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Update Regarding Department of Treasury Proposed Section 385 Regulations on Classification of Instruments as Debt or Equity

June 6, 2016

As an update to Dykema’s May 2 alert entitled, Implications of Proposed Debt/Equity Regulations Extend Far Beyond Anti-Inversion Measures, stakeholders are reminded that the U.S. Department of Treasury is soliciting public comments on the proposed regulations until July 7, 2016. Companies are strongly encouraged to comment. Treasury Secretary Jacob Lew has indicated the regulations would be final by the end of the year. The IRS, however, has set an internal deadline of September 5, 2016, to finalize the new rules. 

On April 4, Treasury released proposed regulations under Internal Revenue Code 385 relating to classifications of instruments as debt or equity. While these rules were initially thought to have been promulgated to curb corporate inversions and earnings stripping, since they were released, it has become very clear that they go much further and negatively impact not only cross-border transactions, but also purely domestic transactions. The regulations are still being finalized by Treasury, but, in certain cases, would apply retroactively to transactions entered into after April 4, 2016. In other cases, the new regulations would apply 90 days after becoming final.

The regulations propose fundamental changes to long-standing tax policy and case law that could threaten growth, investment, and jobs. Because they, in-part, apply retroactively, the regulations impact today’s investment decisions and create uncertainty for businesses.

If you have any questions regarding the proposed regulations or would like guidance in submitting comments for the record, please contact Jeff Goldman (jgoldman@dykema.com), Steve Grob (sgrob@dykema.com), Robert Nelson (rnelson@dykema.com), Jim Brandell (jbrandell@dykema.com), Mary Beth McGowan (mmcgowan@dykema.com) or your Dykema relationship attorney.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2018 Dykema Gossett PLLC.