Navigating New Section 385 Regulations on Related-Party Debt: Sweeping Changes on the Horizon

Avoiding Reclassification of Debt to Equity, Structuring Inter-Company Debt Instruments to Withstand IRS Challenge

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Tuesday, June 7, 2016

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide a critical first look into the IRS proposed regulations under Section 385 to reclassify certain related-party debt as equity for U.S. tax purposes. The panel will discuss the scope of the proposed regulations, examine what types of structures and transactions are subject to reclassification as equity, and offer practical guidance on ensuring an existing debt instrument is respected for U.S. income tax purposes.

Description

The newly-proposed Section 385 regulations represent a sweeping change in the IRS’ approach to related-party debt transactions. While initially considered an anti-inversion measure, the proposed regulations apply to indebtedness between related entities, whether those entities are foreign or domestic (other than intercompany debt among members of a U.S. consolidated group). The Service has indicated it will pursue this approach to debt among members of expanded corporate groups, including some controlled partnerships.

Upon adoption, these new regulations will have significant impact on both foreign and domestic corporate groups. The new rules may result in a number of common transactions being subject to previously unforeseen tax consequences; transactions or structures that are subject to the proposed regulations would have interest deductions disallowed on the re-characterized “debt” instrument, and could be subject to dividend withholding tax.

The practical implications of this new requirement cannot be overstated. The new requirements will impose significant new documentation burdens for related-party debt instruments, and tax counsel and advisers must quickly become familiar with the new requirements in structuring these transactions. In its preamble to the proposed regulations, the IRS expressly stated that it is considering expanding the application of this re-characterization approach to blocker entities and many private funds.

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

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Outline

  1. Overview of related party debt rules
  2. Overview of the debt bifurcation rules
  3. Overview of the debt teporting requirements
  4. Entities and structures subject to re-characterization and potential tax consequences
  5. Impact to U.S. consolidated groups

Benefits

The panel will discuss these and other critical questions:

  • What is the purpose of the proposed regulations?
  • What foreign and domestic entities are subject to the proposed regulations?
  • What common transactions and instruments are subject to possible re-characterization?
  • What impact will the proposed regulations have on documentation requirements?
  • What structuring steps must tax counsel take to ensure a related-party debt instrument will be respected as such for U.S. tax purposes?

Faculty

Joshua T. Brady
Joshua T. Brady

Partner
Morgan Lewis & Bockius

Mr. Brady’s practice encompasses a broad range of corporate tax issues involving corporations, partnerships, and...  |  Read More

Scott M. Levine
Scott M. Levine

Partner
Jones Day

Mr. Levine advises on the tax aspects of corporate transactions, including international and domestic mergers and...  |  Read More

Stephen M. Massed
Stephen M. Massed
Managing Director, Tax
KPMG

Mr. Massed is a Managing Director in KPMG’s Washington National Tax Practice. He has been a member of both the...  |  Read More

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