Final Section 385 Regs: Navigating State and Local Tax Impact of New Debt-to-Equity Reclassification Rules

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, January 12, 2017
Recorded event now available


This webinar will provide state and local tax advisers and finance professionals with a critical first look at the state and local tax implications of the sweeping final regulations under Section 385 which present significant changes in the way intra-company debt is treated among commonly controlled entities. The panel will discuss how companies will need to report and document intra-company debt transactions, and will detail potential tax risks in the reclassification of debt to equity in state income and capital-based franchise tax treatment.

Description

The IRS issued final regulations for Section 385 covering related-party debt transactions. While the Service responded to practitioner concerns regarding the reach of the rules, the final regulations will have a major impact on corporations that engage in debt transactions with related corporations. While the major focus of the final regulations is federal tax treatment of related-party debt, the new rules will likely impact state tax treatment of these transactions.

The final regulations permit the IRS to reclassify certain related-party debt as equity. The new rules may result in a number of common transactions subject to the regulations having interest deductions disallowed on the re-characterized “debt” instrument. Many states will likely follow federal treatment, and corp tax advisers will need to understand the possible state tax impact on their companies.

The new requirements will impose significant new documentation burdens for related-party debt instruments, both for federal and state tax purposes. Tax advisers should expect state revenue departments and auditors to apply the final regulations in some state and local tax examinations, even in states that do have federal tax conformity statutes.

Listen as our experienced panel of expert advisers provides a critical first look at the state and local tax impact of the final Section 385 regulations, offering detailed and practical tools to avoid serious tax consequences arising from the new debt-to-equity reclassification rules.

Outline

  1. Final Section 385 regulations on related-party debt transactions
  2. Equity recharacterization provisions
  3. Definitions of “expanded group”
  4. Documentation rules
  5. SALT implications

Benefits

The panel will discuss these and other important questions:

  • Which commonly controlled entities are subject to the final Section 385 regulations?
  • What types of intra-company debt transactions are at risk of reclassification under the new regulations?
  • What are the specific documentation requirements that must accompany intra-company debt transactions?
  • How will various state practices on conformity with federal tax law impact net income calculations under the new regulations?
  • What steps should corporate taxpayers and their advisers take immediately to ensure that their intra-company debt structures will be respected under the final regulations?

Learning Objectives

After completing this course, you will be able to:

  • Identify corporate structures that will be subject to the new Section 385 regulations on debt reclassification
  • Determine the documentation requirements necessary to ensure that intra-company loan transactions will be respected as debt
  • Discern the impact of a state’s rules on conformity to federal tax treatment on whether a debt transaction will be respected on the state tax level
  • Recognize the differences in documentation requirements between state and federal practice under the new Section 385 regulations

Faculty

Jaye A. Calhoun, Partner
Kean Miller, New Orleans

Ms. Calhoun is a senior member of the Firm's SALT team. She provides clients with full-service tax representation covering federal, state, and local tax challenges and business opportunities. She has more than 20 years of experience and assists her clients with tax compliance and planning, guidance on the use of tax and business incentives, and represents clients in tax audits and controversies. She regularly represents clients in audits and administrative and judicial appeals before the IRS, the State of Louisiana Department of Revenue, and numerous local taxing authorities. She is the Chair of the ABA Tax Section State and Local Taxes Committee, is board certified by the Louisiana Board of Legal Specialization in Taxation and teaches state and local tax at Tulane and Loyola Law Schools, as well as in the Georgetown University Law Center SALT Certificate program.  

Kelley C. Miller, Atty
Reed Smith, Washington, D.C.

Ms. Miller's practice areas include cloud computing, complex federal tax controversies, state and federal tax issues involving closely held entities, state tax planning and litigation and tax planning issues involving E-Commerce, and state nexus. She presents on cloud computing, particularly negotiating SaaS agreements. She also has written and spoken widely on numerous federal and state tax topics for clients representing a broad spectrum of industries, including exempt organizations.


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State Income Tax Advisory Board

David Adler

Director of Multistate Tax Services

Deloitte Tax

Elizabeth Bowman

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Williams Mullen

Don Griswold

Executive Tax Counsel

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Faegre Baker Daniels

Richard Pomp

Professor of Tax Law

University of Connecticut

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