On The Hill

Section 385 Regulations

In April 2016, the Obama administration proposed the Section 385 rules to discourage U.S. companies from using a tax inversion. The rules allowed them to merge with a foreign corporation by using their earnings stripping, which in turn allows them to issue debt to their foreign parent. The inversion then limits their U.S. tax liability. The rules allowed the Internal Revenue Service to treat debt between related parties as part equity and part debt, a move that would limit company’s ability to deduct its interest payments on such debt.

The initial version of the rules threatened to complicate corporate treasuries’ use of cash pooling, along with other cash management and risk management techniques. In October 2016, the Treasury Department announced revised rules that provided an exemption for cash pooling but still required documentation of inter-company loans.

Specifically, the documentation rules contained in Regs. Sec. 1.385-2 required specified documentation for all “in-form” debt instruments issued by domestic corporations (1) that are members of an expanded group, (2) that issue an in-form debt instrument to an expanded group member, and (3) where the issuer and the holder are not members of the same consolidated group.[i]

In July 2017, the Treasury identified the regulations as burdensome and pushed back the deadline for complying with them from Jan. 1, 2018 to Jan. 1, 2019. Recently, the Office of Management and Budget (OMB) has cleared proposed regulations that would withdraw the documentation rules from Section 385 regulations. Their decision is expected to be released on the night of August 30^th or August 31^st.

Tax Staffer Moves

Jillian Plank has been promoted to Deputy Chief of Staff in the office of Rep. Devin Nunes (R-CA) office, the House Intelligence Chairman. Ian Foley will now serve as Legislative Director.

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[i] https://www.thetaxadviser.com/issues/2017/feb/sec-385-regs.html