Karen Sowell of the New York State Bar Association Tax Section has responded to a request for comments (Notice 2017-38) on burdensome tax regulations, offering suggestions on how to treat some provisions of the final and temporary debt-equity regs (T.D. 9790) issued in October 2016.

The final and temporary regs under section 385 establish threshold documentation requirements that ordinarily must be satisfied for specified related-party interests in a corporation to be treated as indebtedness for federal tax purposes. They also treat as stock some related-party interests that otherwise would be treated as indebtedness. Notice 2017-38 identified reg. sections 1.385-3 and 1.385-3T (the final per se stock rules) as imposing an undue financial burden on U.S. taxpayers, adding undue complexity to the federal tax laws, or both. The notice requested comments on whether the regs should be rescinded or modified, and if modified, what changes should be made to reduce burdens and complexity.

Section members “believe that the final per se stock rules should not be left outstanding in their current form” and urge Treasury to quickly implement a plan to either withdraw the rules or issue a more targeted and streamlined set of regulations. The tax section proposes three options for achieving this goal.

First, section members suggest that Treasury could withdraw the final per se stock rules and decline to reissue an alternative set of regs because the Tax Cuts and Jobs Act (P.L. 115-97) introduced substantial changes to the taxation of U.S. corporations (and the U.S. taxation of international operations in particular) and included a variety of provisions that specifically target inversion and earnings stripping. Although acknowledging that there could be a slight increase in inversions, the tax section contends that most of these would occur even if the regs were retained. Members also say “it is unclear whether Congress envisioned Treasury continuing to use section 385 to limit earnings stripping beyond the specific provisions included in the TCJA.”

Second, the tax section warns that it will be difficult to issue a more targeted and streamlined set of regulations under section 385 because that statute was originally designed to distinguish between debt and equity of a corporation and not as an anti-inversion or anti-earnings-stripping provision. However, section members say they “would be happy to submit a report making recommendations as to those revised regulations,” but would need to know whether Treasury intends to retain the basic approach taken by the existing regs or develop an alternative framework.

Third, the tax section proposes that the final per se stock rules could be suspended. Members offer this option in recognition “of the enormous amount of Treasury guidance that must be issued under the TCJA and the scarce resources available at Treasury to develop and approve that guidance.” Section members urge Treasury to adopt this alternative if the department concludes that it will not be in a position soon to either withdraw the final per se stock rules or issue a targeted and streamlined set of revised regulations.

NYSBA Tax Section Discusses Fate of Per Se Stock Rules