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Jul 31, 2017

One-Year Delay to the Application of Section 385 Documentation Rules

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On July 28, 2017, the Treasury Department and the IRS announced in Notice 2017-36 (the “Notice”) that they will delay the documentation rules of Treasury regulation section 1.385-2 to debt instruments issued or deemed to be issued on or after January 1, 2019. The documentation rules would have originally applied to debt instruments issued or deemed to be issued on or after January 1, 2018. The section 385 Treasury regulations introduced new documentation requirements and additional rules for intercompany debt. The Notice cites the Trump Administration’s Executive Order to examine rules that could be modified or rescinded for imposing an undue financial burden on taxpayers and the subsequent identification of the section 385 final and temporary Treasury regulations as significant tax regulations requiring additional review pursuant to such Executive Order. In the Notice, the Treasury Department and the IRS cited the ongoing concerns raised by taxpayers regarding the application of the documentation rules and stated that the concerns warranted the 12-month delay. The Notice requests comments regarding whether the 12-month delay provides taxpayers with adequate time to develop any necessary systems and to comply with the documentation rules. The Treasury Department and the IRS intend to amend the documentation rules in Treasury regulation section 1.385-2, but taxpayers may rely on the delay in application of the documentation rules set forth in the Notice until such time.

The Notice, however, does not provide any relief with respect to the debt recharacterization rules under Treasury regulation section 1.385-3, which remain in effect. Previously, on July 7, 2017, in accordance with Executive Order 13789, the Treasury Department issued Notice 2017-38 and identified the section 385 Treasury regulations as under review as a result of imposing undue financial burden on taxpayers and/or adding undue complexity to Federal tax laws. The Treasury Department requested comments from taxpayers by August 7, 2017, and is required to submit a report to the President by September 18, 2017, recommending specific actions, including modifications or repeal, to mitigate the burdens imposed by the section 385 Treasury regulations.

Authors and Contributors

Laurence Crouch

Partner

Tax

+1 650 838 3718

+1 650 838 3718

Menlo Park

Ethan Harris

Partner

Tax

+1 202 508 8163

+1 202 508 8163

Washington DC

Kristen Garry

Partner

Tax

+1 202 508 8186

+1 202 508 8186

Washington DC

Michael Shulman

Partner

Tax

+1 212 848 8080

+1 212 848 8080

New York

Ryan Au

Associate

Tax

+1 202 508 8162

+1 202 508 8162

Washington DC

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