IRS Delays Section 385 Documentation Requirements

| 8/3/2017


On July 28, the Treasury Department and IRS issued Notice 2017-36, which provides for a 12-month delay for the documentation requirements of the Section 385 regulations. Previously, the final documentation requirements were set to be effective for debt instruments issued or deemed issued on or after Jan. 1, 2018.

The notice asks for comments from taxpayers on whether the proposed delay in effective date of the regulations provides adequate time for taxpayers to develop necessary systems or processes in order to comply with the various documentation requirements. Comments are due Sept. 1, 2017.

Section 385 Background

Final and temporary regulations under Section 385 of the Internal Revenue Code, which address the classification of related-party debt as debt or equity for tax purposes, originally were released on Oct. 21, 2016.

Subsequently, on July 7, 2017, the Treasury Department released Notice 2017-38 with its interim report on reducing the tax regulatory burden. The report, required by executive order, identifies eight federal tax regulations issued on or after Jan. 1, 2016 – including the final and temporary regulations issued under Section 385 – that could impose an undue burden on U.S. taxpayers, add undue complexity to the federal tax laws, or exceed the statutory authority of the IRS.

A final report that recommends “specific actions to mitigate the burden imposed by” the identified regulations is due to the president by Sept. 18, 2017.

Potential Considerations

Taxpayers should note that the 12-month regulation delay applies to only the documentation portion of the Section 385 regulations, as the rest of the Section 385 final and temporary regulations are subject to the original effective dates.

In addition, the Section 385 regulations in their entirety continue to be under review by Treasury under Notice 2017-38. As with the other regulations identified in the notice, it is possible that certain regulations ultimately could be withdrawn and not reproposed.

Potentially affected taxpayers should review Notice 2017-36 and provide comments regarding their ability to comply with the extended deadline for documentation requirements to the IRS by the Sept. 1 due date.

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