83 FR 48265 - Proposed Removal of Section 385 Documentation Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 83, Issue 185 (September 24, 2018)
Internal Revenue Service
Federal Register Volume 83, Issue 185 (September 24, 2018)
| Page Range | 48265-48271 | |
| FR Document | 2018-20652 |
[Federal Register Volume 83, Number 185 (Monday, September 24, 2018)] [Proposed Rules] [Pages 48265-48271] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-20652] ======================================================================== Proposed Rules Federal Register ________________________________________________________________________ This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. ======================================================================== Federal Register / Vol. 83, No. 185 / Monday, September 24, 2018 / Proposed Rules [[Page 48265]] DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-130244-17] RIN 1545-BO02 Proposed Removal of Section 385 Documentation Regulations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: This document proposes removing final regulations setting forth minimum documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes (Documentation Regulations). This notice of proposed rulemaking also proposes conforming amendments to other final regulations to reflect the proposed removal of the Documentation Regulations. The final regulations to be amended and removed generally affect corporations that issue purported indebtedness to related corporations or partnerships. DATES: Written or electronic comments and requests for a public hearing must be received by December 24, 2018. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130244-17), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG- 130244-17), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224 or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-130244-17). FOR FURTHER INFORMATION CONTACT: Concerning the proposed removal and amendments, Austin Diamond-Jones, (202) 317-6847; concerning submissions of comments or requests for a public hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Paperwork Reduction Act In accordance with the Paperwork Reduction Act (44 U.S.C. chapter 35), the information collection included in these regulations under control number 1545-2267 will be discontinued upon the adoption of a final rule. Background Overview Section 385 of the Internal Revenue Code (Code) authorizes the Secretary of the Treasury (Secretary) to prescribe rules to determine whether an interest in a corporation is treated for purposes of the Code as stock or indebtedness (or as in part stock and in part indebtedness) by setting forth factors to be taken into account with respect to particular factual situations. On April 8, 2016, the Department of the Treasury (Treasury Department) and the IRS published proposed regulations (REG-108060-15) under section 385 of the Code (proposed regulations) in the Federal Register (81 FR 20912 (April 8, 2016)) concerning the treatment of certain interests in corporations as stock or indebtedness. A public hearing on the proposed regulations was held on July 14, 2016. The Treasury Department and the IRS also received numerous written comments in response to the proposed regulations, all of which are available at http://www.regulations.gov. On October 21, 2016, the Treasury Department and the IRS published final and temporary regulations under section 385. TD 9790 (I.R.B. 2016-46, 81 FR 72858 (October 21, 2016)). The preamble to TD 9790 describes in detail the comments received on the proposed regulations and the thorough consideration given to each comment. The preamble to TD 9790 also explains the decisions reached by the Treasury Department and the IRS and the revisions that were made to the proposed regulations. The final and temporary regulations under section 385 are primarily comprised of (i) the Documentation Regulations, which establish minimum documentation requirements that ordinarily must be satisfied in order for purported debt obligations among related parties to be treated as debt for federal tax purposes; and (ii) rules that treat as stock certain debt that is issued by a corporation to a controlling shareholder in a distribution or in another related-party transaction that achieves an economically similar result (together, the Section 385 Regulations). Under the proposed regulations, the Documentation Regulations would have been applicable with respect to interests issued or deemed issued on or after the date the regulations were finalized. However, when finalized, the Documentation Regulations were made applicable with respect to interests issued or deemed issued on or after January 1, 2018. See Sec. Sec. 1.385-1(f), 1.385-2(d)(2)(iii), and 1.385-2(i). This delayed applicability date responded to taxpayer concerns of inadequate time to begin complying with the Documentation Regulations once they were finalized Executive Order 13789 Executive Order 13789, issued on April 21, 2017 (E.O. 13789), instructs the Secretary to review all significant tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate the burdens of regulations that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue complexity to the federal tax laws; or (iii) exceed the statutory authority of the IRS. E.O. 13789 further instructs the Secretary to submit to the President within 60 days a report (First Report) that identifies regulations that meet these criteria. Notice 2017-38 (2017-30 I.R.B. 147 (July 24, 2017)) included the Section 385 Regulations in a list of eight regulations identified by the Secretary in the First Report as meeting at least one of the first two criteria specified in E.O. 13789. E.O. 13789 further instructs the Secretary to submit to the President a second report (Second Report) that recommends specific actions to mitigate the burden imposed by regulations identified in the First Report. Notice 2017-36 As previously noted, the final Documentation Regulations were originally promulgated to be applicable with respect to interests issued or deemed issued on or after January 1, 2018. However, in response to continued taxpayer concern with the application of the Documentation [[Page 48266]] Regulations, and in light of contemplated further actions concerning the Section 385 Regulations in connection with the review of those regulations under E.O. 13789, the Treasury Department and the IRS determined that a further delay in the application of the Documentation Regulations would be appropriate. Accordingly, in Notice 2017-36 (2017- 33 I.R.B. 208 (August 14, 2017)), the Treasury Department and the IRS announced the intent to amend the Documentation Regulations to delay the applicability of the regulations for 12 months, making the regulations applicable only to interests issued or deemed issued on or after January 1, 2019. Comments Received in Connection With E.O. 13789 In response to Notice 2017-38 and Notice 2017-36, the Treasury Department and the IRS received approximately 40 comment letters submitted by professional and trade associations, private businesses, public interest groups, and trade unions, as well as over 68,500 comments submitted by individual taxpayers on http://www.regulations.gov (website comments) regarding the Section 385 Regulations. The approximately 40 comment letters reflect a wide range of opinions, advocating everything from strengthening to eliminating the Documentation Regulations. The individual taxpayer comments, however, uniformly urged that the Section 385 Regulations as a whole be retained or strengthened. 1. Supporting Retaining or Strengthening the Documentation Regulations At one end of the spectrum are comment letters from various public interest groups, trade unions, and other associations that, together, represent almost 500 organizations, comment letters from private citizens, and the 68,502 website comments. These comments strongly urged that the Section 385 Regulations be retained and enforced, if not strengthened. These commenters would not be subject to the Documentation Regulations. However, they are concerned with the possibility of their withdrawal because they view the Section 385 Regulations as an important tool for maintaining the federal income tax base so that small, domestic businesses and working people and families would not be forced to bear an unfair and disproportionate portion of the cost of U.S. society and infrastructure. Further, these commenters view the Section 385 Regulations as an important step in leveling the playing field for small, domestic businesses that cannot take advantage of earnings stripping tax planning, thus allowing such domestic businesses to compete with large multinational companies based solely on their products and services, and not their ability to take advantage of tax planning. In addition, these commenters argued that allowing large multinational corporations to shift earnings offshore does not create jobs or economic growth in the United States and only serves to disadvantage domestic companies. 2. Supporting Limiting or Withdrawing the Documentation Regulations All of the remaining commenters raised concerns about the complexity, cost, and burden imposed by the Documentation Regulations. Most of these commenters made various suggestions for modifications that would reduce the scope and burden of the Documentation Regulations in ways they believed would make the rules more reasonable. Few disputed the Treasury Department's authority to promulgate the Documentation Regulations, however. Among the commenters that made suggestions for modifications to the Documentation Regulations, there was considerable consensus on the modifications being recommended. Most commenters urged that transactions done in the ordinary course of business, including trade payables, be removed from the application of the Documentation Regulations. Many also urged that ``market standards'' be broadly adopted as the test for determining whether the documentation requirements are satisfied. Another common concern raised by these commenters was that the consequences of failing to satisfy the Documentation Regulations are too harsh, and commenters suggested expanding the rules to make it easier to cure or avoid noncompliance and to modify the consequences of noncompliance to make these consequences more proportionate to the concerns addressed by the Documentation Regulations. For example, commenters noted that the time for curing defects in documentation could be expanded, the rules for establishing substantial compliance or reasonable cause could be expanded, and an exception could be added to excuse transactions that pose no base-erosion concern. In addition, there were comments suggesting that the consequences of failing to satisfy the regulations could be limited to a denial of interest deductions, which would avoid the collateral effects of re- characterizing the interest as equity. Most of these commenters also requested that the application of the Documentation Regulations be delayed so that taxpayers would have adequate time to comply with the Documentation Regulations, taking into account any potential additional modifications. Some suggested delaying applicability for an additional year or two, while others suggested delaying applicability until a date that would presumably allow the effects of any tax reform legislation to be taken into account. But many urged that applicability simply be delayed until the Treasury Department and IRS have completed their review, to avoid the expense of putting systems in place that would not satisfy the Documentation Regulations that are ultimately applicable. There were also various other modifications suggested. Some modifications would apply to taxpayers generally, such as excluding transactions between commonly held consolidated groups, removing the ``reserved'' sections, and replacing the entire rule with an anti-abuse rule. Other modifications were specific to the industry of the commenter or its constituents, such as raising the threshold amounts for certain businesses with higher gross asset levels and exempting industries that are perceived as less likely to engage in abusive transactions or more likely to engage in activities that further public policy. While a number of commenters supported the withdrawal of the Documentation Regulations, most of those commenters were among those also offering suggestions for modifications. However, there were a few commenters that argued only for withdrawal. Explanation of Provisions On October 16, 2017, the Secretary published the Second Report in the Federal Register (82 FR 48013 (October 16, 2017)) stating that the Treasury Department and the IRS are considering revoking the Documentation Regulations and are actively considering developing and proposing streamlined regulations. After careful consideration of the comments received on the Documentation Regulations in connection with E.O. 13789, including with respect to Notice 2017-36 and Notice 2017- 38, this notice of proposed rulemaking proposes the removal of the Documentation Regulations. The Treasury Department and the IRS will continue to study the issues addressed by the Documentation [[Page 48267]] Regulations. When that study is complete, the Treasury Department and the IRS may propose a modified version of the Documentation Regulations. Any such regulations would be substantially simplified and streamlined to reduce the burden on U.S. corporations and yet would still require sufficient documentation and other information for tax administration purposes. Further, they would be proposed with a prospective effective date to allow sufficient lead-time for taxpayers to design and implement systems to comply with those regulations. Proposed Effective/Applicability Date The proposed removal of Sec. 1.385-2 and conforming modifications are proposed to be applicable as of the date of publication in the Federal Register of a Treasury decision adopting these proposed regulations as final regulations. However, taxpayers may rely on these proposed regulations, in their entirety, until the date a Treasury decision adopting these regulations as final regulations is published in the Federal Register. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Special Analyses I. Regulatory Planning and Review Executive Order 13777 directs agencies to alleviate unnecessary regulatory burdens placed on the American people by managing the costs associated with the governmental imposition of private expenditures required to comply with federal regulations. Executive Orders 13771, 13563, and 12866 direct agencies to prudently manage the cost of planned regulations by assessing costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. These proposed regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) (the ``Treasury-OMB MOA'') between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. These proposed regulations have been designated a ``significant regulatory action'' by OIRA under section 3(f) of Executive Order 12866 because they raise novel policy issues. This proposed rule, when final, is expected to be an Executive Order 13771 deregulatory action. Pursuant to section 6(a)(3)(B) of Executive Order 12866, the following analysis discusses the anticipated economic effects of these proposed regulations. Although not required by that section, the Treasury Department and the IRS have generally provided monetized estimates in this analysis. These proposed regulations have been reviewed by the Office of Management and Budget. A. Affected Population This analysis uses an expansive definition of the estimated affected population in order to minimize the risk that the analysis will not capture the effects on collateral groups. 1. Application to C Corporations As discussed in TD 9790, this regulatory action affects approximately 6,300 large C corporations out of 1.6 million C corporations and 5.8 million corporations of all types. This is because only C corporations that are part of expanded affiliated groups in which one or more members have sufficient assets ($100 million) or revenue ($50 million), or are publicly traded, would have been required to document the relevant transactions. 2. Documentation of Intercompany Loans and Compliance While there is variation across businesses, longer-term intercompany debt would typically be documented, in some form of agreement containing terms and rights, by corporations following good business practices. However, some information that would have been required by the Documentation Regulations, such as a debt capacity analysis, may not typically be prepared in some cases. If applicable, the Documentation Regulations would not have required that a specific type of credit analysis or documentation be prepared in order to establish a related-party debtor's creditworthiness and ability to repay, but merely would have imposed a standard intended to be closer to commercial practice. To the extent that information supporting such analysis is already prepared in accordance with a company's normal business practice, removal of the Documentation Regulations would have a relatively low compliance cost savings. However, where a business has not typically prepared and maintained written debt instruments, term sheets, cash flow, or debt capacity analyses for intercompany debt, compliance cost savings related to the removal of the Documentation Regulations would have been higher. While the level of documentation required is clearly evident in third-party lending, there is little available information on the extent to which related parties document their intercompany loans. Anecdotal evidence and comments received indicate that businesses vary in the extent to which related-party indebtedness is documented. B. Description of the Documentation Regulations 1. In General If applicable, the Documentation Regulations would have prescribed the nature of the documentation necessary to substantiate the federal income tax treatment of related-party interests as indebtedness, including documentation of factors analogous to those found in third- party loans. This generally means that taxpayers would have had to be able to provide such things as: Evidence of an unconditional and binding obligation to make interest and principal payments on certain fixed dates; that the holder of the loan has the rights of a creditor, including superior rights to shareholders in the case of dissolution; a reasonable expectation of the borrower's ability to repay the loan; and evidence of conduct consistent with a debtor-creditor relationship. The Documentation Regulations would have applied to relevant intercompany debt issued by U.S. borrowers beginning in 2019 and would have required that the taxpayer's documentation for a given tax year be prepared by the time the borrower's federal income tax return is filed. The Documentation Regulations would have applied only to related groups of corporations in which the stock of at least one member is publicly traded or the group's financial results report assets exceeding $100 million or annual revenue exceeding $50 million. Because there is no general definition of a small business under the Code, these asset and revenue limits were designed to exceed the maximum receipts [[Page 48268]] threshold used by the Small Business Administration in defining small businesses (U.S. Small Business Administration, Table of Small Business Size Standards, 2016). In addition, these thresholds exclude about 99 percent of C corporation taxpayers while retaining 85 percent of economic activity as measured by total income. Approximately 1.5 million out of 1.6 million C corporation tax filers are single entities and therefore have no affiliates with which to engage in tax arbitrage. The intent was to limit the Documentation Regulations to large businesses with highly-related affiliates, which are responsible for most corporate activity. For example, large foreign-controlled domestic C corporations (FCDCs) (those having assets over $100 million or total income over $50 million) make up 3 percent of FCDCs but report 90 percent of FCDC interest deductions and 93 percent of FCDC total income. Similarly, the Documentation Regulations would have exempted most ordinary course transactions. C. Assessment of the Documentation Regulations' Effects The Treasury Department and the IRS estimate that 6,300 or 0.4 percent of C corporation taxpayers would have been affected by the Documentation Regulations, mainly because 95 percent of taxpayers do not have affiliated corporations, and the regulations would have affected only transactions between affiliates. While only a small fraction of corporate taxpayers will be affected by the removal of the Documentation Regulations, these 6,300 taxpayers tend to be the largest C corporation tax filers, claiming 65 percent of total interest deductions claimed by C corporations, 53 percent of total income claimed by C corporations, 81 percent of total income subject to tax claimed by C corporations, and 75 percent of total income tax after credits claimed by C corporations. Of these C corporations, approximately one-third are FCDCs that report about 20 percent of the affected total income and 20 percent of the affected interest deductions. 1. Monetized Estimates The revenue and compliance burden effects are measured against a no-action baseline, which captures tax-related behavior in the absence of the proposed regulatory action and includes taxpayer behavior the Treasury Department and the IRS expect as a result of the enactment of Public Law 115-97 (TCJA). While this particular regulation does not implement TCJA requirements, it interacts with the TCJA. There are several provisions of the TCJA that reduced the tax advantages of Foreign Controlled Domestic Corporations (FCDCs) over domestically controlled companies (DCCs) and thus may affect the tax revenue and compliance burden consequences of the removal of the Documentation Regulations. First, for taxable years beginning after December 31, 2017, the TCJA reduced the statutory corporate tax rate from 35 percent to 21 percent, which lowers the effective tax rate for DCCs more than for FCDCs. Second, the ability of FCDCs to strip earnings out of the United States using deductions for interest expense was significantly reduced by the TCJA through amendments to section 163(j) of the Code. Specifically, the section 163(j) statutory amendments (1) eliminated the debt-equity ratio safe harbor, (2) reduced the maximum net interest deductions' share of adjusted taxable income from 50 percent to 30 percent, (3) limited all, rather than just related-party, interest deductions, and (4) eliminated the carryforward of excess limitation under pre-TCJA section 163(j). The TCJA's Base Erosion Anti-abuse Tax (BEAT) further reduces this ability. Thus, the benefits of the Documentation Regulations in reducing foreign acquisitions of U.S. assets and interest stripping were reduced by the TCJA. The vast majority of TCJA provisions are self-executing, which means that they are binding on taxpayers and the IRS without any regulatory action and therefore their applicability and potential taxpayers' responses to such applicability are assumed in the baseline. The Treasury Department and the IRS recognize, however, that the section 163(j) amendments and the BEAT, along with other TCJA provisions, while self-executing, provide interpretive latitude for taxpayers and the IRS and that, without further implementation guidance, those provisions could prompt a variety of potential taxpayer responses. Faced with ambiguous tax provisions that are susceptible to a range of reasonable interpretations, some taxpayers will take conservative filing positions, others will take aggressive filing positions, and still others will simply forego business activity that implicates any uncertain provisions. Accordingly, the Treasury Department and the IRS have included in the baseline their best assessment of taxpayer behavior under current law and regulatory guidance; the baseline does not assume regulatory guidance that has not yet been issued. To the extent that taxpayer responses to any future legislation or rules regarding section 163(j) or the BEAT differ from this assessment, the revenue and compliance burden estimates with respect to the proposed removal of the Documentation Regulations would also be affected. The Treasury Department and the IRS solicit comments on the revenue and compliance burden estimates with respect to the proposed removal of the Documentation Regulations. a. Revenue Effects of Proposed Regulations The Treasury Department and the IRS previously addressed revenue effects in the original regulatory impact analysis (RIA) published in the preamble to T.D. 9790 and have received comments that address the revenue effect of the Documentation Regulations. The removal of the Documentation Regulations may slightly increase the ability of some firms to strip earnings out of the United States and so reduce their tax payments. The Treasury Department and the IRS estimate that removal of the Documentation Regulations will reduce revenue by $407 million over the period 2019-2028, using standard revenue reporting conventions (undiscounted nominal total). The net present value of the revenue loss is $302 and $243 ($2018 millions) using real discount rates of 3 and 7 percent, respectively. The annualized amounts are $35.4 and $34.5 ($2018 millions), again based on 3 percent and 7 percent real rates respectively. The revenue effects were estimated using the methodology described in the original RIA published in the preamble to T.D. 9790, although the estimate now covers 2019 to 2028 and includes factors that have changed as a result of TCJA as well as other technical adjustments. Annualized discounted revenue effects are shown in the following table. [[Page 48269]] ------------------------------------------------------------------------ Fiscal years 2019 Fiscal years 2019 to 2028 (3% real to 2028 (7% real discount rate) discount rate) ------------------------------------------------------------------------ Estimated change in annual tax -$35.4 -$34.5 revenue (annualized value, $2018 millions)........................ ------------------------------------------------------------------------ b. Compliance Burden Effects From Proposed Regulations The Treasury Department and the IRS estimate that removal of the Documentation Regulations will reduce compliance costs by $924 million over the period 2019-2028 (undiscounted nominal total). The net present value of the compliance cost savings is $773 and $685 ($2018 millions) using real discount rates of 3 and 7 percent respectively. These amounts are $90.6 million and $97.5 million on an annualized basis, again based on 3 percent and 7 percent real rates respectively. The methodology for estimating the compliance cost savings also followed the methodology described in the original RIA published in the preamble to T.D. 9790, with analogous adjustments due to the change in the period covered, the effects of TCJA, and other technical adjustments. The Treasury Department and the IRS view the proposed action (removal of Sec. 1.385-2) as reducing both tax revenues and compliance costs but they view the TCJA as primarily affecting the reduction in tax revenue from the action due mainly to reduced allowable interest deductions (163(j)) and to a lesser extent, taxation of certain base eroding payments to related parties (BEAT), including interest. The Treasury Department and the IRS do not expect a significant reduction in the number of relevant related party transactions, only a reduction in the dollar amounts, and therefore see a smaller effect of the TCJA on compliance cost savings than on revenue losses, relative to previous estimates. In addition, the analysis includes a sensitivity analysis in which the compliance costs were estimated for a 90 percent interval around the central estimate. Annualized discounted ongoing and start-up changes in compliance costs ($2018 millions) are shown in the following table. ------------------------------------------------------------------------ Estimated change in annual Fiscal years 2019 Fiscal years 2019 compliance costs (annualized to 2028 (3% real to 2028 (7% real value, $2018 millions) discount rate) discount rate) ------------------------------------------------------------------------ Central estimate.................. -$90.6 -$97.5 High estimate..................... -113.3 -121.9 Low estimate...................... -68.0 -73.1 ------------------------------------------------------------------------ Technical note: In this rulemaking, the Treasury Department made technical adjustments relative to the 2016 rulemaking in calculating the annualized compliance cost estimates. The cost stream in this rulemaking is in 2018 dollars, reflects a two-year delay in effective date (relative to the previous estimates), and applies real discount rates of 3 and 7 percent. Technical adjustments account for part of the difference in the estimates between the rulemakings. 2. Non-Monetized Effects a. Reduced Tax Compliance By slightly increasing the ability of some taxpayers to strip earnings out of the United States through transactions with no meaningful economic or non-tax benefit, and so reducing their tax payments, removal of the Documentation Regulations is likely to slightly reduce the overall perceived legitimacy of the U.S. tax system, and hence reduce voluntary compliance. b. Efficiency and Growth Effects By changing the treatment of certain transactions and activities, removal of the Documentation Regulations potentially affects economic efficiency and growth (output). While the removal of the Documentation Regulations may have multiple and to some extent offsetting effects, on net they are likely to slightly reduce economic efficiency. For example, the removal of the Documentation Regulations will likely increase the tax advantage foreign owners have over domestic owners of U.S. assets, and consequently will increase the propensity for foreign acquisitions and ownership of U.S. assets that are motivated by tax considerations rather than economic substance. While these effects will likely be small, they likely reduce efficiency and growth. By increasing the ability to undertake tax-motivated acquisitions or ownership structures, removal of the Documentation Regulations may slightly reduce the incentive for assets to be owned or managed by those most capable of putting the assets to their highest-valued use. Moreover, removal of the Documentation Regulations may put purely domestic U.S. firms on less even tax footing than their foreign-owned competitors operating in the United States. On the other hand, removal of the Documentation Regulations may slightly reduce the effective tax rate and compliance costs on U.S. inbound investment. While the magnitude of this reduction is small, to the extent that it increases new capital investment in the United States, its effects would be efficiency and growth enhancing. Most inbound investment is via acquisition of existing U.S. companies rather than greenfield (new) investment in the United States, however, and thus such investment changes the ownership of existing assets, without necessarily adding to the stock of capital employed in the United States. On balance, the likely effect of the removal of the Documentation Regulations is to reduce the efficiency of the corporate tax system slightly. c. Higher Tax Administrative Costs for the IRS The reduced loan documentation required of large corporations as a result of the removal of the Documentation Regulations will reduce the ability of the IRS to more effectively administer the tax laws by making it harder for the IRS to evaluate whether purported debt transactions are legitimate loans. This will raise the cost of auditing and evaluating the tax returns of companies engaged in these transactions. II. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that the proposed regulations will not have a significant economic [[Page 48270]] impact on a substantial number of small entities. As discussed earlier in this preamble, on October 21, 2016, the Treasury Department and the IRS published final and temporary regulations under section 385. The final and temporary regulations under section 385, among other things, established minimum documentation requirements that must be satisfied in order for purported debt obligations among related parties to be treated as debt for federal tax purposes. When finalized in October 2016, the Documentation Regulations were made applicable with respect to interests issued or deemed issued on or after January 1, 2018. In response to continued taxpayer concern with the application of the Documentation Regulations, the Treasury Department and the IRS, in Notice 2017-36, further delayed the applicability of the regulations by making the regulations applicable only to interests issued or deemed issued on or after January 1, 2019. This proposed rule, if finalized, would remove these Documentation Regulations that have not yet been made applicable to any interests issued by any taxpayer. Section 1.385-2, if applicable, would have provided documentation requirements to substantiate the treatment of certain related party instruments as indebtedness. Section 1.385-2 would have applied to large corporate groups (specifically, those that are publically traded, or have assets exceeding $100 million or annual total revenue exceeding $50 million in its expanded group), thus limiting the scope of small entities affected. Section 1.385-2 would have applied to financial institutions, which are considered small entities under the Regulatory Flexibility Act if they have less than $550 million in assets (13 CFR 121). The Treasury Department and the IRS believe that Sec. 1.385-2 would not affect a substantial number of small entities other than small financial institutions. Even if the regulations affected a substantial number of small entities in that sector, the economic impact of this rule would be minimal because the proposed regulations would remove the currently inapplicable documentation requirements in Sec. 1.385-2. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f), this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2018, that threshold is approximately $150 million. This proposed rule does not include any mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. Executive Order 13132: Federalism Executive Order 13132 (entitled ``Federalism'') prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This proposed rule does not have federalism implications and does not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the public hearing will be published in the Federal Register. Drafting Information The principal author of this notice of proposed rulemaking is Austin Diamond-Jones of the Office of the Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in its development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 is amended by removing the sectional authority for Sec. 1.385-2 to read, in part, as follows: Authority: 26 U.S.C. 7805 * * * * * * * * 0 Par. 2. Section 1.385-1 is amended by revising paragraph (a), the last sentence of paragraphs (c) introductory text and (c)(4)(iv), paragraph (d)(1)(i), the first sentence of paragraph (d)(1)(ii), and paragraphs (d)(1)(iii) and (d)(1)(iv)(A), and removing and reserving paragraph (d)(2)(i). The revisions read as follows: Sec. 1.385-1 General provisions. (a) Overview of section 385 regulations. This section and Sec. Sec. 1.385-3 through 1.385-4T (collectively, the section 385 regulations) provide rules under section 385 to determine the treatment of an interest in a corporation as stock or indebtedness (or as in part stock and in part indebtedness) in particular factual situations. Paragraph (b) of this section provides the general rule for determining the treatment of an interest based on provisions of the Internal Revenue Code and on common law, including the factors prescribed under common law. Paragraphs (c), (d), and (e) of this section provide definitions and rules of general application for purposes of the section 385 regulations. Section 1.385-3 sets forth additional factors that, when present, control the determination of whether an interest in a corporation that is held by a member of the corporation's expanded group is treated (in whole or in part) as stock or indebtedness. * * * * * (c) * * * For additional definitions that apply for purposes of their respective sections, see Sec. Sec. 1.385-3(g) and 1.385-4T(e). * * * * * (4) * * * (iv) * * * For purposes of the section 385 regulations, a corporation is a member of an expanded group if it is described in this paragraph (c)(4)(iv) of this section immediately before the relevant time for determining membership (for example, immediately before the issuance of a debt instrument (as defined in Sec. 1.385-3(g)(4)) or immediately before a distribution or [[Page 48271]] acquisition that may be subject to Sec. 1.385-3(b)(2) or (3)). * * * * * (d) * * * (1) * * * (i) In general. If a debt instrument (as defined in Sec. 1.385- 3(g)(4)) is deemed to be exchanged under the section 385 regulations, in whole or in part, for stock, the holder is treated for all federal tax purposes as having realized an amount equal to the holder's adjusted basis in that portion of the debt instrument as of the date of the deemed exchange (and as having basis in the stock deemed to be received equal to that amount), and, except as provided in paragraph (d)(1)(iv)(B) of this section, the issuer is treated for all federal tax purposes as having retired that portion of the debt instrument for an amount equal to its adjusted issue price as of the date of the deemed exchange. In addition, neither party accounts for any accrued but unpaid qualified stated interest on the debt instrument or any foreign exchange gain or loss with respect to that accrued but unpaid qualified stated interest (if any) as of the deemed exchange. This paragraph (d)(1)(i) does not affect the rules that otherwise apply to the debt instrument prior to the date of the deemed exchange (for example, this paragraph (d)(1)(i) does not affect the issuer's deduction of accrued but unpaid qualified stated interest otherwise deductible prior to the date of the deemed exchange). Moreover, the stock issued in the deemed exchange is not treated as a payment of accrued but unpaid original issue discount or qualified stated interest on the debt instrument for federal tax purposes. (ii) Section 988. Notwithstanding the first sentence of paragraph (d)(1)(i) of this section, the rules of Sec. 1.988-2(b)(13) apply to require the holder and the issuer of a debt instrument that is deemed to be exchanged under the section 385 regulations, in whole or in part, for stock to recognize any exchange gain or loss, other than any exchange gain or loss with respect to accrued but unpaid qualified stated interest that is not taken into account under paragraph (d)(1)(i) of this section at the time of the deemed exchange. * * * (iii) Section 108(e)(8). For purposes of section 108(e)(8), if the issuer of a debt instrument is treated as having retired all or a portion of the debt instrument in exchange for stock under paragraph (d)(1)(i) of this section, the stock is treated as having a fair market value equal to the adjusted issue price of that portion of the debt instrument as of the date of the deemed exchange. (iv) * * * (A) A debt instrument that is issued by a disregarded entity is deemed to be exchanged for stock of the regarded owner under Sec. 1.385-3T(d)(4); * * * * * * * * Sec. 1.385-2 [Removed] 0 Par. 3. Section 1.385-2 is removed. 0 Par. 4. Section 1.385-3 is amended by revising paragraph (g)(4) to read as follows: Sec. 1.385-3 Transaction in which debt proceeds are distributed or that have a similar effect. * * * * * (g) * * * (4) Debt instrument. The term debt instrument means an interest that would, but for the application of this section, be treated as a debt instrument as defined in section 1275(a) and Sec. 1.1275-1(d). * * * * * 0 Par. 5. Section 1.1275-1 is amended by revising the last sentence of paragraph (d) to read as follows: Sec. 1.1275-1 Definitions. * * * * * (d) * * * See Sec. 1.385-3 for rules that treat certain instruments that otherwise would be treated as indebtedness as stock for federal tax purposes. * * * * * Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2018-20652 Filed 9-21-18; 8:45 am] BILLING CODE 4830-01-P
![48265
Proposed Rules Federal Register
Vol. 83, No. 185
Monday, September 24, 2018
This section of the FEDERAL REGISTER (202) 317–6847; concerning submissions related parties to be treated as debt for
contains notices to the public of the proposed of comments or requests for a public federal tax purposes; and (ii) rules that
issuance of rules and regulations. The hearing, Regina Johnson, (202) 317– treat as stock certain debt that is issued
purpose of these notices is to give interested 6901 (not toll-free numbers). by a corporation to a controlling
persons an opportunity to participate in the shareholder in a distribution or in
SUPPLEMENTARY INFORMATION:
rule making prior to the adoption of the final
another related-party transaction that
rules. Paperwork Reduction Act achieves an economically similar result
In accordance with the Paperwork (together, the Section 385 Regulations).
DEPARTMENT OF THE TREASURY Reduction Act (44 U.S.C. chapter 35), Under the proposed regulations, the
the information collection included in Documentation Regulations would have
Internal Revenue Service these regulations under control number been applicable with respect to interests
1545–2267 will be discontinued upon issued or deemed issued on or after the
26 CFR Part 1 the adoption of a final rule. date the regulations were finalized.
However, when finalized, the
[REG–130244–17] Background Documentation Regulations were made
RIN 1545–BO02 Overview applicable with respect to interests
issued or deemed issued on or after
Section 385 of the Internal Revenue
Proposed Removal of Section 385 January 1, 2018. See §§ 1.385–1(f),
Code (Code) authorizes the Secretary of
Documentation Regulations 1.385–2(d)(2)(iii), and 1.385–2(i). This
the Treasury (Secretary) to prescribe
delayed applicability date responded to
AGENCY: Internal Revenue Service (IRS), rules to determine whether an interest
taxpayer concerns of inadequate time to
Treasury. in a corporation is treated for purposes
begin complying with the
ACTION: Notice of proposed rulemaking.
of the Code as stock or indebtedness (or
Documentation Regulations once they
as in part stock and in part
were finalized
SUMMARY: This document proposes indebtedness) by setting forth factors to
removing final regulations setting forth be taken into account with respect to Executive Order 13789
minimum documentation requirements particular factual situations. Executive Order 13789, issued on
that ordinarily must be satisfied in order On April 8, 2016, the Department of April 21, 2017 (E.O. 13789), instructs
for certain related-party interests in a the Treasury (Treasury Department) and the Secretary to review all significant
corporation to be treated as the IRS published proposed regulations tax regulations issued on or after
indebtedness for federal tax purposes (REG–108060–15) under section 385 of January 1, 2016, and to take concrete
(Documentation Regulations). This the Code (proposed regulations) in the action to alleviate the burdens of
notice of proposed rulemaking also Federal Register (81 FR 20912 (April 8, regulations that (i) impose an undue
proposes conforming amendments to 2016)) concerning the treatment of financial burden on U.S. taxpayers; (ii)
other final regulations to reflect the certain interests in corporations as stock add undue complexity to the federal tax
proposed removal of the Documentation or indebtedness. A public hearing on laws; or (iii) exceed the statutory
Regulations. The final regulations to be the proposed regulations was held on authority of the IRS.
amended and removed generally affect July 14, 2016. The Treasury Department E.O. 13789 further instructs the
corporations that issue purported and the IRS also received numerous Secretary to submit to the President
indebtedness to related corporations or written comments in response to the within 60 days a report (First Report)
partnerships. proposed regulations, all of which are that identifies regulations that meet
DATES: Written or electronic comments
available at http://www.regulations.gov. these criteria. Notice 2017–38 (2017–30
On October 21, 2016, the Treasury I.R.B. 147 (July 24, 2017)) included the
and requests for a public hearing must
Department and the IRS published final Section 385 Regulations in a list of eight
be received by December 24, 2018.
and temporary regulations under section regulations identified by the Secretary
ADDRESSES: Send submissions to: 385. TD 9790 (I.R.B. 2016–46, 81 FR in the First Report as meeting at least
CC:PA:LPD:PR (REG–130244–17), Room 72858 (October 21, 2016)). The one of the first two criteria specified in
5203, Internal Revenue Service, P.O. preamble to TD 9790 describes in detail E.O. 13789. E.O. 13789 further instructs
Box 7604, Ben Franklin Station, the comments received on the proposed the Secretary to submit to the President
Washington, DC 20044. Submissions regulations and the thorough a second report (Second Report) that
may be hand-delivered Monday through consideration given to each comment. recommends specific actions to mitigate
Friday between the hours of 8 a.m. and The preamble to TD 9790 also explains the burden imposed by regulations
4 p.m. to CC:PA:LPD:PR (REG–130244– the decisions reached by the Treasury identified in the First Report.
17), Courier’s Desk, Internal Revenue Department and the IRS and the
Service, 1111 Constitution Avenue NW, revisions that were made to the Notice 2017–36
daltland on DSKBBV9HB2PROD with PROPOSALS
Washington, DC 20224 or sent proposed regulations. As previously noted, the final
electronically via the Federal The final and temporary regulations Documentation Regulations were
eRulemaking Portal at http:// under section 385 are primarily originally promulgated to be applicable
www.regulations.gov (IRS REG–130244– comprised of (i) the Documentation with respect to interests issued or
17). Regulations, which establish minimum deemed issued on or after January 1,
FOR FURTHER INFORMATION CONTACT: documentation requirements that 2018. However, in response to
Concerning the proposed removal and ordinarily must be satisfied in order for continued taxpayer concern with the
amendments, Austin Diamond-Jones, purported debt obligations among application of the Documentation
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![Federal Register / Vol. 83, No. 185 / Monday, September 24, 2018 / Proposed Rules 48271
acquisition that may be subject to (iv) * * * Acquisition Regulation (FAR) to
§ 1.385–3(b)(2) or (3)). (A) A debt instrument that is issued implement a section of the National
* * * * * by a disregarded entity is deemed to be Defense Authorization Act (NDAA) for
(d) * * * exchanged for stock of the regarded Fiscal Year (FY) 2017.
(1) * * * owner under § 1.385–3T(d)(4); * * * DATES: Interested parties should submit
(i) In general. If a debt instrument (as * * * * * comments to the Regulatory Secretariat
defined in § 1.385–3(g)(4)) is deemed to Division at one of the addresses shown
§ 1.385–2 [Removed] below on or before November 23, 2018
be exchanged under the section 385
regulations, in whole or in part, for ■ Par. 3. Section 1.385–2 is removed. to be considered in the formulation of
stock, the holder is treated for all federal ■ Par. 4. Section 1.385–3 is amended by a final rule.
tax purposes as having realized an revising paragraph (g)(4) to read as ADDRESSES: Submit comments in
amount equal to the holder’s adjusted follows: response to FAR Case 2017–010 by any
basis in that portion of the debt § 1.385–3 Transaction in which debt of the following methods:
instrument as of the date of the deemed proceeds are distributed or that have a • Regulations.gov: http://
exchange (and as having basis in the similar effect. www.regulations.gov.
stock deemed to be received equal to * * * * * Submit comments via the Federal
that amount), and, except as provided in (g) * * * eRulemaking portal by entering ‘‘FAR
paragraph (d)(1)(iv)(B) of this section, (4) Debt instrument. The term debt Case 2017–010’’ under the heading
the issuer is treated for all federal tax instrument means an interest that ‘‘Enter Keyword or ID’’ and selecting
purposes as having retired that portion would, but for the application of this ‘‘Search’’. Select the link ‘‘Comment
of the debt instrument for an amount section, be treated as a debt instrument Now’’ that corresponds with ‘‘FAR Case
equal to its adjusted issue price as of the as defined in section 1275(a) and 2017–010’’. Follow the instructions
date of the deemed exchange. In § 1.1275–1(d). provided on the screen. Please include
addition, neither party accounts for any your name, company name (if any), and
* * * * *
accrued but unpaid qualified stated ‘‘FAR Case 2017–010’’ on your attached
■ Par. 5. Section 1.1275–1 is amended
interest on the debt instrument or any document.
by revising the last sentence of
foreign exchange gain or loss with • Mail: General Services
paragraph (d) to read as follows:
respect to that accrued but unpaid Administration, Regulatory Secretariat
qualified stated interest (if any) as of the § 1.1275–1 Definitions. Division, ATTN: Lois Mandell, 1800 F
deemed exchange. This paragraph * * * * * Street NW, 2nd Floor, Washington, DC
(d)(1)(i) does not affect the rules that (d) * * * See § 1.385–3 for rules that 20405.
otherwise apply to the debt instrument treat certain instruments that otherwise Instructions: Please submit comments
prior to the date of the deemed would be treated as indebtedness as only and cite ‘‘FAR case 2017–010’’ in
exchange (for example, this paragraph stock for federal tax purposes. all correspondence related to this case.
(d)(1)(i) does not affect the issuer’s Comments received generally will be
* * * * *
deduction of accrued but unpaid posted without change to http://
qualified stated interest otherwise Kirsten Wielobob, www.regulations.gov, including any
deductible prior to the date of the Deputy Commissioner for Services and personal and/or business confidential
deemed exchange). Moreover, the stock Enforcement. information provided. To confirm
issued in the deemed exchange is not [FR Doc. 2018–20652 Filed 9–21–18; 8:45 am] receipt of your comment(s), please
treated as a payment of accrued but BILLING CODE 4830–01–P check www.regulations.gov,
unpaid original issue discount or approximately two to three days after
qualified stated interest on the debt submission to verify posting (except
instrument for federal tax purposes. DEPARTMENT OF DEFENSE allow 30 days for posting of comments
(ii) Section 988. Notwithstanding the submitted by mail).
first sentence of paragraph (d)(1)(i) of GENERAL SERVICES FOR FURTHER INFORMATION CONTACT: For
this section, the rules of § 1.988–2(b)(13) ADMINISTRATION clarification of content, contact Mr.
apply to require the holder and the Michael O. Jackson, Procurement
issuer of a debt instrument that is NATIONAL AERONAUTICS AND Analyst, at 202–208–4949. For
deemed to be exchanged under the SPACE ADMINISTRATION information pertaining to status or
section 385 regulations, in whole or in publication schedules, contact the
part, for stock to recognize any exchange 48 CFR Parts 13, 15, and 16 Regulatory Secretariat Division at 202–
gain or loss, other than any exchange [FAR Case 2017–010; Docket No. 2017–
501–4755. Please cite ‘‘FAR Case 2017–
gain or loss with respect to accrued but 0009; Sequence No. 1] 010.’’
unpaid qualified stated interest that is SUPPLEMENTARY INFORMATION:
not taken into account under paragraph RIN 9000–AN54
(d)(1)(i) of this section at the time of the I. Background
deemed exchange. * * * Federal Acquisition Regulation: Section 825 of the NDAA for FY 2017
(iii) Section 108(e)(8). For purposes of Evaluation Factors for Multiple-Award (Pub. L. 114–328) amends 10 U.S.C.
section 108(e)(8), if the issuer of a debt Contracts 2305(a)(3) to modify the requirement to
daltland on DSKBBV9HB2PROD with PROPOSALS
instrument is treated as having retired AGENCY: Department of Defense (DoD), consider cost or price as an evaluation
all or a portion of the debt instrument General Services Administration (GSA), factor for the award for certain multiple-
in exchange for stock under paragraph and National Aeronautics and Space award task order contracts issued by
(d)(1)(i) of this section, the stock is Administration (NASA). DoD, NASA, or the Coast Guard. Section
treated as having a fair market value ACTION: Proposed rule. 825 provides that, at the Government’s
equal to the adjusted issue price of that discretion, solicitations for multiple-
portion of the debt instrument as of the SUMMARY: DoD, GSA, and NASA are award contracts for the same or similar
date of the deemed exchange. proposing to amend the Federal services that state the Government
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Document Created: 2018-09-22 00:33:34
Document Modified: 2018-09-22 00:33:34
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking. | |
| Dates | Written or electronic comments and requests for a public hearing must be received by December 24, 2018. | |
| Contact | Concerning the proposed removal and amendments, Austin Diamond-Jones, (202) 317-6847; concerning submissions of comments or requests for a public hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers). | |
| FR Citation | 83 FR 48265 | |
| RIN Number | 1545-BO02 | |
| CFR Associated | Income Taxes and Reporting and Recordkeeping Requirements |
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