9770)
  • Final regulations under Sec. 7602 on the participation of a person described in Sec. 6103(n) in a summons interview (T.D. 9778)
  • Proposed regulations under Sec. 2704 on restrictions on liquidation of an interest for estate, gift, and generation-skipping transfer taxes (REG-163113-02)
  • Temporary regulations under Sec. 752 on liabilities recognized as recourse partnership liabilities (T.D. 9788)
  • Final and temporary regulations under Sec. 385 on the treatment of certain interests in corporations as stock or indebtedness (T.D. 9790)
  • Final regulations under Sec. 987 on income and currency gain or loss with respect to a Sec. 987 qualified business unit (T.D. 9794)
  • Final regulations under Sec. 367 on the treatment of certain transfers of property to foreign corporations (T.D. 9803).


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