Debt-Equity Documentation Rules Delayed One Year

In October 2016, the Treasury Department and IRS released final and temporary debt-equity regulations under IRC Sec. 385.  Contained in those regulations are documentation rules which were to become effective for interests issued on or after January 1, 2018.  Since the regulations were issued, concern has been expressed by taxpayers that more time was needed to comply with these documentation rules. 

In just released Notice 2017-36, the Treasury Department and IRS have announced that they intend to delay the application of the documentation rules by 12 months.  These rules will now apply only to interests issued or deemed issued on or after January 1, 2019.

As described in Notice 2017-36, the documentation rules have two principal purposes.  The first is to provide guidance regarding the documentation and other information that must be prepared and maintained to support a determination of whether certain indebtedness will qualify as debt (as opposed to equity) for federal income tax purposes.  The second is to establish certain operating rules, presumptions and factors to be taken into account in making that determination.

Based on the wording of Notice 2017-36, there are likely to be further developments regarding the application and implementation of the IRC Sec. 385 debt-equity regulations.  In IRS Notice 2017-38 released July 7, 2017, the Treasury announced that it would propose reforms to mitigate the burdens created by eight specified tax regulations.  That notice was in response to President Trump’s Executive Order 13789 regarding regulations that imposed financial burdens on U.S. taxpayers or added undue complexity to the federal tax laws.  One of the identified regulations was the IRC Sec. 385 debt-equity regulations.  Part of the stated justification in Notice 2017-36 for the twelve-month delay is the likelihood of “further actions concerning the final and temporary regulations under section 385 in connection with the review of those regulations.”