The Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) announced and invited comments on a one-year delay to the application of certain portions of the final regulations issued under section 385 of the Internal Revenue Code (“Section 385 Regulations”).  The affected regulations relate to the documentation necessary to determine whether an interest is treated as stock or indebtedness for federal tax purposes.  Taxpayers had expressed continued concern about the ability to comply with the applicability date of the documentation requirements for interests issued or deemed issued on or after January 1, 2018.  The IRS and Treasury now intend to amend the documentation requirements to apply only to interests issued or deemed issued on or after January 1, 2019.

The Section 385 Regulations pertaining to documentation have two principal purposes:

  1. Provide guidance regarding the documentation and other information that must be prepared, maintained, and provided to be used in the determination of whether an instrument subject to the documentation requirements will be treated as indebtedness for federal tax purposes; and
  2. Establish certain operating rules, presumptions, and factors to be taken into account in the making of any such determination.

The documentation requirements implement these purposes by generally requiring taxpayers to prepare and maintain documentation that evidences specified “indebtedness factors” with respect to purported debt instruments subject to the regulations.  Compliance with the documentation requirements, however, will not necessarily establish that an interest is indebtedness but serve to satisfy the minimum documentation for the determination to be made under the general federal tax principles.

Because the Section 385 Regulations are considered significant tax regulations and were issued after January 1, 2016, they required additional review pursuant to Executive Order 13789.  In light of this review and continued concern of taxpayers about the applicability date, the IRS and Treasury determined a delay in the application of the documentation requirements by twelve months was warranted.

Pending the issuance of the amended regulations, taxpayers may rely on the delay in the application of the documentation requirements set forth in Notice 2017-36.